April 14,2005

Grassley, Baucus Outline Concerns to Be Resolved Prior to Russia’s WTO Membership

WASHINGTON – Sen. Chuck Grassley, chairman of the Committee on Finance, and Sen. Max Baucus, ranking member, have urged the Acting United States Representative and the Administration to resolve a number of outstanding trade concerns before concluding negotiations that would allow Russia to join the World Trade Organization.

The text of the senators’ April 11 letter to the Acting United States Trade Representativefollows.

April 11, 2005

Honorable Peter F. Allgeier
Acting United States Trade Representative
Winder Building, 600 17th Street, NW
Washington, D.C. 20508

Dear Ambassador Allgeier:

We write to you regarding our bilateral negotiations on the accession of the Russian Federation tothe World Trade Organization (WTO). We note that President Bush and President Putin met inFebruary and issued a joint statement indicating our commitment to complete bilateral negotiationswith Russia in 2005. That is certainly a worthwhile objective. However, we must express our strongconcern that the negotiations not be rushed to conclusion simply to meet an artificial deadline. Manykey issues remain outstanding in both our bilateral and the multilateral WTO negotiations onRussia’s accession. These issues must be resolved satisfactorily before the negotiations can beconcluded, even if that entails extending the negotiations beyond the end of this year.

Foremost among our outstanding issues is the absence of a comprehensive legal and regulatoryframework for the protection of intellectual property rights (IPR), coupled with a disturbing lack ofcommitment on the part of the Russian government to enforce existing laws to protect intellectualproperty. Russia has been on the Special 301 Priority Watch List since 1997 and significantdeficiencies remain in Russia’s IPR regime. A case remains pending to review Russia’s status as abeneficiary country under the U.S. Generalized System of Preferences (GSP) program. Estimatedlosses to U.S. copyright industries due to piracy of films, videos, sound recordings, books, andcomputer software continue to exceed $1 billion annually. Over 80 percent of all DVDs on theRussian market are estimated to be pirated, while pirated music is estimated at 66 percent of salesand software piracy is estimated at about 88 percent. Pirated CD and DVD products are exportedfrom Russia to more than 25 other countries, and we understand that exports of software pirated inRussia are increasing at an alarming rate. Not only are enforcement efforts anemic, the legalframework is incomplete. According to a recent report in the press, Moscow prosecutors haverefused to take action against piracy over the Internet because Russian copyright laws cover onlyphysical media such as CDs and DVDs. U.S. and multinational companies also continue to reportserious problems with the counterfeiting of patented and trademarked goods.

Piecemeal legislative, regulatory, and administrative changes introduced over the past few years havefailed to quell the problem. Instead, the scale of IPR infringement in Russia has become markedlyworse. Membership in the WTO must be founded upon a strong commitment to embracing andenforcing the rule of law and living up to one’s obligations. To date, the Russian government hasfailed to demonstrate such commitment. We must insist upon visible and sustained improvement inthis area, coupled with a demonstrable commitment to long-term enforcement, before the accessionnegotiations may be concluded.

A second matter of particular importance to U.S. producers of beef, pork, and poultry is access tothe Russian market. This includes producers of beef, pork, and turkey in Iowa, as well as beef andpork producers in Montana. In September 2003, we reached an agreement in principle with Russiaon market access parameters for beef, pork, and poultry. To date, that agreement has yet to befinalized. Russia’s market access commitments for these important U.S. exports must be finalizedbefore the accession negotiations may be concluded. Significant non-agricultural market accessissues also remain outstanding. Chief among these are an effective tax in excess of 40 percent onRussian imports of aircraft and 70 percent on imports of larger U.S.-made passenger cars and sportutility vehicles. These levels of protection are unacceptable if Russia is to join the WTO.

Third, Russia’s current domestic gas pricing policy is of major concern due to the commercialdistortions that result for industrial consumers of natural gas. Gas is sold on Russia’s domesticmarket for about $25/tcm, while estimates of cost-recovery levels are roughly $35-$40/tcm and gasfor export on the world market sells at $100-$120/tcm. The downstream effects are significant.

Natural gas is the primary feedstock for producing nitrogen fertilizers, accounting for roughly 70-90percent of the cost of production. It is no surprise, then, that Russia has become the world’s largestexporter of nitrogen fertilizers. The volume and pricing of Russian nitrogen exports have disruptedinternational fertilizer markets and are a major concern of U.S. producers in Iowa and across theUnited States. We must ensure that the trade-distorting aspects of Russia’s natural gas pricingpractices are clearly and effectively addressed in Russia’s WTO accession commitments. Russiamust agree to conduct any state intervention in its economy on commercial terms, so that U.S.participants in the Russian market and other markets are afforded an adequate opportunity tocompete.

