Russian Energy Policy and the WTO


Seminar Paper, 2015
12 Pages, Grade: A

Excerpt

Abstract: The accession of Russia to the WTO has a fairly minor impact on its oil and gas sector. However, it does offer interesting new possibilities. First, it has urged the WTO to review and re-negotiate its regulatory framework concerning trade in energy. Many critics even expect the WTO to conclude a new, separate treaty in the field of energy. Russia as an important exporter could defend her interests and exercise considerable influence in these negotiations. Second, Russia could make good use of the highly efficient Dispute Settlement Mechanism of the WTO. In fact, Russia has already filed or threatened to file complaints against unfair European energy rules or anti-dumping sanctions.

I. INTRODUCTION

On the 22th of August 2012 the Russian Federation joined the World Trade Organization (WTO). Most critics agree that the WTO accession has only a very small impact on the Russian energy market1.

According to the Working Paper of the International Trade Center 2012, Russia will retain the possibility to regulate the tariffs for electricity and gas, intended for the population as well as set game rules in the services market2. The only restriction in tariffs for energy products agreed by Russia during WTO negotiations is a requirement that gas sales in the internal market for industrial consumers must bring profits. However, the country has been moving toward this goal in the past several years, therefore such a requirement has not been a surprise. Gazprom will not feel any direct effect from the accession since State regulation of gas tariffs in Russia will be preserved and relations between Gazprom and Russian consumers will be arranged in the form of “standard commercial contracts” as before3. Thus, the accession of Russia to the WTO seems to only have a very small impact on the Russian energy market. Taking into account that the Russian public is increasingly critical about the WTO as a whole, the accession of Russia is not only considered useless, but often even regretted4.

However, taking a closer look, Russia’s accession to the WTO might offer interesting new possibilities. The aim of this paper is to explore these new opportunities and how Russia’s energy policy could profit from the WTO framework. This paper shall focus on two main aspects: First, the accession of Russia and other important energy exporting countries has forced the WTO to review its mechanisms concerning trade in energy. These have turned out to be rather inappropriate, which is why the WTO is increasingly urged to re-negotiate aspects concerning trade in energy or even conclude a new treaty. Russia as an important exporter could defend her interests and exercise considerable influence in these negotiations. Second, Russia could make good use of the highly efficient Dispute Settlement Mechanism (DSS) of the WTO. The DSS could be used as a mechanism to settle transit state disputes or as a means of defense against unjustified European sanctions.

II. TRADE IN ENERGY AND THE WTO

1) “The Cat Is Out of the Bag”

60 years ago, when the General Agreement on Tariffs and Trade (GATT) was negotiated, world energy demand was a fraction of what it is today and so were energy prices. Energy was therefore not a political priority and it was widely believed that trade in energy was de facto, if not even de jure, excluded from GATT/WTO coverage. Marhold offers a good analysis of the reasons for this5. First, the main petroleum producing and exporting countries were not original parties to the GATT. Second, the industry was largely dominated by state run monopolies and cartels, which preferred to settle their business outside the global trading system. Third, energy was considered a strategically sensitive commodity. Thus, she concludes, “de facto, energy trade has been treated as mostly outside of the GATT for several decades”6.

However, contrary to this general perception, de jure, trade in energy is, and has always been, covered by the GATT/WTO. WTO Members have ever since made concessions on crude petroleum and fossil fuels in their Schedules.

Now energy becomes increasingly important in the WTO. One reason is the increasing energy need of many member States. But moreover, recently several energy-exporting countries have joined the WTO (Saudi Arabia, China, Russia, Oman, Ukraine) and others are currently negotiation their accession (Kazakhstan, Azerbaijan, Iraq, Iran and Algeria), hence, a substantially larger amount of energy trade is now in the hands of WTO trade7. When Russia, a leading energy exporter, joined the WTO, the cat was out of the bag and the issue of energy was on the table. It becomes increasingly clear that there are many unresolved questions that now need to be discussed: The WTO Agreements cover trade in energy, but they were not drafted with energy in mind.

