Proposal for a COUNCIL REGULATION on countermeasures in response to the failure of the Russian Federation to fulfil its obligations under the Partnership and Cooperation Agreement in regard to trade in alcoholic beverages

(presented by the Commission)

EXPLANATORY MEMORANDUM

1. The Agreement on Partnership and Cooperation (PCA) between the European Communities and their Member States and the Russian Federation has as one of its principal objectives the promotion of trade and investment and harmonious economic relations between the Parties.

2. A number of provisions of the PCA concern trade in goods; these are closely based on the corresponding GATT Articles.

Despite these provisions, regulation of the market in alcoholic beverages by the Russian Federation has repeatedly infringed the Interim Agreement and PCA. In particular, elements of the following legislation of the Russian Federation violates the PCA: Federal Law no. 5-FZ "On Duties for the Issuing of Licenses for the Right to Produce and Distribute Ethyl Alcohol, Spirit-containing Products and Alcohol Products", Federal Law no. 18-FZ of January 7, 1999 "On State Regulations of Production and Turnover of Ethyl spirits and Alcohol Products", Federal Law No. 61-FZ of 31 March 1999, "On the Temporary Ban of Imports of Ethyl Spirits", Government Decree No. 34 of 10 January 1999 "On Transportation of Ethyl Spirits on the Territory of the Russian Federation" and Government Decree No. 1365 of 9 December 1999, "On Partial Changes in the Customs Tariff of the Russian Federation".

Regional trade regulations, including compulsory regional identification stamps, further restrict trade in alcoholic beverages and contribute to the overall lack of transparency of Russian legislation.

3. The Community has formally and repeatedly drawn the attention of the Russian authorities to the incompatibility of the afore-mentioned legislation with the provisions of the PCA, including in the institutions established by the PCA and in several aide-mémoires on trade issues of concern, demanding that all Russian legislative provisions in contravention of the Agreement be revised forthwith. In addition, consultations under Article 102 of the PCA took place in December 1998. Unfortunately, only minimal progress was achieved.

4. A proportionate Community reaction is desirable and justified, for the following reasons:

- the trade impact of the failure of the Russian Federation to fulfil its PCA obligations is substantial. Community exports of alcoholic beverages to the Russian Federation decreased from EUR478 million in 1994 to EUR143 million in 1998, thereafter declining further to reach approximately EUR66 million in 1999 (i.e. 14% of the 1994 figure). In large part, this is a direct result of market access difficulties and restrictions on trade, aggravated by the 1998 rouble devaluation and breakdown in import financing arrangements;

- draft legislation threatens to further restrict market access;

- the Community's aim, as set out in the Common Strategy on Russia, is to engage with the Russian Federation to promote a state governed by the rule of law and underpinning a prosperous market economy. A proportionate reaction to the violation of the PCA will give substance to Community declarations on the need to consolidate the rule of law in the Russian Federation and respect international trade rules (intrinsically linked to WTO accession and a prospective EU-Russia FTA). It will also serve to reinforce the Community's credibility as a trading partner;

- there has been little or no movement by the Russian Federation to resolve a growing number of trade issues of serious concern to the Community for example, draft insurance legislation which violates some of the key PCA provisions.

5. Article 107.2 of the PCA provides that countermeasures may be taken, in the event that either Party considers that the other Party has failed to fulfil an obligation under the Agreement. The Russian Federation has failed to fulfil its obligations with regard to trade in alcoholic beverages. Therefore, in accordance with the provisions of PCA Article 107.2, the Community has addressed a letter to the Chairman of the Cooperation Council, supplying the Cooperation Council with all relevant information required for a thorough examination of the situation with a view to seeking a solution acceptable to the Parties.

The Commission proposes that proportionate measures be taken to sanction the failure of Russia to fulfil its obligations under the PCA by introducing a punitive tariff on imports into the Community of vodka and undenatured ethyl alcohol of an alcoholic strength by volume of 80% volume or higher (chemically indistinguishable from vodka of similar strength) originating in the Russian Federation. The volume of trade affected by the proposed increased duty amounts to approximately EUR12.2 million per year.

