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. Last Updated: 07/27/2016

Market Status Not All It's Cracked Up to Be

Giving with the right hand and taking with the left, the European Commission this week approved and delivered to its 15 member states proposed amendments to trade protection legislation that simultaneously grant Russia market economy status while tightening up the rules.

The commission said it expected the amendments to be approved by mid-September, making the changes official.

The commission has been quick to point out that the changes to anti-dumping and anti-subsidy legislation merely formalize existing practices and are not aimed at Russia in particular.

"It reflects a reality that has come about but has not been put in legal form," said Vincent Piket, deputy head of the commission delegation to Moscow. "It should be done for the sake of transparency and openness."

The amendment to the anti-dumping law removes Russia from the list of non-market economies, giving companies the right to be judged by domestic prices in anti-dumping cases, rather than by prices from a comparable country. European regulations allowed companies to apply individually for market economy status, but only SUAL, the nation's second-largest aluminum company, had won such status.

It also defines "particular market situations" in which the commission can increase the cost of production of a company by "a reasonable amount" when investigating claims that imports are sold below cost such as "[among other things], when prices are artificially low or when there is significant barter trade, or when there are non-commercial processing arrangements."

Russia's low energy prices have been a sticking point in negotiations with the European Union for accession to the World Trade Organization, with Brussels pushing Moscow for a commitment to increase prices to world levels.

The amendment also allows the EC to use information from other markets if it decides a company doesn't "reasonably" reflect its production and sales cost in its records.

"[The costs] shall be adjusted or established on the basis of the costs of other producers or exporters in the same country, or where such information is not available or cannot be used, on any other reasonable basis, including information from other representative markets."

Brussels may use information from comparable countries in cases of "particular market situations."

Richard King, associate attorney at White & Case in Brussels, said the amendments do in general reflect common practice. But, he said, the combination of Russia and the new rules is "an interesting coincidence.

"If something is undefined in the regulation, they have broad discretion anyway," King added.

Gaining market economy status also opens up Russian companies to the threat of anti-subsidy tariffs -- similar to the countervailing duties in the United States.

"It's potentially two-edged," King said. "Market economy status is not necessarily a total benefit."

The amendment to the anti-subsidy law also allows the EC to adjust prices by an "appropriate amount which reflects normal market terms and conditions," or use information from a comparable country information "if there are no such prevailing market terms and conditions for the product or service in question in the country of provision or purchase which can be used as appropriate benchmarks."

Falsification of accounts is not necessary; the EC could deem that domestic accounting principles are not adequately reflective of true costs, King said.

Analysts and experts took different views of how the amendments would affect Russia.

"If this new regulation is adopted then the practical significance of Russia's status as a market economy will be nonexistent," wrote Alexei Moiseyev, economist at Renaissance Capital, in a recent report. "It seems that it would be fairly easy to prove that natural monopolies' tariffs in Russia are regulated and artificially lowered."

Chris Weafer, former head of research at Troika Dialog, said it seemed the EC was backpedaling under pressure from major lobbying groups.

"The EU is continuing to pressure Russia not to stop reform process. Russia will not have an easy ride on economic trade unless it continues the reform process," Weafer said.

"Being granted market economy status is not going to ensure easier times for major exporters," he added. "We've seen repeatedly that when it suits the United States or the EU, they'll find some reason to block imports."