Russian Exporters Faced with EU's Non-Standard Dumping Methodology: What Does the EU's Recent Report on Market Distortions in Russia Really Change?

In December 2017, the European Union ("EU") introduced what has been referred to as a "non-standard" methodology for the calculation of dumping margins for cases in which significant distortions caused by government intervention affect the prices and costs of exporting producers.¹ In practice, this non-standard methodology relies heavily on reports prepared by the European Commission ("Commission") on market distortions in specific countries. On October 23, 2020, the Commission published its second report, which targets Russia ("Russia-Specific Report").²

This Legal Update discusses the relevance of country-specific reports for the application of the non-standard methodology, the content of the Russia-Specific Report and its potential impact on future anti-dumping investigations targeting Russia.

1. What is the non-standard methodology, and how does it rely on country-specific reports?

Under the non-standard methodology, normal value—one of the two elements for the calculation of dumping margin—is not based on the reported prices and costs on the domestic market but instead on undistorted prices or benchmarks, which—in most cases—reflect the corresponding costs of production and sale in a representative third country. This, typically, increases the normal value and, correspondingly, the dumping margin.

However, in order to apply the non-standard methodology, the Commission must establish the existence of significant distortions caused by government intervention. In that regard, the EU's basic anti-dumping regulation, Regulation (EU) 2016/1036 ("Basic AD Regulation"),³ entitles the Commission to prepare country-specific reports where it has well-founded indications of the possible existence of significant distortions in that country or in a certain sector in that country.⁴

These country-specific reports are to be used in two specific ways:

• They can be used by complainants as part of the prima facie evidence put forward in a complaint to justify the use of the non-standard methodology in support of allegations of dumping.⁵
• They can be used by the Commission in the course of the investigation, provided interested parties have ample opportunity to rebut, supplement, comment or rely on the report and the evidence on which it is based in each investigation in which such report or evidence is used.⁶

While—in theory—country-specific reports are not a prerequisite for the application of the non-standard methodology, they facilitate such application. Indeed, for the application of the non-standard methodology to be considered in any given investigation, the notice of initiation of that investigation must specify that fact. This means the Commission must already have evidence justifying the assessment of significant distortions at the time it initiates an investigation. In practical terms, this implies that complainants are able to provide sufficient prima facie existence of such distortions.

Nonetheless, the existence of a country-specific report does not exonerate the Commission from its obligation to consider all the relevant evidence on the investigation file with regard to the existence of significant distortions in each investigation nor from its obligation to assess the existence of significant distortions for each exporter and producer separately.⁷ In other words, the existence of a country-specific report should not automatically result in the application of the non-standard methodology in each and every investigation targeting imports from that country.

2. What distortions are alleged in the Russia-Specific Report?

The Russia-Specific Report is structured in 15 chapters, divided by the Commission into three parts.

The first part (Chapters 2 to 7) identifies the core features that give the Russian economy its current shape and structure and determine the way of its functioning. In that part, the Commission alleges:

• Strong presidential powers; informal arrangements, such as the “telephone laws,” resulting in a prerogative of political power over the application of the law; the expansion of state ownership of major companies as well as the expansion of the definition of strategic sectors; and a mixed record in the state’s efforts to improve the institutional framework (low bureaucratic quality and weak performance in tackling corruption);
• A financial sector dominated by banks and with a decreasing number of operating banks; an increasing share of state ownership; and an increase in the market share of the largest, state-controlled banks (reportedly 72.1 percent of banking assets were controlled by five state-controlled banks) since the 2008-2009 and 2014-2015 financial crises;
• A more strategic approach to state ownership, with Russia pursuing industrial policies or strategic policy goals, and—despite reforms to match best practices in the area of corporate governance of state enterprises—a lack of a transparent system of state ownership so that in many sectors State-Owned Enterprises represent a tool for potential state intervention in (regulated) markets;
• A public procurement system still subject to a number of significant restrictions for foreign companies (due to the government's aim to develop domestic industries and an ongoing import substitution policy), mostly based on non-competitive methods for State-Owned Enterprises and impacted by corruption or lack of transparency;
• Import substitution policies implemented in a number of sectors, some of which may be challenged at the World Trade Organization ("WTO"); and
• A regime for investment that is heavily regulated, with both horizontal and sector-specific regulations, which can be burdensome for foreign investors.