However, goods in shipment to the Community should be excluded from this increased import duty, provided that they were dispatched before entry into force of this Regulation.

6. The Council is requested:

- to adopt the proposed Regulation.

2000/0247 (ACC)

Proposal for a COUNCIL REGULATION on countermeasures in response to the failure of the Russian Federation to fulfil its obligations under the Partnership and Cooperation Agreement in regard to trade in alcoholic beverages

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, and in particular Article 133 thereof,

Having regard to the Agreement on partnership and cooperation establishing a partnership between the European Communities and their Member States, of the one part, and the Russian Federation, of the other part,

Having regard to the proposal from the Commission [1],

[1] OJ C [...], [...], p. [...]

Whereas:

(1) The Agreement on Partnership and Cooperation (PCA) establishing a partnership between the European Communities and their Member States, of the one part, and the Russian Federation, of the other part [2] lays down as one of its objectives the promotion of trade and investment and harmonious economic relations between the Parties.

[2] OJ L 327, 28 November 1997, p.1

(2) Article 11 of the PCA indicates that products of the territory of one party shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products. Moreover, these products shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use.

(3) Article 13 of the PCA sets out that GATT Article VIII, according to which fees and charges of whatever character connected with importation must be limited to the cost of the services rendered and GATT Article X, providing for reasonable transparency and predictability, shall be applicable mutatis mutandis between the Parties. Moreover, Article 15.2 of the PCA indicates that goods originating in the Community shall be imported into the Russian Federation free of quantitative restrictions and Article 16 provides that, until the Russian Federation accedes to the WTO, consultations are to be held in the Cooperation Committee on import tariff policies, including changes in tariff protection. In addition, Article 53 of the PCA stipulates that the Parties shall remedy or remove restrictions on competition in so far as they affect trade between the Parties.

(4) In 1998, the Russian Federation adopted Federal Law no. 5-FZ "On Duties for the issuing of licenses for the right to produce and distribute ethyl alcohol, spirit-containing products and alcohol products", which contained a discriminatory licensing fee requirement for importing and trading foreign-made alcoholic beverages, in breach of Article 11.2 of the PCA.

This discriminatory requirement remains in force, despite the subsequent adoption by the Russian Federation of Federal Law no. 18-FZ of January 7, 1999 "On State Regulations of Production and Turnover of Ethyl spirits and Alcohol Products" which, although seemingly intended to address this breach, has not done so and in addition contains a quota restriction on imports of strong alcohol, in breach of Article 15.2 of the PCA. This same legislation provides that, to qualify for an alcohol import license, an importer needs to have annual minimum imports of alcoholic beverages equal to 50,000 decalitres of pure alcohol. This threshold conflicts with Article 13.2 of the PCA. It also restricts market access by normal, bona-fide importers, is a technical barrier to trade and contravenes Article 53.1 of the PCA.

In May 1999, Federal Law No. 61-FZ of 31 March 1999, imposing a ban on imports of ethyl spirits until 2002 and thereby infringing Article 15.2 of the PCA, entered into force. This latter law supersedes Government Decree No. 34 of 10 January 1999 "On Transportation of Ethyl Spirits on the Territory of the Russian Federation", which remains in force and which imposes restrictions on imports of ethyl spirits, such that they may only be imported through designated points of entry. This requirement contravenes Article 13.2 of the PCA, which refers to GATT Article VIII.

Regional trade regulations, including compulsory regional identification stamps, further restrict trade in alcoholic beverages and contribute to the overall lack of transparency of Russian legislation, infringing Article 13.4 of the PCA which refers to GATT Article X.

Government Decree No. 1365 of 9 December 1999, which entered into force on 1 April 2000, introduced an ad-valorem import duty on certain wines without consultations being held in the Cooperation Committee, in breach of Article 16 of the PCA.

(5) The Community has expressed its distress over these breaches of the PCA on numerous occasions, without adequate result.

