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08MOSCOW2720 2008-09-10 14:05:00 CONFIDENTIAL Embassy Moscow
Cable title:  

RUSSIA-UKRAINE TRADE RELATIONS STRAINED

Tags:   ETRD EINV ECON UP RS 
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1. (C) SUMMARY: In what many observers see as a sign of
Russia's increasingly belligerent trade policies, Russian
First Deputy PM Shuvalov announced September 1 that Russia
would consider imposing restrictive trade measures on Ukraine
now that Ukraine had acceded to the WTO. The GOR is
considering a reduction in the number of Ukrainian goods
subject to duty-free entry in Russia, the possible imposition
of new tariffs, and a delay in lifting the import quotas on
Ukrainian sugar and spirits for up to five years. In their
conversations with the Ukrainian Embassy and with us, GOR
officials denied any political motivation, insisting that
Ukraine's WTO membership raised legitimate concerns for the
GOR. END SUMMARY.



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Russia Looks to Remake Trading Regime with Ukraine


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2. (C) On September 1, Russian First Deputy PM Shuvalov gave
the Ministries of Economic Development, Industry and Trade,
Agriculture, Finance and Foreign Affairs one week to develop
measures to protect the Russian market from goods from
Ukraine, in light of Ukraine's free trade regime with Russia
and its May accession to the WTO (Ref B). Many Ukrainian
goods now enter Russia duty free under the countries' 1993
bilateral free trade agreement, and the countries had
previously agreed to permit unlimited imports of Ukrainian
sugar starting in 2009 and of Ukrainian spirits as of 2010.



3. (C) On September 5, Econoff met with Embassy of Ukraine
trade officer Vladislav Yegorov to discuss Shuvalov's
announcement. Yegorov said that Russian officials had
advised his embassy that the GOR was considering a number of
potential measures affecting Ukrainian imports. The Russian
officials had denied that they were seeking to nullify the
1993 Russia-Ukraine bilateral trade agreement, but did note
that they wanted to expand the list of Ukrainian goods that
would no longer be eligible for duty-free entry in Russia and
would be subject to new tariffs. Russian officials had also
noted they were also considering delaying the lifting of
import quotas on Ukrainian sugar and spirits until 2013.



4. (C) According to Yegorov, GOR officials denied that the
potential changes in the countries' trading regime were
politically motivated or connected with Ukraine's support of
Georgia in its conflict with Russia. Instead, because
Ukraine had recently joined the WTO, GOR officials argued
that Russia had legitimate concerns about the negative
economic consequences that Ukrainian imports could have on
domestic industries and about the possibility that low
quality goods from other WTO countries would transit Ukraine
and enter Russia. (N.B. In a separate conversation with us,
Russian MFA officials repeated the same argument regarding
the need to revisit the trading regime with Ukraine now that
it had become a WTO member.)



5. (C) Yegorov said that Ukrainian officials were expecting
that Russia would target some of the biggest Ukrainian
exports to Russia, including dairy products such as milk,
cheese and butter; automotive and aviation parts and
equipment; steel scrap, pipes and tubes; chemicals; and
fertilizers. Yegorov said that the imposition of duties or
other restrictions on the Ukrainian imports to Russia could
have a significant economic impact on many domestic Ukrainian
industries, including agriculture. With $29.6 billion in
two-way trade during 2007 and $16.8 billion during the first
half of 2008, Russia is far and away Ukraine's largest export
market. Yegorov noted that many Ukrainian imports were less
expensive than equivalent Russian-made goods, and some
Russian ministries, including the Agriculture Ministry, had
complained about the injury to domestic industries from
competing Ukrainian products. Yegorov observed that GOR
officials did not appear to be concerned about the potential
inflationary impact that increased duties or other trade
measures could have on downstream and consumer prices in
Russia.



6. (C) Despite the official Russian denials of a political
motivation, Yegorov told us that the timing of Shuvalov's
September 1 announcement was "strange," given that Ukraine
had been a WTO member since May (a point we made to the MFA
officials). In his view, this suggested that the potential
trade measures targeted at Ukraine were politically motivated
and intended to punish Ukraine for its support of Georgia.
Yegorov noted that Ukrainian Economic Minister Danilishin
would discuss the issue with Russian Economic Development
Minister Nabiullina during the September 10 meeting in Moscow
of the Russia-Ukraine Trade Sub-Committee, which the two
ministers chaired.



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Ukraine Unsure About Bilateral WTO Talks


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7. (C) On Russia's WTO accession process, Yegorov confirmed
that Ukraine still had not asked for bilateral market access
negotiations with Russia. He explained that Ukrainian
officials were uncertain what specific commitments would be
worth discussing with Russia during bilateral negotiations.
Still, Yegorov noted that a major revision of the bilateral
trading regime by Russia could strengthen calls in Kyiv to
request market access talks as a part of Russia's accession.
He added that the gas price that Russia charged Ukraine was a
perennially sensitive issue, but that Ukrainian officials
recognized it was a separate question from Russia's WTO
entry. (COMMENT: Even if Ukraine were willing to separate
energy issues from WTO negotiations, it would be impossible
to ignore the importance of energy in bilateral relations.)



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GOR Officials Confirm Review of Ukrainian Imports


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8. (C) On September 9, Russian officials confirmed to us that
the GOR was undertaking a comprehensive review of Russia's
trading system with Ukraine and the 1993 bilateral free trade
agreement between the two countries. Mikhail Cherekayev,
head of the WTO Section in the Economic Development
Ministry's Trade Negotiations Department, told us that the
review was prompted by the large volume of trade with Ukraine
and by Ukraine's accession to the WTO. The review had
nothing to do with political considerations or the Georgia
conflict, according to Cherekayev.



9. (C) Cherekayev stated that the level of tariffs are too
low on certain Ukrainian products, including dairy products
such as milk, butter and cheese. In some cases, Ukrainian
producers have undercut their Russian competitors' prices and
taken market share. Thus, Russia needed to consider the
possibility of protective trade measures against Ukrainian
goods. Even so, Cherekayev felt that the majority of
Ukrainian imports would remain subject to duty-free entry
following the Russian review.



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COMMENT


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10. (C) Russia has now raised in recent weeks trade issues
with the United States, EU, Turkey and Ukraine (reftels),
four of its major trading partners. It seems increasingly
clear that Russia has written off any chance of a near-term
WTO accession and is intent on registering its displeasure by
increasing protection for domestic producers -- and if those
countries supported Georgia, so much the better. The biggest
losers in all of this are, of course, Russian consumers, who
will be paying higher prices for lower quality goods.
BEYRLE