By Amanda Lahan, The PBN Company, Washington, DC

The Customs Union between Russia, Belarus and Kazakhstan has been officially established. The leaders of the three countries signed a formal agreement creating a unified customs union at a November 27 meeting of the Eurasian Economic Community (EurAsEC) in Minsk. A unified system of external tariffs will be put in place by January 1, 2010, while the unified Customs Code, still in the draft stage, will take effect on July 1, 2010.

Approximately 92% of the new tariffs are identical to Russia’s existing tariff system, meaning that Russia won’t have to change much. Considering that Russia has a larger number of tariffs than either Belarus or Kazakhstan, these two countries will have to increase their duties on some goods or put brand new duties into place. Kazakhstan alone will have to raise tariffs on more than 5,000 goods. Once the tariffs are in place, any increase or decrease will have to be negotiated by the governments of all three countries, making any changes a complicated process.

Other tariffs are yet to be determined. Russia currently has much higher import duties on cars - especially used cars - than Belarus or Kazakhstan, and is concerned that lowering these duties will result in a flood of imported used cars from these two countries, especially Belarus. While Russia has export duties on oil in place, Kazakhstan does not. Both of these thorny issues are not expected to be resolved any time soon.

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By Martina Bozadzhieva, The PBN Company, Washington, DC

On September 10th President Medvedev surprised both Russian and international observers with an unexpectedly honest and critical article about Russia’s strategic challenges. Medvedev decried Russia’s “primitive raw materials economy, chronic corruption,” “inefficient economy…weak democracy,” and “negative demographic trends,” causing a flurry of comment and speculation. The fact that the article appeared in Gazeta.ru, an online news source often critical of the Russian government, only made it more unusual.

The initial reaction was one of skepticism, especially among Russians who were asking why he published such a scathing commentary now. Having been president of the country for a year and a half, critics charge that Medvedev hasn’t done anything to solve the problems he identified. A common criticism by both journalists and readers who posted comments on the Gazeta website was that Medvedev’s ambitious agenda for turning Russia into a high-tech, knowledge-based economy was impossible without true political liberalization. Very few seemed to buy Medvedev’s argument that “the more intelligent, smarter and efficient our economy is…[the more] our political system and society as a whole will also be freer, fairer and more humane.”

Many observers considered the article’s message to be yet another example of Medvedev’s tendency to speak eloquently about democracy and liberalism without doing enough to turn his words into reality. Others , however, have started to see “Go, Russia!” as a part of a larger attempt by Medvedev to separate himself politically from Prime Minister Putin. Medvedev’s statement before the Valdai forum that he might run for a second term has been interpreted as a part of an emerging pattern.

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By Amanda Lahan, Account Manager, The PBN Company, Washington DC

After a summer of uncertainty, Russia’s World Trade Organization (WTO) accession process seems to be back on track - but the Russian government seems also be looking to get the best of both worlds. While it is voicing support for a timely accession to the WTO, it still supports the creation of a Customs Union with Belarus and Kazakhstan and simultaneous WTO entry for all three countries, despite the fact that Kazakhstan and Belarus are far behind Russia in terms of their accession negotiations.

In mid-September Prime Minister Putin again voiced his support for the three countries joining the WTO as a group, while at the same time asking the US to drop restrictions on trade with Russia.  Several days later, First Deputy Prime Minister Igor Shuvalov stated that Russia aimed to finish its WTO negotiations in 2010, and that WTO negotiations for Kazakhstan and Belarus should be conducted simultaneously. However, he also cautioned that the leaders of the three countries could change their plans if Kazakhstan and Belarus slowed Russia’s accession process. Shuvalov then reiterated his support for the countries’ accession as a group at a meeting of Customs Union members in Almaty on September 25th.

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By Yekaterina Syrtsova, Associate Account Manager, The PBN Company, Almaty

The proposed Customs Union between Russia, Kazakhstan, Belarus - and now possibly Kyrgyzstan - has received extensive coverage, with much attention focused on the impact on Russia’s accession to the World Trade Organization. However, while there are many potential benefits for Russia in terms greater access to Kazakh markets, what is in the Customs Union for Kazakhstan? A lively debated has been prompted about the economic and the political merits of going along with Russia’s proposal.

The Union is an obvious win for Kazakh industries that supply the Russian market, such as metallurgy, coal and chemicals. It will stimulate development of Kazakhstan’s Russian exports in these sectors by eliminating the customs duties they currently pay, making them more competitive. The Union will also simplify on-going issues relating to transit of Kazakhstan’s oil through Russian pipeline systems. For many years transit routes in general - and the expansion of the Caspian Pipeline Consortium in particular - have been a matter of political dispute with Moscow. That situation may now change.

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By Amanda Lahan, Account Manager, The PBN Company, Washington, DC

The history of Russia’s application for World Trade Organization (WTO) membership was already long and complicated when, in June this year, Russia announced it would withdraw from WTO negotiations and focus on first forming a Customs Union with Belarus and Kazakhstan. However, after five weeks in which Russia sought to convince the international community that they had no intention of joining the WTO independently, the leadership seems to have reversed course again. In President Dmitry Medvedev’s words, joining the WTO as a Customs Union would be “nice, but rather problematic.”

