- International Trade. Major Russian Legislation Changes for 2014
- April 23, 2015
- Law Firm: Dentons Canada LLP - Toronto Office
Creation of the Eurasian Economic Union
On 29 May 2014, the Presidents of the Russian Federation (“Russia”), Republic of Belarus (“Belarus”) and Republic of Kazakhstan (“Kazakhstan”) signed the Treaty on the Eurasian Economic Union (“Treaty”). The Treaty established a new international regional organization, the Eurasian Economic Union (“EEU”), as of 1 January 2015. The EEU operates within the customs territories of the above countries and the Republic of Armenia, which joined the Treaty in December 2014. The EEU will gain another new member - the Kyrgyz Republic - in 2015. The Republic of Tajikistan and other countries in the region may also join the EEU in the future. Already in 2015, the EEU may become, in terms of territory, the world’s biggest customs and economic union, with a developing single market for goods and services comprising over 170 million people, a combined GDP of more than US$4.5 trillion and total turnover of external trade exceeding US$900 billion.
The EEU is an in-depth form of economic integration between EEU member states (“Member States”), which is based on the economic and legal pillars of the Customs Union (“CU”) and the Single Economic Space (“SES”) of Russia, Kazakhstan and Belarus. Cornerstone principles of governance, decision-making and dispute settlement in the EEU have been already tested in the CU and SES, as well as within the Eurasian Economic Community (“EurAsEC”).
The EEU Treaty comprises 118 Articles and 33 Annexes containing detailed provisions, protocols and statutes on various aspects of the functioning of the EEU (in total over 800 pages of legal texts). The Treaty codifies over 90 and terminates 68 international agreements regulating various activities of the CU, SES and EurAsEC. It also addresses many legal shortcomings and reduces exemptions from general rules contained in the previous CU and SES Agreements. While the CU Agreements mainly aimed to create a free trade area (“FTA”) and customs union between Russia, Kazakhstan and Belarus, including implementation of common external policies on trade in goods, and the SES Agreements contained only general principles on trade in services and freedom of movement of capital and labour, while also establishing a basis for coordination of the Member States’ policies in certain other areas, the EEU pursues far more ambitious objectives. For instance, the Treaty significantly deepens coordination between Member States in the regulation of financial and labour flows, establishes generic principles on common industrial and agricultural policies, and unifies rules on subsidies, on protection of competition, and on the functioning of common energy markets.
To achieve these objectives, the Treaty assigns new competencies and powers to the executive bodies of the EEU, correspondingly reducing national sovereignty in many economic areas. The principal executive body of the EEU - the Eurasian Economic Commission (“EEC”) - has also significantly expanded its powers to enforce common policies and regulations on many matters covered by the Treaty.
The following is a brief analysis of main changes in the area of foreign and domestic trade regulations in the EEU in comparison with the previous CU and SES regimes.
International legal personality of the EEU
First, unlike the CU and SES, the EEU has international legal personality, which allows the EEC, within the powers provided to it under the Treaty, to enter into agreements with other international entities (Articles 5-7 of the Treaty). In practice, this will limit the ability of individual EEU Member States to enter into separate bilateral or multilateral international agreements that in one way or another may concern international trade or investments. The terms of such agreements will have to be coordinated with all other Member States in advance. Moreover, these terms must not contradict the Treaty, which has direct effect in the EEU and prevails over the national laws of the Member States.
These changes will impact activities of EEU Member States within the World Trade Organization (“WTO”) and influence international bilateral negotiations in many areas, including, e.g., negotiations on FTA, investment protection, mutual recognition of qualifications/certificates, trade facilitation and customs cooperation, tax evasion and many other matters. It appears that Russia will now have to consider more carefully the positions of all other EEU partners on a wide range of matters related to international economy and trade policy, which may not be a straightforward exercise in practice. These changes may also inspire the EEU business community to engage more actively in lobbying at the EEC level, albeit hand in hand with national institutions.
