RUSSIA: WTO AND CUSTOMS UNION "IN PARALLEL"

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 002000

SIPDIS

WHITE HOUSE FOR USTR:RODHE/WILSON/HAFNER

E.O. 12958: DECL: 08/01/2019
TAGS: ECON ETRD PREL RS WTO
SUBJECT: RUSSIA: WTO AND CUSTOMS UNION "IN PARALLEL"

REF: A. MOSCOW 1939

B. MOSCOW 1625 AND PREVIOUS

C. GENEVA 504

Classified By: CHARGE D'AFFAIRES ERIC RUBIN, REASONS 1.4 (B) AND (D)


1. (C) Summary. Following President Medvedev's announcement
that Russia will continue its individual WTO accession
process "in parallel" with formation of a customs union with
Belarus and Kazakhstan, Russian officials are now scrambling
to find a way to move forward with the WTO without
contradicting Putin's desire to form a closer trade
relationship with these two neighbors. Russian trade
officials are in the process of comparing the tariff
schedules and trade regimes of the three countries, with the
aim of implementing a unified tariff code on 1 January 2010.
The three countries will hold another high-level meeting on
August 15, at which they will discuss the findings from this
comparison, as well as begin addressing several other
outstanding issues related to the customs union. Following
the meeting, GOR officials plan to present the U.S., EU and
other key delegations with a new proposal on tariffs, as well
as a proposed "way forward." Embassy officials emphasized
the importance of abiding by previously reach agreements in
the WTO process so as not to lose more ground in the
accession process. While most economic analysts here view
Medvedev's announcement and the apparent change of position
as positive, it does raise questions regarding the
predictability (or lack thereof) of economic decision-making
in Russia. End Summary.

Meeting Two Objectives
--------------


2. (C) While Medvedev's statement that Russia will continue
its individual WTO accession process appeared, on the face of
it, to contradict the earlier pronouncement of Prime Minister
Putin that Russia intended to join the WTO as part of a
customs union with Belarus and Kazakhstan, officials here in
Moscow have been careful to emphasize that the two positions
are not contradictory. Rather, given the "technical
difficulties" of joining the WTO as part of a customs union
(ref C),Russia decided to move forward with its WTO
accession while also developing closer ties to Belarus and
Kazakhstan. According to officials from both the Ministry of
Economic Development (MED) and the Ministry of Industry and
Trade (MIT),Russia still plans to move forward with the
January 1, 2010 entry into force of the customs union with
Belarus and Kazakhstan, but is looking at ways of ensuring
that this agreement does not stand in the way of any of
Russia's commitments made in the WTO context.


3. (C) At this point, GOR trade officials have been given the
task of trying to meet two objectives that many experts view
as contradictory, or at least, highly dissimilar. Maksim
Medvedkov, Russia's lead negotiator on WTO, told us
"informally" that Russian negotiators and policy-makers are
considering the following course of action: Russia will move
ahead with implementation of the customs union as envisaged
in the current customs union statements (e.g., tariff
harmonization staring in January 2010, with a goal of
removing internal customs posts among the three countries by
2011). At the same time, Russia will pursue its individual
WTO accession, ensuring that any agreement reached in the WTO
context would be in conformity with its obligations under the
customs union agreement. Thus, Russia's individual WTO
accession process would be slowed as it attempted to balance
these two differing interests, but could move forward.


4. (C) According to Medvedkov and his team, they are
currently examining the Russian, Kazakh and Belarussian
tariff codes, as well as the commitments the countries have
made in the course of their respective WTO accession
negotiations. Medvedkov noted that most of the tariffs are
similar, and that harmonization among the three should be
possible by January 1, 2010. MED officials also stressed
that the customs union harmonization applies only to trade in
goods. It does not/not include services, or any of the other
aspects of trade relations covered under the WTO accession
process--at least in the first stage.


5. (C) Under the original customs union agreement, the three
countries are committed to creating a "common customs space"
by January 1, 2011. Customs posts among the three countries
would be removed and regulatory policies would be harmonized.
A senior MIT official recently noted that the assumption has
been that there would not be much difference among the three

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countries' regulatory practices, as they all started from the
same Soviet practices and regulations. In doing a
comparison, however, they discovered that regulatory
practices in all three countries have changed more than
expected since the end of the Soviet Union.


