Russian Gas Dual Pricing consistency
with WTO law: a Question that Might
Have Been Answered
Author: Cornelia Furculiță
Mastertrack: International and European Law:International Trade and Investment Law
Supervisor: Dr. J. H. (James) Mathis Date of submission: 12 July 2017
Table of contents
Introduction ... 3
Chapter I: The Concept of Dual Pricing and its Historical Background ... 5
Chapter II: Russia’s Gas Dual Pricing and WTO Accession Negotiations ... 8
2.1 Russia’s WTO Accession Negotiations on Gas Dual Pricing ... 8
2.2 Russian Gas Sector and the Issue of Dual Pricing ... 10
Chapter III: Russian Gas Dual Pricing under the Subsidies Provisions ... 12
3.1 Overview of Subsidies Provisions ... 12
3.2 The First Element of a Subsidy: the “Financial Contribution” ... 13
3.3 The Second Element of a Subsidy: the “Benefit” ... 15
3.4 The Specificity Requirement ... 16
3.5 The Current Status and Possible Developments of Russian Gas Dual Pricing under Subsidies Provisions ... 17
Chapter IV: Russian Gas Dual Pricing under the Anti-Dumping Provisions ... 18
4.1 Russian Gas Dual Pricing under the Anti-Dumping Provisions before EU – Biodiesel ... 18
4.2 EU – Biodiesel: Relevant Conclusions for Russian Gas Dual Pricing ... 20
4.2.1 The Meaning of “Reasonably Reflect” under Art. 2.2.1.1 of the ADA ... 21
4.2.2 The “Cost of Production in the Country of Origin” under Art. 2.2 of the ADA ... 23
4.3 EU – Biodiesel: Expectations and Results ... 25
Chapter V: The Possible Outcomes of the Russian Cases on Anti-Dumping Measures Imposed as a Response to Gas Dual Pricing System ... 26
Conclusion ... 30
Introduction
The present thesis intends to answer the question of WTO consistency of Russian gas dual pricing. During the negotiations for Russia’s WTO accession one of the most discussed subjects was the problem of different prices for gas applied inside Russia and outside it. The problem of dual pricing has a long history in WTO/GATT and it was also analysed by several authors. Still, without case law on this specific issue there was no definite answer provided to this dilemma.
The problem of dual pricing is currently more pressing, since out of five cases that the Russian Federation commenced, three of them are related to dual pricing and anti-dumping measures imposed on the Russian products. Recently, the Appellate Body (hereinafter “AB”) Report in EU-Biodiesel1 was adopted, a Report that can provide answers for Russia’s dual pricing compatibility with anti-dumping rules. Argentina complained against the anti-dumping measures imposed by the EU, based on the same provision that served as a legal basis for the application of anti-dumping duties in the Russian cases. EU – Biodiesel can be considered the first case that provides answers to the question of Russian gas dual pricing WTO consistency with anti-dumping provisions. By using the descriptive method, Chapter I will illustrate what represents the problem of dual pricing and its history inside WTO/GATT. At the end of this chapter, by looking at the existing history and using the prescriptive method, the possible developments of future multilateral negotiations with respect to dual pricing will be anticipated. In the next Chapter, the history of Russia’s WTO accession negotiations related to dual pricing, as well as the gas domestic market and its regulations, will be briefly described. Based on this description, the analytical method will be used for establishing whether Russia’s accession commitments and its regulatory framework can eliminate the problem of disparity between external and internal prices for Russian gas.
The thesis will further provide an answer to the question of Russian gas dual pricing consistency with WTO rules on subsidies and anti-dumping, limiting its scope of analysis to these two invoked trade remedies for Russian gas dual pricing. It will not address other possible relevant provisions, as for example those on State Trade Enterprises, since they were less raised in practice, during negotiations, and in the case law. In Chapter III
1 Appellate Body Report, European Union – Anti-Dumping Measures on Biodiesel from Argentina,
WT/DS473/AB/R, 6 October 2016
Russian gas dual pricing will be analysed in the context of subsidies, where an assessment will be performed in order to establish the presence of the elements of a subsidy. Chapter IV will begin with the description of Russian gas dual pricing status in the context of anti-dumping rules before EU – Biodiesel. It will be followed, in the same chapter, by a description of the EU – Biodiesel case, a normative analysis of the consequences and importance of this decision for Russian gas dual pricing, as well as an assessment of the AB’s conclusions. By using the prescriptive method in Chapter V, the possible future decisions in Russia’s cases against anti-dumping measures imposed by the EU and Ukraine will be determined by applying the reasoning provided in EU -
Biodiesel. The conclusion of the present thesis will constitute an attempt to establish,
Chapter I: The Concept of Dual Pricing and its Historical Background
Energy dual pricing has been defined as the application of a two-tier policy of pricing, where the energy price applied domestically is lower than the one applied in case of exports or compared to the world prices.2 Domestic producers, by using lower price energy, can produce and afterwards export cheaper products. The low price of energy has a great impact especially on industries that are more energy consuming. Dual pricing is not expressly regulated in any WTO Agreement, however there have always been vocalized concerns about it, as it will be further shown.
The discussions about trade in commodities trace their origin in the negotiations for the creation of the ITO.3 The ITO draft Charter established that in case of primary commodities
Members could derogate from the prohibition to grant subsidies if their interests were seriously prejudiced and provided the conditions that had to be respected if such a derogation took place.4 As ITO was never created, the rules on trade in commodities remained only draft provisions.
In 1984, already in the era of GATT, an Ad-hoc Group for the implementation of the Anti-dumping Code was created and it also addressed, inter alia, the specific issue of input dumping. Two Draft Recommendations5 were issued as reports of the Ad-hoc Group discussions to the Committee on Anti-dumping Practices. Input dumping was defined as ‘the situation where materials or components that are used in manufacturing an exported product are purchased internationally or domestically at dumped or below cost prices, whether or not the product itself is exported at dumped prices’.6 Though input dumping does not specifically refer to energy dual pricing, its regulation could have led to the
2 Yulia Selivanova, ‘World Trade Organization Rules and Energy Pricing: Russia's Case’ (2004) 39 (4)
Journal of World Trade 559, p 560; Vitaliy Pogoretskyy, ‘The System of Energy Dual Pricing in Russia and Ukraine: The Consistency of the Energy Dual Pricing System with the WTO Agreement on Anti-dumping’ (2009) 4(10) Global Trade and Customs Journal 313, p 313; Reinhard Quick, ‘Export Taxes and Dual Pricing: How Can Trade Distortive Government Practices be Tackled?’ in Joost Pauwelyn, Global Challenges at the Intersection of Trade, Energy and the Environment (Centre for Trade and Economic Integration, 2010), ch 4 p 194
3 Selivanova (n 2), ‘World Trade Organization Rules and Energy Pricing: Russia's Case’, p 562 4 Final Act and Related Documents, United Nations Conference on Trade and Employment, Interim
Commission for the International Trade Organization, Havana, Cuba, 21 November 1947 – 24 March 1948, Art. 27, 28
5 Draft Recommendation Concerning Treatment of Input Dumping, Committee on Anti-Dumping Practices,
Ad-Hoc Group on the Implementation of the Anti-Dumping Code, ADP/W/83/Rev.1, 2 October 1984; Draft Recommendation Concerning Treatment of the Practice Known as Input Dumping, Committee on Anti-Dumping Practices, Ad-Hoc Group on the Implementation of the Anti-Anti-Dumping Code, ADP/W/83/Rev.2, 19 December 1984
6 Draft Recommendation Concerning Treatment of Input Dumping, para 1; Draft Recommendation
clarification of the dual pricing problem, as energy would have been qualified as an input. Still, these draft recommendations were never adopted, therefore they did not lead to the creation of new mandatory rules.