Trade in goods and protection of the EEU domestic market
In the area of trade in goods, the Treaty mainly codifies rules already existent within the CU framework (i.e., aiming to secure free movement of goods within the EEU), and definitely eliminates trade defence measures in internal trade, except certain compensatory and retaliatory measures against subsidies contradicting the Treaty (see below). At the same time, the Treaty grants additional rights and powers to the EEC in the sphere of anti-dumping, countervailing and safeguard measures in trade with third countries (Articles 48-50 and Annex 8 of the Treaty). For example, the EEC received additional rights to obtain confidential information from EEU Member States. The Treaty also tightens the procedural rights of participants of trade defence investigations. In addition, the EEC managed to improve the effectiveness of legal instruments available for prompt protection of domestic markets from aggressive, unfairly traded imports (for example, more flexible rules on retrospective and provisional anti-dumping and countervailing measures).
However, it appears that the EEC might experience practical difficulties in applying certain new instruments in the course of ongoing trade defence proceedings. For example, until the entry into force of the new Customs Code of the Eurasian Economic Union (“CC EEU”, expected in 2016), the imposition of retrospective anti-dumping or countervailing measures against sharply increased imports, which is taking place just after investigations are initiated, will not be possible because the required customs procedures/regimes are still legally absent.
Most likely, trade defence measures in force in the CU will be automatically extended to the new EEU Member States (i.e., Armenia and the Kyrgyz Republic), even without initiation of any interim review proceedings. The EEC has already done this for safeguard measures on the import of grain harvesters and modules. Although this approach might be considered controversial from the WTO point of view, a similar approach was used during the creation of the CU in 2011 and, for instance, during enlargement of the European Union (“EU”) in 2004 and 2007. Interested producers, exporters, importers or consumers concerned may still be able to submit substantiated requests for interim reviews of particular trade defence measures.
It is important to note that the Treaty significantly restricts the ability of private entities to challenge trade defence measures in the new Court of the Eurasian Economic Union (see below). The Treaty has dramatically weakened the effectiveness of this legal mechanism for the business community. This may increase risks of WTO disputes over EEU trade defence measures (this primarily concerns Russia and Armenia, as the only WTO members in the EEU at the beginning of 2015).
At the same time, the EEC remains very limited in its ability to remove trade barriers and improve market access in third countries. In practice, all real powers to challenge tariff and non-tariff barriers in countries outside the EEU, to provide export support or to impose retaliatory measures remain within the competencies of individual EEU Member States.
Article 28(3) of the Treaty mandates that EEU Member States should abolish all import and export duties in internal trade in goods. At the same time, national governments retain full control over export duties in trade with third countries.
The Treaty extends the EEC’s powers to impose non-tariff regulations in internal and external trade in goods (including import/export quotas, prohibitions, licenses, permits and exclusive rights). Although EEU Member States can still impose unilateral non-tariff measures in exceptional circumstances without EEC approval, these measures can apply for no more than six months from the date of introduction (Chapter X of Annex 7 to the Treaty).
According to the Treaty, the creation of common electricity, gas, pharmaceutical and medical product markets is to be completed after 2016 but no later than 2025. During this period, Member States are to elaborate uniform requirements and rules for the functioning of these markets. Considering that these processes often face objective technical, legal and political difficulties, in order to safeguard interests in these economic areas, the business community should get involved in the relevant activities at their earlier stages.
Regulation of technical, veterinary and (phyto-)sanitary surveillance as well as consumer protection in the EEU is primarily based on existing CU practices. The Treaty establishes that all Member States must apply unified requirements and achieve maximum harmonization of national procedures for controls/monitoring, safety assessment and confirmation of conformity (e.g., by virtue of the direct effect of the Technical Regulations of the EEU). In the meantime, the Treaty language demonstrates certain deviations from obligations that Russia undertook upon accession to the WTO. For instance, this concerns the WTO obligation to ensure the priority of international technical or (phyto-)sanitary standards (where existing and appropriate) when designing internal technical rules. This approach may limit the possibility of successful challenges of EEC regulatory measures in the EEU Court and increase risks of respective WTO disputes against Russia.
External and internal trade in services and mutual investments
In the area of external trade in services, the Treaty provides only for coordination of relevant policies among EEU members (Article 38 of the Treaty). In other words, in practice, trade in services with third countries remains within the competences of EEU Member States.
