THE CUSTOMS UNION AND TRADE- HARMONIZED TARIFFS

C O N F I D E N T I A L SECTION 01 OF 06 MOSCOW 003083

SIPDIS

COMMERCE FOR BROUGHER/EDWARDS
WHITE HOUSE ALSO FOR USTR FOR HAFNER AND KLEIN
GENEVA FOR WTO REPS
USDA FAS FOR OCRA/HORGAN, RIKER, NENON; ONA/TING

E.O. 12958: DECL: 12/14/2019
TAGS: ETRD EAGR ECON PREL RS WTO KZ BO
SUBJECT: THE CUSTOMS UNION AND TRADE- HARMONIZED TARIFFS
AND NON-TARIFF REGULATIONS (PART 2 OF 3)

REF: A. MOSCOW 3082

B. ASTANA 2131

C. MOSCOW 2381

D. MOSCOW 2204

E. MOSCOW 2000

F. GENEVA 1001

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Classified By: A/DCM Susan Elliott, Reasons 1.4 b&d.


1. (U) Introduction: This cable is the second in a
three-part series presenting major features of the Russia,
Belarus, Kazakhstan Customs Union (RBKCU),finalized on
November 27 with the signing of most binding agreements.
This cable reviews the principal points regarding tariffs and
non-tariff regulations. The first cable covered the major
structure and decision-making process of the RBKCU (ref A).
The third cable will discuss how the RBKCU could potentially
affect Russia's WTO accession. End Introduction.

Tariff Procedures
--------------

2. (U) The RBKCU Commission, which is the single permanent
regulatory body of the Customs Union and is composed of a
representative from each member government (ref A),is in
charge of keeping and amending the harmonized RBKCU tariff
table. The Commission will meet quarterly to make decisions
on customs and tariff regulations. The majority of these
decision will be made by a two-thirds majority of votes (see
para 13 for exceptions). All RBKCU Commission decisions will
be published on the Custom Union's website (www.tsouz.ru)
upon approval. Decisions of the Commission come into effect
at least one month after their official publication and
remain in force unless the Commission or the Interstate
Council of Eurasia Economic Community (EurAsEc),the supreme
body of the RBKCU (ref A),takes action to supersede the
Commission's decision. Tariffs, while listed in Euros on the
table, will be calculated and paid in the currency of the
country where the goods enter.


3. (U) Each country will keep its own tariff commissions,
which will continue to consider requests for tariff changes
and safeguards. (Note: For Russia this is the commission
headed by Deputy PM Zubkov, aka - the Zubkov Commission. End
Note.) The recommendations on overall tariff changes will go
to the RBKCU Commission for approval. Through the national
tariff commissions, a RBKCU member may also ask the
Commission for a higher, protective duty rate just for its
country if a member government believes this is necessary for
the development of a branch of its economy. A member may
also request a lower duty rate just for its country in the
case of an acute shortage of goods, particularly if essential
for "meeting socially important needs of the population or
production development needs." In addition, the member must
show that production of the same or similar goods within the
RBKCU cannot meet this need.


4. (U) In the case of individual country requests for tariff
changes, the Commission will send out the proposal to other
members for comment. The Commission has 30 days from receipt
of the request to make a decision. The Commission generally
requires a consensus to allow the member to introduce a
higher or a lower duty rate, provided that the member's
request has been properly substantiated and that other
members do not want to take on such a tariff change as well.
The term of the higher or lower duty rate approved by the
Commission shall not exceed six months and may be extended if
the interested party submits a proposal at least one month
before the measure expires. In some undefined "emergency
situations", Customs Union members can apply protective
tariffs on selected goods without the consent of the other
members, but only for six months per year and for a maximum
of five years. The member states have agreed to grandfather
in all previously existing protective and anti-dumping
measures at the time of accession into the RBKCU. (Note:
Current safeguards investigations will remain within the
purview of each country. While the objective is to migrate
these decisions to the RBKCU commission, no date has been set
for the transfer. End Note.)