So why the 180-degree turn so soon after the first reversal? It seems that U.S. and EU officials – intentionally or otherwise – called their bluff. The Russians stated that once the Customs Union was in place, expected to happen by January 1, 2010, they would immediately begin WTO negotiations to enter as a union. Previous WTO negotiation agreements would, they claimed, stand for the Customs Union as a whole. U.S. and EU officials, however, pointed out that joining the WTO as a Customs Union would not be nearly as easy as the Russians thought it would be. U.S. Commerce Secretary Gary Locke stated that the joint bid would be “unworkable, unprecedented and would only delay matters.” Pascal Lamy, head of the WTO, suggested that the Customs Union may not have the “competence to negotiate these issues.”

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By Brandon Zack, Intern, The PBN Company, Washington, DC

President Obama’s visit to Moscow was billed as a “resetting” of diplomatic relations between the US and Russia, however his visit also provided a shot in the arm to economic relations which have flat-lined in recent years.

Before the trip, Obama highlighted that annual trade between the two countries totals $36 billion - about one percent of US trade with the rest of the world and equivalent to the US’s trade with Thailand, a country with less than half of Russia’s population. “Surely we can do better,” the President said. And back came the familiar refrain “Yes we can” from the CEOs of America companies who accompanied Obama to Moscow.

A number of US companies that are existing investors in Russia reaffirmed their commitment and announced extra funding for significant expansion plans. PepsiCo’s deal was the largest - a $1 billion investment over the next three years as well as the opening of a bottling plant outside Moscow, which will be its largest plant worldwide. Pepsi is a veteran of the Russian market. Soviet Premier Nikita Khrushchev tried Pepsi for the first time in his 1959 Moscow “kitchen debate” with then Vice President Richard Nixon. Later, in 1973, Pepsi was named the official soft drink supplier to the Soviet Union in a détente agreement that enabled the USSR to export Stolichnaya vodka to the US. Pepsi currently has seven plants operating in Russia and has invested some $3 billion over the last ten years, including the acquisition of leading Russian juice maker Lebedyansky in 2008.

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By Blake Marshall, Senior Vice President & Managing Director - Government Relations, The PBN Company, Washington DC

Prime Minister Vladimir Putin’s June 9 announcement that Russia will discontinue its World Trade Organization (WTO) negotiations in favor of a new Customs Union with Belarus and Kazakhstan took many by surprise, including high-ranking officials in Russia and trade negotiators in Europe and the United States.

Despite the fact that Putin’s decision appears to many to have come out of the blue, the notion of a three-country Customs Union has been under discussion for several years. While the withdrawal from WTO negotiations in favor of reapplication as a bloc is unconventional, it is consistent with Russia’s political and economic strategies on both a geopolitical and a regional level.  Several objectives seem to emerge from this stance:

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By Amanda Lahan, Account Manager, The PBN Company, Washington, DC

Since our post yesterday on the apparent progress made in Russia’s WTO accession process, a wrench has been thrown into the works.  Prime Minister Putin announced on June 9 that Russia would withdraw its WTO application and instead reapply as a part of a trade bloc with Kazakhstan and Belarus.  In a joint statement by all three countries Putin said, “Our priority remains WTO entry, we confirm this, but already as a customs union and not as separate countries.”  Reapplication would require starting all WTO negotiations from scratch, meaning it could be years before the Customs Union entered the WTO.

The news came as a surprise to US and EU officials, who had just been speaking with Russian officials about their WTO bid several days ago.

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By Amanda Lahan, Account Manager, The PBN Company, Washington, DC

Russia’s accession bid to the World Trade Organization received quite a bit of attention during the St. Petersburg International Economic Forum on June 4-6. EU Trade Commissioner Catherine Ashton and US Trade Representative Ron Kirk met separately with Economic Development Minister Elvira Nabiullina to discuss Russia’s entry into the WTO.  While Ashton was optimistic that the accession process could be completed by the end of this year, Kirk stopped short of putting a date on when Russia would finally join.

These meetings follow on other, mostly positive, signals coming out of Russia regarding its desire and readiness to enter the WTO.  Since President Obama first met with President Medvedev on April 1 and discussed WTO accession, Prime Minister Putin and Foreign Minister Lavrov have expressed support for Russia’s WTO bid.  Minister Nabiullina has stated that she thinks that Russia could become a member of the WTO by early 2010.

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By Adrian Erlinger, Account Manager, The PBN Company, Washington, DC

With $476 million in exports last year, Russia is the fifth-largest market for US pork. Yet as the sudden outbreak of swine influenza spreads, the health of Russia’s accession to the World Trade Organization could also take a turn for the worse.

On April 27, Russia’s Federal Agency for Veterinary and Phytosanitary Supervision (Rosselkhoznadzor) banned all meat imports - including poultry and beef - from the US states of California, Texas, Kansas, New York and Ohio, and non-thermally treated pork imports from eight other states.

The US Centers for Disease Control and Prevention continue to reiterate to an increasingly unnerved public that pork is safe to eat. “You cannot get swine influenza from eating pork or pork products,” stated US Trade Representative Ron Kirk and Agriculture Secretary Tom Vilsack in an e-mailed statement on April 28. The UN Food and Agriculture Organization is even lobbying for a name change to disassociate pork production with the human-human virus.

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