Chapter VI and Annex 16 to the Treaty, which govern internal trade in services and activities of economic entities in this area, are important novel features of the Treaty. In this regard, Article 67(2)(4) of the Treaty prohibits Member States from worsening market access conditions in all services markets after execution of the Treaty. The Treaty also provides for gradual liberalization of internal trade in services (including with respect to natural monopolies and government procurement practices) and easing of mutual investments within EEU Member States.
Nevertheless, Member States may still invoke certain pre-defined exemptions from national treatment and most favoured nation (MFN) regimes applying in internal trade in services. Exhaustive lists of exemptions/restrictions that may be imposed by Member States in all sectors and activities in the area of trade in services (“horizontal exemptions”) are included in Appendix 1 to the Protocol on Trade in Services, Establishments, Activities and Investments in Annex 16 to the Treaty.
Individual Member States may also retain restrictions in certain services sectors in accordance with so-called “national schedules”, which include specific restrictions, exemptions and additional requirements/conditions for internal trade in services approved by the EEU’s supreme body, the Supreme Eurasian Economic Council, at the level of the heads of EEU Member States. These national lists have yet to be elaborated, and the business community still has an opportunity to participate in this process.
In regulating trade in services, the Treaty heavily relies on principles and provisions of the General Agreement on Trade in Services (GATS), which is among the WTO’s most legally complex and difficult Agreements in application. Considering the existing WTO experience with GATS issues, it might be difficult for Member States and the EEC to enforce complete implementation of certain Treaty provisions on trade in services.
The Treaty contains another important innovation - a codification of dispute resolution procedures for investment disputes between a Member State and private investors from other Member States (Clauses 84-87 of Annex 16). In such disputes investors may decide to have recourse to national courts within the Member State hosting the investments, or to international commercial arbitration proceedings at the chamber of commerce of any Member State agreed upon the parties, or to an ad hoc arbitration court under UNCITRAL rules (unless the parties agree on other rules), or to the International Centre for Settlement of Investment Disputes (ICSID) under the Washington Convention on the Settlement of Investment Disputes between States and Nationals of Other States of 1965
New powers of the EEC on competition and subsidies
In other spheres of the SES, the Treaty provides only for coordination of activities by Member States. Coordination is to take place in regard to macroeconomic and currency policies, regulation of financial markets and internal taxes, regulation of labour migration and transportation, energy and natural monopolies and certain other areas. In respect to government procurement and protection of intellectual property, the Treaty provides for mandatory national treatment regimes for all economic operators within the EEU and for adherence to relevant international agreements.
Chapter XVII of Annex 19 to the Treaty sets out general principles and rules on protection of competition in the EEU. These provisions should be transposed into national legislation of Member States. The Treaty also grants the EEC real powers on surveillance and enforcement of competition rules within cross-border EEU markets. For example, the competent EEC bodies (in cooperation with the competent national authorities of Member States) will soon receive powers to conduct investigations and impose penalties. The forms and amounts of the penalties are provided in Chapter IV of Annex 19 to the Treaty. With respect to activities of economic operators from third countries, Member States will continue to undertake a coordinated antimonopoly (competition) policy.
According to Chapters XXIV and XXV of the Treaty, EEU Member States are to pursue their own industrial and shall coordinate their agricultural policies.
The most important innovation in these areas are detailed rules on the provision of industrial subsidies and the imposition of “compensatory measures” on subsidies provided by a Member State in violation of the Treaty and materially injuring other Member State (Annex 28 to the Treaty). The Treaty introduces concepts and definitions of prohibited, specific, permitted and non-actionable subsidies and establishes a formal procedure for the conduct of investigations on conformity of subsidies with the Treaty and for the application of compensatory and retaliatory measures by an injured Member State.
Approaches, principles and definitions of the above rules were broadly borrowed from the WTO Agreement on Subsidies and Countervailing Measures (SCM). However, unlike WTO rules on countervailing measures, which aim to protect a domestic market from subsidized imports, compensatory measures in the EEU can only be in the form of a withdrawal of an entire amount of the subsidy plus interest from the recipient. Specific subsidies cannot be withdrawn after five years from the date of provision. In cases where national authorities refuse to enforce withdrawals, the injured Member State can undertake reasonable retaliatory measures. The Treaty does not contain further clarifications on measures of this kind.
