UKRAINE: PRESIDENT SIGNS LAW TO RAISE IMPORT

UNCLAS KYIV 000349 SENSITIVE SIPDIS C O R R E C T E D COPY CAPTION STATE FOR EUR/UMB, EB/TPP/BTA, EB/TPP/MTA STATE PLEASE PASS TO USTR FOR CKLEIN, PBURKHEAD, CMORROW USDOC FOR 4201/DOC/ITA/MAC/BISNIS USDOC FOR 4231/ITA/OEENIS/NISD/CLUCYK USDA FOR FAS/ONA AND FAS/OCRA GENEVA FOR USTR E.O. 12958: N/A TAGS: ETRD EFIN WTRO PGOV UP SUBJECT: UKRAINE: PRESIDENT SIGNS LAW TO RAISE IMPORT TARIFFS REF: YARNELL EMAIL OF 02/06 TO DESK ¶1. (U) Summary: President Yushchenko on February 20 signed into law a bill that will impose a temporary, 13 percent increase in customs duties for a large number of imported goods. The law will come into effect in less than two weeks, and is scheduled to last six months. Supporters of the law have justified it as necessary for Ukraine to address a balance-of-payment crisis, in line with WTO rules. The law violates Ukraine's IMF loan conditionalities, and the IMF Board would have to grant an exception if it is to move forward with further disbursements of the loan program. Ukrainian lawmakers have put the country at the forefront of a worrisome global trend toward protectionism, and have threatened Ukraine's own economic recovery in the process. End Summary. 13 Percent Tariff Increases for Many Products -------------- ¶2. (U) Law No. 923-VI, "On Amending Some Laws of Ukraine to Improve the Balance of Payments of Ukraine in Response to the World Financial Crisis," will impose a temporary, 13 percent, ad valorem increase in import duties for a range of goods, including agricultural products, textiles, and cars. The law specifically identifies those goods that will face higher tariffs, and all those not listed are exempted. (Note: See the end of this report for a complete list of goods affected. End note.) The generated revenues will go to a special Stabilization Fund meant to address the balance-of-payments crisis. ¶3. (U) The higher tariffs will come online ten days after the official publication of the law. (Note: The Rada secretariat has not yet officially published the law, but should do so any day now. Post will inform Washington when the law is published. End note.) The law stipulates that the tariff surcharges remain in effect until six months after the end of the month in which they were introduced. (Note: So, if the new tariffs were introduced on March 6, they would expire only after the end of September. End note.) It also grants the Cabinet of Ministers authority to extend the increased tariffs for an additional six months, if deemed necessary. President Signs, Over Staff's Veto Recommendation -------------- -------------- ¶4. (SBU) President Viktor Yushchenko signed the bill into law on February 20. Serhiy Chervonchuk (please protect), from the Presidential Secretariat's Social/Economic Department, had told us only days earlier, on February 17, that the President would veto the law. Chervonchuk confirmed on February 23 that his Department had in fact recommended a Presidential veto and was surprised by Yushchenko's decision to sign the law. Chervonchuk guessed that the President did not think a veto worthwhile since 328 MPs had supported the bill, well over the 300 required for a veto override. (Comment: We do not find this explanation convincing since Yushchenko often vetoes legislation that he knows the Rada will likely override. End comment.) ¶5. (U) While he did sign the bill, Yushchenko simultaneously took steps to try to limit its impact. He filed an appeal to the Constitutional Court challenging the provision in the law that would allow the Cabinet of Ministers to extend the temporary duty surcharge beyond six months. (Note: The Ukrainian Constitution specifically gives the Rada authority over import duties. End note.) Yushchenko also appealed to the Cabinet of Ministers to exempt products from countries with which Ukraine has a preferential trade agreement (mostly CIS countries) from the tariff surcharge. History of the Law -------------- ¶6. (U) Law No. 923-VI, originally Draft Law No. 3379, was introduced in November 2008 by Serhiy Teriokhin, Chairman of the Rada Tax and Customs Policy Committee and a prominent member of PM's Yulia Tymoshenko's electoral bloc. Referencing Article XII of GATT, which provides conditions by which a country may restrict imports "in order to safeguard its external financial position and its balance of payments," Teriokhin's