2) Not Drafted With Energy in Mind

First of all, the strict division between goods, which are subject to the GATT, and services, which are subject to the GATS, has turned out to be difficult to apply to energy trade, since traded energy mostly encompasses elements of both. Traditionally, the energy industry has perceived energy services as a value added to energy goods which could not be dealt with separately. Although many fossil fuels, such as gas, have independent physical property and can be stored detached from a pipeline system, they depend on networks and grids, which makes their distribution much closer to a service8.

However, the classification of energy services itself has always been one of the topics of debate among various interest groups. Neither the WTO’s Services Sectoral Classification List9 nor the United Nations Provisional Central Product Classification10 lists energy services as separate categories. Instead, energy services are scattered under different headings. There are energy services listed under the category of “services incidental to mining” under the general heading “Other Business Services”. Other essential services such as oil and gas field exploration and geological surveying services are not covered by this category, but are classified as “Geological, geophysical and other scientific prospecting services”, under “Engineering related scientific and technical consulting services”. Other energy-related services are listed under the heading “transportation of fuel”, which comes under the broad category of transport services and is therefore not strictly appropriate, since the transportation of energy-related products and services requires very specific and technically complicated procedures. Moreover, there is a third entry related to “Services Incidental to Energy Distribution”.

As Cottier correctly points out, such a classification does not provide a clear view or complete information in one place and may therefore lead to confusion in commitments11. However, the problem goes even further. According to the WTO Panel in the China – Electronic Payments case, if a service is made up of a combination of different services, it is possible to classify the service under a single sector that covers the “essential character”12. This is applied to “integrated services” in which “each component of the system is critical” and the “service is supplied as a coherent whole”13. It should be borne in mind that the energy industry is a chain of interconnected activities and often one cannot function without another. It can therefore happen that a State takes commitments on energy trade in one sector, say energy distribution. In case of a dispute, the WTO Dispute Settlement Body (DSB) might decide that the entire chain of energy drilling, transport and supply constitutes one single integrated service. Thus, States might accidentally take commitments on services they do not want to.

Apart from that, there is a series of other problems. It is, first of all, unclear what “like” energy products are and if non-renewable energies can be considered “like”. Then, there are particular challenges associated with the existence of natural monopolies, as well as with the role of state-owned enterprises that dominate some energy markets.

3) Opportunities for Russian Energy Policy

Summing up, the accession of Russia and other important energy exporting countries has forced the WTO to review its mechanisms concerning energy trade. A growing number of essays about this issue has been published, and authors agree that the WTO system lags behind in almost every aspect, not few of them urging the WTO to conclude a separate treaty on energy trade14. This process has already started. In a speech to the Workshop on the Role of Intergovernmental Agreements in Energy Policy on 29 April 2013, the Director-General of the WTO, Pascal Lamy, acknowledged that “what is sorely lacking in the current WTO context is a constructive and forward-looking discussion among members on the rapidly expanding trade and energy interface.” Russia as an important exporter could align with the OPEC and other energy exporter States in order to build up a strong position and exercise considerable influence. The WTO offers a good platform for political negotiations in which Russia, now being a member State, can defend her interests instead of letting the rest of the world decide over her head. Also, this would offer a good opportunity to address urgent environmental and climate change issues.

III. RUSSIA AND THE DISPUTE SETTLEMENT SYSTEM

Russia has probably not acted inconsistently with WTO law. Therefore, instead of being afraid of the WTO Dispute Settlement System (DSS) as a “Western instrument” that could be used against her, Russia could apply this mechanism for her own purposes. The DSS of the WTO is highly effective and is increasingly used by emerging economies to defend their interests.

