Russia Faces Backlash from Invading Ukraine

By the time Russian troops invaded Ukraine on February 24 as part of a “special military operation” to “liberate” Ukraine from “bad actors,” the global community was already denouncing Russian President Vladimir Putin’s aggressive machinations and actively exploring measured retaliatory economic sanctions and trade restrictions options. As this audacious military invasion develops in the E.U.’s backyard, it is proving to be the most significant geopolitical conflict in Europe since the Second World War. It’s a cold, hard fact that Russia controls global-scale destructive potential in its nuclear and, reportedly, chemical weapons stockpiles.

Though the specter of a large scale Russia-instigated nuclear event subsided greatly since 1991 when the Russian Federation emerged from the USSR, Putin’s recent, not-so-veiled threats and announcement that he’d put Russia’s nuclear forces on high alert should not be dismissed as insincere blackmail. Thus, it is critical that nations ready to stand in opposition to Putin’s aggression respond with measured sanctions that economically and politically undermine Putin’s will to continue the aggression without directly threatening Russian national security militarily. One of the economic sanctions widely discussed is withdrawal of Russia’s “most favored nation” (“MFN”) status. So, what is MFN status, and what does losing this status mean for Russian businesses and foreign businesses that purchase Russian goods?

The WTO and Most Favored Nation Status

The World Trade Organization (“WTO”) (and the General Agreement on Tariffs and Trade (the “GATT”)) sets a precedent of general non-discrimination between trading partners. This is the MFN principle: the agreement that all trading partners must trade equally and indiscriminately with other countries in an agreement. In 1998, the U.S. replaced the MFN moniker with the phrase “Normal Trade Relations” (“NTR”) (presumably to avoid any confusing appearance of problematic “favoritism”?), and later—in an act of optimism—augmented it to “Permanent Normal Trade Relations” (“PNTR”).

In practice, it means, for example, that goods imported in the U.S. from any foreign PNTR country will be subject to the same U.S. PNTR tariff rates and treated the same under various non-tariff trade barriers. There are exceptions to this general rule, such as:

• trade blocs like the USMCA and the European Union, which are allowed to discriminate against imports from outside the bloc

• trade barriers in response to unfair competition

• for trade preferences extended to developing countries

• for trade in services, on a limited basis

Quoted from Investopedia.

Exceptions include Free Trade Agreements (“FTA”), as noted above, which may allow tariff reduction from PNTR rates. Additionally, exceptions may also include unfair trade remedies, such as anti-dumping and countervailing duties; special extra-favorable treatment to imports from developing countries; plus barriers related to concerns of phytosanitary issues, endangered invasive species, forced labor, national security concerns, and other ancillary public policy objectives that may be accomplished via changes in trade policy.

Practically speaking, this concept of non-discrimination and cooperation gives us systems such as Harmonized Tariff systems, harmony amongst customs systems in trading partners, and sets the foundational principle for many customary practices in international trade. This generally accepted principle of cooperation in international trade leads to more trade development amongst partners.

Revoking a Country’s Most Favored Nation Status?

While rarely done, countries can revoke MFN statuses of others for many reasons. For example, during the “trade war” with China, there were calls by legislators to end China’s MFN status, permanently relegating them to higher tariffs. While the U.S. did not revoke China’s MFN status, we see the effects of restricting trade with massive trade partners with Section 301 duties against Chinese goods, which raises the blood pressure of all international trade professionals when attempting to import from Chinese markets. Thus, this now begs the question: what happens if Russia’s MFN status is revoked?

While there are many sanctions against Russia and its economy, this move would attack the Russian economy en masse. This relegation to non-MFN status would not be concerned about military end-uses, dual-use items, or even financial transactions that may or may not be funding military applications; this decision, if undertaken, attacks the entire Russian economy from ammunition to caviar and vodka. All importers and consumers of Russian goods would immediately feel a shockwave of increased tariffs leading to higher shelf prices. Furthermore, while economic sanctions are relatively easy to enact or revoke, MFN status requires Congressional legislation to alter. Therefore, if Congress and President Biden revoke Russia’s MFN status, this is a blow to the Russian economy that will not be easy to recover from.

What does this mean for my company?

Companies, importers, and exporters need to be cognizant of their supply chains. If your company operates with Russian suppliers or the Russian economy, your compliance department has likely been in a frenzy keeping up with the constantly evolving sanctions regimes that the government and the world community have enacted. Should Russia’s MFN status be revoked, importers should expect tariffs on Russian goods to increase immediately and exponentially.

Givens & Johnston stresses the importance for companies to structure their compliance programs to handle new export controls and economic sanctions regimes, which is paramount in this landscape. As more countries enact sanctions and controls against the Russian economy due to their invasion, the regulatory framework for trade in Russian goods will grow exponentially to a point where management is nearly impossible without professional help. Givens & Johnston strongly recommends that all importers and companies assess their compliance and trade programs by reaching out to one of our highly specialized attorneys to help your company stay compliant.