initial draft sought to create a general framework to allow the government to respond to a balance of payments crisis by temporarily raising import tariffs. Provisions were later added to identify exactly which products would face higher import tariffs, and which would be exempted. Much wrangling ensued, as the law passed in first and second readings in December, was vetoed by the President in January, and then was revised and passed again by the Rada on February 4. WTO Implications -------------- ¶7. (U) For virtually all goods involved, tariffs will rise above the bound rates agreed to as part of Ukraine's WTO accession. The law calls on the government to notify WTO members within 30 days of imposing the new tariffs. (Comment: This requirement appears to meet the bare minimum required by WTO rules. End comment.) Post is not aware of any notification made by Ukraine, or that the GOU has initiated consultations through the WTO Committee on Balance-of-Payments Restrictions. ¶8. (U) The law justifies raising tariffs as necessary to address a balance-of-payments crisis. Ukraine did experience a severe merchandise trade deficit in 2008, reaching $18.5 billion for January-December, that contributed to its balance-of-payments problems. The trade deficit has already begun to shrink, however, as the hryvnia (UAH),the national currency, has fallen from about 4.7 UAH/USD in July to about 8.5 UAH/USD in February. The monthly trade deficit shrunk from $1.6 billion in November to $638 million in January, making the case for import restrictions less plausible. IMF Implications -------------- ¶9. (SBU) The $16.4 billion IMF Stand-By Agreement with Ukraine specifically lists the "prohibition on the imposition or intensification of import restrictions for balance of payments reasons" as a continuous performance criteria for the IMF loan. The local IMF residential representative was not immediately available for comment, but earlier the IMF told us that the law clearly violated this condition. IMF reps told us on February 5 that virtually all IMF Stand-By Agreements contain such a condition, as IMF loans are meant to help recipient countries meet their external obligations without resorting to protectionist measures. They said that the IMF Board would have to grant an exception to Ukraine to move forward. Comment: Bad for Int'l Trade, Worse for Ukraine -------------- -- ¶10. (U) Ukraine's decision to raise import duties as a response to the economic crisis runs directly counter to the spirit of last November's G-20 Communique, which called on countries to avoid such beggar-thy-neighbor policies. Especially since a currency devaluation has already reduced Ukraine's trade deficit, the move looks more like an attempt to bolster low budget revenues, as well as old fashioned protectionism for a few domestic industries, than an attempt to address a balance-of-payments crisis. And while the impact on global trade is bad enough, even worse is that Ukraine is further testing the patience of the IMF, which has not yet approved the second tranche of the $16.4 billion Stand-By Arrangement because Ukraine still needs to fulfill other conditionalities. End Comment. -------------- -------------- Annex: List of Goods Subject to Import Tariff Surcharge -------------- -------------- ¶11. (U) The following goods will face a 13 percent, ad valorem surcharge on import duties as a result of this law: HS Code Description -------------- -------------- 0202 Meat of bovine animals, frozen 0203 Meat of swine, fresh, chilled, or frozen 0206-0210 Other types of meat 0504-0506 Other animal parts (stomachs, skins, bones) 0509 Animal sponges 0511 Various animal products (except for 0511 10 00 00 - Bovine semen) 0808 Apples, pears and quinces, fresh 1601-1605 Sausages, prepared meats, seafood 1701-1702 Sugars (except for 1702 30 99 00) 2204-2208 Wines and various spirits 2701 Coal 4203 Apparel made of leather 4303 Apparel made of furskin 57 Carpets and other textile floor coverings 60-65 Fabrics and textiles 6806 Mineral wools 6901 Bricks, tiles and other ceramic goods 7201 Pig iron 7301 Sheet piling of iron or steel 7321 Stoves, ranges, and similar nonelectric domestic appliances of iron or steel 8401 Nuclear reactors and equipment 8414 Air or vacuum pumps 8418 Refrigerators and freezers 8501 Electric motors and generators 8516 Various heating appliances 8702-8704 Some motor vehicles TAYLOR