Statement of the Hon. Thomas R. Pickering, Senior Vice President,
International Relations, Boeing Company, on behalf of the U.S.-Russia Business Council;
Former Under Secretary for Political Affairs, U.S. Department of State;
and Former United States Ambassador to the Russian Federation

Testimony Before the Subcommittee on Trade
of the House Committee on Ways and Means

Hearing to Explore Permanent Normal Trade Relations for Russia

April 11, 2002

Opening Remarks

Good Morning Mr. Chairman and Members of the Committee.  Thank you for the opportunity to testify on what is certainly an important and very timely subject.  My name is Thomas R. Pickering, and I am Senior Vice President, International Relations at The Boeing Company.  Prior to joining Boeing, I held a number of senior positions in the U.S. Department of State, including Undersecretary for Political Affairs for the years 1997-2000 and Ambassador to the Russian Federation from 1993-1996.  I retired from government with the rank of Career Ambassador at the end of 2000.

I am testifying today on behalf of the U.S.-Russia Business Council, a Washington-based nonprofit trade association whose mission is to expand and enhance the U.S.-Russian commercial relationship on behalf of more than 260 American firms active in U.S.-Russian trade and investment.  Guided by member interests, the Council promotes an economic environment in which U.S. business can succeed in a challenging Russian marketplace.  To achieve its mission, the Council conducts activities and provides services that fall into the following categories: company-specific assistance and problem-solving; Russian and U.S. government policy work; information products; Russian business relationships; and formal and informal briefing and networking opportunities. 

I will focus my remarks this morning on Russia’s accession to the WTO, terminating the application of the Jackson-Vanik amendment to Russia, and extending Permanent Normal Trade Relations.  I will outline for the committee why each of these issues is important to the USRBC and Boeing and why we believe that WTO accession and Jackson-Vanik are separate issues and should be treated as such. 

Jackson Vanik

Mr. Chairman, the USRBC and Boeing support terminating the application of the Jackson-Vanik amendment to Russia, thereby discarding a remnant of the Cold War that is of no practical consequence.  As we all know Russia has been in full compliance with the legislation since 1994 and its intent should not be altered ex-post facto to suit unrelated objectives.  If the requirements have been satisfied and its raison d’etre is obsolete, it should be terminated.

Just as Jackson-Vanik has been successful in its pressure for important changes within the new post-Soviet Russia, so has the changing nature of our strategic relationship with Russia been startling and far-reaching.  The tension that defined our relationship in the early days of the Soviet collapse has been replaced with new opportunities and cooperation.  Compare Russia’s reaction to the latest round of NATO expansion with their reaction to the first round.  Rather than objecting to an enlargement of the alliance, Russia has instead begun negotiating to establish formal cooperation with NATO and to meet regularly in a new council “to pursue opportunities for joint action.”

There are other examples.  Earlier this year, President Putin announced the closing of the Lourdes listening facility in Cuba, and both Presidents have agreed to reduce the level of deployed nuclear warheads by one-third.  Russia’s reaction to the September 11 terrorist attacks, more than any other event, best illustrates how the relationship has fundamentally changed.  President Putin was the first foreign leader to contact President Bush following the attack.  President Putin offered his condolences to the American people and his clear support for a strong response.  That contact was followed by a series of concrete actions and policy decisions, some of which were done in clear contradiction to the public positions of the national security and intelligence officials who form his inner circle and from which he came.

As our relationship unfolds in previously unimaginable ways, and our security relationship is transformed, it is important that the trade and investment aspect of our relationship keep pace with the times.  Removing Russia from annual Jackson-Vanik consideration is an important part of this evolution.  Jews in Russia today are free to emigrate, and Russia is no longer a controlled economy.  Terminating the amendment’s application to Russia would help foster a sense of normal trade relations between the U.S. and Russia and demonstrate to countries that continue to restrict emigration that graduation is possible with the right reforms.

