The EU-Russia WTO Rumble

On 9 July 2013, the European Union notified the WTO that it was requesting dispute settlement consultations with Russia over draft Russian regulations that the EU alleges would discriminatorily levy a “recycling fee” on imported vehicles, while exempting domestic vehicles and vehicles imported from Customs Union partners Belarus and Kazakhstan from similar obligations (the case is catalogued as Russian Federation – Recycling Fee on Motor Vehicles – WTO Doc WT/DS462/1 [Request for consultations]). By requesting the WTO for consultations, the EU is effectively taking the first step in a potentially years-long dispute process that could either end in a negotiated settlement or a ruling by the WTO’s Dispute Settlement Body (DSB). Interestingly, this is the first time that Russia is being party to a WTO dispute since it acceded to the organization on 22 August 2012. The political implications flowing from this action are also potentially profound: the case is being seen as a litmus of increasingly frigid relations between Moscow and a number of European capitals (Russia is the EU’s third largest trade partner with and EU vehicle exports to Russia valued at over €10 billion in 2012), and will test Russia’s enthusiasm for greater integration into the multilateral trade architecture.

Why is the EU taking Russia to the WTO? 

The EU argues that a Russian law imposing a charge on imported vehicles is protectionist in nature. Specifically, the EU argues that in September 2012, Russia’s Federal Law No. 128-FZ of 28 July, 2012 on Amending the Federal Law on Production and Consumption and Article 51 of the Budget Code of the Russian Federation inserted an article (Article 24) into Federal Law No. 89-FZ of June 24, 1998 on Production and Consumption imposing a “recycling fee” (“Утилизационный сбор”) on vehicles imported into Russia:

1. За каждое колесное транспортное средство, ввозимое в Российскую Федерацию или произведенное, изготовленное в Российской Федерации, за исключением колесных транспортных средств, указанных в пункте 6 настоящей статьи, уплачивается утилизационный сбор в целях обеспечения экологической безопасности.

(1. For every wheeled vehicle imported to the Russian Federation or manufactured in the Russian Federation, except for wheeled vehicles as described in paragraph 6 of this Article, a recycling fee shall be paid in order to ensure environmental safety.)

….

3. Плательщиками утилизационного сбора для целей настоящей статьи признаются лица, которые: осуществляют ввоз транспортных средств в Российскую Федерацию; осуществляют производство, изготовление транспортных средств на территории Российской Федерации;

(3. Payers of the utilization/recycling fee for the purposes of this Article shall be persons who: import vehicles into the Russian Federation; are engaged in the manufacture or production of vehicles in the Russian Federation;)

….

6. Утилизационный сбор не уплачивается в отношении транспортных средств:

…которые ввозятся в Российскую Федерацию с территорий государств – членов Таможенного союза в рамках ЕврАзЭС и имеют статус товаров Таможенного союза. Утилизационный сбор в отношении транспортных средств, предусмотренных настоящим абзацем, не уплачивается при соблюдении условий, определенных Правительством Российской Федерации;

(6. Recycling fee is not payable in respect of vehicles:

…which are imported to the Russian Federation from the territory of states – members of the Customs Union within the Eurasian Economic Community and have the status of goods of the Customs Union.)

As a WTO member, Russia is bound by the principle of non-discrimination, which encompasses the twin rules of national treatment and Most Favored Nation (MFN). Both require that imports be treated no less favorably than a like import from any other WTO member state, which in turn must be treated no less favorably than any directly competitive domestic product. Under the proposed recycling fee regulations, purchases of imported cars in Russia would incur a fee ranging between 17,200-110,000 руб. (€405 – €2,600) fee for new vehicles, and between 75,000-450,000 руб. (€1,770 – €1,580) for used vehicles. The EU argues that this fee would effectively offset any reduction in tariffs on vehicle imports that Russia would have undertaken as part of its WTO accession, and it asserts that despite the stated environmental objective of the Russian regulation, “the aim of Russia’s so-called “recycling fee” is not to help the environment but discriminate arbitrarily and unjustifiably against imported vehicles”.

The EU argues that the impact of the Russian recycling fee on European exporters would be considerable. According to its communiqué,

The recycling fee has a clear negative impact on EU exports to Russia and on the competitive position of EU products on the Russian market.

The fee affects exports from EU to Russia worth €10 billion a year (in 2012). The levels of the fee represent a significant proportion of the customs value of vehicles concerned and, in some cases, are prohibitive. According to Russia’s own estimates, the fee (levied almost exclusively on imported vehicles) provides the Russian treasury with an extra €1.3 billion every year.

European Commissioner for Trade Karel De Gucht said that “the fee is incompatible with the WTO’s most basic rule prohibiting discrimination against and among imports (and) is severely hampering trade in a sector which is key for the European economy”.

What was the lead-up to 9 July?

As with most WTO disputes, the EU would have first reviewed the relevant factual and legal issues in order to gauge the seriousness of a potential Russian breach and the likely complexity of a WTO dispute process. Article 3.7 of the Dispute Settlement Understanding (DSU – appended to the WTO Treaty via Schedule 2 of the Treaty) requires the initiating state to make a determination as to whether a WTO action would be fruitful. The EU would have raised its concerns with Russia directly with a view to bilaterally resolving the inconsistencies in question without the need for costly and lengthy litigation. According to the EU, European officials had been engaging Russian counterparts on the tax since the bill’s introduction in the Russian State Duma in September 2012. At the 26 November 2012 meeting of the WTO Trade in Goods Council, Russia was questioned on both its vehicle recycling tax legislation and ban on import of live slaughter pigs from the EU. At the EU-Russia Summit in Yekaterinburg in June, the EU urged Russia to extend the recycling tax to domestically-produced cars so as to remove any potential discriminatory effect on foreign exporters.