The issue of dual pricing was further addressed during the Uruguay Round. From a Note by the Secretariat on the Meeting of the Negotiating Group on Natural Resource-Based Products, it can be inferred that several countries expressed their views on this topic, some viewed it as being comparable to subsidies, while others saw this as being just a comparative advantage of countries with natural resources.7 The EC expressed its concerns about dual pricing when this is a practice followed by governments, and not by private parties, which has a distortive effect on trade.8 With no provisions addressing dual pricing after the Uruguay Round, it is clear that countries could not achieve an agreement on this issue.
As the Uruguay negotiations did not lead to a result, dual pricing still remained an issue for the WTO Members. Therefore, discussions on dual pricing reappeared on the agenda for the Doha Round.9 This time the problem was not raised under the discussions on natural resource-based products, but in the context of subsidies. The US in its Communication on Clarifications and Improvement for Subsidies noted the sensitive problem of dual pricing and the need to address it.10 In its submission, the EC stated that it “has long been concerned” with the government practices that make available cheaper inputs for domestic producers, therefore it made a proposal to change the text of Art. 3.1 of the Agreement on Subsidies and Countervailing Measures11 (hereinafter “SCM Agreement”) in order to expressly include input dumping as a situation of a prohibited subsidy.12
The history of negotiations on dual pricing clearly shows the importance of the subject for the Members. Because of the absence from the GATT/WTO of major energy exporting countries, it is possible that in the beginning this was the reason for the non-regulation of
7 Note by the Secretariat, Negotiating Group on Natural Resource-Based Products Meeting of 8 June 1990,
MTN.GNG/NG3/19, 5 July 1990, para 7
8 ibid, para 11 9 Quick (n 2), p 195
10 Communication from the United States, Subsidies Disciplines Requiring Clarification and Improvement,
TN/RL/W/78 19 March 2003, p 3
11 Agreement on Subsidies and Countervailing Measures, 15 April 1994, Marrakesh Agreement Establishing
the World Trade Organization, Annex 1A, The Legal Texts: The Results of the Uruguay Round of Multilateral Trade Negotiations 231 (1999), 1869 U.N.T.S. 14 (1994)
energy related issues,13 including energy dual pricing. However, this problem reappeared during the negotiations even after energy exporting countries became Members, and a common solution could still not be reached. As the US pointed out in its Communication, this is a controversial topic, because it touches upon the sovereignty of states.14 Therefore, Members could not agree on the regulation of energy dual pricing because Members exporting and those importing natural resources had different interests. The principle of sovereignty over natural resources is recognized in Public International Law and it can be inferred from the UN Declaration on Permanent Sovereignty over Natural Resources.15 There is no clear conflict between this principle, as provided in the UN Resolution, and the principle of free trade as established by the WTO law, it is the conflict of the liberalist approach adopted by energy importing countries and statist one adopted by energy exporting ones that causes tensions.16 Thus, the problem of dual pricing, whether seen in the context of negotiations of WTO Agreements or related to sovereignty over natural resources, has the same roots. The same conclusion is reached – the energy dual pricing issue is not solved, because of the opposite positions of resource exporting Members and resource importing Members. Consequently, the origin of this problem and the possible gap in the WTO law is not caused by a mere omission, but it is the result of clashing opinions of the Members.
It is hard to envisage an agreement between Members on how to deal with dual pricing taking place in the near future. The long history of the attempts to solve it and the fact that circumstances did not radically change, make us foresee the maintenance of the current attitudes. What can happen though, and which does not imply an agreement between the Members, is the interpretation of the existing legal framework by the Dispute Settlement Body (hereinafter “DSB”) in a manner that could address the issue of dual pricing by using current legislation. Though, WTO/GATT rules were not initially created to deal with energy issues, it has been agreed, by large now, that general rules are applicable to energy
13 Selivanova (n 2), ‘World Trade Organization Rules and Energy Pricing: Russia's Case’, p 562; Timothy
Meyer, ‘Explaining energy disputes at the World Trade Organization’ (Int Environ Agreements, Springer, 24 March 2017) <http://link.springer.com/article/10.1007/s10784-017-9356-y> accessed 7 April 2017, p 4
14 Communication from the United States (n 10), p 3
15 UN Declaration on Permanent Sovereignty over Natural Resources, UNGA Resolution 1803 (XVII), 14
December 1962, UN Doc. A/5217 (1962) at 15
16 Daniel Behn, Vitaliy Pogoretskyy, ‘Tensions between the Liberalist and Statist Approaches to Energy
Trade Governance: The Case of Gas Dual Pricing’ (2011) Dynamics of Energy Governance in Europe and Russia <https://ssrn.com/abstract=2704298> accessed 7 April 2017, p 46
products.17 However, it has to be noted that in Russia’s case the issue is related to the low domestic prices for gas used as an input, that lead to the production of cheaper final products compared to those originating in third countries. The difference between prices is caused by the fact that domestically prices are regulated by the state to support local industries,18 the difference in price being not caused by an export duty. Therefore provisions related to duties, such as Art. II of the GATT, are not applicable. This thesis will analyze Russian gas dual pricing under the subsidies provision, because they apply to cases of governmental intervention on the market and anti-dumping provisions that are used in case of disparity between prices.
Chapter II: Russia’s Gas Dual Pricing and WTO Accession Negotiations 2.1 Russia’s WTO Accession Negotiations on Gas Dual Pricing
The Russian Federation applied for GATT Membership in June 1993, however it became a Member only after 19 years, in August 2012.19 As negotiations lasted for 18
years, there were several problematic issues, one of them being the gas dual pricing system. Members were expressing their concerns that the regulated prices in the energy sector are trade distortive and could represent subsidization in favor of domestic producers. This, according to them would have led to the inability of foreign products to compete with the local ones that used cheaper inputs.20 Russia’s position was quite frank: it can make certain concessions, however the price to be paid for accession was limited. It confirmed that the energy sector was going to be reformed, as it was also in the interest of the country, but dual pricing was not regarded by the Russian Federation as being in conflict with the WTO rules.21 Therefore, the Russian Federation and other Members had different views on the dual pricing system. An agreement was hard to reach, this being one of the reasons of the lengthy negotiations. Russia’s strong position and unwillingness to cede is understandable. An increase of domestic prices to the level of European ones, or a decrease of the export
17 Yulia Selivanova, ‘The WTO and Energy: WTO Rules and Agreements of Relevance to the Energy Sector’
(2007) 1 International Centre for Trade and Sustainable Development (ICTSD) p 4; Gabrielle Marceau, ‘The WTO in the Emerging Energy Governance Debate’ (2012) vol 106 ASIL Proceedings 385, p 386
18 Pogoretsky (n 2), p 314
19 WTO, Accessions < https://www.wto.org/english/thewto_e/acc_e/a1_russie_e.htm> accessed 20 April 2017 20 Draft Report of the Working Party on the Accession of the Russian Federation to the World Trade
Organization, Working Party on the Accession of the Russian Federation, WT/ACC/SPEC/RUS/25, 28 March 2002, para 49
21 Accession of the Russian Federation: Communication from the Government of the Russian Federation,
prices to the level of domestic ones, would lead to the loss of billions,22 consequently it would have a great negative impact on the Russian economy.
