WHAT RUSSIA'S TRADE NEGOTIATORS ACCOMPLISHED IN

C O N F I D E N T I A L SECTION 01 OF 04 MOSCOW 003082 SIPDIS DEPARTMENT PLEASE PASS TO DEPT OF AGRICULTURE COMMERCE FOR BROUGHER/EDWARDS WHITE HOUSE ALSO FOR USTR HAFNER AND KLEIN GENEVA FOR WTO REPS USDA FAS FOR OCRA/HORGAN, RIKER, NENON; ONA/TING E.O. 12958: DECL: 12/24/2019 TAGS: ETRD EAGR ECON PREL RS WTO KZ BO SUBJECT: WHAT RUSSIA'S TRADE NEGOTIATORS ACCOMPLISHED IN SIX MONTHS - STRUCTURE AND OPERATION OF THE RUSSIA, BELARUS, KAZAKHSTAN CUSTOMS UNION (PART 1 OF 3) REF: A. MOSCOW 2381 ¶B. MOSCOW 2204 ¶C. MOSCOW 2000 ¶D. MOSCOW 1538 ¶E. GENEVA 1001 MOSCOW 00003082 001.2 OF 004 Classified By: A/DCM Susan Elliott, Reasons 1.4 b&d. ¶1. (U) Introduction: This cable is the first in a three-part series presenting major features of the Russia, Belarus, Kazakhstan Customs Union (RBKCU),which was finalized on November 27 with the signing of most binding agreements. This cable covers the major structure and decision-making process of the RBKCU. The second cable will review the principal points regarding tariffs and non-tariff regulations. The third cable will discuss how the RBKCU could potentially affect Russia's WTO accession. Post is concerned that the legal void caused by staggered implementation dates, as well as insufficient preparation time for customs officers, could create massive delays at customs points starting January 1, 2010 that could adversely affect U.S. exports. End Introduction. Background -------------- ¶2. (U) Discussions on the RBKCU began in 1994. On June 9 Prime Minister Putin announced that the Customs Union would come into being on January 1, 2010, and that the three countries would now apply for WTO accession as a group (Refs C & D). Putin's announcement provided the principal momentum for the current entry into force of the RBKCU. Russia's trade negotiators halted almost all work on WTO for the last six months in order to focus exclusively on creating the RBKCU. Their principal tasks were to create a harmonized Common External Tariff, harmonized non-tariff regulations, and a harmonized Customs Code. The three countries have now signed more than 50 agreements to bring the Customs Union to fruition, over half of them on November 27 in Minsk. Relationship to EurAsEc -------------- ¶3. (U) The RBKCU represents the core of the Eurasian Economic Community (EurAsEc),as its members are the three founding countries of the group. As a result, the RBKCU plans to use many of the legal structures already in existence in EurAsEc as its own institutions. Some of these authorities, such as the Interstate Council, have already been approved for use by the RBKCU (see para 5),but some are still pending authorization, such as the EurAsEc Court (see para 10). ¶4. (U) Any country wanting to joint the RBKCU must follow EurAsEc's membership procedures to join. As EurAsEc members become "ready" they may be included in the RBKCU. Other current members of EurAsEc are Tajikistan and Turkmenistan, with Armenia, Moldova and Romania as observers. Uzbekistan was once a member, but now has an undefined observer-like status. Structure -------------- ¶5. (U) The RBKCU Secretariat provides organizational and technical support to the Commission and is located in Moscow. It is responsible for the day-to-day operations among the member states and publication of information about the RBKCU. On the management board of the Secretariat are Executive Secretary Sergey Glazyev and an unspecified number of Deputy Secretaries. The Secretariat currently has 70 employees, increasing to 135 by November 1, 2010. Of these employees, 22 will be officials, 113 will be support staff. The Secretariat will also contain a Center for Customs Union Statistics to collect trade statistics, and carry out studies on the effectiveness of different RBKCU policies (such as tariff revenue distribution). ¶6. (U) The RBKCU Commission is the single permanent regulatory body of the Customs Union and makes most of the policy-level decisions for the RBKCU. The Commission is also MOSCOW 00003082 002.3 OF 004 responsible for the execution of decisions made by the Interstate Council, and the operation and development of the Customs Union. It will meet in Moscow once a month. The Commission is composed of one representative from each member government, approved by the Interstate Council. It currently consists of Russia's First Deputy Prime Minister Igor Shuvalov (also ChaiQrmanQ of the Commission),Belarus Deputy Chairman of the Government Andrei Kobyakov, and Kazakh First Deputy Chairman Umirzak Shukeev. ¶7. (U) The supreme body of the RBKCU is the Interstate Council of EurAsEc, which operates on two levels. At the level of the Heads of State are Presidents Medvedev, Lukashenko and Nazarbayev, who will