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The RBKCU Harmonized Tariff Table
--------------

5. (SBU) The harmonized tariff table contains over 11,000
lines, 80% of them ad-valorem tariffs. According to a
December 7 presentation by Senior Russian Trade Negotiator
Maxim Medvedkov, the harmonization process has only resulted
in a small number of increases to Russia's tariffs, most in
the area of meat and food products. All other tariffs will
be lower. He stated that this harmonized table represents a
1% decrease in the effective real tariff for Russia in
comparison to 2009. And, he added, even with the GOR's
anti-crisis measures, Russia's real effective tariff rate in
2009 was lower than 2008. Therefore, Medvedkov believes this
harmonized tariff table represents real, increased market
access for foreign goods. (Note: This statement however,
does not take into account that the real effective tariff in
2009 was lower due to a decrease in world trade. The better
comparison would be with the real effective tariff of 2007,
which MED did not provide. End Note.) Medvedkov added that
the "few" anti-crisis measures taken so far are temporary and
will be removed "when the circumstances allow." (Note: Our
review of two specific cases reveal that this is not
altogether true - See para 8. End Note.)


6. (SBU) According to Medvedkov, the country most affected by
the harmonized tariff rates is Kazakhstan, whose real
effective tariff rate will go up, as it had to raise tariffs
on over 3,000 tariff lines. According to Medvedkov,
Kazakhstan did receive some tariff exemptions for periods of
one to five years, and some permanent exemptions (see para
17). Kazakhstan also lowered over 3,000 tariff lines.
(Note: The full tariff table can be found, in Russian, on the
RBKCU web site (www.tsouz.ru). End Note.)


7. (U) For the moment, each country will keep its own export
tariffs, but the objective is to harmonize those as well.
While some early press reports stated that the harmonized
export tariffs would go into effect on January 1, 2011,
Russian trade negotiators indicated that these discussions
are set for an unspecified date in the future. As well, a
separate agreement on duties to be paid by individuals
importing single vehicles for sale, as well as other goods
such as alcohol, tobacco, and home appliances is still
pending discussion and approval by the RBKCU Commission.

Specific Tariff Cases
--------------

8. (SBU) A review of the RBKCU tariff table reveals that some
of Russia's recent protectionist "temporary" tariff increases
have now been transferred into the harmonized tariff table.
One case was the increase in the tariff on trucks to 25%,
which practically stopped all trade in large, industrial
off-highway trucks, which Russia does not produce. Prior to
Putin's RBKCU announcement on June 9, Russia had agreed to
create special tariff lines for different types of large
trucks, so the tariffs on them could be reduced, while the
overall truck tariff remained in place. The new tariff lines
did make it into the harmonized tariff table, with some,
(8704 10 1012) and (8704 10 1010),receiving a 0% and 25%
tariff respectively. However, the higher tariff on the
largest off-highway trucks, involved in mining and oil
exploration (8704 10 1029),will remain in the harmonized
code for the time being because Belarus is strongly opposed
to decreasing it. A more negative example is the wholesale
transfer of the "temporary" increase of tariffs on combines
to 15%, but no less than 120 Euros per kilowatt of engine
capacity, thereby making it permanent in the harmonized
table.

Treatment of Meat ) Tariff Rate Quotas
--------------

9. (U) The RBKCU Commission is also charged with introducing
Tariff Rate Quotas (TRQs). The quantities allocated for
Russia in the RBKCU tables are global; however, the RBKCU
documents note that the issue of the country specific
allocations, "if necessary," should have been distributed
within two weeks of November 27. The TRQ volumes are
significantly less than the 2009 pork and poultry volumes,
but identical to the total 2010 figures in Russia's September

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draft decree on the "import of beef, pork and poultry meat in
2010-2012." In-quota duties remain the same, 15% for beef
and pork, and 25% for poultry. Out-of-quota duties for beef
and pork are also unchanged at 50% and 75% respectively. The
poultry out-of-quota duty has been reduced from 95% to 80%,
which is still viewed as prohibitive for U.S. poultry.


10. (U) Post believes Russia will announce country specific
allocations similar to their September draft decision. The
agreements also instructed RBKCU members to issue licenses
starting December 15, and in a manner consistent with each
country' laws. This start date has slipped with the only
explanation from Russian officials being &this year is
complicated.8 Post and industry contacts attribute the
delay to internal disputes regarding country allocations and
future TRQ quantities. (note: Russia published its met
tariff quotas on December 21. Post will report septel.)


11. (U) As in the past, high-quality beef does not count
against the TRQ quantities but receives a duty identical to
the in-quota rate of 15%. The beef qualifying for this
benefit, however, has become more restrictive. Previously
meat with a value of "not less than 3,000 Euros per 100 kg."
would qualify. The new standard applies to beef with a value
"not less than 8,000 Euros per 100 kg."


