COMMENT: Russia on cusp of trade war with Europe

By bne IntelliNews July 17, 2013

Policy and Regulatory Report -

Russia is likely to introduce an extension of the recycling fee on domestic manufacturers soon, international trade lawyers have told PaRR.

As PaRR previously reported, the European Union (EU) has launched its first claim in the World Trade Organization (WTO) against Russia for imposing a recycling fee on imported cars.

Retaliation measures by the EU are possible only if the WTO dispute takes its full course up to a ruling of the Dispute Settlement Body, and after an authorisation for the EU to impose such measures, e.g. additional tariffs on Russian exported goods, according to Bogdan Evtimov, a Brussels-based Partner at Dentons. However, for that to happen, Russia in practice would have to take a political decision not to proceed with (or significantly delay) a bill according to which domestic manufacturers would not be exempt from paying the recycling fee, he said. However, Russian authorities have already expressed their political intention to pass such a bill, Evtimov added.

The recycling fee is set in the Federal Law 28.07.2012 N 128-FZ from September 1, 2012. It is in relation to imported and domestically produced motor vehicles. However, the same law provides for an exemption for vehicles that are produced by organizations [domestic manufacturers], which have agreed to ensure safe handling of waste generated as a result of the loss of consumer qualities of the vehicles in question, said Vladimir Tchikine, a partner in charge of customs and international trade at Goltsblat BLP, the Moscow branch of the Berwin Leighton Paisner law firm.

At the same time, Russia committed itself to reducing the import duty on motor vehicles (5% for cars and 10% for trucks) in connection with its WTO accession. This reduction took effect on August 23, 2012, in compliance with the WTO accession Protocol, which took effect for Russia on 22 August, 2012.

It's no secret that the recycling fee had to counterbalance the reduction in duties, said Tchikine. The proof of this statement is in the fact that domestic manufacturers were immediately released from its payment subject to certain conditions, whilst foreign car producers cannot get such an exemption in principle, he explained.

In addition, the size of the fee is almost equal to the amount of the reduction in import duty. Thus, there is reason to believe [and the European Commission (EC) seems to believe] that Russia, eight days after its WTO accession, violated its commitments to reduce tariffs set out in Annex 1 to the Protocol, Tchikine concluded.

As a result of negotiations, the EC and Russia had reached an informal agreement on the extension of the recycling fee to domestic manufacturers. The agreement could have been implemented by the Russian Parliament (State Duma) through the adoption of a bill, but this had not been done.

The Russian Government on May 13, 2013 introduced a bill to exempt domestic manufacturers from paying the recycling fee and on 17 June, 2013, the Council of the State Duma reviewed and supported it. However, on 5 July, 2013, the State Duma went on its annual summer holiday and the bill did not become law.

The EC waited until the end of the spring session of the State Duma, and once the session was over, it filed the suit in the WTO.

The Russian Government is likely to extend the recycling fee on domestic manufacturers. This is what the Russian Government intends to do (at least all known facts confirm this intention), according to Vladimir Tchikine.

This may happen when the State Duma returns from vacation in September, he added.

Other Possible Scenarios

Cancellation of the recycling fee completely is another possible scenario, said Tchikine. This solution will be welcomed by the European Commission, and both European and Russian car manufacturers, but not by the Russian Government, he added.

If Russia decides to fight, the legal battle at the WTO court may last for years, Tchikine predicted. If Russia losses this battle, the EU will have the right to impose countervailing duties in the amount equal to the disputed recycling fee on any goods originating from Russia, he added.

It remains to understand what these goods are, Tchikine added. 'It's hard to predict because the Commission is prone to impose anti-dumping duties whenever it suits,' he added. Anti-dumping duties have already been imposed on many manufactured goods originating from Russia, he added.

There is also no fundamental prohibition to the EC also introducing a countervailing duty, in addition to the existing anti-dumping duty, though such a move would look odd, Tchikine said.

It is clear that there are few manufactured goods originating from Russia to which the countervailing duty could effectively apply. Oil and gas could be good candidates, but "I don't think that shooting one's own leg is a good idea either", according to Tchikine. Therefore, if the EU wins the case, the European Commission will face a difficult choice in selecting goods originating from Russia eligible for the countervailing duty. This is the reason why the case has to be resolved amicably, he added.

Winners and Losers

The Russian Government and the Commission will welcome the most likely scenario of extending the recycling fee on domestic manufacturers. However, both domestic and foreign car manufacturers will not be happy, said Tchikine.

This scenario would be especially disappointing for certain European car manufacturers who started production of cars in Russia, thus becoming domestic manufacturers and so able to qualify for exemption from the recycling fee. When making a decision about investing in Russia, these companies acted in accordance with a specific business plan, which would not have included either the recycling fee or the import duty reduction. The European Commission has taken the difficult decision to file the suit against Russia in the WTO, contrary to the interests of some European automakers who have already invested in Russia, Tchikine observed. ??The EC has to regularly consider and weigh the interests of different stakeholder groups, said Bogdan Evtimov. In this case, the interests of EU automobile exporters appeared to prevail, possibly because the value of EU automobile exports to Russia is higher than the value of investments of EU automobile producers into automobile manufacturing in Russia, he said.

The EC normally initiates several WTO cases every year, and it appears that the EC decided that a case against Russia is currently one of the most pressing, said Evtimov.

The Russian automobile market is attractive for European producers because, in contrast to the European automobile market, the Russian market is expected to grow, said Artem Egorenkov, a sector analyst at Uralsib Capital. The Russian automobile market is expected to decline by 4% in 2014, but after that resume growth of between 5% and 6% on average each year until 2021, he added. 

In addition, the structure of the Russian automobile market benefits European automobile producers that make mid-price and premium segment cars, Egorenkov said. B class cars [an EU classification of car size] have a 40% share in the Russian automobile market, and C class [another size classification] cars have 23%, while cross-over and sports utilities vehicles (SUVs) have a 27% share. Cars with a price above USD 15,000 make up around 56% of the market, Egorenkov said. 

Solutions for Russian automobile sector

The Russian Government may instead decide to provide alternative incentives to the Russian automobile sector soon, said Bogdan Evtimov, referring to recent media reports on the issue. 

Kommersant recently reported that the Russian authorities have given 'an asymmetrical response to the EU suit in the form of an auto loans subsidy program'.

The publication reported that since July 2013 Russia has started operating a programme of subsidising the interest rate on car loans for domestic vehicles and cheap foreign car brands that are both imported and manufactured in Russia.

This programme of subsidies is designed to benefit various producers, including those foreign producers that have production in Russia, Egorenkov said. Hence, it is not exactly a response to the EU suit, he added. 

The EC may be concerned about subsidies especially in case they fall under the category of 'prohibited' subsidies, said Bogdan Evtimov. 

According to the WTO's website, two categories of subsidies are prohibited by Article 3 of the SCM (Subsidies and Countervailing Measures) Agreement. The first category consists of subsidies contingent, in law or in fact, whether wholly or as one of several conditions, on export performance (export subsidies). A detailed list of export subsidies is annexed to the SCM Agreement. 

The second category consists of subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods (local content/import substitution subsidies). 

These two categories of subsidies are prohibited because they are designed to directly affect trade and thus are most likely to have adverse effects on the interests of other Members, the WTO says. 

The new programme on interest rates for car loans in Russia, as reported by the Russian media, does not on its face appear to fall under the criteria for prohibited subsidies, according to Evtimov. However, that may change in the case that the subsidies would predominantly benefit the sales and purchases of domestically produced cars in Russia, discouraging purchases of similar imported cars, Evtimov said.

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