One of the most active proponents of the idea that gas dual pricing system should be prohibited under WTO law was the European Union. Russia represents the fourth trading partner of the EU, while the EU is the first trading partner of Russia, with the largest part of the exports constituting oil and gas.23 Therefore, the position on gas dual pricing system was one of the most important to be maintained by Russia. At the end of the negotiations the EU dropped the idea of harmonization of gas prices on the world market.24 The signed deal between the EU and the Russian Federation addressed the issue of domestic gas prices, providing that domestic prices will be raised and will cover costs, profits and investments.25 Thus, Russia agreed to raise its domestic prices, however it did not commit to eliminate the difference between the domestic and export ones. In conclusion, even if the EU during WTO negotiations rounds and also during the Russian accession negotiations constantly showed discontent with dual pricing, in the end it gave up. The EU chose to see the Russian Federation inside the WTO on the terms of accession that would satisfy Russia, rather than not having it all as a WTO Member. However, with the Russian Federation inside the WTO, the dispute settlement mechanism became available for both parties, leaving space for future debates inside the WTO framework. Therefore, the agreement between the two Members with the European apparent concession did not put an end to the discussions on gas dual pricing. Debates outside the WTO entered the WTO world and are now subject to its mechanism of dispute settlement.
Russia’s Accession to the WTO with respect to gas dual pricing system can be said to be a Russian victory. The Russian Federation did not make any commitment on the elimination of the regulated prices. Still, it made several commitments that were requested by the WTO Members. Thus, it confirmed that it will still regulate the prices, but domestic prices will be formed in the course of normal commercial considerations. Therefore, the
22 Tarr and Thomson estimated the loss from the reduction of European prices to the domestic ones being
around 5 and 7.5 billion dollars based on the prices used in 2000 and 2001 (David G Tarr, Peter D Thomson, The Merits of Dual Pricing of Russian Natural Gas (Blackwell Publishing Ltd, 2004), p 11)
23 European Commission, Countries and Regions: Russia (European Commission, Brussels, 18 May 2017)
<http://ec.europa.eu/trade/policy/countries-and-regions/countries/russia/> accessed 12 June 2017
24 Sergey Sutyrin, Nikita Lomagin, Членство в ВТО – новый этап участья России в международной торговой системе (WTO Membership - a New Stage in Russia’s Participation in the International Trade System) (Sankt-Petersburg State University, 2013), p 205
25 European Commission, ‘Russia-WTO: EU - Russia deal brings Russia a step closer to WTO membership’,
prices will cover the costs and will also entail the making of profit. Russian Government also committed to increase prices until 2030 according to its adopted Energy Strategy.26
In conclusion after long negotiations on gas dual pricing and the discontent of many Members, the Russian Federation managed to accede to the WTO with a relative weak commitment. Indeed, Russia is bound by the commitments to increase gas prices and also to form them on the basis of normal market conditions. However, even if the domestic prices will be formed based on market principles and will be increased, they can still be lower than those used for exports.27 Consequently, domestic producers can still benefit from cheaper gas as an input and other Members will still find themselves in the situation of paying higher prices for gas. Thus, Russian accession commitments cannot be considered as eliminating the issue of gas dual pricing.
2.2 Russian Gas Sector and the Issue of Dual Pricing
The Problem of gas dual pricing in Russia is caused by the prices practiced by Gazprom Joint Stock Company. This Company is the successor of the State Gas Concern as a result of its privatization, inheriting also all its rights to exploit natural resources.28 However, even if the Company was privatized, the Government still retained the majority of its shares, the site of Gazprom itself mentioning that the State controls over 50% of the shares.29 In conclusion, Gazprom – a privatized company, cannot be considered to act on its own, as the Government controls enough shares in order to determine the policy practiced by the Company.
Prices used by Gazprom and its affiliated companies are currently regulated by the Russian government. Even if the gas market is divided into a regulated and deregulated sector, the regulated market is dominant.30 According to the Regulation No. 333 dating 28 May 200731 the principle of price formation based on the market conditions should have
26 Report of the Working Party on the Accession of the Russian Federation to the World Trade Organization,
Working Party on the Accession of the Russian Federation, WT/ACC/RUS/70 WT/MIN(11)/2, 17 November 2011, para 126-133
27 Vitaliy Pogoretsky, Sergii Melnyk, ‘Russian Energy and the WTO: Overview of the Accession
Negotiations of the Russian Federation and Final Commitments’ S. Melnyk, K. Hober et al (eds) (2016) The Uppsala Yearbook of Eurasian Studies, forthcoming <https://ssrn.com/abstract=2838134> accessed 25 April 2017, p 18
28 Gazprom Joint Stock Company <http://www.gazpromquestions.ru/en/about/#c491> accessed 11 April 2017 29 ibid
30 Gazprom in Russian Market <http://www.gazpromquestions.ru/en/russian-market/> accessed 11 April 2017 31 Постановление Правительства Российской Федерации от 28 мая 2007 г. N 333 г. Москва, О
совершенствовании государственного регулирования цен на газ (Russian Government’s Decree from 28 of May 2007 N. 333 on the Improvement of the State Regulation of Gas Prices)
been introduced as of 2011. However, in 2010 a new Resolution was adopted that introduced a transitional period, initially lasting until 2014 and, subsequently, amended to last until 2018.32 This Resolution establishes the formula for gradually achieving equal
returns on gas in domestic and international markets. According to the Resolution, at the end of the transitional period, based on the acquired practice, relevant bodies will make a proposal to change the regulation of gas prices to the regulation of the tariffs for gas transportation.
The prices in Russian Rubles per 1,000 m3 of gas grew from 2,631.7 in 2011 to 3,641.3 in 2015 in the domestic market, and from 11,259.9 in 2011 to 15,057.3 in 2015 in case of the European market.33 While domestic prices grew, they also did in the case of exported gas, being hard to see how domestic prices got any closer to the European ones. Gazprom seems to promote the increase in domestic prices,34 as it increases its income, however at this moment the amount of increase wholly depends on the will of the Russian Government that regulates the prices.
