Presidential Meeting

June 24, 2010 THE U.S.-RUSSIA BUSINESS COUNCIL

USRBC Issue Paper

Obama-Medvedev Meetings June 24, 2010

USRBC Issue Paper Obama-Medvedev Meetings June 24, 2010

CURRENT ISSUES I. WTO Accession U.S. firms across all sectors support Russia’s accession to the WTO, as this would improve foreign firms’ access to the Russian market and improve Russia’s investment climate by creating more stable and predictable conditions for Russian access to global markets. Companies and governments are seeking assurances that, under the Customs Union with Kazakhstan (and possibly Belarus), Russia will operate in accordance with its WTO commitments. An intense schedule of multilateral meetings over the next 6 to 12 months will be required to reconcile changes in the Customs Union that affect a significant portion of the customs code before Russia can accede to the WTO. The U.S. continues to seek Russia’s implementation of commitments made under the November 2006 U.S.-Russia bilateral trade agreement and side-agreements. These commitments include (but are not limited to) lower tariffs on combine harvesters and certain leased narrow-body aircraft; a scientifically-based inspection and certification regime for U.S. meat exports to Russia; a transparent, predictable, nondiscriminatory import regime for goods containing encryption technology; and improved intellectual property protections.

II. Jackson-Vanik Amendment Contrary to some claims, the Jackson-Vanik Amendment does not prevent Russia’s accession to the WTO. Once Russia does join the WTO, Jackson-Vanik will constitute a violation by the United States of WTO rules that prohibit countries from placing conditions on each other’s normal trade relations (most favored nation) status. If Congress does not “graduate” Russia from the amendment and extend permanent normal trade relations (PNTR), the U.S. will have to give up its right to trade with Russia on WTO-compliant terms until PNTR is extended.

Russia has been found to be in full compliance with the Jackson-Vanik Amendment since 1994.

Its continued application serves as an unnecessary irritant and an obstacle to greater trust in the bilateral relationship.

III. Civilian Nuclear Cooperation Agreement (123 Agreement) The Obama Administration has re-submitted to Congress a U.S.-Russia Civilian Nuclear Cooperation Agreement (123 Agreement) that will allow the U.S. and Russia to share information and technologies for nuclear power generation, while providing a clear regulatory framework to ensure that it will only be used for peaceful purposes.

The agreement will build on nearly a generation of successful cooperation between the United States and Russia through the Megatons-to-Megawatts program, in which uranium from Russian nuclear weapons is sent to the United States, repurposed and used in American nuclear power

plants. Megatons-to-Megawatts will expire in 2013 and the Civil Nuclear Cooperation Agreement is the next step forward in this successful partnership.

The 123 Agreement will automatically enter into force 90 days after it was submitted to Congress unless there is a joint resolution of disapproval. Resistance to the agreement has emerged in the form of two resolutions, which mainly object to Russia’s nuclear cooperation with Iran. To date, those measures seem to lack broad support. Congress has never disapproved a 123 Agreement, but in a few cases has added nonproliferation conditions.

IV. Bilateral Investment Treaty The U.S. business community would support an early resumption of negotiations for a bilateral investment treaty (BIT), which would reduce risk and provide greater confidence to U.S. investors through guarantees of full and equitable treatment, protection from expropriation and an alternative dispute resolution mechanism, among other advantages. Although a U.S.-Russia BIT was signed in 1992, it was never ratified.

The Obama Administration has lent its support to a U.S.-Russia BIT but is still working on a model BIT format that would facilitate bilateral investment treaties with other countries. The Administration may be reluctant to move forward on a U.S.-Russia BIT until the successful conclusion of Russia’s WTO accession process.

V. Import Substitution Policies Government policies to limit imports and protect domestic industries during the global economic recession are harmful to consumers and distort the market for these goods. In Russia, the emergency tariff increases adopted in January 2009 on imported automobiles and agricultural machinery continue to be in force despite initial sunset provisions that would have eliminated them after six months. At the same time, localization policies pushing the use of domestic suppliers/products (Buy American or Buy Russian) create inefficiencies and raise costs for producers as well as lead to inefficient government expenditures.

The localization policies adopted by Russia may pose additional problems in the country’s final WTO accession negotiations.

VI. Restrictions on Investment The U.S. business community favorably views recent Russian government moves to liberalize the Law on Foreign Investment in Strategic Sectors and the Law on Subsoil Usage in order to increase the prospects for foreign investment in a number of sectors, particularly the energy and natural resources sectors. However, restrictions continue to affect a large number of sectors and exert a negative influence on the investment climate.

The review process for investments that fall under the Strategic Sectors Law should be streamlined so that decisions can be rendered in a more time-sensitive manner, and foreign investors welcome recent comments from the Federal Anti-Monopoly Service regarding that process.

During President Medvedev’s June 18 speech at the St. Petersburg International Economic Forum, he noted that the number of “strategic” enterprises would be reduced from 208 to 41, a move that was met with widespread approval from the investment community.

VII. Customs Reform The U.S. business community applauds Russian progress on customs code harmonization with standard international codes and would welcome further improvement in customs clearance processes. However, recent customs clearance changes in Moscow have added significant delays to the processing of shipments through that checkpoint, prompting several international carriers to temporarily suspend service to the city.

The business community also strongly endorses U.S. government efforts to streamline export licensing procedures for potential dual-use technologies.

VIII. Visas/Work Permits The U.S. business community is encouraged by recent progress on easing travel and work visas and improvement in U.S. visa processing times. Further progress could be achieved by greater use of on-line applications. Real improvement has been made in Russian work permit quota allocation and visa issuance process as well. The business community supports the initial reforms of the internal registration process and urges the elimination of domestic re-registration.

IX. Russia as a Financial Center Russia’s leaders have announced the goal of establishing Moscow as a Eurasian regional financial center that could eventually become a global center. Many international financial observers have endorsed this concept as realizable over the medium- to long-term. At the same time, they have noted that Russia currently lacks some of the basic conditions for becoming a leading financial center. Among these are the relatively small and under-capitalized domestic financial markets, the absence of a robust legal and regulatory framework, and the lack of sufficient economic diversity that would provide for balanced financial flows and decrease currency volatility. Other factors, such as inadequate physical infrastructure and persistent questions concerning corruption are also barriers.

X. High Technology U.S. business and technologically-oriented academic communities are actively engaged with the Russian government and private sector in exchanging views and experience on a range of high tech issues, including financing for small-scale tech start-ups, interaction between academic (theoretical) and business (applied) research, and the protection and commercialization of intellectual property.

STRUCTURAL/INSTITUTIONAL ISSUES I. Rule of Law Strict adherence to the rule of law is a basic condition for investment and sustained economic growth. President Medvedev deserves recognition for the progress that he has achieved in modernizing Russia’s legal system, particularly the arbitrazh courts (those dealing with commercial issues). Moreover, his frequent calls for improving the professional training of judges and prosecutors, as well as for ensuring the independence of the judiciary, are heartening signals to the investment community. At the same time, many observers point to a significant gap between President Medvedev’s aspirational statements and the effective implementation of policies in many areas.

President Medvedev’s recent moves to eliminate the abuse of pre-trial detention as a means of applying pressure to suspects and potential witnesses are welcomed by the investment community.

II. Corruption Corruption continues to be pervasive in Russia and creates an environment of increased risk and uncertainty for U.S. companies doing business there. It is tantamount to a perverse and regressive tax on all sectors that undermines the basis of a market economy.

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