The first case of Russia in the WTO: causes and consequences

BRUSSELS/MOSCOW, October 11 - RIA Novosti. The European Union has requested the World Trade Organization to call a panel of arbitrators for the case of the regime of scrap due payment on cars that the Russian Federation employs. This is the first “panel” case within the WTO for Moscow, and it begins simultaneously with the customs friction between Russia and Lithuania. If the WTO rules Russia wrong on the matter of scrap due and if our country does not revoke the existing regime, sanctions by the EU are in order. For example, raised tariffs on the exports to that region, which is the largest commercial partner of the Russian Federation.

The scrap due is currently exacted only from the cars that are imported to Russia. The manufacturers that operate within our country may instead guarantee to the authorities that their cars will be safely scrapped in the future.

The due was enacted shortly after Russia’s joining the WTO. According to the Euro Commission (EC), it levels the decrease of the import tariffs, which Russia adopted at the joining. The EC claims that the scrap duty significantly impacts the exports of means of transportation from the EU to Russia, evaluated at approx. 10 billion euros per year. Eurocommissar on commerce Karel de Gucht pointed out that the automobile industry is key for the EU economy that has not yet recovered from the crisis.

Number trouble

The due on new cars that are imported to Russia from the European Union ranges from 420 to 2,7 thousand euros, on the cars older than three years – from 2,6 thousand to 17,2 thousand. The Euro Commission informs that the due may exceed 145 thousand euros for certain means of automobile transportation like rock haulers. According to EC, “The Russian party estimates that the due brings 1,3 billion euros to the country’s treasury annually”.

Russia is the third most important commercial partner of the European Union. The exports from the EU to Russia reached 123 billion euros last year, while the imports – 213 billion. The EC stresses: “This makes the EU Russia’s largest commercial partner”.

Raw materials are responsible for approx. 80% of Russian exports to the EU, while the European Union supplies Russia mainly with machines and transportation equipment, including means of transportation (some 50%), says the EC.

Background

The practice of payment of the due preoccupied the European Union, and the Ministry of economic development (the MED) of Russia declared in February that the Russian manufacturers will make the same payments as the foreign ones. But the matter remains to be settled in the legislation of Russia.

The European Union initiated the dispute settlement procedure in the WTO with Russia on that issue on July 9. Japan filed a similar request on July 24. Pursuant to the rules of the Organization, the parties to the dispute have a minimum of 60 days for consultations – an amicable settlement without bringing in the WTO officials. The time limit for the Russian-European dispute expired on September 7. The Euro Commission informed that consultations held on July 29 and 30 did not result in the settlement.

Thus, the EU became entitled to request the forming of a special panel (group) on the settlement of the dispute within WTO in September. The request will be considered by the WTO Dispute Settlement Committee during its session on October 22. Russia may dismiss the first request to form the panel if it wishes to continue the consultations, but the second request by the EU cannot be dismissed. According to the Euro Commission information, the EU may file the second request in November, at the next meeting of the Dispute Settlement Committee.

Eurocommissar de Gucht declared Thursday that the EU has exhausted all possible means of finding the mutually acceptable resolution, and that he had no other way than to appeal to the WTO. Maxim Medvedkov, Director of Commercial Negotiations Department of the MED of Russia, later stated that the Euro Commission refused to look for a mutually acceptable way out.

The EU filed the request to form the panel within several days of the first-reading adoption by the State Duma of the draft law, pursuant to which Russian automobile manufacturers will pay the scrap due. John Clancy, Spokesman for the European Commission, declared Thursday that the matter of the due had been raised long ago, but it was still unclear, when the new regime of due payment would be legalized. J.Clancy said that the breach of the rules called for actions.

Nikita Maslennikov, Councilor to the Institute of Modern Development, said: “The EU will attempt to force the adoption of the law. First reading is not adoption”.

An enlightened road to sanctions

Partner of the Law Firm "YUST", Advocate Alexander Bolomatov, is convinced: “This case is noteworthy for the weakness of the Russian position concerning the scrap due”.

A source in the commercial circles of Geneva, where the WTO is located, told RIA Novosti about the possible ways to settle the dispute between the Russian Federation and the EU within the WTO.

When the WTO decides on the calling of the panel of arbitrators, the parties will have to agree on the composition of the panel of three Organization officials. The group will then have six months to decide on who is right in the dispute. That decision may be appealed against. The decision of the appeal instance is definitive and binding on the parties.

If, during the course of the work of the panel, Russia finally adopts the legislation obliging the Russian automobile manufacturers to pay the same scrap due as the importers, this will not cause the automatic termination of the panel’s work. That can only be early interrupted by the claimant’s request, in this case – the EU. Such request may be filed if, for example, the EU becomes satisfied with the due situation (say, if the respective law is adopted in Russia and is satisfactory for the EU). If the European Union still believes that the tax regime in Russia breaches the WTO rules, the arbitrators will keep working.

If the process is not early interrupted, the winning side, when it is over, is entitled to demand that the losing side change the practice that is in effect and breaches the WTO rules. The losing side will have time to do that. The source said that the claimant will be able to impose sanctions unless the losing side changes its practice.