Another important innovation in the area of industrial subsidies is the introduction of a mandatory requirement for prior EEC approval of specific subsidies. A similar approach has been applied in the EU for many years.
The above principles of regulation of industrial subsidies are functioning relatively well in the WTO and the EU. However, key provisions on surveillance and compensatory/retaliatory measures for injurious subsidies are conditional upon the adoption by Member States of an additional international agreement (Article 105 of the Treaty). It appears that the Treaty’s overall effectiveness in the area of industrial and competition policy of the EEU will largely depend on the content of that agreement, which should be drafted by 1 January 2017.
Similar conclusions may also apply to the EEU agricultural policy in general and to state support for the agricultural sector in the EEU. Articles 94 and 95 and Annex 29 to the Treaty (devoted to agricultural policies and subsidies) are, to a major extent, based on principles of the WTO Agreement on Agriculture. In this respect, and as provided in Clause 11 of Annex 29 to the Treaty, Member States will be required to completely abandon export and import substitution subsidies in agriculture and limit (to 10% of the gross value of agricultural production) state support measures that distort internal trade in agricultural goods. When state support rules are violated, an EEU Member State will be able to demand compensation and, if claims for compensation are not satisfied, impose retaliatory measures. However, the above limitations on state support will enter into force only after the EEU elaborates and adopts (possibly in 2015) complex methodologies for calculating the key economic indicators necessary to compute specific production volumes and permitted state support for different agricultural goods.
The new EEU Court
The dispute settlement mechanism of the CU and SES has also experienced substantial changes. In particular, the Treaty progressively restricts certain general and procedural powers of the new Court of the Eurasian Economic Union (“EEU Court” or the “Court” ) in comparison with its predecessor, the Court of the Eurasian Economic Community (“EurAsEC Court”), which has been operating in Minsk (Belarus) since 1 January 2012.
The EEU Court remains the supreme judicial body of the EEU. It occupies the same premises and has similar administrative and organizational structures as the EurAsEC Court. The Treaty extends the term of appointment for judges (two judges from each EEU Member State) from six to nine years. This development should have a positive impact on the skills and impartiality of judges. On 10 February 2015, all eight judges took the oath of the Court. Many judges have been reappointed from the EurAsEC Court.
The EEU Court will continue to resolve disputes between EEU Member States and between the EEC and EEU Member States and will also consider claims brought by private entities (including foreign ones) against decisions, actions or inactions of the EEC, as well as interpret the EEU Agreements.
At the same time, under the Statute of the Court of the Eurasian Economic Union (Annex 2 to the Treaty), the EEU Court has lost important powers to issue advisory opinions on issues pertaining to interpretations of the Treaty and the EEU Agreements. According to the previous rules, the EurAsEC Court could provide non-binding advisory opinions upon requests from the supreme national courts of Member States (analogous to preliminary rulings by the EU Court of Justice) in cases where any party to proceedings in a national court has requested such reference to EEU law. These changes may significantly diminish the unifying and consolidating influence of the EEU Court on judicial and enforcement practices taking place within national courts of EEU Member States. This may also negatively affect the chances of private entities to successfully invoke EEU law in defending their interests in the national courts of Member States.
The new EEU Court has also lost its exclusive right to interpret the Treaty and the EEU Agreements. Member States are also allowed to do so now and respective decisions of the Member States will be automatically regarded as consistent with the Treaty. Member States and the EEC will also have the right to intervene in any Court proceedings as an interested party.
Under the Treaty the EEC will have three months (previously two months) to reply to mandatory Pre-court Requests that private claimants submit to the EEC prior to a formal application to the EEU Court. The claims and grounds of subsequent applications to the Court cannot deviate from the respective Pre-court Requests. In addition, decisions of the EEU Court cannot go beyond the claims raised by private entities in their formal applications to the Court. This approach may significantly limit the active roles of judges in the proceedings and their ability to consider a case impartially, objectively and comprehensively. In sum, the new procedural rules may negatively impact the ability of private entities to defend their interests in the EEU Court.
