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Walking the line

Walking the line

Alexander Nadmitov and Sergey Lapin of Nadmitov Ivanov and Partners describe the transformative first six months of Russia’s accession to the World Trade Organization

On August 22 2012, Russia joined the World Trade Organization. In doing so, Russia agreed to be bound by a complex network of international trade rules, and gave a number of commitments to bring its laws and practices into line with those rules, either immediately upon accession or after a certain transition period.

In particular, Russia agreed to lower and bind its customs tariffs on a significant number of goods. For more than one third of national tariff lines, Russia agreed to implement the final bound rate on the date of accession. It also undertook to eliminate, either immediately or gradually, several important restrictions on foreign participation in companies providing various types of services (such as telecom, insurance, banking, and transportation). The Russian Federation also made a commitment such that export duties would be fixed for over 700 tariff lines, including major types of raw materials. In addition, Russia undertook to remove import licensing requirements inconsistent with WTO rules, including on important items such as pharmaceuticals, alcohol, and products using encryption technologies. Russia also agreed to either eliminate its industrial subsidies or bring them into line with the relevant WTO agreements. Furthermore, Russian agricultural subsidies were bound at a certain level and are to be either eliminated or gradually reduced, depending on their type. Importantly, Russia gave a commitment that producers and distributors of natural gas in the Russian Federation would operate on the basis of normal commercial considerations based on recovery of costs and profit. Russia also made a number of specific commitments related to compliance with the Agreement on Technical Barriers to Trade (TBT), the Agreement on Sanitary and Phytosanitary Measures (SPS), the Agreement on Trade-Related Investment Measures (TRIMs) and the Agreement on Trade-Related Aspects of Intellectual Property Rights, Including Trade in Counterfeit Goods (TRIPs). Finally, Russia agreed to enter into negotiations on accession to the WTO Government Procurement Agreement after a certain transition period, and took a number of transparency-related commitments including the publication of draft laws, rules and decisions in various trade-related areas.

In sum, the commitments described above are likely to contribute in the medium-term future to the serious reshaping of the Russian regulatory environment. Not only does this concern traditional international trade areas such as customs tariffs, but also, for example, subsidies and investment measures, which are at the core of any national economy.

Key concerns

Regarding the tariffs, the major concern expressed by the WTO members during the WTO accession negotiations (and acknowledged by Russia) is the use of so-called combined customs duties applied in the framework of the Unified Customs Tariff of the Russia-Kazakhstan-Belarus Customs Union. Russia agreed to bring the level of its specific duties into line with an admissible level of the ad valorem duties, and the major part of this work is expected to be completed around March 2013. On the other hand, in some cases Russia has even increased or introduced new customs duties. This may seem counterintuitive but this is a direct consequence of the negotiations process where, in certain situations, the Russian representatives managed to ensure the possibility of protection to even higher levels than cited at the time of negotiations, for future use (for example, the increase concerning customs duties on earthmovers and pipe layers). Interestingly, WTO accession already provoked conflict on tariff rules applicable under WTO law and Customs Union law. This relates to, in particular, customs duties on coated paper; under WTO commitments, the customs duty rate was fixed at the level of 5%, whereas the Customs Union applied a rate of 15%. So far, the difference has not led to any formal disputes, but such discrepancies are likely to be found in other areas, giving rise to disagreements between Russia and its trading partners in the future.

As for subsidies, the WTO obligations recently forced the Russian Ministry of Industry and Trade to reduce the level of subsidies provided to the automotive sector until 2020 by R15 billion, ($487 million) or by 25%. On the other hand, with respect to subsidies to the aircraft industry, the Russian Government decided to circumvent WTO rules by channeling the funds via Vnesheconombank, a so-called state corporation. In a similar vein, despite the general trend to give commitments relating to a reduction of the level of agricultural subsidies, in October 2012 Russia extended or introduced new substantial tax reductions, or benefits, for the local farm industry, including reduced tax rates of profit tax, VAT and personal income tax.

