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Cablegate: Customs Valuation Challenges in Russia, and Now

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

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