The EU had then given Russia a 1 July deadline to comply with its WTO obligations. When that deadline passed, presumably without a satisfactory Russian response, the EU moved, under Article XXII.1 of the GATT, to notify its request for consultations to the WTO’s Dispute Settlement Body (DSB) and the relevant councils and committees as required by Article 4.4 of the DSU. In line with the WTO’s requirement for procedural fairness, Russia would have been informed in writing of the EU’s complaint as well as the legal basis for the complaint.

How has Russia responded?

Russia’s Ministry of Economic Development, which leads on Russia’s WTO activities, said that the Russian government has sought to make amendments to Federal Law 89-FZ (as amended by Federal Law 128-FZ) in order to make Russians equally obligated to pay the recycling fee. On 31 May 2013, the Russian government submitted Draft Federal Law No. 289157-6 on Amendments to Article 24 of the Federal Law on Production and Consumption (Законопроект № 289157-6) to the State Duma – according to the Russian Governmment’s Gazette, the explanatory note to the Amendment made it clear that “(I)n this way, Russia will fulfill its obligations WTO member to establish a level playing field for domestic manufacturers and importers. In turn, it will significantly reduce the risks of filing a lawsuit in the dispute settlement body in the WTO against the Russian Federation in connection with the introduction of the recycling collection”. However, the Ministry clarified that as of July 1, the Amendment was still pending in Russia’s legislature and had not been passed in time for the July 5 start of the summer recess. The Ministry’s deputy head for trade negotiations said that although Russian legislators would not be able to review the amendment until August 26, she was hopeful that the amendment could be passed before the 60-day     mandated under the WTO’s Dispute Settlement Understanding (DSU) elapsed on September 7.

The concerns of Russian economic stakeholders will invariably affect Russia’s appetite for a negotiated settlement or full litigation. At least one major Russian vehicle manufacturer, Kamaz, has expressed concerns that the application of the recycling fee to domestic players would have a significant impact on its own operations: Kamaz estimates its potential recycling fee burden to total 10-18 billion руб., which it says would translate into a 5-25% rise in the price of its vehicles.

In an interview on the first anniversary of Russia’s accession to the WTO, Deputy Economic Development Minister Alexei Likhachev assured that there was “absolutely no contradiction” between Russia’s WTO commitments and its commitments under the Russia-Belarus-Kazakhstan Customs Union.

What happens next?

Article 4.7 of the DSU provides for a 60-day consultation period from the day that the complainant state (in this case, the EU) submitted its request for consultations (in this case, 9 July).    good offices  . There’s a clear WTO preference for the parties to work toward achieving an”out-of-court” resolution during this period that would remove the need for litigation. Article 3.7 of the DSU encourages the parties to seek a mutually acceptable solution throughout the dispute’s activeness, while Article 4.5 requires both the complainant and respondent to attempt to obtain a satisfactory resolution in the course of the 60-day consultation period. Article 4.3 places the onus on the respondent specifically to enter into consultations in good faith with a view to reaching a mutually acceptable outcome. Under Article 4.6, the substance of the consultations are confidential and would not be disclosed to the public in order to promote free negotiation by the parties.

If no settlement is reached by end of the 60-day consultation period, then the EU as complainant would formally request that an ad hoc dispute settlement Panel be established under Article 6.2 DSU. During the panel examination process, which consists of two panel proceedings, both the EU and Russia will make written submissions (the EU would have prepared an draft submission in consultation with member state governments, experts and external consultants in the weeks if not months prior to requesting consultations) following which the Panel will release an interim report, containing its decision and reasoning, for the parties’ comments. Within 9 months of its formation, the Panel would have issued its final report and circulated it to the DSB (Articles 12.8 and 12.9).

Will the matter proceed to full litigation?

The potential spillover effects from a protracted litigation process will not be favorable to either side. Due to their publicity and protractedness, WTO disputes incur considerable political economic transaction costs, which may push both sides toward a negotiated settlement during the consultation stage. Busch and Reinhardt argue that parties stand to make the largest gains during the pre-litigation negotiations, and that the scope for compromise drastically narrows once the dispute proceeds to litigation and a ruling. The dispute may also have wider geopolitical implications: Russia and the EU are currently at loggerheads over arbitrary interruptions in the supply of Russian gas to European markets, while the Austrian detention of a Bolivian presidential aircraft that had departed from Moscow (on suspicion that it had been carrying U.S. whistleblower Edward Snowden) has unnerved Russian policymakers. Whether or not the rccycling fee dispute can be satisfactorily disposed of during the consultation stage will largely turn on whether the Russian Federal Assembly (legislature) is able to legislate Amendment No. 289157-6 within the 60-day consultation period, and whether the EU would consider the amendment a sufficient remedy in itself. There is a possibility that even if the dispute does proceed to Panel stage, Russia could theoretically, under Article 12.12 DSU, request that the proceedings be paused for up to a year while it negotiates the domestic legislative processes of amending its rulebook. Should Russia then manage to make the necessary changes, and both the EU and Russia consider this an amicable accommodation, then this would halt the Panel’s work and bring an end to the dispute.

 

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