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Pandora’s Box Opened by Russia: What are the Threats of the Claim against Ukraine in WTO

Date of publication: 3 July 2017

Olena Omelchenko, Head of International Trade
Source: European Pravda

Russian government informs on filing a complaint to World Trade Organization (WTO) against Ukraine regarding alleged restrictions and prohibitions implemented against the Russian Federation. This dispute is expected to be one of the most complicated and large-scale in the history of WTO.

The WTO site does not provide any official information yet, although the statements of Mr. Maksim Oreshkin, the Minister of Economic Development of the Russian Federation, make it clear that the request for consultations has been coordinated at the bilateral meeting of the Minister with WTO Director-General Roberto Azevedo.

During the meeting the Minister paid Mr. Azevedo’s attention to the fact that Russia has reasonable reasons to presume that Ukraine takes measures in breach of its obligations to WTO. Such approach to the case indicates the significance and particular reference to this matter from Russia.

What issues may be disputed by Russia?

Based on the press-release of the Ministry of Economic Development of the Russian Federation, Russia shall allegedly try to dispute the maximum of Ukrainian restrictions to trade and market access that have been implemented since 2014.

First of all, this may be the prohibition of import to the customs territory of Ukraine of goods manufactured in the Russian Federation. This prohibition was introduced by the Resolution of the Cabinet of Ministers of Ukraine dated 30 December 2015 No. 147 with further amendments.

Pursuant to the Cabinet of Ministers decision the ban relates only to the import of goods from Russia, it was introduced only in response to the Russian embargo for food products and entered into force in 10 days. Ukraine shall supposedly extend the abovementioned prohibition until RF terminates its embargo.

Ukrainian ban reportedly covers meat, milk, fish and some foods of plant origin, confectionary, tea, beer and alcohol beverages, cigarettes, railway equipment and parts thereof, diesel electric locomotives, potassium chloride, detergents, certain agrochemicals, etc. These goods were particularly indicated in the press-release.

Secondly, these may be personal special economic and others restrictive measures (sanctions), listed in the decision of National Security and Defense Council of Ukraine dated 28 April 2017 and enforced by the Decree of the President of Ukraine of 15 May 2017 No. 133/2017.

It is commonly known that the Law of Ukraine “On Sanctions” envisages 25 types of sanctions, in particular, restrictions of trade operations; asset blocking; restriction and ban of resources transit, flights and freights; license and other permits revocation; restrictions and limitations of telecommunication services and usage of public telecommunication networks; prohibition to participate in privatization; implementation of additional measures in economic, veterinary, sanitary and phytosanitary areas. Some of these sanctions could have been potentially included into the list of those sanctions that RF deems incompatible with WTO standards.

Moreover, the request for consultations may possibly contain even the special foreign economic sanctions applied pursuant to Article 37 of the Law of Ukraine “On Foreign Economic Activity”, or the restrictions for individuals and legal entities of the Russian Federation to participate in privatization implemented by the Law of Ukraine dated 16 February 2016 No. 1005.

The consultations shall obviously include the discussion on the application of restrictions in banking and financial areas. For example, such restrictions as the prohibition for credit institutions to fulfill wire transfers, and restrictions on issuing the licenses for foreign exchange operations.

In addition, judging by the press-release, Russia shall raise the issue of the legitimacy of special tax treatment applied to the import of Russian used cars. The law of Ukraine “On Amendments to Subsection 5 Section XX “Transitional Provisions” of the Tax Code of Ukraine Concerning the Stimulation of Used Vehicles Market Development” dated 31 May 2016 No. 1389-VIII envisages the reduction of excise rates for used cars by 31 December 2018.

The envisaged rates of excise duty do not apply to light motor vehicles manufactured in the country declared occupier country under the laws of Ukraine and/or aggressor state with regard to Ukraine under the legislation, or to those that are imported from such aggressor state and/or occupied territory of Ukraine set forth in Ukrainian law.

Thirdly, it is not worth to expect that RF shall miss the opportunity to challenge the ban on the dissemination and demonstration of Russian films and programs, implemented under the applicable Law of Ukraine “On Cinematography”, as well as the limitation of access of the international printed products with anti-Ukrainian contents envisaged by the Law of Ukraine dated 8 December 2016 No. 1780-VIII, or the restriction of journalistic activities envisaged by the Resolution of the Verkhovna Rada of Ukraine dated 12 February 2015 No. №185-VIII “On Temporary Suspension of the Accreditation of Journalists and the Representative of Certain Russian Media within State Authorities of Ukraine”.

It is more likely that the Russian Federation shall indicate the following issues with regard to all the abovementioned points: absence of market access, breach of non-discrimination principle, lack of transparency and predictability, as well as absence of adequate opportunity to comment on decisions.

The Russian Federation may inter alia refer to the violation of Articles I, II, III, X, XI GATT 1994 and Articles II, III, XI, XVI, XVII GATS, and certain Articles of the Agreement on the Application of Sanitary and Phytosanitary Measures, Agreement on Technical Barriers to Trade and Agreement on Import Licensing Procedures.

Estimated position of Ukraine

Ukrainian position shall by all means be based on the fact that the Verkhovna Rada of Ukraine declared Russia to be the aggressor-state, and therefore it believes that all trade restrictions fall within the exceptions to WTO rules due to national security interests.

Article XXI GATT is one of the basic norms that allow the application of trade restriction measures as exceptions. The Article provides the maximum freedom to the countries to independently designate and take any actions that they consider necessary for the protection of their “essential security interests” in case they are taken in time of war or other emergency in international relations.

Taking into account that Ukraine did not designate at the legislative level the existence of war time, it is more likely that the country shall argue the presence of emergency in international relations.

Among the other issues, in the course of the dispute Ukraine will have to provide the arguments that the abovementioned restrictions were applied in support of its legitimate interests of national security with the real and legal threat, and the implemented measures were equivalent to the existing danger and/or threat. Moreover, it will necessary to reason the relation between the threat to essential security interests and the adequacy of the applied measures.

Article XXI GATT therewith has been quite rarely used and has not been officially construed earlier by WTO Dispute Settlement Body. Consequently, there is no precedent practice to designate the legitimacy of the national security interests under the subjective decision of certain WTO member-states, and which could establish the elements impacting the procedure, conditions and circumstances of Article XXI GATT application.

This dispute between Ukraine and the Russian Federation may become the first precedent for the interpretation of Article XXI GATT, which may influence the understanding of the legitimacy of its application.

Moreover, until now this Article was deemed to be a sort of Pandora’s Box the opening of which may cause a serious meltdown in the present international trade system. This is the exact reason why the EU, the USA, Canada, Australia were hesitant to appeal to this Article even after the application of products embargo against them by Russia.

In addition, according to unofficial sources, these were the states that refrained Ukraine from challenging the Russian sanctions in WTO.

Today this Pandora’s Box has been opened by Russia. And this means that the dispute between Ukraine and RF may become a global-scale event. Therefore, a lot of WTO member-states shall carefully follow the development of the situation, as this case law may become obligatory for them.

This means that the Russian claim may give the green light to the similar statements, but this time against Russia itself.

There is however a popular opinion among the subject matter experts that the Dispute Settlement Body shall continue abstaining from the establishment of the detailed precedent with regard to the interpretation of Article XXI GATT in order to keep the balance and ensure non-infringement of sovereign rights.

Only practice and time will show how possible this scenario is.