In conclusion, currently the Russian gas market continues to be regulated by the Government. However the existing legal framework is according to the commitments undertaken by the Russian Federation in the course of its accession to the WTO, as it indeed increased its domestic prices and adopted legislation that will ensure the formation of gas prices based on the market conditions. Still, the legal framework does not state that the domestic and export prices will be equal, however it does enshrine that the prices should bring equal returns and should be based on the market conditions. These provisions certainly ensure that the domestic prices will grow, but it does not in anyway ensure equal prices. By introducing the formula, the Government is still the one regulating the prices at its own latitude. Claiming that the formula has the aim to achieve the same returns, does not prove that it is so indeed. Meanwhile, the transitional period is still in place, and it could be again prolonged. But even if the transitional period would soon end and even if the regulation of gas prices will be changed on a regulation of tariffs for transportation, this
32 Постановление от 31 Декабря 2010 г. N 1205 О Совершенствовании Государственного
Регулирования Цен на Газ (В редакции постановлений Правительства Российской Федерации от 22.01.2013 г. N 24; от 15.04.2014 г. N 342; от 04.09.2015 г. N 941) (Resolution from 31 of December N 1205 on the Improvement of State Regulation of Gas Prices (as amended by the Russian Federation’s Decrees from 22.10.2013 N 24; 15.04.2014 N 342; 04.09.2015 N 941)) <http://pravo.gov.ru/proxy/ips/?docbody =&prevDoc=102069046&backlink=1&&nd=102145341> accessed 12 June 2017
33 Gazprom Marketing: Europe, <http://www.gazprom.com/about/marketing/europe/> accessed 11 April 2017 34 Sergey Dembitsky, Valeriy Semenovich, Alexandr Zheltenkov, ‘The Analysis of Economic Effects of
could still pose a problem, as imposed tariffs will be also able to cause disparity between prices. How the prices are going to be formed after this period remains a question of time for now. If Russia is going to implement the provisions of the existing legislation in good faith, and if domestic prices will steadily increase, in order to reduce the great gap between the prices at a minimum level, this could alleviate the concerns of other Members. This could ultimately lead to the termination of discussions on the relevant WTO Rules in respect to Russian gas dual pricing, without a need to further address whether or not it is consistent with existing WTO rules.
Chapter III: Russian Gas Dual Pricing under the Subsidies Provisions 3.1 Overview of Subsidies Provisions
Members were discussing the dual pricing issue during negotiations in the context of subsidies and its consistency with subsidies provisions was also analyzed in the legal literature.35 The World Trade Report 2010 on Trade in Natural Resources also suggests the
possibility to find a violation of Art. XVI of the GATT36 on subsidies and of the SCM Agreement, because a member that practices a dual pricing system can be considered to subsidize domestic producers by providing cheaper input materials.37 The present section will conclude whether it is still relevant to argue that Russian gas dual pricing system can be curtailed by using the present legal framework on subsidies.
Following the wording of Art. VI:3 of the GATT and Art. 10 and 32.1 of the SCM Agreement, in order to offset subsidies, Members may unilaterally apply measures that are called countervailing duties. For dual pricing, the case of offsetting “subsidies bestowed [...] indirectly upon manufacture” could be relevant, which is provided by footnote 36 of the SCM Agreements that defines countervailing duties. As interpreted by the AB in US –
Softwood Lumber IV this case refers to the subsidization of the inputs used in
manufacturing the processed products on which countervailing duties are to be imposed.38
35 Sergey Ripinsky, ‘The system of gas dual pricing in Russia: compatibility with WTO rules’ (2004) 3(3)
World Trade Review 463; Selivanova (n 2), ‘World Trade Organization Rules and Energy Pricing: Russia's Case’; Behn & Pogoretskyy (n 16); Sherzod Shadikhodjaev, ‘Russia and Energy Issues under the WTO System’ (2016) 50 (4) Journal of World Trade 705
36 General Agreement on Tariffs and Trade 1994, 15 of April 1994, Marrakesh Agreement Establishing the
World Trade Organization, Annex 1A, 1867 U.N.T.S. 187 (1994)
37 WTO, World Trade Report 2010 Trade in Natural Resources (2010) <https://www.wto.org/english/res_e/
booksp_e/anrep_e/world_trade_report10_e.pdf> accessed 8 April 2017, p 173-174
38 Appellate Body Report, United States – Final Countervailing Duty Determination with Respect to Certain Softwood Lumber from Canada, WT/DS257/AB/R, 19 January 2004, [140]
As a countervailing measure is taken against a subsidy, it should be first analyzed what is a subsidy and whether there is a subsidy in case of Russian gas dual pricing.
The definition of subsidy is governed by Art. 1.1 of the SCM Agreement. According to the case law there are two separate elements that determine the existence of a subsidy, a “financial contribution, or income or price support” by a Government or any public body and a “benefit”.39
3.2 The First Element of a Subsidy: the “Financial Contribution”
The first element ensures that not every government’s measure will be qualified as a subsidy, but only those constituting financial contributions. Thus whether or not there is a financial contribution is determined by the exhaustive list contained in Art. 1.1 (a) (1).40 Item (i) and (ii) of Art. 1.1(a)(1) of the SCM Agreement refer to the situation when there is a transfer of funds by the government and when a government revenue is forgone or not collected. These situations are clearly irrelevant for Russia’s case where the government, through Gazprom, allegedly, provides cheap input and neither transfers funds, nor forgoes the collection of revenue. For Russia’s dual pricing system are relevant item (iii) that establishes the case of a government that “provides goods or services other than general infrastructure, or purchases goods” and item (iv) providing the situation when the government “entrusts or directs” a private body to carry functions normally carried by the government.41 According to Art. 1.1 (a) (1) the term “government” in the SCM Agreement may refer to the government itself or to any public body. As Gazprom clearly cannot be qualified as a government, the question is whether it is a public body or not. Ripinsky reached the conclusion that the status of a public body depends on whether the control test is applicable or not.42 However, after his study the term “public body” was defined by the DSB in its case law.
According to the Panel in Korea – Commercial Vessels the control test is indeed the decisive criteria,43 therefore there is a public body when the government controls an entity.
Thus, by following these conclusions Gazprom, being controlled by the Russian
39 Appellate Body Report, Brazil – Export Financing Programme for Aircraft, WT/DS46/AB/R, 2 August
1999, [157]; Panel Report, United States - Measures Treating Exports Restraints as Subsidies (US – Export Restraints), WT/DS194/R, 29 June 2001, [8.20]; ABR, US –Softwood Lumber IV, [51]
40 PR, US – Export Restraints, [8.73] 41 Ripinsky (n 35), p 469-470 42 ibid
43 Panel Report, Korea – Measures Affecting Trade in Commercial Vessels, WT/DS273/R, 7 March 2005,
government, would qualify as a public body. However, later the AB in US – Antidumping
and Countervailing duties (China) established that in order to qualify as a public body
under Art. 1.1 of the SCM, the entity should also be vested with public authority, or ability to direct and command.44 By following this test, even if the Russian government controls Gazprom, it is hard to see how it can be seen as vested with authority. It does not possess any power and ability to exercise authority over other entities. Gazprom is only a company that produces, transports and provides energy.45 Therefore, taking into consideration the thorough analysis exercised by the AB in US – Antidumping and Countervailing duties
(China), Gazprom should not be considered a public body. Whether Art. 1.1 (a) (1) (iii)
will be considered applicable for Russia’s gas dual pricing system will depend on the approach the AB will follow, the control test or the more restrictive interpretation.
