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"Transit" loss in WTO: Is revenge possible?

Ukraine lost a “transit” dispute with Russia within the World Trade Organization. The WTO rejected the claims of our country, although the actions of the Kremlin practically deprived Ukraine of direct trade links with Central Asia. The fiasco in trade disputes is the third in a row for us. Why is this happening and is it possible to fix the situation?

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Ukraine lost another dispute with Russia in the framework of the World Trade Organization. The WTO announced its verdict on case DS512 "Russia - Measures relating to transit traffic", which was initiated by Kyiv. Claims put forward by our country have been rejected.

The essence of the dispute was as follows: On July 1, 2016, the Russian Federation banned transit by road and rail of Ukrainian agricultural products and goods subject to more than zero customs duty in accordance with the Unified Customs Tariff of the Eurasian Economic Union, intended for recipients from Kazakhstan and Kyrgyzstan. Subsequently, similar restrictions were imposed by Moscow on our goods destined for Mongolia, Tajikistan, Turkmenistan and Uzbekistan. The procedure, which exceptionally allows the transit of these goods, has never been able to be implemented. In fact, Ukraine was deprived of trade communication with the countries of Central Asia across the Ukrainian-Russian and Belarusian-Russian borders.

On September 14, 2016, Ukraine applied to the Russian Federation regarding consultations in connection with the current situation. Having been refused, Kyiv on February 9, 2017, filed a lawsuit with the WTO with a request to create a panel for the consideration of the case. And now - after analyzing all the circumstances, this arbitration group found that Russia's actions satisfy all the requirements for the application of restrictions in terms of security, therefore, Moscow did not violate the commitments made when joining the WTO.

In fact, the World Trade Organization agreed with the Kremlin’s claims that restrictive measures are among those that are necessary to protect their basic security interests. Although it decided that the application of the norm cannot depend only on the will of one side: the emergency should be related to the interests of defense or order, the timing of measures should correspond to the duration of the emergency, and the concept essential interests of national security refers only to population and territory from external threats or to the maintenance of law and order. The most important principle for the applying party is good faith, understood as the focus of measures on the protection of security interests, and not on the avoidance of obligations in the sphere of trade.

The case itself is unprecedented, as it was for the first time considered by the WTO under Article 21 of the GATT, which allows for the introduction of protective measures in case of a threat to national security. Not a single state, unlike Ukraine, has ever decided to file a complaint regarding the legality of applying this article. Now, the WTO agreed with the position of Russia - they say, the political situation in Ukraine in 2014-2015 created significant threats to the national security of the Russian Federation. As a result, the transit restriction was not recognized as a violation.

This is not Ukraine’s first defeat - the WTO has already satisfied the Russian Federation’s complaint about the introduction of protective duties on Russian ammonium nitrate by our country, rejected a complaint about Russia’s blocking imports of railway rolling stock and railway equipment (cases DS499 “Russian Federation dated October 21, 2015, and DS532 “Russian Federation - Measures relating to the importats and transit of certain Ukrainian goods” dated October 13, 2017).

The Ministry of Economic Development and Trade announced that it was currently studying the decision of the arbitrators of the World Trade Organization and planned to file an appeal on the “transit” dispute. At the same time, the agency refutes the loss in two more cases in the WTO, "because this information is premature and false."

“For the WTO, a two-stage resolution of disputes is natural: a group of experts and an appeals body. Contacting the appeals body is a well-established practice. Two of our cases are now being considered by the appeals body: Ukraine vs Russia on restrictions on the import of railcars and turnouts, and also Russia vs Ukraine regarding anti-dumping duties on ammonium nitrate. The result of the review is not yet known,” said the Ministry of Economic Development and Trade.

Experts believe that it’s really early to talk about the defeat of Ukraine as the appeal is yet to be considered. But everything that happens is the result of the low competence of the Ukrainian representatives in the WTO and the poor-quality agreement on our country's accession to the Organization.

