RUSSIA PUTS OFF PROHIBITIVE DUTY ON TIMBER EXPORTS

UNCLAS SECTION 01 OF 02 MOSCOW 003311 SENSITIVE SIPDIS STATE PLS PASS USDA/FAS FOR OCRA (FLEMINGS, KUYPERS) AND ONA (SALLYARDS, MURPHY) COMMERCE FOR MAC (MATT EDWARDS, JAY THOMPSON, JACK BROUGHER) STATE PLS PASS USTR (KLEIN, HAFNER) E.O. 12958: N/A TAGS: ETRD EAGR EINV ENRG ECON RS SUBJECT: RUSSIA PUTS OFF PROHIBITIVE DUTY ON TIMBER EXPORTS THIS CABLE IS SENSITIVE BUT UNCLASSIFIED. NOT FOR DISTRIBUTION OUTSIDE USG CHANNELS AND NOT FOR POSTING ON THE INTERNET. -------------- SUMMARY -------------- ¶1. (SBU) In a major trade concession to the EU, PM Putin announced on November 12 that Russia would delay for 9-12 months the implementation of a prohibitive duty on uncut timber and round wood exports, which was scheduled to take effect as of January 1, 2009. Putin's announcement eliminates, at least temporarily, one of the most contentious trade issues between Russia and the EU, and a major sticking point for the EU in Russia's WTO accession. Russian and EU trade negotiators now have additional time to come up with a long-term resolution of the appropriate tariff level for Russian timber exports, and to address the question of European investment in the development of Russia's wood-processing industry. -------------- Putin Delays Prohibitive Timber Duty -------------- ¶2. (U) On November 12, during a press conference in Moscow following talks with Finnish Prime Minister Vanhanen, Russian PM Putin announced that Russia would delay for 9-12 months the imposition of a prohibitive duty on exports of timber and round wood, which was scheduled to take effect as of January 1, 2009. In explaining the decision, Putin said imposition of the prohibitive duty, during a period of global financial and economic crisis, would have led to major cuts in production and job losses for Finnish wood processors, who rely heavily on Russian round wood imports to supply Finnish sawmills and other downstream wood processing facilities. However, Putin also noted that Russia would not abandon long-term plans (which he has championed) to develop a domestic wood-processing industry in Russia. He stated that Russia would establish a package of incentives for investments in domestic wood processing, including for foreign investors, though he did not offer any specifics on the incentives. ¶3. (SBU) Putin's announcement resolved, at least temporarily, one of the most contentious issues in Russian-EU trade relations and a major sticking point for the EU in Russia's WTO accession. In a press conference on November 10, Maksim Medvedkov, Russia's Chief WTO Negotiator, had characterized the duty on timber exports as one of the three remaining "political questions" that still needed to be resolved in Russia's accession (along with the issues of agricultural subsidies and the commercial behavior of state-owned enterprises). According to a French diplomat in Moscow with whom we spoke, the export duty on timber had also become an issue in the EU-Russia Partnership and Cooperation Agreement (PCA) negotiations, with EU diplomats pushing for its inclusion on the agenda of the Nice Summit during the October 28 Permanent Partnership Council Session in St. Petersburg. ¶4. (U) EU diplomats quickly welcomed Putin's announcement. EU Trade Commissioner Ashton issued a statement noting that the postponement of the duty was a "very positive move by Russia" and "a welcome result following months of negotiation." She added that the announcement gives much needed "breathing space to allow us to continue working towards a definitive solution to the problem of export duties, which is an essential step in our bilateral trade relations and for Russia's accession to the WTO." ¶5. (SBU) Privately, local EU diplomats told us that the issue of Russian timber export duties has long been a sensitive labor issue for Finnish politicians. The current duty allows Finnish wood processors to make a profit and not scale back their operations. However, the proposed increase would have likely led to massive layoffs at Finnish sawmills and other downstream wood processing facilities. In the wake of the announcement, they speculated that Finnish investors will likely continue to make major investments in the development MOSCOW 00003311 002 OF 002 of Russia's wood processing industry. -------------- COMMENT -------------- ¶6. (SBU) Although Russian and EU trade negotiators will still need to agree on a permanent solution to the question of timber export duties, Putin's postponement of the duty increase is a welcome salve on one of the major irritants in EU-Russian trade relations, PCA negotiations, and EU support for Russia's WTO accession. BEYRLE