In case of Art. 1.1 (a) (1) (iv), while arguendo considering Gazprom a private body, it does not meet the required criteria of “entrustment and direction” by the government with one or more functions listed in paragraphs (i) to (iii) of Art. 1.1 (a) (1) of the SCM Agreement. There is no transfer of funds by Gazprom, it does not imply the non-collection of revenue, and it does not have the function to provide goods or services. Gazprom indeed provides gas, however the Russian government does not regulate the provision of gas itself, but only the prices. Ripinsky tried to argue that this could be a de facto direction.46 The Panel in US – Export Restraints concluded that to “entrust” and “direct” requires an “explicit and affirmative action of delegation or command”,47 in a similar manner the AB in
US – Antidumping and Countervailing duties (China) established that “to direct” implies
authoritative instructions, commands, orders.48 These conclusions would support only the
interpretation in favor of a de jure control, however the AB in US – Countervailing Duty Investigation on DRAMs established that there are means that can have more subtle forms
than simple commands, and may involve different degrees of compulsion.49 Thus, if the de jure approach is adopted then Russian gas dual pricing system will not qualify under
paragraph (iv), if a de facto approach is endorsed it could be found that Russian Government through its control of the shares directs Gazprom to provide gas to consumers.
44 Appellate Body Report, United States – Definitive Anti-dumping and Countervailing Duties on Certain Products from China, WT/DS379/AB/R, 11 March 2011, [292-297], [317-318]
45 Gazprom Joint Stock Company (n 28) 46 Ripinsky (n 35), p 471
47 PR, US – Export Restraints, [8.44]
48 ABR, US – Antidumping and Countervailing duties (China), [294]
49 Appellate Body Report, United States – Countervailing Duty Investigation on Dynamic Random Access Memory Semiconductors (DRAMs) from Korea, WT/DS296/AB/R, 27 June 2005, [111]
Therefore, whether or not there is a financial contribution in the case of Russian gas dual pricing it is not clear and it would be a matter of interpretation for the DSB.
3.3 The Second Element of a Subsidy: the “Benefit”
The second element prescribed by Art. 1.1 of the SCM Agreement is the presence of a conferred “benefit”. The DSB confirmed on numerous occasions that a benefit is a contribution that places the recipient in a more advantageous position than the recipient would have received in market conditions.50 Art. 14 of the SCM Agreement provides the methods used to calculate the benefit. Paragraph a) establishes how to calculate the benefit in case of equity capital, paragraph b) in case of a loan by the government, and paragraph c) when there is a loan guarantee by the government. These paragraphs are not applicable to the Russian case where the issue is the provision of cheap gas. Relevant for Russian dual pricing system is paragraph d), establishing that the determination that a provision is made at a less than adequate remuneration is to be done “in relation to prevailing market conditions”. This wording may seem to suggest that the price of gas would be compared only to the domestic prices, which would not, most probably, lead to the conclusion that the remuneration paid by domestic producers to Gazprom is much lower than other market prices, since all prices are distorted by the government’s intervention. This particular situation was addressed by the AB in US – Softwood Lumber IV and it allowed the use of other benchmarks than in-country prices, in very limited instances, when there is market distortion.51 This possibility was later reaffirmed by the AB in US – Antidumping and
Countervailing duties (China).52
Thus, in the context of subsidies there is no doubt that prices practiced in third countries’ markets can be used in order to establish that a recipient was granted a benefit. However, it has to be pointed that the AB in US – Softwood Lumber IV made sure that its conclusion will not be later interpreted too broadly and will not give raise to multiple cases of application of countervailing measures only because prices vary in different markets. It established that whenever prices from other markets are used, they have to be adapted to the market conditions of the country of provision, moreover the comparative advantage of a country is one of the criteria that is to be taken into account when adjusting the
50 Appellate Body Report, Canada – Measures Affecting the Export of Civilian Aircraft (Canada – Aircraft),
WT/DS70/AB/R, 2 August 1999, [157-158]; PR, Korea – Commercial Vessels, [7.427]; Appellate Body Report, Japan – Countervailing Duties on Dynamic Random Access Memories from Korea,
WT/DS336/AB/R, 28 November 2007, [225]
51 ABR, US – Softwood Lumber IV, [90]
remuneration to the market conditions of the country of provision.53 In conclusion, in Russia’s case, by using an out-of-country benchmark for comparison it would be possible to find the existence of a benefit, however this amount will have to be considerably lowered by adjustments to the Russian market, that will also have to take into account Russia’s comparative advantage – the presence of natural resources.
3.4 The Specificity Requirement
Presuming that in case of Russian gas dual pricing there is a subsidy according to the requirements of Art. 1.1 of the SCM Agreement, Art. 1.2 still establishes that it will be subject to the provisions of the Agreement only if it also meets the conditions of Art. 2 which provides the specificity requirement. For a subsidy to be specific it can be either expressly prohibited as provided in Part II, or enshrined as an actionable subsidy in Part III of the SCM Agreement. Prohibited subsidies are assumed to be specific, as prescribed by Art. 2.3 of the SCM Agreement, while in case of actionable subsidies a specificity analysis is required.
There are two types of prohibited subsidies according to Art. 3.1 of the SCM Agreement, the ones that are “contingent” upon exportation and the ones “contingent” upon the use of domestic goods over the imported ones. To be “contingent” was interpreted as meaning “conditional” or “dependent for its existence on something else”.54 In Russia’s case the cheap gas is available domestically to every consumer, it is not conditional upon exportation or use of domestic goods over the imported ones. Therefore, it is widely agreed that neither type of prohibited subsidies is applicable to Russian case.55 Thus, Russian gas dual pricing cannot benefit from the specificity assumption.
For establishing whether Russian dual pricing can be an actionable subsidy, however, and thus, comply with the specificity requirement, Art. 2 prescribes three principles that are to be applied in order to determine whether a subsidy is specific to “an enterprise or industry or group of enterprises or industries”. According to the AB in US – Antidumping
and Countervailing duties (China) each principle shall be given appropriate weight.56 The principle set in Art. 2 (a) is irrelevant for the Russian case, since it is applicable to situations when the government “explicitly limits” the access to a subsidy to certain enterprises. To “explicitly limit” has been interpreted as “a limitation that expressly and
53 ABR, US – Softwood Lumber IV, [109] 54 ABR, Canada – Aircraft, [166]
55 Ripinsky (n 35), p 476-477; Selivanova (n 2), p 573; Behn & Pogoretsky (n 16), p 56 56 ABR, US – Antidumping and Countervailing duties (China), [366]
unambiguously restricts the availability of a subsidy” for certain enterprises.57 In Russia’s case there is neither limitation of access to the gas as provided by Art. 2(a), nor are there established eligibility conditions for receiving a subsidy as required by the second principle envisaged in Art. 2(b). Therefore, the last principle prescribed by Art. 2(c), that relates to
de facto58 specificity is to be analyzed.
When a subsidy seems non-specific after applying paragraphs (a) and (b), there are other factors to be considered in the specificity analysis that are provided by Art. 2(c) of the SCM Agreement. The first and the second factor refer to the “use by a limited number” and “predominant use” by certain enterprises and are to be considered only in the context of an existent subsidy programme.59 Since there is no subsidy programme for Russian gas, these factors are not applicable. The third factor, which is the “disproportionally large granting of amounts of subsidy to certain enterprises”, is also not applicable to Russian gas dual pricing, because if arguendo considering that dual pricing is a subsidy, it is offered in the entire country and used by all consumers, therefore it is of a general and not of specific use.60 Hence, the Russian gas dual pricing does not meet the requirement of specificity and it cannot be subject to the provisions of the SCM Agreement.