The second part (Chapters 8 to 13) identifies the functioning of the markets for various factors of production, namely land (including the implementation of environmental standards), capital, energy, transportation services, raw materials and other materials inputs as well as labor. In that part, the Commission alleges:

• An absence of governmental norms affecting the cost of land (although prices allegedly do not fully reflect market indicators due to the low number of transactions) and of policies to reflect the environmental impacts of various types of industrial activities in the prices of land;
• A stratification of the financial sector into mega-sized and micro-sized banks, while the Central Bank of the Russian Federation, which attempts to consolidate the sector and enlarge access to capital, faces difficulties due to its role as mega-regulator, which both controls and regulates several banks;
• Policies related to taxation of energy exports continue to exercise a downward pressure on domestic energy prices, in addition to a host of monopoly rights and state regulated prices, particularly in the natural gas sector, which influences the functioning of energy markets;
• Railway transportation development and regulation of competition in this market is, largely, in hands of the government, with a potential underpricing of transportation costs by regulated and subsidized railways tariffs for some industries;
• A combination of strategic planning documents aimed at stimulating additional domestic production of raw materials (with sector-specific or horizontal-level supports for producers of raw materials such as preferential loans, accelerated depreciations, subsidies and reduced taxes) and export restrictions in the industrial raw materials sector. These measures eventually reduce prices of raw materials to the benefit of downstream industries and the detriment of foreign competitors.
• Issues with the observance of International Labour Organization's conventions No. 87 on the Freedom of Association and No. 98 on the Collective Bargaining and limited wage policy and working conditions bargaining and with poor enforcement of strict labor regulations.

The third part (Chapters 14 to 16) focuses on specific sectors: steel, aluminum and chemicals (including fertilizers). In that part, the Commission alleges:

• In the steel sector, limited Government programs and instruments, which represent typically less than 1 percent of total investments, although reference is made to:

(i) the Development Strategy of the Steel Industry for 2014-2020 and for the Perspective until 2030; and

(ii) potential cost benefits resulting from certain elements of the country’s electricity, natural gas and rail transport pricing policies as well as export restrictions on scrap.

• In the aluminum sector, macroeconomic factors outweighing measures taken by Russian policymakers, although the state has taken some measures, including import barriers, to strengthen domestic producers and, in the first instance, UC Rusal (as shown in the 2014 Minpromtorg Strategy and the 2014 Minpromtorg program);
• In the chemicals sector, support measures designed in response to the forecasted increase in the domestic consumption of chemicals, although reference is made to:

(i) the development of the chemical industry being part of the state program of import substitution; and

(ii) the competitiveness of commodity chemical productions on regional markets being caused by low domestic energy prices.

3. What will be the impact of the Russia-Specific Report?

Concomitantly with the introduction of the non-standard methodology in December 2017, the Commission published its first report on market distortions targeting China (“China-Specific Report”).⁸ In a Q&A accompanying the China-Specific Report, the Commission announced that the next country report would concern Russia.⁹

The Russia-Specific Report was, however, published only in October 2020, almost three years later. In the meantime, in investigations targeting Russia, where the Commission suspected the existence of significant distortions, the Commission continued to apply what has been referred to as the "cost adjustment methodology," through which it justified disregarding input costs on the basis that they are not reasonably reflected in the records of the exporting producers. This methodology was found to be inconsistent with WTO rules in disputes DS473 (EU — Biodiesel),¹⁰ DS480 (EU — Biodiesel (Indonesia))¹¹ and, more recently, DS494 (EU — Cost Adjustment Methodologies II (Russia)).¹² 

To date, therefore, the non-standard methodology has never been applied to Russian exporters.

Will that change with the Russia-Specific Report? Certainly, but probably to a more limited extent as compared with China:

• On the one hand, the Russia-Specific Report will ease the evidentiary burden of complainants when requesting the initiation of anti-dumping investigations targeting Russian exporters.
  
  Indeed, the Russia-Specific Report should mostly be used by complainants to request the applicability of the non-standard methodology and to ask the Commission to assess whether such non-standard methodology should effectively apply in any given investigation targeting Russia.

• On the other hand, the Commission—when making such an assessment—must undertake a comprehensive case-by-case assessment, for each exporter and producer separately. Furthermore, even if significant distortions are established, the Commission is obliged to consider domestic costs to the extent that they are positively established not to be distorted.¹³
  
  However, the Russia-Specific Report refers primarily to horizontal distortions, with no clear indication or conclusion that such distortions would in any case result in costs and prices being "significantly distorted."
  
  In that regard, it is telling that for the three specific sectors covered by the Russia-Specific Report, the Commission mostly concludes that such sectors operate under market conditions, save for limited exceptions. This is to be contrasted with the China-Specific Report, which for the steel, aluminum and chemical industries, for example, established a significant degree of state intervention and resulting market distortions.
  
  As a result, it is unclear how and to what extent the horizontal findings in the Russia-Specific Report could lead to an industry-specific or company-specific conclusion that costs and prices are distorted in a way that justifies the application of the non-standard methodology.
  
  In light of the limited distortions alleged in the Russia-Specific Report, the Commission could be constrained to only disregard those cost items for which significant distortions are alleged rather than the entirety of costs and prices as it currently does for China.

The Russia-Specific Report may therefore lead to more investigations relating to the non-standard methodology but not necessarily to a generalized application of this methodology. In fact, the application of the non-standard methodology could become the status quo, whereby it is used solely to replace those cost items for which the Commission previously relied on its cost adjustment methodology.