PROTECTIONISTS WINNING WAR OF WTO (NON-)ACCESSION?

C O N F I D E N T I A L MOSCOW 002878 SIPDIS DEPARTMENT FOR EUR/RUS STATE PLS PASS USTR (PORTER, KLEIN, HAFNER) STATE PLS PASS USDA/FAS (FLEMINGS, SALLYARDS, KUYPERS) E.O. 12958: DECL: 09/25/2018 TAGS: ETRD EINV ECON WTO RS SUBJECT: PROTECTIONISTS WINNING WAR OF WTO (NON-)ACCESSION? REF: A. ANKARA 1688 ¶B. MOSCOW 2825 AND PREVIOUS Classified By: Ambassador John R. Beyrle, Reasons 1.4(b,d). -------------- SUMMARY -------------- ¶1. (C) The Georgia conflict and increased international tensions have strengthened the hand of protectionist forces opposed to Russia's WTO accession. As the GOR slows down the accession process by unwinding previous commitments with the United States and the EU, and reviewing duties on Ukrainian goods, WTO opponents see immediate advantage in appeasing vocal domestic constituents and extracting rents from sheltered and uncompetitive sectors of the Russian economy. Russian leaders are still paying lip service to the idea of WTO entry, provided it happens on terms favorable to Russia. Although the Ministry of Economic Development (MED) has put on a brave public face as it goes through the motions of accession talks, it appears increasingly unable to rein in other powerful ministries opposed to accession, particularly the Ministry of Agriculture. -------------- Russia's Protectionist Pressures -------------- ¶2. (C) Over the past two weeks, President Medvedev and First Deputy Prime Minister Shuvalov have both stressed that Russia still wants to enter the WTO, but only on terms that are favorable to Russia. With WTO accession appearing less likely in the near term, Russia's leaders have instead sought to further narrow self-interests and to appease vocal domestic constituencies that were concerned about the potential impact of greater foreign competition on their prices and market shares. As Deutsche Bank Securities Chief Economist Yaroslav Lissovolik told us recently, in the post-Georgia environment, the balance of power has clearly shifted to isolationist and protectionist hard-liners, and the economic reform agenda, including integration into the world trading system, has been pushed to the back burner. ¶3. (C) Agriculture Minister Gordeyev is a key WTO opponent and appears to be behind many of the proliferating protectionist measures. On August 27, he threatened to reduce import quotas on poultry and pork products by "hundreds of thousands of tons." It is widely known that Gordeyev and other senior ministry officials have substantial ownership interests in Russian meat, grain and dairy businesses. Gordeyev and his ministry have actively opposed Russia's WTO entry for years, presumably because they are worried that increased foreign competition in meat, dairy and other domestic food markets will put pressure on the profit margins of domestic producers and decrease the opportunities to extract rents from the domestic industry. The domestic poultry industry has averaged 15 percent annual growth over the last seven years, but is currently losing money because of high feed costs. Several domestic producers have confirmed to us that they plan to raise their prices as soon as a new quota lowering the volume of imports is in place. ¶4. (C) MinAg's protectionist streak was also plainly evident in the September 16 letter from the Russian Veterinary Service (VPSS),which is a part of the Ministry. The letter refused to add U.S. meat facilities to the list of eligible exporters and questioned the continued validity of the U.S.-Russia WTO bilateral market access agreement and side letters signed in November 2006. VPSS apparently did not clear the September 16 letter with other agencies, and the MFA and MED have both told us the letter did not reflect an official change in GOR policy. At best, therefore, the letter suggests that no one within the GOR is in charge of coordinating the accession process and reining in agencies such as the Agriculture Ministry that are inclined to act unilaterally to protect domestic industries from foreign competitors (Ref B). -------------- Is WTO Still a GOR Priority? -------------- ¶5. (C) Despite the heightened protectionist rhetoric, MED's trade negotiators have continued to be upbeat about Russia's accession. In recent briefings for the press and Moscow's diplomatic community, Chief WTO Negotiator Maksim Medvedkov has maintained that accession is still a priority and will help Russia develop a diversified and innovative economy. He has stated that the Duma will likely pass all necessary legislative amendments needed for accession by the end of the