1) Consistency of Russia’s Dual Pricing System with WTO law

Generally, Western countries understand that WTO accession implies radical structural reforms. They expected Russia to pursue an effective liberalization of its economy and its energy pricing strategy and partially reverse the status quo in its state-dominated energy markets. Russia continues to apply a dual pricing system, which entails it sells its fossil fuels on the world market for a higher price than on the own domestic market, on which prices for energy are kept artificially low15. According to energy importing countries such as the US and the EU, this system is trade distortive and thus inconsistent with WTO law. Its export-restrictive effect supposedly violates Art XI of the GATT (General Elimination of Quantitative Restrictions). Additionally, they claim that, as a result of dual pricing, domestic producers can be favoured over foreign ones by access to cheaper energy leading to lower production costs. This leads to a subsidy system that keeps the conditions of trade better for Russia16. Western calculations come to the conclusion that these implicit subsidies play a particularly significant role in distorting Russian energy markets, the distortionary system corresponding to about 6% of the GDS17. They conclude that Russia uses foreign energy markets to subsidize its own economy and has therefore practically acquired all the benefits of WTO membership, with making apparently no important concessions18.

[...]


1 See for example the comment of Matthew Sagers, the head of IHS CERA’s Russian and Caspian Energy service told Oil&Gas Eurasia: “In general, the WTO impact on the Russian oil and gas sector is actually fairly minor, despite the fact that oil and gas exports are Russia’s major means of contact with global trade”, quoted “WTO Opens World to Russia”, Oil and Gas Eurasia, February 12, 2012. The head of the International Monetary Fund (IMF), Christine Lagarde noted that no principal changes (including positive ones) for the energy market of Russia are foreseen, quoted in Sutyrin,Sergei, “Russia’s Accession to the WTO: Major Commitments, Possible Implications”, in: Paper of the International Trade Center 2012, p. 21.

2 Sutyrin et al ITC 2012, p. 25.

3 Ibid., pp. 21 ff.

4 Russia is probably the only country that has an entire movement that advocates a withdrawal of Russia from the WTO: http://stop-vto.ru/2012/07/24/prichinyi-pochemu-rus-nelzya-byilo-vstupat-v-vto-kratko/

5 Marhold, Anna, “The World Trade Organization and Energy: Fuel for Debate”, in: ESIL Reflections, Volume 2, Issue 8, September 30, 2013, pp. 1 f.

6 Ibid., p. 2

7 Cottier, Thomas, et al (eds), “The Prospects of International Trade Regulation – From Fragmentation to Coherence”, in: CUP, Cambridge 2011, p. 2

8 Ibid., pp. 3, 8 f.

9 WTO, Services Sectoral Classification List MTN.GNS/W/120, July 10, 1991.

10 Department of Economic and Social Affairs, Statistics Division Statistical Papers Series M No. 77, Ver.1.1, UN, New York.

11 Ibid., pp. 10 f.

12 China – Certain Measures Affecting Electronic Payment Services (“China — Electronic Payments”), WTO Panel Report WT/DS413/R, adopted 31 August 2012, para. 7.718 ff.

13 Ibid., para. 7.198 ff, 7.55.

14 See: Marhold 2013, pp. 5 f.; Cottier et al 2011, p. 8; Sutyrin et al ITC 2012, p. 18.

15 Marhold 2013, p. 4.

16 Marhold 2013, p. 4; Kerkelä, Leena, “Distortion Costs and Effects of Price Liberalization in Russian Energy Markets: A CGE Analysis”, in: BOFIT Discussion Papers, 2004/2, pp. 14; Rungi, Armando, “Russian Accession to WTO and Gas Efficiency”, in: POLINARES Working Paper No 57, December 2012, pp. 1 f.

17 Kerkelä 2004, pp. 17, 21 .

18 Grigoriadis, Theocharis, “WTO Accession and Energy Markets: An Overview of Russia”, Working Paper No 41/2014, February 2014, pp. 6 f.

Excerpt out of 12 pages

Details

Title
Russian Energy Policy and the WTO
Grade
A
Author
Year
2015
Pages
12
Catalog Number
V502391
ISBN (eBook)
9783346036469
Language
English
Tags
russian, energy, policy
Quote paper
Sonja Kahl (Author), 2015, Russian Energy Policy and the WTO, Munich, GRIN Verlag, https://www.grin.com/document/502391

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