With respect to services negotiations, we remain concerned that we have yet to reach an acceptablecompromise on the issue of branching for financial service providers. Consumers of banking,insurance, and securities services in Russia stand to benefit greatly from liberalization in this area.

We are also concerned about Russia’s equity and sectoral cap limitations in the areas of insurance,banking, and securities. In the telecommunications sector, significant outstanding issues include thepreferential treatment of Russian satellite communication systems, the relatively short duration oftelecommunications licenses, and the absence of transparent regulatory procedures applicable toproviders of telecommunications services. Indeed, a lack of transparency is not limited to Russia’stelecommunications sector. Expanding Russia’s commitment to transparency and the rule of lawshould be prioritized in all areas of the negotiations. For example, Russia must commit to transparentapplication of the rule of law when conducting preshipment inspections in customs and specialeconomic zones. And Russia must ensure uniform application of its trade regime throughout itsterritory. Corruption continues to present a huge problem for foreign investors in the Russian market.

In fact, Russia’s Economic Development and Trade Minister reported recently to President Putin thatin a survey of 158 foreign companies operating in Russia for some time, 71 percent identifiedcorruption as the main impediment to their business. We also find it remarkable that Russia has yetto ratify the Bilateral Investment Treaty (BIT) between the United States and Russia that was signedin 1992 and ratified by the United States Senate that same year. The failure to ratify our BIT sendsthe wrong signal about Russia’s commitment to fostering transparency and the rule of law.

We are concerned that other trade frictions may undermine political support for Russia’s entry intothe WTO. One concern arises from Russian’s sanitary and phytosanitary (SPS) measures, which areoften burdensome and at times do not appear to be grounded in sound science. For example, sinceDecember 2003 Russia has imposed a ban on U.S. beef imports in response to the detection of onepositive case of Bovine Spongiform Encephalopathy (BSE) from a cow imported from Canada. Yetscience shows that U.S. beef is safe. SPS measures must not be used as non-tariff barriers to impedelegitimate access to the Russian market for U.S. exports of beef and other agricultural products.

Russia’s industrial policies also raise some concerns. In May 1999, Russia imposed a 15 percentexport tariff on ferrous steel scrap (amounting to not less than 15 euros per metric ton). In the contextof rising global demand for steel and steel scrap, Russia’s export tax artificially restricts globalsupply thus contributing to higher prices for steel scrap and finished steel. And higher steel pricesadversely impact U.S. steel consumers in Iowa, Montana, and across the United States. Russia alsocurrently maintains a 10 percent export tariff on copper cathode and a 0 percent export tariff copperwire rod. As a result, copper cathode producers in Russia cannot export their product for fair marketvalue and Russian producers of copper wire rod obtain favorable prices for this input. This taxdifferential thus serves to distort the global market for copper. But a primary function of the WTOis to promote the elimination of artificial market distortions. Russia’s accession negotiations offeran excellent opportunity to address the elimination of these artificial distortions in the steel andcopper markets.

The list of significant outstanding issues does not end there. Additional trade frictions worthmentioning include: Russia’s restrictions on overflight rights and express delivery services; reportsthat illegal logging accounts for as much as 20 to 30 percent of Russia’s timber harvest; variousissues regarding customs valuation including the failure to pass final legislation in the Duma; andthe possibility that Russia will require unduly onerous customs border inspections based onencryption concerns.

Taken together, all the foregoing concerns make clear that we have a long way to go and manydifficult issues to resolve before reaching an agreement on Russia’s WTO accession that will serveto advance the interests of U.S. farmers, ranchers, workers, and service providers. In our view, forcedadherence to an artificial deadline will not serve to advance our interests in these negotiations. Wehope that you and the Administration will agree.

Thank you for your ongoing attention to these important concerns. In addition, please note that weintend to raise them with your successor at the earliest opportunity.


Charles E. Grassley 

Max Baucus
Ranking Member

CC: Dr. Condoleezza Rice
Secretary of State
U.S. Department of State
2201 C Street, NW
Washington, D.C. 20520

Hon. John W. Snow
Secretary of the Treasury
U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220

Hon. Carlos M. Gutierrez
Secretary of Commerce
U.S. Department of Commerce
1401 Constitution Avenue, NW
Washington, D.C. 20230

Hon. Mike Johanns
Secretary of Agriculture
U.S. Department of Agriculture
1400 Independence Avenue, SW
Washington, D.C. 20250

Hon. Stephen J. Hadley
Assistant to the President for National Security Affairs
The White House
1600 Pennsylvania Avenue, NW
1st Floor, West Wing
Washington, D.C. 20500