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Scylla and Charybdis of Ukrainian and Russian Trade

Date of publication: 13 January 2016

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

Source: Jurliga

A political dialogue has always played an important role in trade relations between the Russian Federation and Ukraine which allowed resolving any trade problems. Political elites and high-ranking state officials coordinated the terms of lifting trade barriers, introduced them into the protocols of a bilateral commission, road maps etc. Even after establishment of the Customs Union the parties had a special platform for reaching agreements – a trade dialogue between Euro-Asian economic commission and the Ministry of Economic Development and Trade of Ukraine which was held two times a year: in spring – in Kyiv, and in autumn – Moscow.

With an outbreak of political problems between two countries two-party trade contacts and negotiations were ceased.

There is an ongoing “dialogue” only within the work of the WTO bodies (committees and the dispute settlement body), as well as within three-party consultations Ukraine-European Union-the Russian Federation, which were established for minimization of consequences of establishment of the trade barriers. Due to such consultations the Russian Federation managed to bargain postponement of entry of the EU-Ukraine Association Agreement into force and advanced new claims towards further postponement of such entry into force this year.

In October and November 2015 the Prime Minister and the Minister of Economic Development and Trade of the Russian Federation informed about their intentions to tighten the economic trade regime with Ukraine in view of prospective enactment of the Association Agreement and no progress in three-party negotiation process.

The President and the Prime Minister of Ukraine were not slow in their response and declared that there would be no postponements and the Association Agreement will come into force from January 01, 2016. They also warned the Russian party that in case of embargo and increase of duties Ukraine will act accordingly.

What trade restrictions have already been introduced?

According to the experts’ opinion the Russian Federation has assumed more than 130 measures influencing the trade and investment process concerning Ukraine. The first wave of “demonstrative” trade restrictions was introduced prior to the summit meeting in Vilnius and served as a warning for the Ukrainian elites of what it is to await in case of enactment of the Agreement with the EU.

Among the bodies restricting the trade in food products are the Federal Service on Customers’ Rights Protection and Human Well-being Surveillance and Federal Service for Veterinary and Phytosanitary Surveillance which exercise control measures concerning confectionery, milk, cheese and meet products, alcoholic and beer drinks, vegetables and other plant products, corn grits, sunflower seeds, soya, oil seed meal products, vegetable/fruit and fish preserves etc.

The State Fiscal Service of the Russian Federation has started using risk profiles which led to delays at customs as well as selective non-recognition of Ukrainian certificates of origin.

The Russian Federation has ceased to acknowledge validity of TIR carnets of Ukrainian forwarding companies and made transit of Ukrainian freight transport through it territory more difficult. The group of industrial products towards which measures of restricted export were applied included rock-salt, wall-paper, household chemicals and chip board.

Russian Federal budget authority “The Certification Register at the Federal Railroad Transportation” has unilaterally terminated validity of certificates issued by Ukrainian manufacturers of railway carriages and crossing switches.

In addition the Eurasian economic commission has initiated anti-dumping probes against Ukrainian ferrosilicon manganese, steel wheels, forged rolls, corrosion-resistant tubes and pipes, steel pipes and fittings according to which it is proposed to introduce a 4.32-26.35% of anti-dumping duty for a five-year period with the right of prolongation.

In their turn Ukrainian exporters started demanding corresponding measures to expand the internal market and minimize losses suffered as a result of decreased export. But for taking corresponding measures required are the legal mechanisms allowing to secure them. Ukraine was not ready to apply corresponding “concealed measures” in the form of sanitary and phytosanitary measures or technical barriers as soon as any inspections were forbidden by the legislation.

At the same time Ukraine introduced special selective sanctions applied to foreign economic activities of certain Russian companies as well as used certain legal instruments of trade protection in the form of anti-dumping and countervailing measures.

For the first time Ukraine carried out price adjustments towards gas prices within the anti-dumping investigation related to ammonia nitrate and applied 38% duty as well as introduced a compensation duty towards automobiles imported from the Russian Federation. As a result of re-consideration of the anti-dumping duty Ukraine extended the measures applied to the Russian float-process glass and crossing switches. Competent authorities initiated investigation regarding carbamide, caustic soda as well as re-considered the measures applied to the chip board, asbestos wallboard and abrasive wheels. As a result the trade turnover between the countries has decreased significantly and Ukrainian and the Russian parties raised the corresponding disputes in the WTO.

What is to be expected from January 01, 2016?