As previously, contested decisions or (in)actions of the EEC remain in force during the Court’s proceedings. Moreover, the Treaty unequivocally clarifies that even successfully contested decisions or (in)actions are normally not recalled or suspended automatically when the Court issues a ruling: the EEC has 60 days to amend contested acts so as to bring them into conformity with EEU law and the Court’s findings. In this respect, the EEC may determine its own precise ways and means of complying with decisions of the Court.
In case of anti-dumping, countervailing or safeguard measures, successfully contested decisions of the EEC will be amended only after the EEC will initiate and conclude ex officio reviews of the measures. These reviews are to be limited to matters that are necessary to comply with the Court’s findings (Clause 276 of Annex 8 to the Treaty). This approach substantially diminishes the practical value of the EEU Court for challenging trade defence measures, and thus multiplies risks of WTO disputes.
In other words, it appears that the Treaty critically reduces competencies, powers and, thus, the role of the judicial authority in the day-to-day activities of the overall organization, and, arguably, the rule of law in the EEU. The above changes in the balance of powers between the EEU’s executive and judicial bodies as well as the new restrictions on private entities in the Court may adversely affect the overall performance of the organization and impede achievement of its main objective: economic development on the basis of law in the interests of all citizens of the EEU, as stated in the preamble to the EEU Treaty.
On the other hand, the EEU Court continues to enjoy sufficient legal powers to adjudicate professionally and impartially in accordance with the principles of due administration and with equal respect for legal rights of the parties in all potential cases.
Economic sanctions on Russia in connection with the events in Ukraine
Economic sanctions imposed on Russia by some of its major trade partners in connection with the events in Ukraine in 2014 significantly impacted international trade flows in the region. In particular, over the period of several months from March through December 2014 a range of political and economic measures were introduced by the United States of America (“US”), the EU, Canada, Australia, Japan, Norway, Switzerland, Iceland and certain other countries with a view to influencing Russian engagements in this region.
The first round of sanctions was limited to political measures, including cancellation of the G8 summit in Sochi, suspension of negotiations on a number of bilateral and multilateral international agreements and similar actions. The second round of measures included travel bans and asset freezes targeting certain individuals and organizations allegedly influencing events in Ukraine. The third round of sanctions comprised so-called “sectoral economic sanctions” against several sectors of the Russian economy and individual companies.
The sectoral sanctions imposed by the EU and the US, as Russia’s major trading partners, had the most significant effect on international trade. In addition to import and export bans on certain goods and on the provision of certain services to Russian companies, the EU and the US imposed wide-ranging restrictions on Russian financial, military and energy sectors.
Most notably in the EU, EU persons are prohibited from directly or indirectly purchasing, selling, providing investment services for or assisting in the issuance of, or otherwise dealing with transferrable securities and money-market instruments with a maturity exceeding 90 days issued after 1 August 2014 to 12 September 2014 or with a maturity exceeding 30 days that are issued by:
(a) five major state-owned Russian banks: Sberbank, VTB Bank, Gazprombank, Vnesheconombank and Rosselkhozbank; their subsidiaries outside the EU, and legal entities more than 50% owned, directly or indirectly, by these banks or acting on behalf or at the direction of these banks;
(b) three major Russian energy companies: Rosneft, Transneft and Gazprom Neft;
(c) three major Russian defence companies: OPK Oboronprom, JSC United Aviation Construction Corporation and JSC Uralvagonzavod.
Accordingly, EU nationals and companies can no longer provide loans, buy or sell new bonds, equity or similar financial instruments with a maturity exceeding 30 days issued by these institutions. It is noteworthy, however, that the above restrictions do not apply to other financial services, such as deposits or money transfers.
With respect to military and dual-use goods and technology and energy-related equipment, the following measures are in place in the EU:
- Embargo on import and export of arms and related materials from/to Russia, covering all items on the EU common military list;
- Prohibition on exports of dual-use goods and technology for military use in Russia or to Russian military end-users, including all items in the EU list of dual-use goods; exports of dual-use goods to nine mixed defence companies are also banned;
- Prior authorisation required by competent authorities in the EU Member States for exports of certain energy-related equipment and technology to Russia. Export licenses will be denied if products are destined for deep-water oil exploration and production, Arctic oil exploration or production and shale-oil projects in Russia.
- Prohibition on supply of services necessary for deep-water oil exploration and production, Arctic oil exploration or production and shale-oil projects in Russia, for instance drilling, well testing or logging services.