Long way to solve problem

Partner of Ilyashev & Partners Law Firm Alyona Omelchenko believes that the WTO decision on the “transit” case is exceptional - it can open the way for countries to actively use trade restrictions for security reasons. Experts have yet to analyze how this decision will affect other disputes.

“Now, in order to refer to national security interests in trade disputes, states will need to prove the objective 'emergency situation' and 'good faith' when introducing measures. Namely - the focus of measures to protect the population and territory from external threats or to maintain law and order. In the near future, the expansion of such practices may adversely affect the activities of the WTO, increasing the tendency for states to move away from common trading platforms in favor of the development of regional associations,” the lawyer said.

She also believes that Ukraine has every chance to challenge the decision of the WTO arbitrators in the permanent Appeal Body of the World Trade Organization: “The panel has reviewed Ukraine’s demands and assessed them. This is of particular importance in the light of the fact that the WTO's permanent Appeals Body is limited only to issues of law considered in the report of the panel, and legal interpretation given by the panel. In fact, without the analysis carried out by the group, Ukraine would have lost the opportunity to challenge the decision on the merits.”

Chairman of the Council of the National Bank, Bohdan Danylyshyn, does not rule out that an appeal from Ukraine is possible, but the main thing now is to focus on new export routes.

“The decision of the WTO may be revised by the appeals body of the Organization if Ukraine appeals there. But in this case, the WTO did not recognize transit restrictions for Ukraine through the territory of Russia as a violation. The Group of Experts of the Organization took the side of the Russian Federation and indicated that they could argue the application of restrictions on transit traffic by Article 21 of GATT of 1994. This article allows transit restrictions for security reasons, the WTO expert group considered the exemption applicable to the Russian Federation and Ukraine, as there is an emergency situation in international relations between these countries. The losses of the Ukrainian side from this WTO decision, taking into account the growth prospects for transit supplies, can be estimated at between $500 million and $1 billion. But losses, by the way, are small. For understanding, in terms of currency, it's only 2-3 trading days on our interbank market. And another important factor is that Ukraine became the first country in the world to file a complaint under Article 21 of the GATT. We were even recommended to refrain from such a debut, since there has been no practice of making decisions on this article. Of course, this verdict weakens our exports, but it also sharply raises the question of the need to search for and organize new routes for export,” concluded Danylyshyn.

He noted that Ukraine became a WTO member ten years ago – and through all this time, very little attention has been paid to relations with the Organization. “Ukraine became a member of the WTO when I was Minister of Economy. For ten years we have not paid enough attention to protecting the interests of the country in the Organization. In fact, what was originally laid out is still there,” the expert stressed.

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Oleh Ustenko, head of Blazer Foundation in Ukraine, is more critical. He says there is another very important lawsuit, where we challenge tariffs for more than 150 goods. There is a risk to lose it, too.

“That is, we have entered the WTO, concluded agreements, then realized that we did something wrong, that we somehow did not protect our interests, and now we are filing lawsuits. These claims, even by the standards of well-standing countries in such institutions that are good in defending their interests, seem ridiculous. As a rule, they defend one or two positions and this is already a lot. But the list of more than 150 goods seems completely strange and abnormal. I think we will see a fiasco in this case. The bottom line is that we expose ourselves to ridicule. In the framework of the WTO, of which we are a member, we are filing lawsuits, without even understanding what to do next. Of course, everything can be fixed, but it only takes a very long time. The decision-making process in the WTO is quite long. Ukraine should be represented in such disputes by competent specialists and lawyers, and we have more than enough losses. I don’t know how the 'kitchen' works, but for the time being we look ridiculous. A serious European state would not have led the case that way," summed up Ustenko.

While the issue of an appeal regarding the “transit” decision of the WTO is being resolved, Ukraine has filed another lawsuit against Russia. In the framework of the meeting of the Committee on Trade Facilitation of the World Trade Organization, which took place on February 12-13 in Geneva, our delegation stated the need to consider banning the Russian Federation from importing into its territory certain goods transported in transit through the territory of Ukraine from third countries that are also members of the Organization. I would like to believe that the experience of already filed lawsuits will help the authorities cope with the next case.

Nana Chornaya

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