It is to be expected that starting from January 01, 2016 Ukraine will, nevertheless, impose the embargo and will raise the rates of duties applied to certain list of goods up to the level of tariff bindings on the Russian Federation in the WTO. By doing this the Russian Federation will fulfill its promises which it numerous times gave at three-party negotiations – to block the trade with Ukraine in order to protect its own market from the export of European products under the guise of Ukrainian goods, as well as to raise the issue of lifting the preferential regime of the CIS free-trade zone enjoyed by Ukraine.

What does it mean to lift the Ukrainian preferential trade regime in the CIS?

According to the Agreement on free trade zone Ukraine enjoys the preferential trade regime with the Russian Federation and certain CIS countries. In 2011, when than-Prime Minister – Mykola Azarov – signed the said Agreement Annex 6 (which had not been planned in the coordinated text) suddenly appeared. The Annex 6 stipulated the possibility of the countries – members of the Customs Union – to unilaterally increase the rates of the duties in case of import growth which inflicts harm to the industrial sector of the Customs Union as a result of conclusion by Ukraine of the Association Agreement with the EU.

With the mentioned purpose in mind the Russian Federation offered Belarus and Kazakhstan to uphold a new resolution on new regime applied to Ukrainian goods at the meeting of the council of the Eurasian economic commission. However, these countries did not welcome such proposal as soon as the import had not increased and no loss had been suffered, but the Russian Federation received the right to act unilaterally.

So, on September 19, 2014 the Government of the Russian Federation upheld a Decree “On introduction of import levies onto the goods with origin from Ukraine”. The Decree contained the list of products towards which levies in the amount of common customs tariff will be applied (instead of zero customs duty). These measures threaten to force Ukrainian products from Chinese and the Russian markets.

The increased duties will be applied to the products with total cost of around USD 800 mln a year. At the same time the average level of tariff protection applied to these products constitutes around 8.2 %.

Thus, the amount of the duties may be increased for importing goods to the Russian Federation, but (as previously) the preferential regime will continue to be valid in relations with Belarus, Kazakhstan and other countries.

The Russian Federation may not restrict itself to the mentioned products only. It may further broaden the list and include into it the whole nomenclature of Ukrainian import as well as to return to the matter of increasing the rates of duties from the part of Belarus, Kazakhstan and other CIS countries.

What does it mean to institute a ban (embargo) onto Ukrainian products?

In addition to increase of amounts of the rates Ukraine should wait for introduction of product embargo from January 01, 2016 as soon as in August 2015 the Government of the Russian Federation included Ukraine into the list of the countries under the embargo (along with Canada, the USA, Australia, Norway, Montenegro, Island and Lichtenstein).

It may safely be said that potential ban will influence Ukrainian export of meat, sausage products, fish, milk, milk products, foodstuffs produced on the basis of vegetable oils, as well as vegetables and fruits. In general Ukrainian export may suffer a decrease for the total amount of USD 689 100 000 a year compared with 2013 or for the amount of USD 388 300 000 compared with 2014. In 2012-2014 the share of the mentioned goods in the general exports of Ukraine to the Russian Federation constituted approximately 4% and in 2015 – less than 3%.

How will Ukraine react?

Declarations made by Ukrainian Government about an adequate reaction should not be underestimated as soon as they are totally real. In the course of the recent two years Ukraine has started organizing a legal framework to secure attachment of the mentioned sanctions. Passing the Law of Ukraine “On sanctions” at first and the Strategy of the national security of Ukraine our country has legally secured the status of ongoing “trade war” expressed in aggressive actions of the Russian Federation.

Corresponding measures may be introduced in accordance with the mentioned Law “On sanctions” or through provision of such powers to the Cabinet of Ministers of Ukraine to take certain measures under the simplified procedure. Moreover, the Government is creating a system of engagement by the state of foreign legal advisors to settle the disputes at the WTO.

We may see new disputed in the WTO in the nearest future as well as witness approval and introduction of new lists of goods onto which Ukraine will impose embargo or increase the rates of duties in response. The main thing is that such lists are published in advance prior to their introduction so that Ukrainian companies are able to refocus and redirect their sales and purchases.

In this context an advice may be given to the companies to enter into cooperation with special-purpose associations and ministries so that the critical import was not included into the list of the prohibited goods as well as to seek for new possibilities at other markets as soon as apparently there will be no thaw in trade relations between the Russian Federation and Ukraine.