VZCZCXRO5450
RR RUEHDBU RUEHLN RUEHSK RUEHVK RUEHYG
DE RUEHMO #3009/01 3481509
ZNR UUUUU ZZH
R 141509Z DEC 09
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC 5651
INFO RUCNCIS/CIS COLLECTIVE
RUEHOT/AMEMBASSY OTTAWA 0001
RUEHBS/USEU BRUSSELS
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEHAAA/WHITE HOUSE WASHDC

UNCLAS SECTION 01 OF 04 MOSCOW 003009 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR EUR/RUS AND EEB 
WHITE HOUSE FOR USTR--EHAFNER 
 
E.O. 12958: N/A 
TAGS: ETRD EAGR ECON RS
SUBJECT: CUSTOMS VALUATION CHALLENGES IN RUSSIA, AND NOW 
THE CUSTOMS UNION 
 
 Summary 
-------- 
¶1.  (SBU) Over the course of the last twelve months, U.S. 
exporters have been experiencing increasing difficulties with 
customs valuations on their exports to Russia.  Following 
several months of effort, Emboffs were able to schedule a 
meeting with officials from the Russian Federal Customs 
Service (FCS) on August 28.  Emboffs focused on the increased 
inconsistency in the application of customs valuation 
procedures, and the increased claims of undervaluation by 
customs officials.  In response, FCS reviewed Russian customs 
valuation guidelines and dispute resolution measures, as laid 
out in Russian law, emphasizing that customs officers have 
not strayed from these procedures.  The lead FCS officer 
closed the meeting by cryptically admitting that the global 
financial crisis had created an "extraordinary situation" for 
FCS that called for unusual measures.  While no resolution 
was found, Emboffs succeeded in registering USG concern over 
inconsistencies in customs valuation procedures and in 
establishing a basis for future discussions of this topic. 
However, this situation has now been complicated by the 
up-coming entry into force on January 1, 2010 of the Russia, 
Belarus, Kazakhstan Customs Union (RBKCU).  While the RBKCU 
Customs Code section on valuation is practically identical to 
current Russian regulations, implementation of valuation by 
Belorussian and Kazakh customs officials may be inconsistent 
for a while, causing more headaches for U.S. exporters.  End 
Summary. 
 
¶2.  (U) Starting in November 2008, various U.S. exporters 
began contacting the Embassy, noting that the Russian Federal 
Customs Service (FCS) was requesting unnecessary additional 
documentation in customs valuations procedures and disputing 
declared values of U.S. exports.  The Embassy's Agricultural 
Trade Office (ATO) verified that European and Canadian 
exporters were experiencing similar problems, particularly 
with meat and cut flower exports.  EU mission officers stated 
that FCS disregarded EU complaints that they were not 
following the WTO valuation agreement.  After numerous 
attempts to set up a meeting, Emboffs were finally able to 
obtain an appointment with FCS Deputy Chief of the General 
Directorate for Federal Customs Revenues and Tariff Control 
Oleg V. Dorochenko, and Senior Trade Customs Inspectors Igor 
¶O. Smitenko and Nadezhda L. Razumkova. 
 
The Problem 
----------- 
¶3. (SBU) Beginning in November 2008, the Embassy began 
receiving complaints from various U.S. exporters regarding 
customs valuation practices being implemented by the Russian 
Federal Customs Service.  Emboffs fielded complaints 
regarding almonds, meat, peanut butter, and other nuts. 
 
--Almonds: The Almond Board of California, which accounts for 
roughly 80% of global almond production, informed the ATO 
that FCS was requesting additional documentation, including 
the Shipper's Export Declaration (SED), to prove the value of 
their exports.  The Almond Board had tried to demonstrate to 
Russian customs officials that the world price of almonds had 
declined to $4 per kilo in 2008, but the FCS insisted that 
they pay duties based on the previous year's (substantially 
higher) average price. 
 
--Meat:  This problem cropped up in the meat market as well. 
Industry representatives in this sector, however, were able 
to initiate meetings and demonstrate world prices without 
Embassy assistance. 
 
