FEBRUARY 2009 Presented by THE U.S.-RUSSIA BUSINESS COUNCIL
Recommendations to the Obama Administration Regarding the U.S.-Russia Commercial Agenda
Recommendations to the Obama Administration Regarding the U.S.-Russia Commercial Agenda Presented by the U.S.-Russia Business Council1 February 2009
Executive Summary Increased bilateral trade and investment ties have been a hallmark of U.S.-Russia commercial relations in recent years, highlighting a cooperation that has evaded the bilateral geopolitical agenda. Strong commercial links at times not only provide ballast for abrupt swings in the U.S.Russia political relationship but also serve as a basis for expanded partnership in critical areas of common interest, including important strategic issues. For this reason, the bilateral economic relationship — with all of its associated opportunities and challenges — deserves the highest-level attention in U.S. policy towards Russia. The U.S.Russia Business Council offers the following recommendations:
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As we “press the reset button” on the U.S.-Russia conversation, there can be no better way for the Obama Administration to demonstrate the importance of this relationship than to establish a bilateral commission to facilitate regular exchanges on commercial issues. Such an interagency commission, led at the highest levels of the U.S. and Russian governments, should have a strong private sector component.
The U.S. and Russia should seek to revive a commercial energy dialogue to promote shared objectives in energy security and efficiency.
To recognize actions taken by Russia more than a decade ago and as a notable symbolic gesture of good will, the Obama Administration should advocate repeal of the JacksonVanik Amendment.
At the same time, the Obama Administration must make it clear that a good faith effort to repeal Jackson-Vanik will not compromise bilateral and multilateral objectives in negotiating Russia’s accession to the World Trade Organization on commercially meaningful terms.
In defining a commercial agenda of common interest, the Obama Administration should focus on matters that advance the interests of both countries. Support for economic diversification, rule of law, and even-handedness in regulation should guide the discussions.
The USRBC, a non-profit association with more than 250 member companies from the U.S. and Russia, is the premier organization based in Washington, DC, focused on U.S.-Russia commercial relations. The Council has a 16-year track record of supporting bilateral economic engagement and understanding.
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Introduction: Constructing a New Partnership
Closer and more fruitful bilateral trade and investment ties can serve as a stabilizing influence on the political relationship and lead to a more constructive partnership. It is clear that Russia “matters,” from issues such as strengthening the nonproliferation regime to supporting NATO’s critical mission in Afghanistan. The political relationship will continue to be fraught with complex issues that require significant attention to achieve meaningful advances. The United States must construct a new partnership with Russia, and the bilateral economic relationship must be a key component. The commercial agenda offers a solid foundation for moving forward in this cooperative fashion: U.S. companies have been operating successfully in Russia for almost two decades, and are market leaders in many sectors. While bilateral trade is relatively small (growing from $19 billion in 2005 to over $35 billion in 2008), U.S. and Russian companies are eager for deeper contacts. Russia’s market potential has captured the interest of U.S. CEOs from a range of industries and services, and Russia has emerged as a key market, if not the leading one, in their corporate strategies. At the same time, until the advent of the global economic downturn, Russian companies had begun to invest significantly in the United States, creating and saving many high-paying U.S. jobs. The commercial environment provides an opportunity for natural collaboration. II.
Moving Forward – Commercial Cooperation
A. High-Level Dialogue One of the many shortcomings of U.S.-Russia relations to date has been the failure to institutionalize the bilateral relationship. Since the fall of the Soviet Union, our bilateral relations have been closely tied to the personalities of our respective national leaders. This has created a lack of continuity both between and within administrations on both sides and has prevented the advancement of a cooperative agenda. By creating a high-level bilateral commission to facilitate regular exchanges on commercial issues, the Obama Administration will engender greater mutual understanding and the possibility of a more constructive relationship. This will de-link political issues from commercial ones. The goodwill and advancements that emanate from the commercial discussions are likely to have a positive spillover effect into the political sphere. Regular exchanges will facilitate timely discussions on regulatory and legislative proposals before they devolve into full-blown confrontations. Agreeing from the outset on an agenda based on common objectives would foster discussions that lead more quickly to substantive results. The private sector, represented both by individual corporations and trade associations, must play an active role in this dialogue.
