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TAGS: ETRD EFIN WTRO PGOV UP
SUBJECT: UKRAINE: PRESIDENT SIGNS LAW TO RAISE IMPORT 
TARIFFS 
 
REF: YARNELL EMAIL OF 02/06 TO DESK 
 
¶1. (U) Summary: President Yushchenko on February 20 signed 
into law a bill that will impose a temporary, 13 percent 
increase in customs duties for a large number of imported 
goods.  The law will come into effect in less than two 
weeks, and is scheduled to last six months.  Supporters of 
the law have justified it as necessary for Ukraine to 
address a balance-of-payment crisis, in line with WTO 
rules.  The law violates Ukraine's IMF loan 
conditionalities, and the IMF Board would have to grant an 
exception if it is to move forward with further 
disbursements of the loan program.  Ukrainian lawmakers 
have put the country at the forefront of a worrisome global 
trend toward protectionism, and have threatened Ukraine's 
own economic recovery in the process.  End Summary. 
 
13 Percent Tariff Increases for Many Products 
--------------------------------------------- 
 
¶2. (U) Law No. 923-VI, "On Amending Some Laws of Ukraine to 
Improve the Balance of Payments of Ukraine in Response to 
the World Financial Crisis," will impose a temporary, 13 
percent, ad valorem increase in import duties for a range 
of goods, including agricultural products, textiles, and 
cars.  The law specifically identifies those goods that 
will face higher tariffs, and all those not listed are 
exempted.  (Note: See the end of this report for a complete 
list of goods affected.  End note.)  The generated revenues 
will go to a special Stabilization Fund meant to address 
the balance-of-payments crisis. 
 
¶3. (U) The higher tariffs will come online ten days after 
the official publication of the law.  (Note: The Rada 
secretariat has not yet officially published the law, but 
should do so any day now.  Post will inform Washington when 
the law is published.  End note.)  The law stipulates that 
the tariff surcharges remain in effect until six months 
after the end of the month in which they were introduced. 
(Note: So, if the new tariffs were introduced on March 6, 
they would expire only after the end of September.  End 
note.)  It also grants the Cabinet of Ministers authority 
to extend the increased tariffs for an additional six 
months, if deemed necessary. 
 
President Signs, Over Staff's Veto Recommendation 
--------------------------------------------- ---- 
 
¶4. (SBU) President Viktor Yushchenko signed the bill into 
law on February 20.  Serhiy Chervonchuk (please protect), 
from the Presidential Secretariat's Social/Economic 
Department, had told us only days earlier, on February 17, 
that the President would veto the law.  Chervonchuk 
confirmed on February 23 that his Department had in fact 
recommended a Presidential veto and was surprised by 
Yushchenko's decision to sign the law.  Chervonchuk guessed 
that the President did not think a veto worthwhile since 
328 MPs had supported the bill, well over the 300 required 
for a veto override.  (Comment: We do not find this 
explanation convincing since Yushchenko often vetoes 
legislation that he knows the Rada will likely override. 
End comment.) 
 
¶5. (U) While he did sign the bill, Yushchenko 
simultaneously took steps to try to limit its impact.  He 
filed an appeal to the Constitutional Court challenging the 
provision in the law that would allow the Cabinet of 
Ministers to extend the temporary duty surcharge beyond six 
months.  (Note: The Ukrainian Constitution specifically 
gives the Rada authority over import duties.  End note.) 
Yushchenko also appealed to the Cabinet of Ministers to 
exempt products from countries with which Ukraine has a 
preferential trade agreement (mostly CIS countries) from 
the tariff surcharge. 
 
History of the Law 
------------------ 
 
¶6. (U) Law No. 923-VI, originally Draft Law No. 3379, was 
introduced in November 2008 by Serhiy Teriokhin, Chairman 
of the Rada Tax and Customs Policy Committee and a 
prominent member of PM's Yulia Tymoshenko's electoral bloc. 
 
