Energy Dual Pricing in the Context of Russia-EU Relations ______________________

1. Energy Dual Pricing in the Context of Russia-EU Relations______________________ PEEER Presentation Moscow, Russia September 14, 2009 Daniel Behn University of Dundee, CEPMLP

2. Overview___________________________ Russian Dual Pricing Practices Russia and the WTO Dual Pricing of Energy and the WTO Implications for Energy Governance

3. Russian Dual Pricing Practices___________________________ Export prices and domestic prices are different Commonly practiced by energy-exporting countries Russia: natural gas and electricity Natural gas and electricity prices are suppressed domestically Limited export market in electricity, but large export market in natural gas to EU and CIS

4. Russian Dual Pricing Practices___________________________ Arguments for: Humanitarian: provides inexpensive heating and energy in a cold climate Environmental: reduces usage of dirtier energy sources Economic: Russia’s resource endowment is a comparative advantage to energy-intensive Russian industries

5. Russian Dual Pricing Practices___________________________ Arguments against: Provides a trade-distorting subsidy to energy-intensive industries Encourages excessive use of resources domestically Actual practice is triple pricing: different prices for the EU, CIS, and domestic markets

6. The WTO Accession Process________________________ Membership in the WTO commits its members to certain fundamental principles: Most-favored nation principle National treatment Transparency Lowering trade barriers through negotiations Reliance on tariffs

7. The WTO Accession Process________________________ Applicant requests WTO membership WTO sets up a Working Party open to all interested countries Applicant submits description of current trade regime to WP

8. The WTO Accession Process________________________ WP and applicant negotiate the terms and conditions for entry Applicant must also complete bilateral negotiations with WP countries Once completed, formal vote is taken requiring a two-thirds majority of all WTO members

9. Russia and the WTO___________________________ Russia is the largest country remaining outside the WTO 1993 Began accession process 2000 Putin makes WTO accession a priority 2004 Bilateral agreement with EU signed 2006 Bilateral agreement with US signed 2009 Putin announces Russia will only pursue WTO accession as part of a customs union with Belarus and Kazakhstan

10. Dual Pricing and the WTO___________________________ No specific provisions on natural resource or energy pricing in any of the WTO agreements Prior attempts at the multilateral level have failed Energy pricing provisions have become part of acceding countries WTO-pluscommitments

11. Dual Pricing and the WTO___________________________ Legal Analysis under WTO Law Subsidies and Countervailing Measures (SCM) Agreement GATT Article XI on Export Restrictions GATT Article III.9 on Internal Maximum Price Controls GATT Article XVII on State-Trading Enterprises

12. Dual Pricing and the WTO___________________________ SCM Agreement Subsidy Definition Financial contribution by a government or by any public body Or any form of income or price support Whereby a benefit is conferred

13. Dual Pricing and the WTO___________________________ Divides subsidies into 3 categories Prohibited export subsidies (except those permitted under the Agreement on Agriculture) Actionable domestic subsidies (must be found de jure or de facto specific) Non-actionable subsidies (phased out in 2000)

14. Dual Pricing and the WTO___________________________ Distinctions: between prohibited export contingent subsidies (which must be terminated) and actionable domestic subsidies (which are countervailable) between subsidies to energy industries and subsidies of energy to energy-intensive industries

15. Dual Pricing and the WTO___________________________ While pricing of natural gas and electricity is suppressed domestically, the practice does not constitute either a de jure prohibited export contingent subsidy or de jure specific domestic subsidy Domestic prices for natural gas and electricity are suppressed equally to all sectors of the Russian economy

16. Dual Pricing and the WTO___________________________ Critics argue that the provision of natural gas and electricity to industries requiring large energy inputs is tantamount to: a de facto specific domestic subsidy (i.e. steel, fertilizer, and petro-chemical industries) a de facto export contingent subsidy (i.e. ammonia industry exports 90 percent of production)

17. Implications for Energy Governance___________________________ Both the EU and the US failed to obtain commitments on abandoning dual pricing of natural gas as a condition for WTO accession EU agreement requires incremental price increases for domestic natural gas prices

18. Implications for Energy Governance___________________________ As most countries still outside the WTO are energy-exporting countries, energy pricing remains a contested WTO-plus issue Recently, Saudi Arabia agreed to abandon dual pricing practices as part of its WTO accession agreement

19. Implications for Energy Governance___________________________ After accession, Russia may still be subjected to a challenge of its dual pricing practices before the WTO Dispute Settlement Panel Prior to accession, Russia could be subject to domestic countervailing practices that would be illegal under WTO rules

20. Implications for Energy Governance___________________________ Issues relating to triple pricing remains: CIS as regional free-trade area (but most CIS countries still outside the WTO) Energy pricing policies under EuroSec (the proposed customs union between Russia, Belarus, and Kazakhstan)