Can Ukraine Impose Duties on Fuel from Russia?
Author: Zvenyslava Opeida
Source: Lexology, 3 February 2020


On January 21, three major Ukrainian oil-producing companies filed a petition asking for anti-subsidy duties to be imposed on diesel fuel and liquefied natural gas (LNG) from Russia.

Although anti-dumping and safeguard measures have been actively applied in Ukraine for decades, anti-subsidy investigations remain terra incognita. Since trade remedy law has been adopted in Ukraine, anti-subsidy duties have only been imposed once – on imports of cars from Russia, in 2016. If Ukraine decides to open an investigation, it will pose a serious challenge to the Ukrainian Commission of International Trade which is responsible for conducting trade remedy investigations. Having no substantial experience and methodology for this type of investigation, the Commission will have to make a difficult decision from both political and legal standpoint.

Many legal difficulties arise from the nature of subsidy at issue, i.e. subsidy to fossil fuel. This type of subsidy has never been challenged at the World Trade Organization (WTO). Similarly, unilateral trade remedies have not been used against fossil fuel production subsidies. The problem is that unilateral trade remedies, imposed by states, must be in line with WTO law, yet WTO law does not easily apply to fossil fuel subsidies.

For a measure to constitute a subsidy under WTO law, it must represent a financial contribution by a government and provide a benefit to a recipient. The law distinguishes between prohibited and actionable subsidies. Prohibited subsidies are those subsidies which are contingent upon export performance or the use of domestic over imported goods. Actionable subsides must in addition be “specific” (i.e. limited to an enterprise or industry or group of enterprises or industries) and can then be challenged if they have adverse effects on the interests of another WTO Member. 

Fossil fuel subsidies, however, are often designed in such a way that it is unlikely they can be found inconsistent with WTO law. This can also be an issue in the present case. The measure under consideration is the so-called Tax Maneuver in the Russian oil industry. The scheme envisages a gradual reduction of the oil export duty rate with a simultaneous increase in mineral extraction tax. To keep domestic fuel prices from rising and to offset the reduction in duties, the maneuver provides for the excise tax refund that Russian companies can receive under certain conditions. It is this excise tax refund that the Ukrainian initiators of the investigation claim to be a subsidy prohibited by WTO law.

Is this scheme indeed inconsistent with WTO law? Is it even a subsidy within a meaning of WTO law? The answer depends on whether the measure meets the requirements for a subsidy, in particular, a benefit conferred. The existence of a benefit is not self-evident in the current case and will require more serious analysis. For instance, under the scheme, the Russian government compensate companies' losses they may incur as a result of selling diesel fuel and gasoline in the domestic market at prices below export parity when the oil prices in international markets exceeds $55 per barrel. If, however, the price is lower than $55 per barrel the companies do pay the excise tax to the state, which, in fact, significantly increases their tax burden comparing with the previously existing tax system.

It is difficult to prognose the outcome of this investigation, should Ukraine decide to open it. In addition to the above-mentioned factors, an active participation of Russian companies and other interested party in the investigation may have a crucial impact on its result, as well as provide the base for possible appeal of the decision in the national courts and for the challenge of the imposed duties in the WTO.

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