--Peanut Butter:  FCS officials requested that the peanut 
butter exporter American Trading International, Inc. provide 
the manufacturer's original price list, which legally has no 
bearing on the actual export price of any particular customs 
transactions. 
 
--Nuts:  Several nut importers chose to pay the fees and then 
litigate the case.  While ultimately successful, they had to 
wait six months to get the overpayment back.  Functionally 
the funds are not returned to the importer, but rather used 
to cover inflated tariff payments charged to the importer for 
more recent customs transactions.  It essentially amounts to 
a "shell game" in which importers are forced to lend FCS 
funds on a rolling basis. 
 
MOSCOW 00003009  002 OF 004 
 
 
 
¶4. (SBU) U.S. exporters had a variety of responses to the FCS 
requests.  Some surrendered additional documents like the 
SED, while others negotiated values directly with Russian 
customs officials.  These varied approaches strained 
relations with Russian importers.  In the case of almonds, 
Russian buyers informed the ATO that, as a result of the 
customs valuation issues, their purchases of California 
almonds were 20-30% less than they had originally planned 
from December 2008-February 2009.  Although trade has 
increased again for larger exporters, smaller traders are 
still unable to offset the costs of the inflated and 
inconsistent tariffs FCS is imposing. 
 
The Russian Response 
-------------------- 
 
¶5. (U) Emboffs began the meeting with the FCS by requesting 
clarification as to which process the FCS is currently using 
to determine tariffs and which documents it used for 
valuation.  Senior Inspector Smitenko insisted that valuation 
is carried out according to the uniform procedure outlined in 
the Law on Customs Tariffs, which is consistent with Article 
Seven of the GATT.  In 90% of the cases, the Single 
Administrative Document (SAD), a unified document for Russian 
customs declaration that integrates Russia with the common 
European transit procedures, is used to calculate transaction 
value.  The declarant presents the SAD along with the 
shipping invoice.  If the price for a product is reduced due 
to a specific contract negotiation or to a drop in world 
prices, then the declarant must show the contract indicating 
the negotiated discount or some proof of the new world price. 
 
¶6. (SBU) Deputy Director Dorochencko noted that, while a new 
lower price on goods should not be grounds for rejection of 
the declared value, the FCS reserves the right to question a 
declared value and request further documentation.  The 
declarant can submit documents such as invoices, 
correspondence of negotiation, or payment documents to 
confirm value.  (Note: The importer must pay storage fees for 
products for the period during which the valuation is 
disputed.  Thus, customs officials have an incentive to draw 
out the process, while importers have an incentive to settle 
quickly - even if it means paying a higher valuation than 
they believe necessary. End Note.)  While Smitenko insisted 
that customs officials were doing their jobs correctly, U.S. 
(and European) exports claim that customs officials are 
inconsistently adhering to their own protocol and often 
bypassing steps in the process as outlined in the law. 
 
When Value Is Questioned -- What Can A Company Do? 
--------------------------------------------- ----- 
¶7. (U) According to Smitenko, the declared value can only be 
rejected for reasons listed in the law, and the FCS must 
inform the declarant of the reason and suggest different 
methods for stating the value.  Smitenko then presented two 
alternate scenarios.  The first is for FCS to reject the 
declared value and request the declarant come back with new 
documents.  The second is for customs officials to "advise" 
the declarant, before the clearance procedure begins, that a 
preliminary review has generated doubts as to the declared 
value.  Smitenko stated that if the declarant refuses to 
present acceptable alternative proof of value, FCS will make 
its own determination, often using a different shipment of 
identical goods, price lists, or catalogues of identical 
goods found on the internet as reference.  The declarant can 
also present any or all of these documents voluntarily for 
consideration by FCS. 
 
¶8. (SBU) According to FCS officials, declarants also have the 
option of paying a guarantee.  The goods clear customs and 
can be brought to market, while the declarant engages in the 
procedure of confirming value with FCS.  Smitenko emphasized 
that this pre-clearance procedure does not mean that the 
declarant accepts the value on which the guarantee is based. 
After the value is determined (within 120 days) any 
difference between the guarantee and the tariff duties can be 
refunded or applied to the next shipment.  Emboffs noted that 
importers prefer to litigate rather than use the guarantee 
because the time frame for resolution is more reliable. 
 