Referencing Article XII of GATT, which provides conditions 
by which a country may restrict imports "in order to 
safeguard its external financial position and its balance 
of payments," Teriokhin's initial draft sought to create a 
general framework to allow the government to respond to a 
balance of payments crisis by temporarily raising import 
tariffs.  Provisions were later added to identify exactly 
which products would face higher import tariffs, and which 
would be exempted.  Much wrangling ensued, as the law 
passed in first and second readings in December, was vetoed 
by the President in January, and then was revised and 
passed again by the Rada on February 4. 
WTO Implications 
---------------- 
 
¶7. (U) For virtually all goods involved, tariffs will rise 
above the bound rates agreed to as part of Ukraine's WTO 
accession.  The law calls on the government to notify WTO 
members within 30 days of imposing the new tariffs. 
(Comment: This requirement appears to meet the bare minimum 
required by WTO rules.  End comment.)  Post is not aware of 
any notification made by Ukraine, or that the GOU has 
initiated consultations through the WTO Committee on 
Balance-of-Payments Restrictions. 
 
¶8. (U) The law justifies raising tariffs as necessary to 
address a balance-of-payments crisis.  Ukraine did 
experience a severe merchandise trade deficit in 2008, 
reaching $18.5 billion for January-December, that 
contributed to its balance-of-payments problems.  The trade 
deficit has already begun to shrink, however, as the 
hryvnia (UAH), the national currency, has fallen from about 
4.7 UAH/USD in July to about 8.5 UAH/USD in February.  The 
monthly trade deficit shrunk from $1.6 billion in November 
to $638 million in January, making the case for import 
restrictions less plausible. 
 
IMF Implications 
---------------- 
 
¶9. (SBU) The $16.4 billion IMF Stand-By Agreement with 
Ukraine specifically lists the "prohibition on the 
imposition or intensification of import restrictions for 
balance of payments reasons" as a continuous performance 
criteria for the IMF loan.  The local IMF residential 
representative was not immediately available for comment, 
but earlier the IMF told us that the law clearly violated 
this condition.  IMF reps told us on February 5 that 
virtually all IMF Stand-By Agreements contain such a 
condition, as IMF loans are meant to help recipient 
countries meet their external obligations without resorting 
to protectionist measures.  They said that the IMF Board 
would have to grant an exception to Ukraine to move 
forward. 
 
Comment: Bad for Int'l Trade, Worse for Ukraine 
--------------------------------------------- -- 
 
¶10. (U) Ukraine's decision to raise import duties as a 
response to the economic crisis runs directly counter to 
the spirit of last November's G-20 Communique, which called 
on countries to avoid such beggar-thy-neighbor policies. 
Especially since a currency devaluation has already reduced 
Ukraine's trade deficit, the move looks more like an 
attempt to bolster low budget revenues, as well as old 
fashioned protectionism for a few domestic industries, than 
an attempt to address a balance-of-payments crisis.  And 
while the impact on global trade is bad enough, even worse 
is that Ukraine is further testing the patience of the IMF, 
which has not yet approved the second tranche of the $16.4 
billion Stand-By Arrangement because Ukraine still needs to 
fulfill other conditionalities.  End Comment. 
 
 
--------------------------------------------- ---------- 
Annex: List of Goods Subject to Import Tariff Surcharge 
--------------------------------------------- ---------- 
 
¶11. (U) The following goods will face a 13 percent, ad 
valorem surcharge on import duties as a result of this law: 
 
HS Code         Description 
-------         ----------- 
0202            Meat of bovine animals, frozen 
0203            Meat of swine, fresh, chilled, or frozen 
0206-0210       Other types of meat 
0504-0506       Other animal parts (stomachs, skins, bones) 
0509            Animal sponges 
0511            Various animal products 
(except for 0511 10 00 00 - Bovine semen) 
0808            Apples, pears and quinces, fresh 
1601-1605       Sausages, prepared meats, seafood 
1701-1702       Sugars 
(except for 1702 30 99 00) 
2204-2208       Wines and various spirits 
2701            Coal 
4203            Apparel made of leather 
4303            Apparel made of furskin 
57              Carpets and other textile floor coverings 
60-65           Fabrics and textiles 
6806            Mineral wools 
6901            Bricks, tiles and other ceramic goods 
7201            Pig iron 
7301            Sheet piling of iron or steel 
7321            Stoves, ranges, and similar nonelectric 
                domestic appliances of iron or steel 
8401            Nuclear reactors and equipment 
8414            Air or vacuum pumps 
8418            Refrigerators and freezers 
8501            Electric motors and generators 
8516            Various heating appliances 
8702-8704       Some motor vehicles 
 
TAYLOR