As part of its policy of non-recognition of the annexation of Crimea and Sevastopol, the EU has introduced a separate package of economic and political restrictions applicable to that region. In particular, the EU has adopted a prohibition on imports originating from Crimea and Sevastopol unless accompanied by a certificate of origin from the Ukrainian authorities. EU persons are not permitted to invest in that region, to offer tourism services in Crimea or Sevastopol, or to supply goods or technical assistance, brokering, construction or engineering services related to infrastructure development on the Crimean peninsula. Also prohibited is the export of goods and technology to Crimean companies or for use in Crimea that relate to the transport, telecommunications and energy sectors or to prospecting, exploration and production of oil, gas and mineral resources.
The sanctions imposed on Russia by the US are in general similar to those imposed by the EU, albeit with some differences. The US sanctions mainly aim to restrict access of Russian state banks and defence and energy companies to international financing. The US sanctions also prohibit the supply of goods and services for deep-water, Arctic and shelf oil and gas exploration and development. US citizens and legal entities are also prohibited from engaging in commerce with legal entities or persons in Crimea.
In addition, the US adopted the Ukraine Freedom Support Act in 18 December 2014. This act authorizes (and in certain cases requires) the US President to promptly introduce additional sanctions on Russia, depending on the situation on the ground in Ukraine and fulfilment by Gazprom of its obligations to supply natural gas to Eastern Europe. These additional sanctions may target politicians and executives as well as Russian defence, oil and energy sectors more broadly. In addition to targeting Russian persons, these restrictions may also target non-US persons who, in violation of the US sanctions, supply goods or provide financing or other prohibited services to Russia. This extraterritorial effect of the US sanctions makes Russian access to alternative sources of financing, or access to goods and technologies in other countries that do not formally apply sanctions on Russia (for example, China, Brazil, etc.), less likely.
Notwithstanding the above, it is important to note that the sectoral sanctions on Russia in force in the EU and in the US (or elsewhere for that matter) do not amount to trade embargos and do not require a complete halt of cooperation with Russia as a whole.
Russia’s countermeasures on imports
In response to the above economic sanctions, in August 2014 the Russian President signed countermeasures affecting trade in goods with certain countries. Specifically, in accordance with applicable Russian laws, on 6 August 2014, the Russian President signed a Decree “On Application of Certain Special Economic Measures to Ensure the Security of the Russian Federation”. Specific restrictions and other implementing measures were further determined in the Resolution of the Government of the Russian Federation No 778 adopted on 7 August 2014. According to the Resolution, imports of certain agricultural products, raw materials and foodstuffs from the US, the EU, Canada, Australia and Norway are banned for a period of one year, while imports from Japan, Switzerland and New Zealand are not restricted.
The initial list of banned imports covered all kinds of meat and meat products (including sausages, similar products and offal), fish and other seafood, milk and dairy products (cheeses, cottage cheese, etc.), vegetables, fruits and nuts. It is noteworthy that baby food was specifically excluded from the scope of the prohibition.
On 20 August 2014, the Russian Government revised the list to exclude Atlantic salmon and trout juveniles, lactose-free milk, seed potatoes and onions, hybrid sweet corn and seed peas, food supplements, vitamin mineral complexes, food flavourings/additives and protein concentrates from the scope of the ban.
It is also relevant that other EU Member States, i.e., Belarus, Kazakhstan and Armenia, have not “joined” Russian countermeasures. Therefore, in the absence of customs controls within the EEU’s common market, there are certain difficulties in enforcing the import ban (giving rise to instances of customs fraud involving forged transit documentation and certificates of origin).
What the measures imposed on Russia and the Russian countermeasures have in common is that at different times different authorities made statements arguing that the economic sanctions in question violate the General Agreement on Tariffs and Trade (GATT 1994) and other WTO Agreements. Moreover, both sides suggested that they would challenge the measures at the WTO. However, thus far neither side has filed a formal request for consultations, which is necessary to initiate a legal proceeding in the WTO. Given the political context of the matter and in light of the WTO’s jurisprudence on the issue of trade sanctions and embargos to date, a swift resolution or settlement of such disputes in the WTO would be unlikely.