MORE QUESTIONS THAN ANSWERS ON CUSTOMS UNION

C O N F I D E N T I A L SECTION 01 OF 04 MOSCOW 002381

SIPDIS

WHITE HOUSE ALSO FOR USTR: WILSON, KLEIN, HAFNER
GENEVA FOR WTO REPS

E.O. 12958: DECL: 09/17/2019
TAGS: ETRD ECON PREL RS WTO KZ BO
SUBJECT: MORE QUESTIONS THAN ANSWERS ON CUSTOMS UNION

REF: A. MOSCOW 2372

B. MOSCOW 2204

C. ASTANA 1445

D. MOSCOW 2000

E. MOSCOW 1939

F. MOSCOW 1538

Classified By: DCM Eric Rubin for reasons 1.4 b&d


1. (C) Summary: In an attempt to understand the form the
Russia, Belarus, Kazakhstan Customs Union (RBKCU) will take
on its planned implementation day of January 1, 2010 and its
potential effect on the external trade of the three
countries, post has put together this backgrounder on the
Customs Union. The information we have, however, only seems
to provide more questions than answers. On paper, the RBKCU
has a structure, harmonized tariffs, a tariff collection
policy, and common customs procedures. The members admit
that negotiations are still pending on a code approval
process, sanitary regulations, and re-importation of
products, among others, but feel that these will all be
resolved before the final agreement is signed in Astana on
November 27. Conversations with observers and actors in the
process, however, reveal that the hurried negotiations are
not going as smoothly as portrayed in public and final
decisions are more Moscow-directed than consensus based.
Added to that, statements of concurrence with the pace and
direction of the negotiations from Moscow based Kazakhs and
Belarusians, may not reflect the thinking in the capitals.
Regardless, at the working level, the RBKCU negotiations are
going forward and the customs union will come into effect as
planned. Interestingly, a September 9 meeting between First
DPM Igor Shuvalov and EUR A/S Gordon revealed that Russia
claims to be willing to delay implementation of the Customs
Union by up to two years in order for Russia and Kazakhstan
to complete their individual accessions, if Russia receives
the right "assurances" from the U.S. End Summary.

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Overseeing Operations- The Secretariat
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2. (U) Moscow will host the Secretariat of the Russia,
Belarus, Kazakhstan Customs Union (RBKCU),which will consist
of a total of 40-45 officers selected from all three
countries. According to Sergei Shilov, Deputy Director for
Foreign Economic Relations at the Ministry of Industry and
Trade, each country has a set quota of members and dues to
pay in support of Secretariat operations. He added that
while the head of the organization has not been identified,
the Secretariat location has been chosen and is ready. Each
member has approved the dues and identified them in the
national budgets. The Secretariat is expected to be
operational by the middle to end of September. Most RBKCU
meetings will take place in Moscow, as it is the most
convenient flight location for all members.


3. (C) Shilov expressed concern, however, about Secretariat
staffing. He stated that between the needs of the joint WTO
negotiation team and the local trade ministries, there is
very little experienced technical trade staff left to staff
the Secretariat (Ref B). He added that even Russia, the
largest of the three, was finding staff allocation a
challenge.

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The Decision Making Structure
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4. (SBU) The RBKCU Commission currently conducts the
negotiations and harmonization efforts for the Customs Union.
According to our sources the Commission staff and experts
will become part of the permanent Secretariat staff once the
Customs Union Agreement is signed by the three presidents on
November 27 in Kazakhstan. Our understanding from our
Russian interlocutors is that currently, the Commission
experts are negotiating harmonized documents in Moscow, which
then are approved by all three capitals.


5. (C) Interestingly, during a September 10 conversation with
econoff, Kazakh Economic Counselor Botagoz Kuatbekova
presented a different picture of the decision-making
structure, one which seems more Russia-directed than
consensus based. Kuatbekova stated that harmonization
negotiations are taking place in a working group within the
Eurasian Economic Community (EURASEC). She added that these

MOSCOW 00002381 002 OF 004


discussions are closely coordinated with national level
working groups in each capital, but final decisions and
approvals are made in Moscow. Whichever structure truly
operates currently, it may not remain in place, however,
because during the August 12 RBKCU Summit the Trade Ministers
mandated the Commission experts to develop procedures for
reviewing and changing the customs code. (Note: The RBKCU
represents the founding core of EURASEC. Both Shilov and
Cherekaev told econoff that any future entrants into the
RBKCU will do so through the EURASEC platform. EURASEC
membership includes Kyrgyzstan and Tajikistan, with Armenia,
Moldova and Ukraine as observers. End Note).

