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Russia Lost the First Case in the WTO. What Comes Next?

Date of publication: 2 September 2016

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

Source: European Pravda

The Report of the Group of Arbitrators, which confirmed that application of certain import duties by the Russian Federation does not comply with the country’s obligations in the WTO has been recently published on the site of the World Trade Organization.

This decision is the first one, which was adopted in relation to Russia since its accession to the WTO.

Although Russia has been a WTO member since 2012, it has still not reduced the import duty on some goods to the level of bound rates, which were recorded in the commitments made during the WTO accession.

The EU raised the issue bilaterally with Russia, and at the WTO committees, but it was of no effect. These developments forced the European Union to request consultations in October 2014 and later convene the Group of Arbitrators to settle the dispute in compliance with the WTO procedure.

Brussels argued that failure by Moscow of its obligations in the WTO has a negative impact on exports from the EU countries in the amount of approximately EUR 600 mln per year, and non-compliance with the tariff obligations causes system concern because it violates one of the basic principles of the WTO.

Russia is the EU’s third largest trading partner. Exports from the EU to the Russian Federation amounted to EUR 120 bln per year, mainly machinery, transport equipment, medicinal products, chemicals and agricultural products. However, the Russian unilateral measures adversely affected the development of trade.

The status of a third party in this dispute had Ukraine, Moldova, the USA, Canada, China, Japan, Australia, Brazil, India, Colombia, Chile, Norway, Republic of Korea and Singapore.

In general, the EU challenged 12 kinds of measures that can be divided conditionally into three categories.

The first category of measures includes a number of cases in which Russian applied ad valorem rate of import duty, with the result that exceeded the level of bound rates in the WTO. It is about six tariff lines at the level of 10 characters for the products made of paper and cardboard, which are subject to duty at the level of 10-15%, while the bound rate was 5%.

The second category of measures refers to the cases when the form and the structure of the applied rates of duties differ from the form and the structure of the bound rates. It resulted in the introduction of more bound duties on five tariff lines at the level of 10 characters, namely palm oil, refrigerators and freezers.

The third category covers the twelfth measure, which the European Union called “systemic change of duties”. The point is that in accordance with a certain system import duties above the bound rates are levied.

In general, the Group of Arbitrators ruled in favor of the EU on 11 types of measures. Some of them were removed by Russia during the proceedings.

As for the twelfth measure, the Group of Arbitrators concluded that the EU failed to provide sufficient evidence to establish the existence of systematic and common practice of application of such restrictions.

The report of the arbitrators may be appealed within 60 days. If during this period the appeal is not filed, the report will be adopted, and Russia will be obliged to follow the recommendations.

Russia is unlikely to appeal against this decision. Most likely, the parties will agree on a reasonable period of implementation of the recommendations of the Group of Arbitrators.

An interesting nuance of this case lies in the fact that during accession to the WTO Russia as a member of the Customs Union undertook to bring the whole regulatory framework governing the import/export of goods on the level of the Union in compliance with the WTO rules.

Accordingly, the EU refers to such obligations within the framework of the case and takes measures that are appealed as measures applied by Russia rather than the Eurasian Economic Community. In fact, Russia now has to address the Eurasian Economic Commission with the motion for bringing the Common Customs Tariff in compliance with the obligations of the Russian Federation in the WTO.

In case of non-compliance with the award of the arbitrators the EU will have the legal possibility to apply the “response measures” by suspending concessions to Russia on its part.

What does it mean for Ukraine? On the one hand, Russia must change duties for all WTO members, not just for the EU. However, on the other hand, the positions of the trade dispute in question are nonessential for Ukraine.

More important is creation of a precedent – the first recognition of failure of the WTO rules by the Russian Federation. After all, it is not the only case that the EU initiated against Russia.

In the coming days the decision of the Group of Arbitrators on ban of import of live pigs, their genetic material, pork, pork products and other goods from the EU should be made public, allegedly due to concerns related to cases of African swine fever.

It is a much more important decision for Ukraine! Perhaps this decision will also be in favor of the EU, however, most likely in this dispute the Russian Federation will file the appeal and fight to the end.

In addition, the WTO has two more cases initiated by the EU against the Russian Federation, namely with respect to anti-dumping duties on passenger commercial cars and application of utilization fee.

Previously, when Ukraine had a full-fledged free trade within the CIS, such disputes seemed nonessential for Ukraine. While now, after the beginning of this year the free trade regime with the Russian Federation ceased to operate, all these cases are of fundamental importance for us.

Finally, Ukraine is preparing its cases in the WTO against Russia, in particular, on blocking transit. Although the recent WTO decision has nothing to do with the Russian-Ukrainian conflict, recognition of the illegal policy of the Russian Federation in other cases strengthens our position.

However, it should be remembered that Ukraine’s reputation in the WTO is far from perfect, and Ukraine failed to improve it to the end. In particular, in 2014 (i.e. after the change of power in the state) Ukraine also completed its first case not in its favor, which eventually led to further abolition of the special tax on passenger cars.