U.S. to Join EU’s WTO Complaint Against Russia’s Protectionist Import-Car Levy

ST. PETERSBURG, Russia– The U.S. plans to join the European Union in filing a complaint with the World Trade Organization against Russia’s car-recycling fee, charging the levy is a trade barrier because it applies only to import vehicles.

The EU filed its case earlier this month, and Japan last week submitted a similar complaint. The U.S., along with Japan, Turkey and China, reportedly has asked to be an observer at the upcoming EU-Russia talks aimed at averting formal litigation regarding the dispute.

Russia, which imposed the fee nine days after joining the WTO last August, argues the levy is necessary to offset the future cost of recycling cars and therefore is not a tax. However, critics point out the fee does not apply to vehicles built in Russia nor in Belarus and Kazakhstan, its regional free-trade partners.

Cutting import tariffs on cars was a major sticking point in Russia’s 18-year negotiations to join the WTO, a Reuters report says. Although Russia finally agreed to do so, the EU says the recycling fee, collected up front when the car is imported, effectively is a tax levy.

The base rate of the car-recycling fee is RR20,000 ($660) a car, but the final amount is calculated on the age of the vehicle and its engine capacity. The cost, therefore, can run from RR26,800 ($900) for a car with an engine size up to 2.0L to RR110,000 ($3,660) for a vehicle with engine capacity of more than 3.5L.

Russia had said it planned to also impose the recycling fee on domestic auto makers starting July 1. However, the government now says the adoption of this decision by the Russian Parliament was being postponed until at least October, due to the start of a vacation period.

That means domestic auto makers will continue to operate under more favorable conditions compared with importers, and this has sparked the latest charges of protectionism by most of Russia’s automotive trade partners.

The European Commission estimates the postponement of equalizing the car-recycling fee will save Russian car companies about RR15 billion ($500 million). Aton, one of Russia’s leading investment-market analytic firms, says the amount of savings for AvtoVAZ and KamAZ, alone, likely will reach RR7 billion ($214 million) and RR9 billion ($275 million), respectively.

“The problem is not in the utilization fee, but the fact that the Russian car makers are still exempted from it, which provide them serious competitive preferences over other market players,” an EC official says.

The same position is shared by the U.S. Andrea Mead, a spokeswoman for the U.S. Trade Representative's office, says the U.S. is closely monitoring the EU-Russian talks regarding the recycling fee, which also has been a subject of its negotiations with Russia. But Russia so far has not taken concrete steps to resolve the differences.

Analysts believe Russia will do its best to keep the fee, which brings big revenue to its federal budget. Indeed, the Russian Federal Customs Service says the recycling levy currently accounts for 3% of total customs payments in the country. Applying the fee to more than 700,000 imported cars a year is expected to provide millions of dollars annually.

Sources within the Russian government say they are aware of the U.S. and EU plans to jointly address their complaints to the WTO, and they are considering ways to resolve the conflict.

However, an official representative of the Russian Ministry of Industry and Trade says the imposition of the recycling fee on domestic auto makers could result in serious problems for local auto production.

That’s because prices of Russian-made cars likely would rise by as much as 15%, which could lead to a sharp decline in demand as consumers give preference to foreign cars in the same price segment.

Michael Bryachak, a member of Russia’s State Duma Committee on Transport, says imposing the recycling fee on domestic auto makers would force the government to develop measures to support the local manufacturers as they become uncompetitive with foreign car companies.

Vehicle sales in Russia are expected to fall by up to 4% this year, the government’s Ministry of Trade and Industry predicts, as the country’s $2 trillion economy falters.

Deliveries slid 11% in June from year-ago to 241,346 units, leaving the market’s first-half total down 6% to 1,333,314. Association of European Businesses Automobile Manufacturers Committee data shows the second quarter finished 10% below like-2012.

Last month, the group cut its full-year sales forecast to 2.8 million units, down nearly 5%, from prior-year. However, Committee Chairman Joerg Schreiber says the market could see a boost in car sales with the government’s recently announced plan to subsidize credit-backed vehicle purchases.

The Boston Consulting Group, a global advisor on business strategy, says in a new report that Russia still is on track to overtake Germany as Europe’s biggest car market by 2020, making it No.5 globally, behind China, the U.S., India and Brazil.

The report cites “serious levels of direct foreign investment” during 2011 and 2012 by Ford, General Motors, BMW, Hyundai, Mazda, PSA Peugeot Citroen, Mitsubishi, Renault-Nissan, Toyota and Volkswagen/Audi. Together with expansion plans of the domestic auto makers, this will raise total capacity to about 3.3 million units annually by 2016, up from 2.3 million in 2012.