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Tariffs ) Which Ones...
--------------

6. (SBU) On August 12, the RBKCU Commission members approved
"in principle" the new harmonized table of tariffs. Shilov
indicated that the usual August vacations were canceled as
tariff experts worked around the clock to finalize the tables
for the summit, but they were not able to complete the work.
According to press reports, the RBKCU Commission experts on
customs administration had until September 3 to finalize the
tables, but we have not seen any published harmonized tables
so far. Shilov did indicate the publication by the
Secretariat will be far enough in advance of the January 1,
2010 implementation date for traders to adjust prices, etc.


7. (C) Kuatbekova of the Kazakhstan Embassy stated that the
biggest challenge in the negotiations since June 9 has been
the common customs tariffs. EU Director of Economic, Trade
and Agricultural Affairs in Moscow Timo Hammaren told econoff
that there is resistance from Belarus and Kazakhstan to
accept all Russian tariff levels, with serious differences on
meat and aviation. Russia's Shilov explained that these
challenges have to do with the differences in industrial
capacity. For example, Kazakhstan does not manufacture any
pharmaceutical products, therefore they have a zero tariff on
drugs. As a result, Kazakhstan will have to gradually
increase its tariff on medications until it matches the
harmonized tariff. (Note: This should benefit Russian drug
manufacturers who will have a protected status in the whole
customs union. End note.)


8. (C) Comment. If, as indicated in para 5, the final
decisions on the harmonized tariff code are being taken in
Moscow, the final code will likely reflect Russia's
political, not economic, preferences, following its current
use of tariffs as tools to protect local job and to send
political messages. And, when the decisions based on these
political considerations result in loses, we expect few of
them to fall to Russia. End Comment.

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...And Who Gets Paid
--------------

9. (C) According to press reports, another contentious issue
at the August 12 summit was the collection and distribution
of tariff revenues. Russia wanted a single payment
administrator, the Russian Treasury, receiving and
distributing all funds. Kazakhstan's proposal for collection
at the country of entry and redistribution by each national
entity, won the day, however. WTO Unit Chief of the
Department of Multilateral Trade Negotiations in the Ministry
of Economic Development Michael Cherekaev indicated to
econoff that the distribution will be made according to the
share each country has of overall RBKCU external trade. This
will be a pilot program for 18 months, until July 2011, when
it will be assessed for effectiveness. DPM Igor Shuvalov
told the press that the evaluation will be carried out
through joint monitoring at the national collection offices.


10. (C) This payment structure raises several questions as to
how "share of trade" will be calculated. Will the share be
based on volume or value? Will it include oil or only
non-petroleum products? Even though Russian officials
publicly claim the Commission has solved this issue, given
the different economic structures and industrial bases for
each of the three countries, we see this as a problem that
will frequently crop-up between the RBKCU members.

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Opening Borders ) True Free Trade?
--------------

MOSCOW 00002381 003 OF 004



11. (C) Another challenge facing the RBKCU is customs
procedures. Of the three countries, Kazakhstan reportedly
has moved the farthest from the original Soviet customs
procedures, sometimes as the result of training from western
donors. The level of difference surprised the Russians as
they did not believe that their neighbors had "moved so far
toward the west" in the 16 years since the fall of the Soviet
Union. This variance in customs procedures has made
on-going, Russia-led, joint training programs essential and
these will be part of the RBKCU agreement, according to
Shilov.