WTO rules already have a direct impact both on Russian law and policy in other respects. For example, WTO accession led to the abolition of discriminatory patent application fees for foreign as opposed to domestic applicants. WTO accession also recently pushed the Russian Ministry of Labour and Social Security to prepare a draft law aimed at the substantial liberalization of the access of foreign high-skilled specialists to the Russian labour market. On the policy level, WTO norms was one of the factors in leading the authorities of the Customs Union to abandon the idea to abolish usage of PET-based bottles in the territory of the Customs Union.

Dispute mechanisms

Sometimes, however, Russia adopts measures that may give rise to disputes involving the WTO dispute settlement mechanism. A recent example of this, which could well end up in the WTO Dispute Settlement Body, is the dispute concerning the so-called recycling charge introduced by Russia in September 2012, soon after the WTO accession.

Essentially, it is mandatorily imposed on car importers (both Russian and foreign) but not on those companies producing cars within Russia (again, both Russian and foreign), which could provide a guarantee of safe car recycling instead of paying the charge. Such discriminatory treatment raised foreseeable concerns from the EU, which even threatened to lodge a complaint against Russia with the WTO, so Russia has recently agreed to apply the recycling charge indiscriminately, using the same requirements for importers and local producers.

Another recent example of a WTO-related potential dispute involving Russia is a ban introduced by the Russian sanitary authorities on the import of US meat containing ractopamine. In an attempt to justify this ban, Russia referred to the experience of the EU, which also introduced a similar ban, but this in no way precludes the United States from filing a relevant complaint to the WTO. It remains to be seen, however, what will be the outcome of this potential dispute.

Similarly, in February 2013, the Russian sanitary authorities banned German meat, referring to the Schmallenberg virus allegedly contained in German beef, pork and poultry. The EU denounced these measures as unjustified, both legally and technically disproportionate, and according to public sources, even filed a complaint to the WTO bodies. It remains unclear though at this stage whether formal processes of consultations and panel formation will follow and, again, what will be the result of such formal processes.

On top of this, Russia is already participating in seven disputes as a third party, and this figure, by all chances, will grow in the near future.

On the other hand, Russia’s accession to the WTO led to the lifting of certain restrictions it had previously put in place relating to trade with other countries. For example, after an inspection from Rospotrebnadzor (the Russian consumer watchdog) 36 producers of wine and four producers of mineral water from Georgia were allowed to register samples of their products for export.

At the same time, Russia already receives the benefits provided by WTO membership from other countries. For example, the United States recently repealed the application to Russia of the so-called Jackson-Vanik amendment, which restricted international trade between the two countries for almost four decades. Even though its significance was significantly reduced from 1989, when the United States began to apply a moratorium regarding this amendment, extended on an annual basis, this US action represented an important step in the restoration of international trade relations between Russia and the United States. China recently repealed restrictions on the usage of Russian road trains in the transportation of goods in its territory, and Poland has fully satisfied the Russian request for transit permits. However, more than 90 international trade restrictions against Russian goods and services are still in place in 18 countries. The vast majority of these measures are anti-dumping and countervailing duties, as well as certain safeguard measures and quotas. The Russian Ministry of Economic

Development has confirmed its plans to monitor the status of these trade restrictions and to use all available means, including WTO mechanisms, to achieve their cancellation. As one might recall, one of the main advantages of Russian WTO accession was the access to its dispute settlement system. Along with active participation by the Russian Federation in the work on the common WTO agenda in the aftermath of the Doha Round, such access could also contribute to the increased integration of the Russian Federation into the world economy.

Looking forward

Overall, it may be said that even though only half a year has passed since Russia joined the World Trade Organization, this accession has already had a major impact on both Russian law and policy making, and this trend is likely to continue and grow in years to come. The intimate understanding of WTO law, both by local stakeholders and by companies wishing to do business in Russia, is now crucial.