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Proceeding forward on these terms will likely help build the foundation for further cooperation. The U.S.-China Strategic Economic Dialogue, and other bilateral dialogues, could serve as useful models. B. U.S.-Russia Energy Dialogue Russia is the world’s largest exporter of energy — it holds the world’s largest natural gas reserves, eighth-largest oil reserves and second-largest coal reserves. It is second only to Saudi Arabia in oil exports. These natural resources have been a major driving force of the Russian economy as well as critical resources for world markets. Therefore, the role of energy requires special attention. As the world’s leading energy importer, the U.S. should work with Russia to diversify its sources of supply and increase its energy security. Both sides must work together to enhance energy security and diversity of energy supplies through economically-viable routes, consistent with the principles stated at the St. Petersburg G8 Summit in 2006, which include the creation of open, transparent, efficient, and competitive energy markets. A U.S.-Russia Energy Dialogue will also be a useful forum to create greater cooperation in the advancement of energy efficiency and environmental protection — both areas where the U.S. and Russia can constructively work together to achieve significant results. C. Russia’s WTO Accession Russia has been negotiating its accession to the WTO since 1993, and significant progress has been achieved in the last several years. Negotiations continue in such areas as agriculture, healthcare, energy pricing and intellectual property rights protection; Russia’s legislature must still approve numerous pieces of related legislation to become WTO-compliant. Russia must also carry out commitments agreed to in side letters to the bilateral agreement it signed with the United States in 2006. Russia’s compliance with bilateral and multilateral commitments as well as enforcement in the area of intellectual property rights is a key issue in negotiations on the country’s WTO accession. One example is the Russian government’s failure to submit draft legislation to the State Duma that would bring the country into full compliance with international standards on data exclusivity by May 2007, as the government undertook in the 2006 Side Letter on IPR to the U.S.-Russia Bilateral Agreement on Russia’s WTO accession. As a result, confidential data pertaining to innovative medicines does not receive adequate protection in Russia, putting U.S. companies that support hundreds of thousands of U.S. jobs at an unfair competitive disadvantage. The Obama Administration should work to ensure implementation of this and other IPR obligations and underscore that IPR protection is a critical part of Russia’s World Trade Organization accession commitments. Russia, with a strong cultural industry and its intent to develop more of its own innovation-based industries in order to diversify its economy, should be as keenly supportive of protection for intellectual property as the United States.
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Russia’s recent actions call into question some of its other WTO accession commitments, such as the recent increase in import tariffs on several categories of manufactured goods. These actions, which the government has justified on the grounds of protecting local industry from the effects of the recent global economic downturn, denote a lack of appreciation in some sectors of the Russian government of the importance of upholding its international commitments in that sphere. D. Graduation from Jackson-Vanik Graduation from Jackson-Vanik and the granting of Permanent Normal Trade Relations (PNTR) has long been linked to completion of the WTO accession process. The opportunity now exists, however, to “jumpstart” the U.S.-Russia dialogue by having the Obama Administration take the lead in calling for the repeal of Jackson-Vanik. Such an unconditional gesture would improve relations at a stroke and disarm those Russian critics of U.S. policy who say that the United States does not give credit to Russia even when it properly addresses questioned policies. Accordingly, the Obama Administration should support Russia’s “graduation” from JacksonVanik in advance of the completion of WTO accession negotiations. At the same time, it is imperative that the U.S. government maintain a strong stance in Geneva to ensure that Russia’s WTO commitments are commercially meaningful and that the country meets its bilateral obligations. It is essential that the U.S. communicate firmly and consistently at the highest levels that it is serious about completing these negotiations on such terms. Final U.S. support for Russia’s accession to the WTO should occur only when Russia is in full compliance with the framework agreement of the Working Party. Integrating Russia into the international rules-based trading system will benefit Russia as well as the United States. The Office of the U.S. Trade Representative has demonstrated enormous commitment to executing its responsibilities in these negotiations with professionalism regardless of the party occupying the U.S. White House. The Obama Administration should continue to work closely with the Russian government to ensure that Russia meets its accession obligations and becomes a member of the WTO under commercially meaningful terms. E. Economic Diversification There are a number of areas for partnership between the U.S. and Russia that would further the Russian government’s aim of diversifying its economy away from excessive reliance on natural resources. The U.S. has been a global leader in high-technology innovation, and U.S. companies can play a positive role in assisting Russia to reach that goal. The Obama Administration should advocate policies that are consistent with the development of high-tech industries in Russia, such as investment in scientific education; a fast regulatory approval system; strong intellectual property protection; effective academic-industry partnerships; and market access.
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III.
