Life in Ukraine is about to become more expensive for some importers and cheaper for others. Starting on Jan.1, import tariffs on almost 100 products, from chemicals to construction materials, are set to increase to the maximum level allowed under World Trade Organization rules.
Ukraine has previously tried to renegotiate tariffs on some 350 goods – a move experts say could undermine the global trading club’s legitimacy – with one eye on state coffers and the other on oligarch pockets.
According to a bill passed by parliament on Nov. 6, Ukraine will raise import tariffs on some 100 commodities starting next year. If signed by President Viktor Yanukovych, the bill could raise prices on rubber, metallurgical products, minerals and others. While the weighted average tariff level should not rise above 3.44 percent to comply with WTO rules, some tariffs are slated to increase manifold. Yet others – notably on key inputs used by oligarch-owned businesses – were reduced or scrapped altogether.
With Ukraine sliding into recession and state revenues taking a hit, the tariff hike could help raise the cash needed for the difficult months ahead. According to the law’s authors, the increased tariffs are expected to bring in an additional Hr 500 million ($60 million) in revenue in 2013.
The government also took steps to bring an additional $100 million yearly when President Viktor Yanukovych signed a dual taxation avoidance agreement on Nov. 7 with Cyprus. And exporters recently were required by government to buy the local currency with a portion of their hard currency earnings, a measure that was in place in 1998 to 2005.
The decision comes against the background of Ukraine pushing a comprehensive review of its WTO deal. Back in October, international news agency Reuters revealed Ukraine was trying renegotiate the maximum tariff ceiling for some 350 products – a move some said could undermine the very basis of the trade body’s existence.
Taking advantage of a loophole, Ukraine then argued that a clause allowing countries to temporarily increase tariff ceilings on individual products could in fact be applied to the whole treaty, and would thus allow to redress the injustices of the current deal, which strongly favors developed nations. The benefits allow wide access to emerging markets, Ukrainian officials said, but protect more developed economies.
But an in-depth look shows the new legislation seems designed to protect local players, either by making key inputs cheaper or protecting them from competition.
The bill was formally sponsored by the Federation of Employers of Ukraine, a lobbyist organization representing the interests of quite powerful people, notably in the chemical industry, said senior attorney Daniyil Fedorchuk from leading German law firm Beiten Burkhardt.
The association is headed by billionaire Dmytro Firtash, who controls much of Ukraine’s chemical market. Interestingly, Fedorchuk pointed out, tariffs on magnesium and silicium – two key chemical inputs – would be reduced to zero. The employer grouping did not respond to Kyiv Post appeals to comment.
Meanwhile, Ukraine’s policy is testing the limits of the WTO.
“(The new law) is formally within the WTO parameters, but this appears to be strongly against the accepted practices, because no one has ever tried to modify the tariffs for so many positions at the same time,” Fedorchuk said. “Ukraine may be setting up a negative precedent. The current system was quite fargile but it worked.”
WTO practice suggests tariffs be increased after consultation with other member states, the lawyer explained, but Ukraine stated the tariffs are simply subject to negotiations, but then passed the law, which would enter into force Jan. 1 2013. Given the bureacratic procedures involved, Fedorchuk said, a WTO resolution on the issue could take up to five or six years.
According to Edward Mermelstein, a New York-based attorney best known for negotiating high-profile real estate deals for East European business magnates, Ukraine is trying to correct what was an unfair deal to begin with.
“The (current agreement) has definitely not benefitted the developing countries, something Ukraine is trying to highlight,” he argued. “It has shown the problems with the current agreement, something that is making a lot of the Western countries very nervous,” he said.
Nonetheless, he said, internal politics were also a factor. Like many other developing nations Ukraine is also particularly sensitive to vested interests, he added.
This trend is confirmed by a recent report by Warsaw-based think tank Center for Eastern Studies, which noted that Ukraine’s international trade policy is often dictated by the needs of oligarchs to protect uncompetitive Soviet-era enterprises from superior Western competition. This is particularly true among the second-tier players, who lack the top dogs’ export-oriented businesses.
“As regards the less powerful businessmen, the protection of the internal market from imports, especially from the West, with which they are unable to compete without support from the state, is the top priority,” the report read.
This marks the latest surprising turn in Ukraine’s relations with the trading club. Previous episodes include a lawsuit against Australian legislation that would remove branding from tobacco products and using its veto to block countries like Yemen or Laos from joining the WTO unless they lower tariffs. What makes both cases all the more unusual is the lack of meaningful trade ties with any of the countries involved.
Such efforts risk further deteriorating Ukraine’s image as a reliable business partner. According to Ildar Gazizullin, senior expert at Kyiv-based think tank International Center for Policy Studies, Ukraine’s recent efforts are winning the country no friends.
It is a lot of trouble for very little gain, he said. “It’s counterproductive.”
Kyiv Post editor Jakub Parusinski can be reached at [email protected].