12. (C) Despite these differences, RBKCU members have
publicly stated that they will remove customs officers from
their internal borders on a staggered schedule;
Belarus-Russia posts will close in July 2010 and
Kazakhstan-Russia posts will follow in July 2011. Cherekaev
noted that currently customs border posts between Russia and
Belarus are just a formality, with document checks done only
for statistical purposes. Their removal in 2010 will be
simple. The EU Mission's Hammaren disagrees with this
assessment, however, stating that all Belarusian trucks are
being searched at the border. The pass-through procedures
only seem to work for trains. According to the EU and
Cherekaev, the delay on the Kazakh border is due to the
porousness of the Kazakhstan-China border.

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Other Pending Issues
--------------

13. (SBU) By September 3, the RBKCU Commission experts on
customs administration were also expected to agree on 14
additional amendments to the Customs Union Agreement,
including the definition of the customs territory of the
customs union, the procedure for re-importation of products,
and the refinement of procedures for declaring residency
under the Customs Union. Other pending issues still on the
table include regulations and standards on SPS. Thus far,
there have been no further reports on progress on any of
these points, and the timeframe keeps getting shorter if the
final RBKCU Agreement is to be ready for the presidents by
November 27.

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Is Everyone on Board?
--------------

14. (C) Of course, all of the above is the view from Moscow.
Reports from Astana indicate that PM Putin's July 9
announcement of joint WTO accession and a sped up completion
of Customs Union negotiations took the Kazakhs by surprise
(Refs C and F). Just departed New Zealand Ambassador to
Russia and the CIS reported to us that he was in Astana on
July 9 and that no one in the Ministries of Trade or Foreign
Affairs had any idea about the plan. This is interesting, of
course, because the stories circulating in Moscow imply that
Putin's July 9 announcement was the result of a breakthrough
between Russia and Kazakhstan on vehicle tariffs.
Reportedly, Kazakhstan agreed to accept Russia's tariff
structure in exchange for a joint WTO accession.


15. (C) In a September 10 meeting with econoff, Kazakh
Economic Counselor Botagoz Kuatbekova presented a middle
view, saying that the three countries have been working on
the Customs Union for a long time (the Customs Union was
originally agreed to in 1996),and that it has been and will
continue to be a step-by-step process. She added that they
fully expect there to be "natural and technical"
difficulties.


16. (C) During an August 14 meeting with econoff Belarusian
Economic Counselor in Moscow Oleg Belov indicated that from
the Belorussian side, there were no concerns about the
customs union process. He did not indicate that the joint
WTO negotiation or the sped up RBKCU negotiations are posing
any problem for Minsk.

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

17. (C) While the Russians are publicly playing the RBKCU as
a nearly completed deal that has been easy to agree to,
private conversations indicate that this process has been
much more of a challenge than many expected. Shilov
indicated to A/USTR for Europe and the Middle East Chris

MOSCOW 00002381 004 OF 004


Wilson in July that the Jan 1, 2010 deadline is just the
first step in the creation of the RBKCU. There will be
further six-month deadlines to complete unfinished items. At
each of these steps the three countries will have to overcome
new hurdles, both technical and political.


18. (C) Each of these hurdles, and the resulting solutions,
will only further complicate the desired joint WTO accession
process for all three countries, because it will create an
ever changing basis for the negotiations. Interestingly, on
September DPM Igor Shuvalov told Ambassador and EUR A/S
Gordon that the implementation of the RBKCU could be delayed
up to two years in order for Russia and Kazakhstan to
complete their individual accessions, if Russia were to
receive the right signals from the U.S. (Ref A).


19. (C) At the working level, however, the focus remains on
the January 1, 2010 implementation deadline. Much of the
negotiation of the Customs Union agreement is being completed
very quickly, which means that there will most likely be
large holes in the process and some significant details
overlooked. As a result, even now, two months from the
signing and three months from the launch, we have more
questions than answers about this Customs Union. That said,
on September 3 Shilov emphasized to econoff that U.S.
exporters need to pay attention to RBKCU developments because
they will affect any shipments arriving after Christmas 2009.
He stated that bureaucrats of all three countries have been
working flat-out since the July 9 announcement and many
aspects of the customs union will come into force on the
borders on January 1, 2010. We fully expect, however, that
effective implementation will be a challenge and almost
certainly will cause delays at the borders during the first
half of 2010 if not longer.
Beyrle