3.5 The Current Status and Possible Developments of Russian Gas Dual Pricing under Subsidies Provisions
As discussions related to the consistency with existing provisions on subsidies seem settled, because of the described lack of specificity, one may wonder about the need to still analyze other elements of a subsidy in the context of Russian gas dual pricing. With proposals similar to that of the EU during Doha Round negotiations to include dual pricing as a situation of prohibited subsidies, that would remediate the lack of specificity, it can be expected that subsidies may remain in play in the context of dual pricing. This Chapter, however, had the aim to conclude that even if dual pricing would be prohibited and therefore assumed specific, Russian gas dual pricing would still raise other questions related to the presence of a financial contribution and also to the amount of benefit. Therefore, a modification like the one proposed by the EU would not render immediately the Russian gas dual pricing inconsistent with WTO rules, since there are still many other
57 Appellate Body Report, European Communities and Certain Member States – Measures Affecting Trade in Large Civil Aircraft, WT/DS316/AB/R, 18 May 2011, [949]
58 ABR, US – Softwood Lumber IV, [7.123]
59 Panel Report, European Communities and Certain Member States – Measures Affecting Trade in Large Civil Aircraft, WT/DS316/R, 30 June 2010, [7.965]
questions to answer. In conclusion, Russian gas dual pricing system is currently consistent with the WTO rules on subsidies, however, in the light of the existing negotiations, the question of compliance with other requirements than the specificity one, remains relevant.
Chapter IV: Russian Gas Dual Pricing under the Anti-Dumping Provisions 4.1 Russian Gas Dual Pricing under the Anti-Dumping Provisions before EU –
Biodiesel
As it was concluded that the existing legal framework on subsidies could not curtail Russian gas dual pricing, the applicability of anti-dumping measures is to be considered. According to Art. VI of the GATT and Art. 2.1 of the Anti-dumping Agreement (hereinafter “ADA”)61 dumped products are considered those that are “introduced into commerce of another country at less than its normal value”.
In order to compare with the normal value, there are several benchmarks established by the ADA. In the ordinary course of trade, according to Art. 2.1 of the ADA, the appropriate benchmark for comparison is the price of the products in the exporting country. In case of Russian gas, this situation clearly does not help Members that want to make use of anti-dumping measures to fight dual pricing. Anti-anti-dumping measures are imposed on products that use gas as an input, and not to the gas itself that is sold domestically and externally at different prices. Therefore, the prices of the final exported products that used cheap Russian gas as input will not differ from those of other products from Russian market that benefited from the same low domestic prices. According to the AB in US – Hot Rolled Steel Members enjoy a certain degree of discretion when deciding whether products are in “the ordinary course of trade”.62 Therefore, the Russian case could be regarded as a situation of absence of like domestic products in the ordinary course of trade, or a situation when, because of “the particular market situation” these sales do not permit a proper comparison, as described by Art. 2.2 of the ADA. However, because the determination of “the ordinary course of trade” implies discretion and the meaning of the “particular market situation” has not been interpreted yet, it is also a debatable issue.
In case of the application of Art. 2.2 of the ADA the benchmark for comparison is the price of like products exported to third countries or the cost of production in the country of
61 Agreement on Implementation of Article VI of the General Agreement on Tariff and Trade 1994, 15 of
April 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, 1868 U.N.T.S. 201 (1994)
62 Appellate Body Report, United States – Anti-Dumping Measures on Certain Hot-Rolled Steel Products from Japan, WT/DS184/AB/R, 24 July 2001, [148]
origin. Comparing with the prices of other like products exported to third countries that use the same domestic gas sold at lower prices as input, does not provide a solution for the WTO Members who want to use anti-dumping measures for products that largely benefit from gas dual pricing. The only benchmark that can be effectively used in the Russian case is the one based on the “cost of production”, that would allow to construct a cost that is different from actual prices used for domestic products internally or for exportation.
The method of calculating the cost of production is provided by Art. 2.2.1.1 of the ADA that establishes as the basis for calculation the records kept by the exporters. These records have to fulfill two conditions: to be in compliance with the “generally accepted accounting principles of the exporting country” (hereinafter “GAAP”) and to “reasonably reflect” the costs of production and sale of the product. In order to be effective for dual pricing, the cost of production calculation needs to use out-of country prices. Using gas domestic prices for constructing the cost of production would lead to a calculated amount similar to the prices with which the products are already sold. The problem is that Art. 2.2 of the ADA uses the expression “cost of production in the country of origin”, therefore even when the cost is calculated it seems to be necessary to calculate it in the country of origin.
Before EU – Biodiesel, Art. 2.2.1.1 of the ADA was insufficiently addressed by the existing case law in order to establish whether or not third country prices can be used for the cost of production calculation. Since the conclusions of the AB in US Softwood Lumber
IV allowed their use in a similar situation in case of subsidies,63 numerous discussions sparked. For energy importing Members, an interpretation similar to the one used by the AB in US – Softwood Lumber IV that allowed the use of out-of-country benchmarks was the preferred one. Art. 2(5) of the Basic Regulation on Anti-Dumping of the EU,64 for
example, after replicating in the first paragraph the wording of Art. 2.2.1.1 of the ADA on the calculation of the cost continues with the second paragraph that does not have a corresponding wording in the ADA. The second paragraph establishes that in case of the unreasonableness of the reflection of costs in the records, they are to be adjusted or established by using in-country or out-of-country costs of other producers.
63 ABR, US – Softwood Lumber IV, [90]
64 Council Regulation (EC) No. 1225/2009 of 30 November 2009 on protection against dumped imports from
countries not members of the European Community (codified version), Official Journal of the European Union, L Series, No. 343, 22 December 2009, p 51-73, and corrigendum thereto, L Series, No. 7, 12 January 2010, p 22-23 (hereinafter “Basic Regulation”)
The consistency of the use of out-of-country benchmarks by Members with the rules of the ADA was also addressed in the legal doctrine. In his study, Pogoretsky concluded that Art. 2.2.1.1 of the ADA is to be interpreted in the light of Art. 2.2 that does not make a reference to out-of-country prices for the calculation of the cost of production and requires the cost of production to be the one in the country of origin. Moreover, he argued that the ADA does not envisage a mechanism for addressing input dumping, and the absence of a final agreement between Members that could not be concluded during negotiations in case of input dumping shows that it is not within the scope of the Agreement and it was not the intention of the Members when ADA was drafted.65 Shadikodjaev also concluded that the use of third country prices is inconsistent with the ADA rules, because Art. 2.2 of the ADA refers to the country of origin, and because reading the expression “reasonable reflect the costs” in Art. 2.2.1.1 as referring to the reasonableness of the cost itself and not the way of recording is too broad.66
Thus, energy importing Member States and legal writings reached different conclusions on the consistency of gas dual pricing with the anti-dumping provisions. Recently, the Appellate Body in EU – Biodiesel addressed the interpretation of several relevant provisions for gas dual pricing. Hence, the next section will describe and analyze the conclusions of the Report and its importance for the issue of Russian gas dual pricing.