meet once a year. At the level of the Heads of Government are Prime Ministers Putin, Sidorsky, and Massimov, who will meet twice a year. Decision Making -------------- ¶8. (U) Each member country will submit to the RBKCU Secretariat, for consideration by the Commission, proposals for the introduction, use, modification, or termination of measures to regulate foreign trade in goods. The voting procedure for the Commission gives Russia 57% of the votes, and Belarus and Kazakhstan each 21.5%. Decisions will require a two-thirds majority, unless international treaties that form the legal basis of the RBKCU stipulate a consensus. If there are insufficient votes (i.e. Russia does not agree with a unified Belarus-Kazakhstan position),the Commission will refer the question to the Interstate council at the level of Heads of State. Similarly, if one of the member states disagrees with the Commission's decision, the issue can be appealed to the Heads of State, who will consider the issue and decide by consensus. At this point it is unclear what decisions the Commission will refer to the Heads of Government and how the two levels of the Interstate Council will decide duties. ¶9. (U) All decisions by the three bodies of the RBKCU will be published on the Custom Union's website (www.tsouz.ru) upon approval. Decision will be published at least one month before entry into force of any new provision or agreement. Right of Appeal -------------- ¶10. (U) The RBKCU envisions two mechanisms for appeal: the EurAsEc Court and the Expert Council. According to the RBKCU agreements, the mission of the EurAsEc court will be to ensure uniform application of the treaties that make up the RBKCU. If there are any disputes between the RBKCU members regarding the interpretation and application of the Customs Union treaty, negotiations between the countries will be the first step. (Note: The Forum for these negotiations is not defined. End note.) If negotiations produce no agreement by the parties within six months, the issue goes to the EurAsEc Court. The amendments to transfer the EurAsEc Court from its existing functions of the new RBKCU functions are scheduled to be adopted on April 1, 2010. ¶11. (U) The Expert Council will be central to the administrative appeal mechanism. RBKCU documents state that the Expert Council will include no fewer than five representatives from each member state with the necessary expertise and experience in law, international trade, and other areas related to dispute resolution. These experts will be recommended by their respective governments, chosen by the Commission, and approved by the Interstate Council to serve three-year terms. The Interstate Council at the level of Heads of State decided that the governments of Belarus, Kazakhstan, and Russia should submit candidates for the Expert Council to the Commission of the Customs Union by December 25, 2009. During a December 7 briefing, Russia's Lead Trade Negotiator Maxim Medvedkov stated that the Expert Council will hear any cases before the imQplemQentation of the EurAsEc Court; however, this provision is not specified in the agreements published so far. MOSCOW 00003082 003.5 OF 004 ¶12. (SBU) The RBKCU documents also state that any economic entity (i.e. company) of the member states may appeal to the Expert Council regarding the Commission's compliance with the Customs Union treaties. The Secretariat, in consultation with the governments of each member state, will form a conciliation commission made up of three experts from each country to review the appeal. The Experts Council will recommend revision to the Commission's decisions, but will not make recommendations for compensation. There are several issues of concern with this appeals structure: a) the agreements currently do not make provisions for appeals by foreign companies or actors; b) the Expert Council does not seem to have any "teeth," as it can only make recommendations; c) there are no provisions for compensation for losses; and d) the appeals system is more focused on resolving disputes between member states than between traders and the RBKCU. The Customs Code -------------- ¶13. (SBU) Although the harmonized Customs Code, which governs the conduct of customs activities, has been approved, it will not come into force until July 1, 2010. There are several decisions on customs issues still pending before the Commission, which are not due to be approved until April ¶2010. The transition period also provides the three different customs services time to become familiar with the code and to conduct training exercises. Currently Russian and Kazakh Customs Services are actively engaged in pilot exercises for conducting joint customs control in a number of border regions. The January-July 2010 