If Russia loses the dispute, the sanctions may take the form of increased tariffs for the exports from our country to the European Union. As the source said: “Then the Russian exports to the European Union will legally become more expensive”. Sanctions may remain in effect until the problem of breached WTO rules is eliminated.

The source added that the EU is not entitled to demand that Russia pay any compensation for the scrap due regime under the WTO rules.

Opinions

The MED of Russia, as M.Medvedkov declares, considers that the statement by J.Clancy, Spokesman for the EC, that the WTO process concerning the scrap due will continue, whether or not the law equalizing the terms for Russian and foreign manufacturers is adopted, is indicative of the Euro Commission’s reluctance to compromise and listen to the arguments of the Russian side. He expressed his regret and disappointment in connection with the EC’s request to form a panel of arbitrators.

Advocate Alexander Bolomatov of the Law Firm "YUST" believes this case of initiation of the dispute settlement proceedings under the WTO to be “extremely important and significant”. He said: “On the example of this case, and perhaps of several future cases, the general principles of agreements will be formulated that were discussed during the process of Russia’s joining the WTO”.

A.Bolomatov reminded that Russia joined the WTO without making many reservations that would be significant for its interests. He stated: “When Russia was agreeing its conditions for joining the WTO with each member state, it made many concessions. Now the consequences of those actions arrive, since there are clear ways of settling disputes within the WTO. And Russia’s determination to obey the decisions taken within the WTO is about to be challenged, and the fact that Russia was unable to secure the conditions of joining the WTO, which would have been significant for our country, makes it more difficult”.

Mikhail Emelyanov, Deputy Chairman of the State Duma Committee on economic policy, innovation development and entrepreneurship, stated that the scrap due should not be imposed neither on Russian nor on foreign manufacturers. M.Emelyanov said: “We should have thought about it when we were joining the WTO and agreeing on the conditions of tariff protection for the automobile industry. Such awkward actions did no good to our industry but shamed our country worldwide. We appear as small-time burglars. The law on scrap due for us as well as for the importers doubtlessly needs to be revoked”.

Sergey Sobko o the CPRF faction, Chairman of the State Duma Committee on industry, expressed the opinion that admitting that the introduction of the scrap due was a mistake and revoking it for all automobile manufacturers would be the right thing to do, but that the Government of the Russian Federation is unlikely to do that because of the budget deficit.

According to the deputy, the implementation of the scrap due for foreign manufacturers never could have produced positive results. He said: “Once they pulled us there (into the WTO), we should not make any hasty decisions. The guys there are tricky too, and they are watching us, for sure”.

Nikita Maslennikov, Councilor to the Institute of Modern Development, believes: “The situation has changed greatly during the recent years: we became a member of the WTO, we try to further our interests from the viewpoint of normalization of the visa regime with the EU. <…> At the same time, when dead-end situations or conflicts arise, the traditional approaches are employed, the deficit of adequate actions in new situations is evident”. He points out that such “head-on” face-offs with the European Union never brought anything useful; for example, the progress on visa matters stalled.

M.Medvedkov said Thursday that the EC’s decision to request the forming of the panel with the WTO “unexpected” and “inexplicable”.

Lithuania and the WTO

Last Monday, Rospotrebnadzor banned the imports of dairy products from Lithuania and adopter stricter measures of control towards meat and fish due to numerous breaches of the legislation. Those include non-compliance of the microbiological, sanitary, chemical and organoleptic indicators of the products. The Euro Commission reacted on Wednesday by declaring that it may initiate a process in the WTO against Russia in connection with the ban on Lithuanian dairy.

The Ministry of Economic development of Russia sees no juridical connection between the EU’s decision to request the WTO to form a panel of arbitrators on the Russian scrap duty regime and the ban on Lithuanian dairy, but does not exclude the possibility of a political background of the matter. Alexey Likhachev, Deputy Minister of Economic Development, said that the EU decision cannot be a retaliation to the increased difficulty of importation of Lithuanian goods to Russia.

J.Clancy, the Spokesman for the EC, said Thursday that the panel request simply coincided with the dairy situation between Russia and Lithuania.

Fraser Cameron, Director of the Russia-EU Center in Brussels, also believes that the two matters are not connected.

The Customs Union has been talked about in the EU lately, in particular in connection with the planned signing of the association agreement with Ukraine. The Russian customs took more severe measures of control over the cargo of almost all Ukrainian exporters in August. The European Commission called upon Russia and Ukraine to quickly settle the situation within the rules of the WTO. The customs of Russia later informed Ukraine of the reactivation of the normal regime of customs clearance for the Ukrainian goods.

According to the experts, the situation at the Russian-Ukrainian border could mean the wish of the Russian authorities to drag Ukraine into the Customs Union or to prevent it from executing a free trade agreement with the EU.

Nikita Maslennikov, Councilor to the Institute of Modern Development, said: “I think that Russia and the European Union need to look for a model of relations that would be satisfactory to both parties <…>. A new construction, with the account of new realities and perspectives, should be looked for. Such way would be much more productive as it would show that the partners are ready to continue their commercial relations in a serious and durable way, and not raise difficulties for each other that are sometimes artificial. And this is valid for both sides – us as well as the Europeans, this is an equal game. We are tied on mutual claims and obstacles”.