UKRAINE: PRESIDENT SIGNS LAW TO RAISE IMPORT

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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
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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.


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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

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