President Signs Legislation Granting Russia PNTR Status

December.19.2012

On Friday, December 14, President Obama signed a bill to implement in U.S. law Russia’s accession to the World Trade Organization (“WTO”) and, as required by WTO rules, grant permanent normal trade relations (“PNTR”) status to Russia. Although Russia’s WTO accession and the U.S. legislation are historic achievements and should enhance bilateral business opportunities, each has been attended by various controversies which may translate into sustained commercial uncertainties.

The Russia PNTR legislation ends decades of ad hoc action by U.S. Presidents to keep U.S. tariff treatment of Russian imports at normal levels and places the overall U.S. business relationship with Russia on a more solid footing. The statute should end the threat of WTO-authorized retaliatory trade action by Russia against the United States for failure to provide PNTR. Thus, it should go some way towards giving U.S. companies the ability to take advantage of the legal protections to which Russia committed as part of its WTO accession package.

Russia has agreed to lower tariffs and to eliminate other import restraints applicable to most goods from the United States and elsewhere. In addition, Russia has committed to WTO tariff ceilings or “bindings” that are generally at levels considerably below those that Russia has been applying. In the long-term, Russia’s import treatment should become more predictable, notwithstanding immediate adverse action discussed below. United States companies will now have access to WTO dispute resolution mechanisms over customs, intellectual property, and other issues relevant to companies engaging in trade with Russia.

The new legislation exempts Russia from the so-called Jackson-Vanik Amendment of the Trade Act of 1974, which has forbidden U.S. authorities to grant Russia PNTR status. Originally enacted to help Soviet Jews emigrate safely from the Soviet Union, Jackson-Vanik had been criticized in recent years as being obsolete. Many in Congress, however, were reluctant to grant Russia PNTR without addressing certain human rights and democracy issues. So the PNTR statute includes provisions banning Russians accused of human rights violations from obtaining U.S. visas and restraining their access to the U.S. financial system. The human rights provisions are, in part, a response to the death of Russian tax lawyer Sergei Magnitsky while in Russian police custody in connection with the Russian state's attack on Bill Browder's Hermitage Capital. The Russian government strenuously objects to the statute’s human rights provisions, placing strain on the broader U.S.-Russia relationship. Also on December 14, the Russian Duma preliminarily approved retaliatory legislation that would deny U.S. citizens alleged to have violated Russians’ human rights entry into Russia, their assets in Russia seized, and the operations of their companies in Russia suspended. The Russian bill, which appears in part to target people implicated in the abuse of children adopted from Russia, is named after Dima Yakovlev, a Russian orphan adopted by an American family who died of hyperthermia after being locked in a car in July 2008 by his adoptive father.

Furthermore, allegations have emerged that Russia is not adhering to WTO rules in several respects. One area of concern – and a priority for U.S. companies – has been Russia’s compliance with the WTO’s Information Technology Agreement (“ITA”), which requires ITA signatories to eliminate duties on approximately 150 IT products such as computers and telecommunications devices. Although Russia agreed to join the ITA as part of its WTO accession package, its status as an ITA signatory is yet to be finalized.

Another area of critical concern to U.S. multinationals and other Western investors in Russia is the conflict between Russia’s Strategic Sector Law and its WTO obligations. That law, Federal Law No. 57-FZ of 29 April 2008 “On Procedures for Making Foreign Investment into Business Entities having Strategic Significance for National Defense and State Security,” restricts foreign investment in 42 sectors purportedly deemed of strategic importance to Russian defense and national security interests, including telecommunications, publishing, TV and radio, oil and gas, pipelines and other basic infrastructure. However, as part of its WTO accession process, Russia entered into accession treaties with the United States and the EU in which it expressly undertook to open up some of those same sectors to majority foreign ownership. Upon Russia's accession to the WTO, those accession treaty undertakings became binding obligations of the Russian Federation. Russia is a party to bilateral investment treaties (“BITs”) with a number of countries, including the United States. Many of those BITs include most-favored-nation (“MFN”) clauses that result in investors from those countries receiving the benefit of Russia's other treaty obligations, including, in this instance, Russia's WTO accession treaty undertakings. As a consequence, foreign investors whose investment activities in Russia are covered by a BIT may now have a private right of action against the Russian Federation under their BIT in the event the Russian state uses the Strategic Sector Law to restrict their investment in one or more of the 42 sectors covered by the law.

Western exporters are also concerned about Russia’s implementation of the WTO Agreement on the Application of Sanitary and Phytosanitary Measures (“SPS”), which restrains WTO members’ policies relating to food safety, animal, and plant health with respect to imported pests and diseases. Reports indicate that, even after acceding to the WTO, Russia continues to protect Russian agricultural products through unfounded SPS measures. Of significant concern to both the European Union and the United States is a ban on Russian imports of live animals, which has particularly impacted pork exports to Russia. Last week, Russia banned all U.S. meat imports on the grounds that they contain the drug ractopamine, a food additive that reduces the fat content in beef and pork. There is speculation that this was done in retaliation for the inclusion of the human rights provisions in the PNTR legislation.

Enforcement of intellectual property rights (“IPR”) continues to be an issue, as well. Russia agreed to comply with the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (“TRIPS Agreement”), but many question whether the threat of WTO enforcement proceedings will be adequate to induce Russia to comply in this area.