4.2 EU – Biodiesel: Relevant Conclusions for Russian Gas Dual Pricing
The analysis of the EU – Biodiesel case is relevant for Russian gas dual pricing because it tackles input dumping and the issue of calculating the cost of production under Art. 2.2 and 2.2.1.1 of the ADA, the main problems raised by the doctrine in the Russian case. In
EU – Biodiesel the EU authorities found that biodiesel was not sold domestically in the
ordinary course of trade, as the market was affected by the intervention of the state through its differential system of taxes. Thus, the taxes imposed on exports of soybeans and soybean oil, which are raw materials, were higher than the taxes imposed on the final product: the biodiesel.67 Even if this situation does not exactly resemble the Russian case, we are also in the presence of an input that can cause the final price of the product to be lower than that in the third countries, because of the state intervention on the market.
65 Pogoretsky (n 2), p 319-321 66 Shadikhodjaev (n 35), p 720 67 ABR, EU – Biodiesel, [5.4-5.5]
In Argentina’s case the EU authorities decided that the method of cost construction shall be used. However, because of the lower prices for domestic raw materials compared to the international ones, the EU concluded that the prices were not “reasonably reflected” in the records, so it applied the second paragraph of Art. 2(5) from the Basic Regulation and used the so-called “surrogate price” considered to reflect the international prices.68 The AB had to review the WTO consistency of Art. 2(5) of the Basic Regulation both “as applied” and “as such”. This ruling has been mainly viewed for its importance in case of China and the expiration of its NME status.69 However, its importance for Russian gas dual pricing in the context of anti-dumping should not be overlooked, since it may provide solutions to the unanswered questions. As this thesis is not intended to be a case note on EU – Biodiesel, only the conclusions that help with the issue of consistency of Russian gas dual pricing system with anti-dumping provisions will be further analyzed.
4.2.1 The Meaning of “Reasonably Reflect” under Art. 2.2.1.1 of the ADA
For Russia’s gas dual pricing, one of the most important aspects of the AB’s Report in
EU – Biodiesel was the analysis of the second condition under Art. 2.2.1.1 of the ADA, that
allows the use of records of the exporter as a basis for cost of production calculation if they “reasonably reflect” the costs. The EU considered that a general “reasonableness” should refer to the costs themselves. If the costs are not “reasonable”, it applies the second paragraph of Art. 2(5) of the Basic Regulation and uses another basis for the cost construction which is in- or out- of country.70 The AB did not find support for such a reading. It interpreted the expression “reasonably reflect” in the light of its meaning, context, object, and purpose of the Agreement and concluded that there shall be a connection between “the costs” and “the production or sale of the product” as used in Art. 2.2.1.1 of the ADA. Hence, the costs are those that were incurred by the exporter or producer in the country of origin, associated with the production and sale of the product.71
Moreover, it concluded that the requirement of compliance with GAAP of the records does not overlap with the necessity of the records to be “reasonably reflected”, as there are costs
68 ibid [5.7-5.8]
69 Duane W. Layton & others, ‘WTO Appellate Body Upholds Panel Ruling Rejecting Certain Cost
Adjustment Methodologies by the EU in Anti-dumping Investigations’ (Mayer&Brown, 11 October 2016) <http://www.lexology.com/library/detail.aspx?g=e382863a-aec6-4bb4-aece-0e49d85f559a> accessed 13 June 2017; Brendan McGivern, ‘WTO Appellate Body Report: EU – Biodiesel (Argentina)’ (White & Case, 24 October 2016) < https://www.whitecase.com/publications/alert/wto-appellate-body-report-eu-biodiesel-argentina> accessed 24 April 2017
70 ABR, EU – Biodiesel, [6.11] 71 ibid, [6.17-6.20; 6.23-6.26]
that may have an effect even after the incurrence period, and they have to be allocated and adjusted as described by the second and third sentences of Art. 2.2.1.1 and footnote 6 of the ADA.72
The AB conducted a thorough analysis of the text and its context, and reached a well-founded conclusion. However one may wonder if this reading is not too narrow. While critics of such an interpretation warned about the rendering of the “reasonableness” requirement as meaningless, it was still found to be supported by the conclusions on the lack of coverage of input dumping in the ADA by the Ad-hoc Group on the Implementation of the Anti-dumping Code.73 It has also been argued that this reasoning is narrower than that offered by the Panel in US – Softwood Lumber V.74 The Panel’s conclusions in that case do not in any way contradict the AB’s conclusions in EU – Biodiesel, since it did not analyze the reasonableness of the prices in the market and their substitution with out-of-country prices. It merely stated that Members have discretion when choosing a method in determining whether the “records reasonably reflect the costs” and did not make any suggestion on the possibility to assess the reasonableness of the prices on the market.75 Moreover, it clearly stated that there is no basis for affirming that Art. 2.1.1.1 of the ADA requires that the market value be reflected in the records, confirming that the use of actual costs of the inputs was consistent with Art. 2.2.1.1.76 Consequently, it should not be considered that the AB departed from the existing case law, or interpreted it more narrowly or broader, as the cited conclusions of the previous cases relate to the reasonableness of the records, and not to the reasonableness of prices in a distorted market. It also does not contradict the reasoning of the Panel in China – Broiler Products that the condition of complying with GAAP and “reasonably reflect” have to be different,77 since the AB in EU
– Biodiesel explained how the two condition may not overlap,78 hence also confirmed the distinction between the two.
72 ibid, [6.21-6.22]
73 Christian Tietje, Bernhard Kluttig, Martina Franke, ‘Cost of Production Adjustments in Anti-dumping
Proceedings: Challenging Raw Material Inputs Dual Pricing Systems in EU Anti-dumping Law and Practice’ (2011) 5 Journal of World Trade 45, 1071, p 1091, 1093; Jochem de Kok, ‘The Future of EU Trade Defence Investigations against Imports from China’ (2016) 19 Journal of International Economic Law 515, p 536-537
74 de Kok (n 73), p 537
75 Panel Report, United States – Final Dumping Determination on Softwood Lumber from Canada,
WT/DS264/R, 13 April 2004, [7.242; 7.318]
76 ibid, [7.321]
77 Panel Report, China - Anti-Dumping and Countervailing Duty Measures on Broiler Products from the United States, WT/DS427/R, 2 August 2013, [7.166]
The conclusion of the AB with respect to the reasonableness of the reflection of costs can be regarded as decisive for the application of anti-dumping provisions to Russian gas dual pricing, and dual pricing in general. If producers and exporters reflect in their records the costs that are actually related to the production and selling, the importing Members will have to accept those records as the appropriate basis in the cost of production construction, without being able to judge on the reasonableness of those prices. Therefore, addressing state interventions on the market will be no longer effective under anti-dumping rules. This conclusion reflects the aim of anti-dumping measures themselves that address unfair practices of producers and exporters, and not that of the states. Otherwise, it would mean to punish private actors for the acts of the state that are supposed to be addressed by subsidies provisions and not by the anti-dumping ones. Thus, the AB’s reasoning contributes to the differentiation between subsidies and anti-dumping measures that have different rationales.