12. (SBU) According to information available to us in Moscow,
there are no poultry or beef allocations for Belarus. While
the U.S. currently does not export meat or poultry to Belarus
because of sanitary-phytosanitary (SPS) restrictions, market
potential would exist if Belarus were to adopt a WTO
consistent SPS regime. Interestingly, on December 11 the
Heads of State Commission met and 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." This may
mean, that for the time being, the RBKCU will not provide
U.S. agricultural exporters with more access to the
Belorussian market.


13. (C) Comment: The provisions regarding the meat TRQs are
among the most contentious. As stated earlier, while the
quantity of the meat and poultry TRQs were anticipated, the
provisions specifying the country allocations were not
included in the document. Draft TRQ documents with the
proposed country allocation not only contain a proposal for
2010 parameters but also attempt to solidify the volumes for
2011 and 2012. End Comment.

Exceptions
--------------

14. (U) The RBKCU agreements contain a list of sensitive
items, which will require a consensus decision (vs.
two-thirds vote) from the Commission to change tariffs for
these items. The list is extensive, covering goods from 68
(out of 97 total) two-digit HS code groups. The most
affected groups include: organic chemicals; nuclear reactors,
boilers, machinery and parts; prepared vegetables, fruit,
nuts, or other plant parts; electric machinery; plastics;
vehicles and parts; inorganic chemicals, precious and rare
metals, radioactive components; fish; and meat.


15. (U) The RBKCU also has a list of goods with restricted
movement across the Customs Union border. This list includes
restrictions on the export of obvious goods such as wildlife,
poisons, and cultural property. However, it also includes
restrictions on imports of goods such as pharmaceutical
substances; veterinary medicine; non-military,
radio-electronic and high frequency devices; technical
equipment intended for gathering of information; ethyl
alcohol and alcoholic products; and encryption means (see
para 17).


16. (U) According to the RBKCU documents available to us in
Moscow, Kazakhstan will retain some flexibility in
determining its common external import tariff regime. Over
400 specific commodity items, covering some 11 two-digit
Harmonized System code groups of goods will be subject to a

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transitional period varying from eighteen months to six
years. These items include plastics; optical,
medical/surgical instruments; pharmaceuticals; electric
machinery, sound and TV equipment; aluminum; and paper and
cardboard products. As well, Kazakhstan will have no tariff
on over 900 specific commodity items including modern
aircraft; certain types of engines; and raw materials needed
in the food processing industry, such as tropical fruits (ref
B).

Cryptographic Goods
--------------

17. (SBU) A company currently importing cryptographic goods
into Russia will find little to no difference under the
RBKCU, as the basic principles for their importation will not
change substantially. National legislation and national
license issuers will remain the primary source of regulation
for cryptographic goods. Current licenses issued in Russia
will remain valid under the RBKCU. According to Russian
trade negotiators, renewal procedures and licensing agencies
in each country will not change. Enforcement, however, will
be a question as regulations are not uniform in each country,
and it is still unclear whether customs officials will be
authorized to enforce the laws of the other member countries.


Processing Goods and Special Economic Operators
-------------- --

18. (U) The Customs Code, which governs the conduct of
customs activities, will not come into force until July 1,

2010. The Code increases the duty payment period from 15
days to four months, reduces the period for completing a
customs declaration from three to two days, but increases the
time for customs clearance from three to 10 days. The
declarer will be able to make any changes in the customs
declaration before and after the release of the goods. The
Code also creates a category for "Special Economic
Operators." These are companies that, after an application
process and payment of a "guarantee," will have the right to
a "facilitated customs clearance and control scheme." These
operators will also have the right to store goods in their
own warehouses while conducting customs procedures.

General System of Preferences
--------------

19. (U) The RBKCU will replicate Russia's Generalized System
of Preferences (GSP) in favor of developing and least
developed countries. According to the RBKCU system of tariff
preferences, the Commission develops and keeps the list of
goods originating and imported from developing and least
developed countries, which will receive tariff preferences.
This list will not account for more than 20% of the total
number of the harmonized tariff subheadings. If necessary,
the Commission may establish an additional list of goods
subject to the RBKCU tariff preferences, which cannot be more
than 5% of the total number of harmonized tariff subheadings.
Developing countries that are eligible for the RBKCU tariff
preferences will pay 75% of the rates on the harmonized
tariff table, while least developed countries will enjoy a
duty free regime for specified imports.