Administrative and Commercial Issues
A number of issues currently impede the broader commercial relationship. This is not meant to be an exhaustive list, but to offer illustrative examples on a number of key issues. A. Rule of Law A top priority should be U.S. support of President Dmitry Medvedev’s efforts to strengthen the rule of law and property rights in Russia. While advancements have been made over the last decade, President Medvedev has himself noted that a culture of “legal nihilism” exists in Russia that must be overcome. Two high-profile examples are illustrative of this lack of an adherence to the rule of law and have increased the perception of risk in doing business in the country:
The Bank of New York Mellon (BNYM) is currently being sued by the Russian Federal Customs Service, which alleges that the bank violated the U.S. RICO statute and which is seeking payment on tax arrears dating back a decade. However, the claim of RICO liability has been rejected by U.S. courts in other cases brought against BNYM on behalf of other sovereign nations by the same U.S. law firm that represents the Customs Service. The Federal Customs Service is seeking $22.5 billion in damages in the case. BNYM is one of the leading custodians of depositary receipts in Russia, helping Russian companies access international capital markets. Investors are watching this case closely.
The Hermitage Fund — once the single-largest portfolio investor in the Russian stock market — has become the victim of corporate fraud in the country. A criminal group believed to consist of private and public sector actors has appropriated the Fund’s investment vehicles and received fraudulent tax refunds through corrupt judicial rulings on taxes paid by the Fund. The Hermitage Fund’s case is illustrative of the need for judicial reform in Russia and further efforts to decrease corruption.
B. Protectionism In actions that run counter to the commitments that President Medvedev signed during the G20 summit in Washington, DC in 2008, the Russian government has announced it will impose a tariff of 15 percent or €120 per KW on imports of agricultural combines to support domestic manufacturing. The Russian government has also announced it will impose a moratorium on subsidized financing for the purchase of imported agricultural equipment. Subsidized financing for the purchase of domestic equipment will continue, however. In conjunction with the higher tariffs on combines, this moratorium will severely limit the ability of U.S. manufacturers to compete with domestic producers in terms of pricing and affordability. Access to efficient and high-quality agricultural machinery is in Russia’s own interest as it seeks to develop its agricultural sector. Such short-sighted protectionist measures will not only
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negatively impact Russian farmers, but also, potentially, Russian consumers as higher food prices are likely to result. C. Overflight Rights One of the most critical issues for international shippers is gaining access to satisfactory “overflight” routes across the territory of the Russian Federation, such that they may efficiently operate all-cargo flights linking points around the globe. The senior career officials of the Departments of State and Transportation who handle aviation negotiations with the Russian Federation have done a commendable job of gaining access to these important overflight routes. However, major restrictions remain in the overflight regime in force between the two countries, including restrictions on U.S. carriers flying the shortest possible routes between the Far East and Europe and frequency limits applicable to all routes, but especially to trans-Pacific and Polar Route services between the U.S. and points in Asia. The Administration should continue to recognize the economic value of securing improved access for U.S. carriers to Russian overflight routes, and therefore, to place the highest possible priority on achieving such access in future bilateral aviation negotiations with the Russian Federation. Doing so is critical to enhancing the ability of U.S. carriers to compete with foreign air carriers, such that they may continue to meet the needs of shippers for reliable and efficient air cargo transportation and continue to create stable, quality jobs for U.S. workers.
D. U.S. Regulatory Issues The need for adjustment and reform is not limited to the Russian side: The United States can undertake specific actions to facilitate cross-border cooperation and to increase bilateral investment. In the financial sector, specific examples include:
Qualified Russian banks should be given equal access to the U.S. market as are other foreign banks. While U.S. banks have fully operational subsidiaries offering a wide range of financial products in Russia, there is currently only one representative office of a Russian bank in the United States, and no bank subsidiaries. Several Russian banks have applied for permission to open offices in the U.S., but their applications have not been accepted. While it is true that there is concern regarding illicit activities in the nascent Russian financial sector, there are a growing number of legitimate financial institutions in the country.
The U.S. Securities and Exchanges Commission (SEC) should modify its rules to recognize major Russian depositaries. For U.S. investors in Russian securities, keeping and settling Russian securities in depositaries is significantly cheaper, less risky and more effective for investors. The SEC should recognize two major Russian depositaries (DCC and NDC) as eligible foreign depositaries under SEC Rule 17f-7. This move will help U.S. investors operate in the Russian market more efficiently and cost-effectively.
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********* The U.S.-Russia Business Council looks forward to working with the Obama Administration in promoting a positive agenda with Russia that does not compromise our commercial objectives, but allows for a more constructive engagement between the U.S. and Russia. We have every reason to believe that, based on these criteria, the outcome will result in the advancement of both countries’ vital interests.
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