period, in the absence of a unified Code, will see uneven implementation of customs procedures as all three existing national Codes will still be in force. When asked about this weakness in the enforcement structure, Russia's lead RBKCU negotiator, Andrei Tochen, could only respond "well, as you know, customs officers cannot enforce the laws of other countries." Customs Duties -------------- ¶14. (U) While the harmonized tariff table uses Euros as its assessment currency, duties will be paid in the currency of the country of the port of entry and transferred to the respective central banks using the current rate of exchange. ¶15. (U) Since deciding in August (ref A) that customs duties would be collected in the country in which the goods enter, the RBKCU member countries have finalized the distribution terms. This system, still pending approval by the National Central Banks, is expected to enter into force on April 1, ¶2010. Russian sources have indicated that Russia expects to receive around 90% of the customs revenue. It is unclear how customs revenue will be distributed during the January-April period. Licenses and Certifications -------------- ¶16. (U) The procedures for the issuance of import licenses will remain the same for Russia, as the RBKCU has adopted Russia's procedures. The RBKCU grandfathered in all current licenses, so they will remain valid until their previously stated date of expiration. Russian officials, and RBKCU agreements, are unclear however, on whether there will be mutual recognition of licenses issued by each country, and whether the licenses should come from the country of the points of entry or the country of the final point of sale. This gap in information will affect the renewal process. As it stands now, companies may have to apply for licenses in all three member countries at the same time. This issue has received some clarification for SPS certifications because on December 11 the Heads of Government approved an agreement establishing "mutual recognition of accreditation of certification bodies for testing laboratories that perform work on conformity assessment, as well as sanitary, veterinary-sanitary measures and plant quarantine." Dues/Payments MOSCOW 00003082 004.5 OF 004 -------------- ¶17. (U) Contributions to the RBKCU are proportional to the voting proportions of the members and will be assessed in Russian Rubles. For 2010 the Customs Union's budget will be USD 8.9 million of which Russia will pay USD 5 million and Belarus and Kazakhstan, USD 1.9 million each. Key Dates for the Customs Union -------------- ¶18. (U) Jan 1, 2010 ) CustQoms QUnion becomes a legal entity - Entry into force of harmonized tariff table April 1, 2010 - Entry into force of unified customs duty collection system - All harmonized documents for SPS regulations and procedures due to Commission July 1, 2010 ) Entry into force of harmonized Customs Code - Proposed entry into force of harmonized SPS regulations and procedures - Closing of border check points between Russia and Belarus - Proposed creation of EurAsEc Court July 1, 2011 ) Closing of border posts between Russia and Kazakhstan Comment -------------- ¶19. (C) On paper, the RBKCU seems to have a straightforward, simple structure, with clear lines of responsibility and decision-making, and a defined appeals process. Senior Russian Trade Negotiator Maxim Medvedkov and several other Russian interlocutors insist that this simple structure creates a more attractive and defined market, and will therefore increase economic activity in all three countries. Post has serious doubts, however. The gaps in regulations and implementation outlined in this cable create serious legal voids. The staggered implementation dates produce a lack of clarity on customs procedures and enforcement, collection of duties and the appeals processes. Vagueness on issues such as licensing and certification procedures open the door to confusion and possible abuses of the system by unscrupulous traders and customs officials. As well, the speed with which the RBKCU agreements were finalized means that there has been no time to ensure that all of the bureaucrats involved in these processes will be up to speed on the details and ready to address issues when they come up. In short, we do not know what is going to happen, and we are concQerneQd that when problems arise, many of the structures needed to resolve them will not exist and the officials responsible for answering questions will not know what to do. As a result, goods could stack up at the border, and this chaotic situation could continue for several months or longer. Russian claims of the RBKCU increasing economic activity for the custom union's members remains a goal for which the jury is still out. Beyrle