4.2.2 The “Cost of Production in the Country of Origin” under Art. 2.2 of the ADA
The EU alleged that “the cost of production in the country of origin” under Art. 2.2 of the ADA can be considered the cost of the raw materials that the producers would have paid absent the market distortion.79 The AB made a distinction between the meaning of the word “cost” and that of “information” or “evidence”. It concluded that there is no limitation with respect to the types of information that can be used, in- or out- of country, however it has to help in the construction of the cost in the country of origin.80 Moreover, it concluded that the records kept by exporters or producers are the preferred sources under Art. 2.2.1.1 of the ADA, however other sources may also be used for calculating the cost of production. The use of alternative sources, according to the AB shall not mean simply substituting the cost in the country of origin with another cost, but it shall be used in order to arrive at the cost of production, by means of adapting or adjusting this information.81
In this author’s opinion, the approach adopted by the AB is the broadest one that could have been adopted taking into consideration the requirement of Art. 2.2 of the ADA that the cost of production should be the one in “the country of origin”. Any other interpretation that would lead to attaining costs from other markets would be against the ordinary meaning of Art. 2.2 of the ADA. The prices that would have been, absent the market distortion, are already other prices than those “from the country of origin”. The
79 ABR, EU – Biodiesel, [6.59] 80 ibid, [6.69, 6.70]
interpretation proposed by the EU would mean to read words that are not there, which is against the principle of effective interpretation and the rules set by Art. 31 of the VCLT.82
Therefore, those that critic the approach adopted by the Panel as being overly restrictive,83
an approach later also confirmed by the AB, fail to see that the Panel and the AB were bound by the text of the ADA, and a broader interpretation would simply not have textual support.
Moreover, it has been argued that Art. 2.2.2 of the ADA on the calculation of selling general and administrative costs provides support for a broader reading, as it allows the use of “any other reasonable method” to calculate the amounts, thus showing the wide discretion Members enjoy.84 Art. 2.2.2 of the ADA completely supports the interpretation issued by the AB, since Art. 2.2.2 provides the use of “any other reasonable method” with the condition that the amount of profit established does not exceed the one realized by other exporters or producers of products of the same category in the market of the country of origin. Therefore, Art. 2.2.2 of the ADA indeed allows the use of any method, provided that the final result is according to the profit existent in the country of origin. Similar conclusion was reached by the AB in the context of Art. 2.2 of the ADA in EU-Biodiesel, the use of other information being allowed, as long as the final arrived cost is the one from the country of origin.
The question of use of out-of-country benchmarks, both addressed in the context of subsidies and anti-dumping, clearly shows the difference between the two trade defenses. While the AB in US – Softwood Lumber IV addressed the situation of the use of out-of-country benchmarks in a distorted market by the government’s action,85 it did not do so
expressly in EU – Biodiesel. This difference in approach, in this author’s opinion shall not be regarded as inconsistent interpretation, since it merely emphasizes the difference between rationales of subsidies and anti-dumping measures. Thus, the intervention of a government granting benefits is to be addressed under the SCM Agreement, while unfair practices of producers or exporters under the ADA.
Energy importing Members will be able to use out-of-country sources for the cost of production, however they will have to reach the same costs actually related to the
82 Appellate Body Report, United States - Standards for Reformulated and Conventional Gasoline,
WT/DS2/AB/R, 29 April 1996, p 23
83 de Kok (n 73), p 534-535 84 ibid
production, as if they used the records that reasonably reflect the costs. This interpretation goes hand-in-hand with the conclusions on the meaning of “reasonably reflect”. The AB did not want to limit the source of cost calculation only to records, because this would be impracticable in situations where the records do not comply with the necessary conditions, or they are absent or not sufficient. However, it made sure that when using other sources, the calculated cost of production that is related to the production of specific goods would be the same cost that would have been reasonably reflected in the records. This interpretation is decisive for Russian gas dual pricing, since even if the use of out-of-country sources is allowed, Members will have to adapt them to the conditions of the distorted market and take into consideration the comparative advantage of Russia. Therefore, the AB’s conclusion renders anti-dumping measures ineffective in the fight with dual pricing. As long as Members cannot use external prices in order to construct the final cost of a product in a distorted market of another Member, they will not be able to impose anti-dumping duties, since the arrived costs of production will be the same as the prices used for domestic sales.
4.3 EU – Biodiesel: Expectations and Results
While at the first look the AB’s reasoning in EU – Biodiesel may seem to balance the rights of importing and exporting Members, it is in fact in favor of the exporting ones, leaving the importing Members with almost no tool to address market distortions in the anti-dumping context. It allowed the use of information from third countries which is an endorsement for the position of importing Members, however this right was almost entirely deprived of effectiveness as, anyway, the final costs have to reflect the costs incurred. The legal writings did not foresee the formalistic distinction between the notions of “cost” and “information”, however the final decision of the AB in EU – Biodiesel that the cost to arrive at shall be the one in the country of origin, confirms the opinions expressed by doctrinaires that dual pricing should be considered consistent with the ADA.86 Thus, the
AB while showing some support for the position of importing Members, ended with reaching the conclusion militated by the doctrine, since that position was in line with the wording of the ADA. With EU – Biodiesel it seems secure to affirm now that Russian Gas dual pricing is not a violation of anti-dumping rules.
86 See supra (n 65, 66)
Chapter V: The Possible Outcomes of the Russian Cases on Anti-Dumping Measures Imposed as a Response to Gas Dual Pricing System
Though the AB in EU-Biodiesel issued a decision in favor of the importing energy Members for “as applied” claims, the “as such” claims of violation by Art. 2 (5) of WTO obligations failed.87 Therefore, the second paragraph of Art. 2(5) of the Basic Regulation that permits the use of third country information is still in force and can operate in other cases. However, Art. 2(5) of the Basic Regulation will have to be applied with the limitations set by the restrictive reading of the expression “reasonably reflect” and the use for external information only to arrive at the costs in the country of origin. As the second paragraph of Art. 2(5) from the Basic Regulation is still in force and WTO consistent, it is important to note how Russian cases alleging a violation by the application of this Regulation will be probably solved, taking into consideration the reasoning of the AB in
EU – Biodiesel.
The Russian Federation is currently involved in five WTO disputes as a complainant. Interestingly to note is that out of these cases, four of them are related to energy issues, while three, specifically, to dual pricing and anti-dumping measures.88 Thus, it can be
clearly seen, that dual pricing represents one of the main areas of interest for the Russian Federation. With its accession, it finally managed to raise this problem in front of an international tribunal.
The very first consultations initiated by the Russian Federation in December of 2013 were in the case DS474.89 It addressed, inter alia, the problem of “cost-adjustment” procedure when there is a “particular market situation”, used by the EU authorities in investigations and reviews, while rejecting the recorded costs and replacing them with prices outside of the country of origin based on the EU Basic Regulation. In its Request for Consultations the Russian Federation particularly mentions the rejection of costs of gas and electricity.90 The cost of gas as an input was replaced with the gas price for delivery in Waidhaus (Germany).91 In the case of certain seamless steel pipes, of iron or steel, for example, the EU authorities concluded that the price for export was three times higher than
87 ABR, EU – Biodiesel, [6.262; 6.282]
88 WTO, Russian Federation and WTO <https://www.wto.org/english/thewto_e/countries_e/russia_e.htm>
accessed 30 April 2017
89 Request for Consultations by the Russian Federation, European Union – Cost Adjustment Methodologies and Certain Anti-Dumping Measures on Imports from Russia, WT/DS474/1, G/L/1063, G/ADP/D102/1, G/SCM/D101/1, 9 January 2014
90 ibid
91 Notice of initiation of an expiry review of the anti-dumping measures applicable to imports of ammonium
