3 October 2012
PaRR (Policy and Regulatory Report) publishes commentary by Gleb Bialyi on Russia and Ukraine reaching an agreement over the contentious issue of automobile salvage fees

Russia and Ukraine likely to reach bilateral agreement on salvage fee without WTO involvement

  • Both sides introduced duties in automotive import sector in September
  • Issue widely seen as protection of national automotive industries
  • WTO dispute would be costly and result might not be satisfactory to Russia

Russia and Ukraine are likely to reach an agreement over the contentious issue of automobile salvage fees without either side referring the dispute to the World Trade Organization (WTO), lawyers familiar with the process said.

Salvage fees are duties applied to some vehicles imported into the country for domestic use. The issue is of particular importance to the Russian and Ukrainian automotive industries, as these two countries are two of the largest trade partners to each other in the sector.

"Russia and Ukraine will find mutual, fruitful decisions and will stop applying salvage fees to the respective imports to each other, without [resorting to] the WTO dispute resolution procedure’ said Gleb Bialyi, the Head of the International Trade and Customs Practice at the Kiev-based law firm, Egorov Puginsky Afanasiv & Partners (EPA&P Ukraine).

A second, Moscow-based lawyer with the firm agreed with this prediction.

Russia will likely conduct bilateral meetings with Ukrainian representatives to resolve the issue, said Alexander Bychkov, a partner at the Moscow Office of Baker & McKenzie.

For Russia, the Ukrainian automotive market is a strategic and very important one, Bychkov added. Due to the close economic and political relationship between the two countries, Ukraine is likely to try to use the potential cancellation of this measure as a bargaining chip, said Bychkov.

Imposition of respective salvage fees by Russia and Ukraine

On September 3, 2012, the Cabinet of Ministers of Ukraine passed Resolution No. 843, imposing a salvage fee on vehicle imports from Russia, classified under groups of codes 8702—8705 and 8707 of the Ukrainian Tariff Code. This classification covers almost every type of vehicle that can be potentially imported from Russia to Ukraine with the possible exception of agricultural equipment, said Bialyi.

Passenger cars, trucks, busses are all included in the classification, added Bialyi.

The Ukrainian measure was seen as a response to a similar salvage fee introduced by Russia on 1 September, 2012. Since then, Russia has imposed a salvage fee on imports of all vehicles to Russia, regardless of the country of origin.

As Russia was at the time in negotiations over its WTO accession and had undertaken to decrease import duty on vehicles, the move was seen as a hidden protection of the national car industry, Bialyi added.

Potential WTO cases

Both the Ukrainian and the Russian salvage fees may be seen as violations of WTO norms, trade lawyers in the two countries told PaRR.

However, the extent of the violations and the possibility that either of the parties would resort to the WTO remain open to debate, the lawyers added.

The salvage fee introduced in Russia does not discriminate against imports as, in theory, it can also be applied to Russian products as well, according to a lawyer familiar with the situation. Hence, it does not contradict WTO standards.

The Ukrainian fee is more vulnerable to a potential challenge because it was prepared as a response to the Russian fee and was not developed well, he added.

The retaliatory measure by Ukraine against Russia is likely to be contrary to the national treatment obligation under Article III of the General Agreement on Tariffs and Trade (GATT), as well as provisions of the WTO Agreements on Trade-Related Investment Measures (TRIMs) and on Subsidies and Countervailing Measures (SCM), said Brussels-based lawyer Charles De Jager, a counsel in the International WTO, International Trade and Customs practice at Salans.

Although the Government of Ukraine is forthcoming about the purely retaliatory intent behind its measure, any attempts by Ukraine’s government to justify its measure on legitimate grounds, such as environmental or health grounds under GATT Article XX, would also not withstand scrutiny, De Jager added.

In De Jager’s opinion, however, Russia’s use of the salvage fee tax could also be open to serious challenge under WTO rules. Russia would seem to be ill-advised to initiate a WTO dispute settlement procedure over the Ukrainian retaliatory measure, he added.

In addition, Ukraine will be able to convince the WTO that salvage fee on imports from Russia is a sole counter-measure, Bialyi added.

Possible scenarios

The WTO dispute resolution procedure is a long and complicated process. Should Russia appeal to the WTO, the procedure could take more than 18 months, Bialyi predicted.

As well as being time consuming, the WTO would not be able to make Ukraine change the ruling, but instead might allow Russia to introduce compensation measures, Bychkov said.

If the WTO deemed the salvage fees in Ukraine to be in breach of Ukraine’s WTO obligations, it would simply allow Russia, as the appellant, to institute a counter-measure against imports from Ukraine, Bialyi explained.

As Russia already has a salvage fee that is applicable to imports from Ukraine, such a WTO ruling would be difficult to execute, he concluded. Hence, WTO mechanics are not effective for this specific case, Bualyi and a number of other lawyers told PaRR.

The main question might be whether this particular issue can be addressed separately or whether it will be subsumed into the broader bilateral trade context, said Charles De Jager of Salans.

Already, Ukrainian politicians, such as first Vice-Premier Valeriy Khoroshkovskiy, are arguing that mutual cancellation of the utilization duty by each country vis-a-vis the other would be the best option for both sides, he added.

by Natalia Lapotko in London