SED -- Still Pushing For It 
 
MOSCOW 00003009  003 OF 004 
 
 
--------------------------- 
¶9. (U) Smitenko proposed the use of the Shipper's Export 
Declaration (SED) as an alternative method for 
declaring/proving the value of goods.  Emboffs emphasized 
that this document is completed by the shipper for 
statistical purposes only, and is in no way reviewed, 
verified or confirmed by the USG.  Smitenko claimed to be 
aware of this but stated that he believed the document was 
valuable as it represents a "pledge" to the USG by exporters 
of the true value of their shipment. 
 
But Exporters Are Saying Differently 
------------------------------------ 
¶10. (U) Throughout the conversation, Emboffs used examples 
from American exporters to underscore the lack of consistency 
in the application of the regulations and procedures Smitenko 
outlined.  Specifically, they expressed concern about the 
emphasis on requesting price lists and SEDs.  Emboffs 
stressed that these problems make importing into Russia 
opaque and create new, informal barriers to trade, which hurt 
the Russian economy in the long run. 
 
FCS Declaring A Force Majeure Of Sorts? 
--------------------------------------- 
¶11. (SBU) Dorochencko closed the meeting by noting that the 
issues raised were important to Russia.  He stated that the 
USG should be aware that there are external reasons for 
changes, such as the world financial crisis.  He added that 
Russia understands the USG's desire to know the rules of the 
game, but in the current situation "there are other factors 
affecting the stability of such issues." 
 
A GOR Counter-Point 
------------------- 
¶12. (SBU) Sergey Shilov, Deputy Director for the Department 
of Foreign Economic Relations at the Ministry of Industry and 
Trade, told Econoff on September 10 that customs valuation 
should not be an issue because the FCS just invested in a new 
database which collects information from all shipments into 
Russia and calculates average prices for goods based on 
transaction records.  According to Shilov, all customs 
officers should have access to this system at each entry 
point.  However, ATO stressed that this price reference 
system may not accurately reflect world prices. 
 
And Additional Wrinkle- a New Customs Union 
------------------------------------------- 
¶13. (SBU) On November 27, Russia, Belarus and Kazakhstan 
signed agreements implementing a Customs Union (RBKCU) among 
the three countries as of January 1, 2010.  A review of the 
customs valuation section of the RBKCU's harmonized Customs 
Code does not reveal any differences from Russia's current 
valuation procedures, as laid out above.  This does not 
ensure, however, its even application at all Russian, 
Belorussian and Kazakh ports of entry.  Complicating the 
matter, the RBKCU's harmonized Customs Code does not enter 
into force until July 1, 2010, making the initial six months 
of the Customs Union a time when the valuation procedures of 
all three countries will be enforced simultaneously. (Note: 
We will report further on the RBKCU and its overall trade 
implications septel. End Note.) 
 
Comment 
------- 
¶14. (U) In the August meeting with the FCS, Emboffs did not 
uncover much new information and it was still too early in 
the RBKCU negotiation process for the FCS to be able to speak 
to the effects of the RBKCU on valuation issues.  What did 
become clear during the discussion is that FCS's increased 
questioning of customs valuation is not a move to combat the 
fraud of under-invoicing, but an attempt to gather as much 
revenue as possible, as a response to decreased budget 
revenue due in large part to lower oil prices and reduced tax 
revenue.  It appears that the GOR is putting pressure on the 
tax and customs services to drum up revenue as it experiences 
its first budget deficit in five years.  As a result, Emboffs 
believe that FCS's tactics of requesting additional 
documentation, creating paper jams, and then holding onto 
traders' money may remain systemic problems in the 
medium-term.  We do not expect the entry into force of the 
RBKCU on January 1, 2010 to change this approach.  In fact, 
we expect the issue to become complicated by the competing 
 
MOSCOW 00003009  004 OF 004 
 
 
demands of increasing revenues and implementation of "new" 
procedures at the ports of entry in all the three countries. 
The delayed entry into force of the harmonized customs code, 
will only aggravate the situation and likely create 
significant delays. 
Beyrle