RUSSIA PUTS OFF PROHIBITIVE DUTY ON TIMBER EXPORTS

UNCLAS SECTION 01 OF 02 MOSCOW 003311

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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.

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SUMMARY
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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.

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Putin Delays Prohibitive Timber Duty
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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

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of Russia's wood processing industry.

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COMMENT
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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