20. (SBU) The products receiving preferences are mostly raw
materials and food stuffs (such as meat, poultry, dairy,
grains, textiles, wood products, and construction materials),
and some light industrial production. For purposes of the
GSP, the RBKCU considers countries such as Argentina, Brazil,
Hong Kong, South Korea, Chile, China and Saudi Arabia as
developing countries. We note that none of the CIS countries
are eligible for these GSP preferences. While these
countries do have FTAs with Russia, it is as yet unclear how
the RBKCU will affect the FTAs as they are not mentioned
anywhere in the RBKCU documents.

Pending Items
--------------

21. (U) Over the next few months, the RBKCU Commission will
continue work on new agreements on harmonized technical
regulations, sanitary and phytosanitary standards (SPS),and
other regulatory systems. During a December 7 presentation

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to foreign embassies, Russia's Senior Trade Negotiator Maxim
Medvedkov noted that an RBKCU group of experts would review
existing SPS regulations in each country and determine which
measures and regulations need to be changed in order to
create a harmonized document. During the December 11 RBKCU
meeting, the Heads of Government approved agreements which
set a deadline of April 1, 2010 for submission of proposals
for harmonized SPS regulations and procedures, and an
intention to have these enter into force on July 1, 2010. On
December 18, the RBKCU signed a preliminary agreement setting
out the operation of a transition period before adoption of
SPS harmonized regulations. The members also discussed a
common economic zone that removes all technical, sanitary and
other non-tariff barriers between the three countries.
(Note: In November, President Medvedev proposed that Russia
recognize all of the EU's regulations and standards as a way
of reducing the work of bringing Russia's, and presumably the
RBKCU's regulations up to international standards. A bill to
this effect was introduced into the Russia Duma on December

16. End Note.)

Comments ) We Have Several Concerns
--------------

22. (C) One of the first areas of concern as we reviewed the
RBKCU documents is that if companies or foreign governments
want to lobby for tariff reductions, the RBKCU structure
essentially requires that the petitioner lobby three
governments simultaneously. In addition, the large number of
tariffs that require consensus votes means that importation
of goods in these categories will depend on the whims of the
RBKCU Commission. This is worrisome given, at least on the
Russian side, the capricious and arbitrary way in which the
national commission approves protectionist tariffs. The
formal RBKCU appeals structure (ref A) only exists on paper
so far, and is more focused on providing a venue for appeals
from RBKCU member countries than from economic operators.


23. (C) The RBKCU documents also lack any serious,
comprehensive discussion on issues of regulation and
enforcement of SPS standards, intellectual property
protection, licensing for cryptographic imports, etc. This,
combined with the delayed implementation of the harmonized
Customs Code (until July 1, 2010),raises serious concerns
about how customs officials in the RBKCU will enforce
regulations and licenses of three different countries. One
Russian trade expert, Galina Baladina, former Director of the
Ministry of Economic Development's Department of State
Regulation and External activity and Customs, is also
concerned that the RBKCU broadens the authority of customs
services disproportionately, while not providing enough legal
guarantees for businesses. Could customs officials in all
three countries have access to the necessary information from
the other member countries and would they be able to enforce
it fairly and effectively? 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." (Note:
Post will discuss the RBKCU's effects specifically on
intellectual property enforcement septel. End Note.)


24. (C) The fact that the RBKCU is being implemented without
every single trade issue officially harmonized and agreed to,
means that local laws and regulations will continue to
operate in parallel. For importers trying to bring products
into the RBKCU, this will only increase their administrative
burden. Complicating matters further, when a harmonized
position does exist, but is preliminary and generalized and
contradicts local regulations, there is no clear method for
determining which regulation takes precedence. Russian trade
officials claim that in places where the RBKCU regulations
contradict Russian laws, the RBKCU agreements, as
international treaties, would take precedence. We did not
find such a statement, however, in the RBKCU documents.


25. (C) In our estimation these areas of concern leave
serious gaps that unscrupulous traders and government
officials can exploit. The traders can use the
inconsistencies in regulations to find alternative ports of
entry for their goods. On the government side, trade

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officials can use the ambiguity regarding which laws and
regulations take precedence to cherry pick which rules most
benefit their country. As well, protectionist tendencies
within the RBKCU will be favored over increased
liberalization of trade, as once tariffs are raised, they
will be harder to reduce.


26. (C) That said, Maxim Medvedkov has repeated publicly that
the RBKCU is an evolving project that will continue to
change. This is a basic admission that they were not able to
cover all issues necessary to create a fully operational
customs union in six months, and will need to continue to
address issues, probably on the basis of their urgency. This
provides a possible opening for foreign companies and
governments to influence changes in regulations that would
increase access and, possibly, make some regulations less
burdensome.
Beyrle