6. (C) MED officials also noted that harmonizing the various
commitments made by the countries in the WTO accession
process may be more difficult than first envisaged, as Russia
and Kazakhstan have reached differing agreements on key
sectors, such as meat and aircraft. Belarus presents fewer
problems as it has not progressed very far in its WTO
accession process and, according to the Russian team, is
willing to agree to the tariff levels Russia has already
negotiated.



7. (C) Medvedkov stated that leaders of the three countries
will meet again on August 15. Among the items they will
consider is how to deal with the differing tariff agreements
in the WTO process. Medvedkov expects that, following the
August 15 session, Russia and its partners will present the
U.S., EU and other key delegations with a new proposal on
tariffs. Econoffs emphasized that the U.S. expects Russia
and its partners to abide by all their previously-negotiated
agreements in the WTO context, and that we would view
re-opening negotiations negatively.

The Decision-Making Process
--------------


8. (C) Various GOR officials and well-places business sector
representatives have assured us from the time of Putin's
announcement that the decision to stop Russia's WTO accession
process wasn't final. Economic liberals, including Finance
Minister Kudrin and Presidential Advisor Dvorkovich, have
been looking for ways to finesse the situation, allowing
Russia to move forward with WTO accession while not overtly
contradicting Putin's statement. A preview of this policy
change came in Commerce Secretary Locke's meeting with MED
Minister Nabiullina on July 7, when she commented that Russia
would continue its individual WTO accession negotiations in
parallel with customs union preparations. Nabiullina's
subsequent concerns over press reports of her comment showed
how sensitive the issue had become inside the GOR. The
comments of Putin adviser Ushakov to Ambassador Beyrle July
17 (ref A) indicated that Putin himself not recognizes that
the idea to join the WTO as a customs union is too
problematic to work.


9. (C) Local business and economic analysts have all reacted
positively to the announcement that Russia will proceed with
WTO accession, which they see as being in Russia's long-term
interest. A number of the have, however, raised concerns
about the GOR's decision-making process, noting that
significant changes in course without warning reduce Russia's
credibility with international partners. Moscow-based EC
representative Timo Hannerin informed us that, while they
think that this is a positive move, they aren't quite sure
how seriously to take the various statements, given the
turn-around following the St. Petersburg forum where their
Trade Commissioner publicly announced EC support for Russia's
accession, only to have Putin reject that path immediately
thereafter. Non-specialized press has generally remained
silent on the matter, after having gone through significant
gyrations trying to produce a rationale for Putin's previous
decision to favor a customs union over WTO membership.

Comment
--------------


10. (C) Medvedev's announcement is a first step toward
putting Russia back on the path toward WTO accession. The
result of efforts by multiple parties, including liberals
within the Russian government, Russian and international
business representatives, trading partners and WTO members,
this action provides an opening to try to recover from what
many here view as a mis-step. As the Ambassador's meetings
with Presidential Advisor Dvorkovich and Putin Advisor
Ushakov clearly indicate (ref A),the Russia government is
again prepared to pursue accession to WTO on its own.


11. (C) That said, any future Russian policy will need to
take into account Putin's concerns regarding trade relations
with Belarus and Kazakhstan. Those individuals and interests
who lobbied for a go-slow approach to Russia's WTO accession
still exist, and are likely to continue to look for ways to

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slow the process down. The Russian government's next task is
to present key partners, including the U.S., with a
convincing road map on how to proceed with Russia's WTO
accession on a parallel track with the customs union. Deputy
Prime Minister Shuvalov's up-coming trip to the U.S.
(currently planned for September) will provide an opportunity
to hear directly from the man charged with moving the Russian
WTO accession process forward how he plans on making that
happen.


12. (C) While some analysts have also raised the possibility
of tensions in the Medvedev-Putin relationship over the trade
issue, citing what they see as Medvedev's willingness to
"contradict' or countermand Putin on WTO accession, it is
unlikely that Medvedev made these statements without support
from Putin for this modified approach. Careful efforts by
senior GOR officials to ensure that the Medvedev and Putin
statements are portrayed as mutually supportive reinforce
this interpretation. End Comment.


RUBIN