Cancelling "zero duties" for Moldovan products: Is Russia right or not?

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PC: Victor Eskenasy PC: Victor Eskenasy
Publishing date: Monday, 04 August 2014
Views: 7472

Russian government adopted a decision that grants the right to impose customs duties on 19 product categories of Moldovan imports (meat, farming production, sugar, wheat, beer, wine, furniture etc.), despite the existence of a free trade area within the CIS. Therefore, as of September 1st 2014, the taxes applied for these product categories will level those from other WTO countries (“the most favored nation clause”). Authorities from Chisinau acknowledged that Free Trade Agreement within CIS is a ”vulnerable” document, since it includes "certain annexes"[1] used by Russia to justify the annulment of “zero duty” on Moldovan products. In this commentary below, we will briefly review the situation while attempting to identify how legitimate is Russia's decision.

As we commence, it is important to note that after a series of actions of non-tariff matter that allowed import restrictions on wines, canned goods, prepared meat and fruits, it is for the first time that Russia applies prohibitive tariff tools in its trade relations with Moldova. At the same time, we should stress that non-tariff measures related to quality and safety of goods initiated frequently, especially after the initialling of the Association Agreement with the EU, are temporary decisions. The matters are different in case of the "zero tax", which relates to budget process, ie revenues that form the state budget, including import duties’ collection. Therefore, the latter could take more time (during one budget cycle) than the restrictive non-tariff measures operated by RosPotrebNadzor and Rosselkhoznadzor (Russian federal services responsible for quality control and compliance with sanitary requirements).

Although there is an obvious political and geopolitical tint, as invoked by the local public opinion, the “zero duties” problem refers to other aspects too, which we are detailing below:

  • Russia has used precisely used the provisions of Annex VI to the referred CIS Agreement signed by Moldova in 2011. So, in case of "damage or threat to harm the Party’s industry (which is a member of the Customs Union)" by products from a country that signed the CIS Free Trade Agreement, the Party member of the Customs Union (CU) can introduce import duties, which shall not exceed the value of taxes for the most preferred nation (Annex VI to the CIS Agreement)[2]. Thus, Moldova was classified a priori by Russia as a country which, hypothetically, could "threaten to impair” the Russian commercial interests. In reality, the Russian authorities may know very well that Moldova does not pose any risk, but they massively exploited the ambiguity of the Annex VI provisions to cancel "zero duties". The reason? The alleged negative effects of signing the Association Agreement with the EU. Therefore, Russia could be accused of hostile and unfriendly position towards Moldova, but in case of the "zero duties" row it acted within the legal limits allowed by CIS Agreement and Annex VI.
  • Russia erroneously presents the Association Agreement with the EU as an initiative that comes at the expense of free trade within the CIS. According to the Free Trade Agreement within the CIS (Article 18), signatory countries hold the right to engage in other free trade agreements without any restrictions. From this point of view, any incompatibility between the CIS and the EU agreement cannot be invoked. In other words, Russia has no arguments to suggest that imports from Moldova could even barely harm the Russian business interests following the creation of the DCFTA within the EU. Moreover, the Annex VI provision on “damaging or threatening to harm the Party’s industry (which is a member of the Customs Union)" actually voids the right specified in Article 18 to participate in other free trade areas other than CIS.
  • Russia's actions reveal the drawbacks of the CIS free trade agreement, signed and ratified by the authorities of the Republic of Moldova. Or, the agreement was not amended after Chisinau approved, signed and then ratified it in the Parliament. The exact current version of this agreement was accepted by the Moldovan authorities. Therefore, the responsibility for the negative effects that Moldova currently faces cannot be attributed only to Russia. The latter announced from start its opposition towards the European vector of Moldova and the subsequent signing the Association Agreement with the EU, while following this approach consistently. So it was the Moldovan authorities who were responsible to negotiate and sign a more beneficial version of the Free Trade Agreement with CIS. The same government had the task to ask for eliminating ambiguities and vulnerabilities included in the Agreement and its annexes (in particular Annex 6), in order to avoid Russia or any other CU country to take advantage over  non-Customs Union CIS countries (including Moldova). Currently, it is very challenging to negotiate with the Russian authorities, to prove that the DCFTA is harmless and perfectly compatible with the CIS Agreement, given the geopolitical regional context (conflict in Eastern Ukraine) and current tensions between Russia and the EU (sector sanctions by EU).
  • Russia's actions of annulling the „zero duty” despite the free trade within the CIS involve hidden risks. First, it is clear that other CIS countries that intend or have already signed free trade agreements that are not approved by Russia will face a similar fate. Moldova’s case should pose as a warning sign for other countries (in particular Ukraine). Second, invoking the Annex VI shows that CIS is likely to lose its economic significance against the CU. Or, "damaging or threatening to harm" the industry of the signatory Party within CIS clearly relates to the CU members and their interests. Like other provisions of the CIS Agreement (Article 8 and Article 9), where a disproportionate approach of rights between CIS countries in the Customs Union and those outside the Customs Union is obvious, in terms of applying protection or anti-dumping measures. Third, once Russia reintroduced duties on Moldovan imports (19 product categories), we can expect this measure would be taken by other CU Member States (Belarus, Kazakhstan). Most probably Russia will insist on the solidarity principle and the necessity to harmonize import tariffs’ regime applied by CU countries. Nonetheless, some opposition may come from Belarus, who often opposed the multiplication of non-tariff restrictive measures initiated by Russia (Belarus waived the restrictions on wine from Moldova and potatoes from Ukraine, previously introduced by Moscow).

We conclude that eliminating "zero duty" for Moldova can trigger a chain reaction with a stronger impact than one which can be currently anticipated. The effects may cover not only Moldova’s trade with Russia and other CU, but also trade between the CIS countries in general. Similarly, Russia has once again proved its unpredictability and lack of credibility as a trading partner. Russian gesture also shows the need to assess the economic importance of CIS and to propose a review of the existing Free Trade Agreement aiming to ensure equal respect for interests of the signatory countries. Otherwise, the initiatives of abandoning the CIS will become louder, especially in the context of the upcoming elections’ campaign.


[1] Valeriu Chiveri: „Odată cu impunerea acestor restricţii atractivitatea CSI-ului a scăzut substanţial”, 1 august 2014, http://www.europalibera.org/content/article/25477634.html

[2] Приложение 6 к Договору о зоне свободной торговли от 18 октября 2011 года, “ В случае если участие одной из Сторон в соглашении, предусмотренном пунктом 1 статьи 18, ведет к росту импорта из такой Стороны в таких объемах, которые наносят ущерб или угрожают нанести ущерб промышленности Таможенного союза, то государства – участники Таможенного союза без ущерба для применения статей 8 и 9 настоящего Договора после проведения соответствующих консультаций Сторонами оставляют за собой право ввести пошлины в отношении импорта соответствующих товаров из такой первой Стороны в размере ставки режима наибольшего благоприятствования.”, http://www.e-cis.info/page.php?id=20062

 

 
Denis Cenusa
 
Denis Cenușă
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