Proposal for a COUNCIL DECISION to supply the Cooperation Council with all relevant information required for a thorough examination of the situation in respect of the failure by the Russian Federation to fulfil its obligations under the PCA 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. Before so doing, the Cooperation Council is to be supplied with all relevant information required for a thorough examination of the situation with a view to seeking a solution acceptable to the Parties.

The Russian Federation has failed to fulfil its obligations with regard to trade in alcoholic beverages. The Commission therefore proposes that proportionate measures be taken to sanction this failure 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.

6. The Council is requested:

- to adopt the proposed Decision to supply the Cooperation Council with all relevant information required for a thorough examination of the situation in respect of the failure of the Russian Federation to fulfil its obligations under the PCA in regard to trade in alcoholic beverages, with a view to seeking a solution acceptable to the Parties;

- to sign the draft letter to the Chairman of the Cooperation Council in annex.

2000/0196 (ACC)

Proposal for a COUNCIL DECISION to supply the Cooperation Council with all relevant information required for a thorough examination of the situation in respect of the failure by the Russian Federation to fulfil its obligations under the PCA 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) Article 107.2 of the Partnership and Cooperation Agreement (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. Before so doing, however, except in cases of special urgency, the Cooperation Council is to be supplied with all relevant information required for a thorough examination of the situation with a view to seeking a solution acceptable to the Parties.

(2) The failure of the Russian Federation to fulfil its obligations under the Partnership and Cooperation Agreement with regard to trade in alcoholic beverages does not constitute a case of special urgency, as defined by three Joint Declarations annexed to the Final Act of the Partnership and Cooperation Agreement.

(3) The following legislation of the Russian Federation violates the PCA and attempts by the European Community to raise its concerns with the Russian Federation at all levels, including in the context of consultations held pursuant to Article 102 of the PCA have been unsuccessful, for which reason it is now appropriate to take appropriate measures to respond to the failure of the Russian Federation to fulfil its obligations under the Partnership and Cooperation Agreement:

- Federal Law no. 5-FZ of January 8, 1998 "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 Temporary Ban of Imports of Ethyl Spirits", which supersedes Government Decree No. 34 of 10 January 1999 "On Transportation of Ethyl Spirits on the Territory of the Russian Federation" which, however, remains in force,

- Government Decree No. 1365 of 9 December 1999 "On Partial Changes in the Customs Tariff of the Russian Federation", which entered into force on 1 April 2000.

(4) 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.

HAS DECIDED AS FOLLOWS:

Sole Article

The European Community shall supply the Cooperation Council with all relevant information required for a thorough examination of the situation in regard to the failure by the Russian Federation to fulfil its obligations under the Partnership and Cooperation Agreement in respect of trade in alcoholic beverages, by means of the letter attached in Annex, co-signed by the Commission and the Council and addressed to the Chairman of the Cooperation Council.

Done at Brussels,

For the Council

The President

ANNEX

Draft letter from the Community to the Chairman of the Cooperation Council with the Russian Federation

Sir,

Subject: failure of the Russian Federation to fulfil its obligations under the PCA in regard to trade in alcoholic beverages

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.

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.

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.

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 contains 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 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, which refers to GATT Article VIII. The threshold also restricts market access by normal, bona-fide importers, is a technical barrier to trade and contravenes Article 53 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.

These restrictions on trade have severely damaged the interests of the Community. The Community has on several occasions raised its concerns with the Russian authorities in an attempt to find a solution, requesting that the provisions of Russian legislation which contravene the PCA be repealed. However, in contrast to the constructive approach adopted by the European Community in attempting to meet Russian trade concerns in recent years, the Russian Federation has addressed little attention to Community concerns. 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 Cooperation Council in May 1999 and the Cooperation Committee in October 1999, 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 was subsequently raised at meetings of the Sub-committee on trade and industry in June 1999 and March 2000, at which time the Russian Federation indicated that some movement to improve the situation may be forthcoming. Disappointingly, however, no concrete proposals or commitments were made.

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 European Community considers that the Russian Federation has failed to fulfil its obligations under the Agreement in respect of trade in alcoholic beverages and hereby seeks to supply information to the Cooperation Council with a view to seeking a solution acceptable to the Parties, in accordance with Article 107.2 of the PCA.

The European Community therefore invites the Russian Federation to remove forthwith the above-mentioned restrictions imposed on trade in alcoholic beverages which are in breach of the PCA.

The European Community further takes this opportunity to inform the Cooperation Council of its intention, in the event that an acceptable solution, in the form of elimination of the provisions of Russian legislation which contravene the PCA, is not forthcoming within three calendar months of the date of this letter, to take appropriate and proportionate measures in order to respond to the failure of the Russian Federation to fulfil its obligations under the PCA in regard to trade in alcoholic beverages.

I would be grateful if you could transmit this letter to members of the Cooperation Council as foreseen under Article 7 of the Rules of Procedure.

Yours faithfully,

For the Council of the European Union For the European Commission

The President The Commissioner for External Relations