year, including changes in the laws governing IPR, customs and technical regulations. ¶6. (C) Attempting to explain recent WTO comments from Putin, Medvedev and Shuvalov, Medvedkov has noted that the pace of accession has been slower than the GOR had hoped -- hence the need to review commitments that Russia agreed to implement in advance of accession that the GOR believes have caused negative economic consequences to certain domestic industries. Still, Medvedkov has made clear that the accession process will continue to proceed in an orderly fashion, and Russia will likely seek consultations to reopen only a few issues, including the 2005 Meat Agreement with the United States. -------------- GOR Actions Say No -------------- ¶7. (C) While the Russians continue to talk a good game on WTO accession, actions speak louder than words. The lack of significant progress in ongoing bilateral consultations, the reopening of bilateral trade agreements, such as the 2005 Meat Agreement, and heightened trade tensions with Turkey and Ukraine, would appear to confirm that Russia has written off the chances of a near-term WTO accession and is instead embracing protectionism. ¶8. (C) EU Diplomats have told us privately that on-going talks with Russia on the few remaining bilateral accession issues have not been making any meaningful progress. PM Putin's strong desire to revive the domestic wood processing industry has meant that Russia is refusing to budge on the proposed imposition of a prohibitive tariff on timber exports, which could effectively put out of business Finnish and Swedish sawmills and wood processors. ¶9. (C) In addition, EU diplomats tell us that "we thought we had a deal" on trans-Siberian overflight fees, but that Russia is now arguing that it only "initialed," but never fully signed, the bilateral agreement, and that it will not change its overflight fee regime until the actual date of WTO entry. Under the current regime, foreign airlines that fly over Siberia are effectively forced to subsidize Aeroflot. Both EU diplomats and aviation experts have told us that a key component of Aeroflot's profitability is the collection of more than $300 million per year in trans-Siberian overflight fees from EU air carriers. ¶10. (C) Likewise, Russia has made no meaningful progress with the Cairns Group on an acceptable level of agriculture subsidies. Agriculture Minister Gordeyev emerges from every round of face-to-face talks, most recently in June, with confident press statements of significant progress. However, EU diplomats here and in Geneva tell us privately that Gordeyev has been an aggressive negotiator and largely unwilling to come down from a range of $9-12 billion in annual agriculture subsidies. (WTO precedent from previous accessions would call for a subsidy level in the range of $3-4 billion per year.) ¶11. (C) Russia's two-month-old customs dispute with Turkey has subsided for the moment, thanks to the September 18 signing of a Customs Protocol between the two countries (Ref A). However, trade relations with Ukraine still remain strained. Likely for political reasons, Russia is conducting a wholesale review of its trading relationship with Ukraine and risks Ukraine asking for WTO bilateral market access negotiations. ¶12. (C) Finally, chances would seem remote -- to put it mildly -- that Russia could negotiate a solution to its WTO deadlock with Georgia. (Even before the outbreak of hostilities, Georgia had blocked formal WTO talks with Russia after then President Putin's April 16 declaration of closer Russian ties to Abkhazia and South Ossetia.) Instead, Russian trade negotiators continue to maintain that they can invoke Article XIII of the Marrakesh Agreement Establishing the WTO to make an end run around Georgia's opposition to Russia's accession. (N.B. We do not believe that their arguments stand up to scrutiny). -------------- COMMENT -------------- ¶13. (C) As the accession process grinds on, we expect Russia to be tempted to embrace additional protectionist measures in agriculture and beyond. We should be prepared to push back against both Russia's protectionist rhetoric and its concrete actions. Our consistent message should be that Russia should not sacrifice our shared long-term goal of WTO membership for Russia, and the momentum of the last two years, for the short-term and uneven gains offered by protectionist measures. We should coordinate this message closely with the EU. This message could help reinforce the position of WTO advocates within the GOR and Russian business circles and can perhaps slow the rush toward protectionism. BEYRLE