Adequate Measures in Response: Myth or Reality?

Olena Omelchenko, Partner, Attorney at Law, Head of International Trade Practice

Source: Liga

Lawyers have analyzed Ukraine’s instruments in a trade war with Russia

Last year was very difficult not only for the industry, located in the Donetsk and Lugansk regions, but also for a number of food producers, which fell under trade bans imposed by the Russian Federation. In particular, the goods that fell under measures imposed by Rospotrebnadzor and Rosselkhoznadzor included:

• confectionery;
• dairy, cheese and meat products;
• fruits and vegetable canned;
• juice products;
• alcoholic beverages and beer;
• potatoes, sunflower seeds, soybeans and other plant products.

Carriage works and manufacturers of switches had problems with recognition of certificates. Another significant negative warning for business relations was a resolution No. 959 adopted by the Government of the Russian Federation. It set forth the list of Ukrainian goods which according to the Association Agreement with the EU, if implemented, could be subjected to import duty in the amount of the Common Customs Tariff of the Customs Union.

In 2014, there were problems in trade with the Republic of Belarus, which on the eve of the World Hockey Championship applied import licensing of Ukrainian goods being protectionist in its nature. Licenses were issued only after price and quantity self-restraint by the Ukrainian producers. The Ukrainian confectionery and brewing industries, as well as producers of cement, pasta and glass products, suffered significant losses as a result of such measures.

Many Ukrainian producers call such actions “trade war” and strongly demand the government to take the appropriate countermeasures.

However, has Ukraine sufficient legal grounds to take the appropriate countermeasures as regards trade bans of foreign countries?

Indeed, according to the Lawof Ukraine “OnForeign Economic Activity”,ifother states, customs unions oreconomic communitieslimitimplementation oflegitimate rightsand interests of the Ukrainianimporters/exporters, the appropriate countermeasures can be taken.

According to the results of investigation conducted by the Ministry of Economic Development, such measures are applied by the Verkhovna Rada of Ukraine, the Cabinet of Ministers of Ukraine, the Interdepartmental Commission on International Trade in the form of full or partial embargo, depriving of the most favored treatment or preferential special treatment, introduction of a special fee, introduction of licensing of foreign economic transactions, establishment of quotas.

It should be noted that our state does not abuse of this mechanism. In practice the appropriate measures have been applied several times and only in exceptional cases:

• in 2011, the CMU introduced licensing and setting quotas on imports to Ukraine of light motor vehicles from Uzbekistan. The quota was 3 cars per year;
• in 2014, a special duty of 55.29% and 60.05% on some Belarusian goods was introduced.

After introduction of the above measures by Ukraine, the parties reached agreement with each other and restored bilateral trade.

Significantly, international conflicts are generally resolved by means of international rather than domestic law; the latter is applied in exceptional cases in the absence of international arrangements.

Therefore, settlement of trade disputes between Ukraine and Russia is, first and foremost, determined in accordance with the procedure set forth by the Rules and Procedures Governing the Settlement of Disputes concluded in the framework of the WTO and the Free Trade Agreement (CIS of October 18, 2011). Introduction by Ukraine of appropriate measures in response to the Russian trade restrictions pursuant to the Law “On Foreign Economic Activity” does not settle the trade dispute. Moreover, such measures will entail violation by Ukraine of the basic principle of international law racta sunt servanda (agreements must be observed. – Ed.), some international treaties, including the WTO Agreement, and will aggravate the situation in bilateral trade.

Domestic Law

Recently the draft law No. 2129 “On Amendments to the Customs Code of Ukraine Regarding Enforcement of Sanctions against Aggressor State” was registered in the Parliament. The draft law provides for ban on movement across the customs border of Ukraine and release for free circulation of goods originating in the Russian Federation. The draft law attracted attention of businesses engaged in foreign trade with the Russian Federation. Meanwhile there is no reason for concern as introduction of such ban is possible only after approval of decision on imposition of sanctions pursuant to the law “On sanctions”, which has not become effective.

On September 11, 2014, the Cabinet of Ministers at its meeting approved proposals to the NSDC on imposition of personal sanctions in connection with the Russian aggression against Ukraine in the military, economic, energy and information areas.

However, the decision of the NSDC on imposition of sanctions has not been published yet. After adoption of the Law “On Sanctions” and decision of the NSDC, immediate imposition of sanctions was declared, but they have not been imposed. Even personal sanctions have not been imposed not to mention ban on trade in non-military goods.

In the Explanatory Memorandum to the draft law No. 2129 it is stated that such position of Ukraine is not clear to many countries that have imposed sanctions against the Russian Federation (41 countries and the Parliamentary Assembly of the Council of Europe). The issue on imposition of sanctions by Ukraine comes to the fore regularly and becomes relevant after expressing regular concerns that Ukraine is doing nothing in this direction.

If Ukraine imposes trade restrictions on the Russian Federation, we should expect such negative consequences as an embargo on trade in goods of Ukrainian origin from the RF, following the example of ban on imports from the USA, EU, Canada, Australia, and the Kingdom of Norway. At least the legal mechanism of imposition of embargo in response is set forth in the decree of the RF President of August 06, 2014.

If Ukraine imposes trade restrictions on the Russian Federation, we should expect such negative consequences as an embargo on trade in goods of Ukrainian origin from the RF, following the example of ban on imports from the USA, EU, etc. In fact, imposition of trade sanctions would mean the outbreak of a “trade war” that the Ukrainian export-oriented economy can fail considering its extremely difficult situation. The Russian market continues to be one of the key markets for Ukrainian producers, and transnational companies are not interested in making such decisions as it will affect their turnover.

This is precisely why imposition of ban on the Russian goods seems more than doubtful, and approval of draft law No. 2129 most likely will not result in sanctions in the form of ban on trade for the entire list of goods, at least, for the foreseeable future.

WTO Assistance

Therefore, the only right way is to prove based on the WTO that Russia’s actions are unlawful. While participating in work of bodies of this international organization, such as the Council for Trade, the Committee on Sanitary and Phytosanitary Measures, the Committee on Technical Barriers, Ukraine expressed concerns about violation of Russia’s obligations, but has not yet requested consultation for settlement of dispute.

Given the above, it can be concluded that trade disputes must be resolved in a civilized way according to the WTO procedures. The Ukrainian government must ensure it by adopting the domestic procedure for initiating cases in the WTO and evidence collection. Further, it is necessary to allocate funds for the Ministry of Economic Development to attract international legal advisers following the example the Ministry of Justice as part of representation of interests of the state in international courts of arbitration and international investment disputes.

Only after that business can expect the state to take actions for applying international legal mechanisms for resolving contentious matters and protecting interests on a regular and systematic basis.