The matter has been raised at meetings of the Cooperation Council and Cooperation Committee. Aide-mémoires on this issue, most recently transmitted to the Russian authorities at the second Cooperation Council in May 1999, the third Cooperation Committee in October 1999 and third Cooperation Council in April 2000, have elicited no adequate response. Community concerns were reiterated by Commissioner van den Broek in his letter to then Deputy Prime Minister Bulgak of May 1999. In addition, Consultations, in accordance with Article 102 of the PCA, took place in December 1998, at which time the Community's concerns were not sufficiently addressed.

The matter has also been raised at meetings of the Sub-committee on trade and industry. At the third meeting of this Sub-committee in March 2000, the Russian Federation indicated that some movement to improve the situation may be forthcoming. Disappointingly, however, no concrete proposals or commitments were made.

(6) The trade impact on the Community is substantial. The failure of the Russian Federation to fulfil its obligations under the PCA and the resulting, cumulative market access problems have been a major factor in the decrease in Community exports of alcoholic beverages to the Russian Federation from EUR478 million in 1994 to EUR143 million in 1998. This trend continued in 1999, with exports falling to approximately EUR66 million.

(7) In view of the above, a reaction by the Community is justified. Article 107.2 of the PCA provides that appropriate measures may be taken in the event that either Party considers that the other Party has failed to fulfil its obligations under the Agreement. The Community considers that the Russian Federation has failed to fulfil its obligations with regard to trade in alcoholic beverages.

(8) Article 107.2 of the PCA further sets out that, in the selection of measures, priority must be given to those which least disturb the functioning of the Agreement. The proposed countermeasures would suspend the Common Customs Tariff for imports into the Community of vodka falling within CN codes 2208 60 11, 2208 60 19, 2208 60 91 and 2208 60 99 and of undenatured ethyl alcohol of an alcoholic strength by volume of 80%volume or higher falling within CN code 2207 10 00 originating in the Russian Federation, which will be replaced, until such time as Russia revises that of its legislation in breach of the PCA, by autonomous customs duties .

(9) In accordance with the provisions of Article 107.2 of the PCA, the Community has addressed a letter to the Chairman of the Cooperation Council, supplying the Council with all relevant information required for a thorough examination of the situation with a view to seeking a solution acceptable to the Parties. That letter informed the Council of the Community's intention, in the event that a solution - in the form of elimination of the provisions of Russian legislation which contravene the PCA - were not forthcoming within three calendar months of the date of the letter, to take appropriate measures to sanction the failure of the Russian Federation to fulfil its obligations under the PCA.

(10) Goods in shipment to the Community should be excluded from this increased import duty, provided that they were dispatched before the entry into force of this Regulation.

(11) Since the measures necessary for the implementation of this Regulation are management measures within the meaning of Article 2 of Council Decision 1999/468/EC of 28 June 1999 laying down procedures for the exercise of implementing powers conferred on the Commission [3], they should be adopted by use of the management procedure provided for in Article 4 of that Decision.

[3] OJ L 184, 17 July 1999, p. 23

HAS ADOPTED THIS REGULATION:

Article 1

The following autonomous customs duties shall be applied to imports into the Community of products originating in the Russian Federation as follows:

>TABLE POSITION>

Article 2

The Commission shall repeal the measures set out in Article 1, in accordance with the procedure laid down in Article 3(2) once the Russian Federation has fulfilled its obligations under the Partnership and Cooperation Agreement in the sector of alcoholic beverages.

Article 3

(1) The Commission shall be assisted by the Management Committee for Wines instituted by Article 74 of Council Regulation (EC) No 1493/1999 [4].

[4] OJ L 179, 14 July 1999, p.1

(2) Where reference is made to this paragraph, the management procedure laid down in Article 4 of Decision 1999/468/EC shall apply, in compliance with Article 7(3) thereof.

(3) The period provided for in Article 4(3) of Decision 1999/468/EC shall be one month.

Article 4

This Regulation shall enter into force on the day following that of its publication in the Official Journal of the European Communities. It shall not apply to products proven to have been dispatched to the European Community before that date.

This Regulation shall be binding in its entirety and directly applicable in all Member States.

Done at Brussels, [...]

For the Council

The President

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