Mr. Chairman, I also believe that PNTR for Russia is logical outside the Jackson-Vanik context.  Russian imports to the United States increased significantly in both 1999 and 2000, reaching an all-time high of $7.8 billion in 2000 (U.S. Department of Commerce).  Russian titanium and other materials included in these figures are an important component in aircraft manufacturing.  Continued access to these products contributes to the competitive position of Boeing and other US manufacturers in world markets.  We therefore encourage continued development of free, fair, and reciprocal trade with Russia.  PNTR and eventual Russian membership in the World Trade Organization are important steps in this direction.

Although Russia has been found in compliance with Jackson Vanik for the past several years, its continued existence perpetuates a feeling of discrimination among Russians and allows a feeling of uncertainty to cloud a markedly improved trade and investment climate.  Stability and predictability are important to exporters and importers alike. 

WTO and Jackson-Vanik

The USRBC and Boeing support Russia’s aspirations to join the WTO, primarily because much is at stake in terms of market access and uniform acceptance of agreed rules of the game.  However, we also believe that WTO accession and the termination of the Jackson-Vanik amendment are separate issues and should be treated accordingly.

At no time since Russia applied for WTO membership has any U.S. official linked Jackson-Vanik to Russia’s WTO accession.  To do so now would be perceived as moving the goalpost on WTO accession and would treat Russia differently from other former Soviet countries in the accession process.

It’s also important to emphasize that the United States, regardless of the administration in power, has an excellent track record in setting the highest bar for new entrants to the WTO.  We are confident that the USTR, under the leadership of Ambassador Robert Zoellick, will continue to seek strong commitments from Russia pertaining to the adoption of WTO rules governing its trade regime, the provision of market access in goods and services, the establishment of limits on agricultural supports, and the enforcement of the rule of law in commerce. 

Absent Jackson-Vanik, the United States maintains the leverage it needs to address trade concerns with Russia, as obviously Russia cannot accede to the WTO without U.S. consent.  As in all WTO accessions, leverage to secure commitments is based on the requirement for consensus in the Working Party — i.e., acceptance without objection by all Working Party members, including the United States, of the accession package.  While there remains much to be done, we are confident that the U.S. government will remain engaged on Russia’s accession process and, likewise, Russia will continue to make great progress.

WTO Accession as a Policy Framework

In addition to the increase in Working Party meetings, USRBC, its member companies, and the U.S. business community in general, is seeing a new momentum within the Putin Administration, which represents an internal recognition of the need for and benefits of WTO accession (as compared to external pressure from the international community).  We are not only seeing WTO accession as a mandate from Putin himself and the Executive Branch, but the Duma has created an Experts Council on Foreign Trade and Investment, whose main task is to review current legislation in terms of its WTO compliance and recommend required changes.  The Duma is currently considering amendments to 55 Russian laws related to WTO norms

Priority Areas

In order to facilitate Russia's accession to the WTO, several priority areas need to be addressed. 

Civil Aerospace:  Russia maintains high tariffs on imported aircraft.  Import duties, when added together with the domestic VAT, equal 40 percent of the purchase price.   In a 1996 bilateral MOU on "Market Access for Civil Aircraft," the Russian government confirmed it will join the WTO Agreement on Trade in Civil Aircraft, which together with other WTO agreements, establishes the basic international rules governing trade in the aircraft sector. 

In the interim, the Russian Government committed to providing market access by taking trade-liberalizing steps such as tariff reductions and tariff waivers.  These steps are designed to enable Russian airlines to meet their needs for importing American and other non-Russian civil aircraft on a nondiscriminatory basis.  Since the signing of the MOU, the Russian Government has lowered its tariffs on imports of aircraft from 50 percent to 20 percent currently, and permitted 16 US-built airplanes to enter Russia on limited tariff waivers.  These are steps in the right direction, but to serve Russia’s airlines’ need for equipment, more needs to be done. 

The Russian Government is under pressure from domestic aircraft makers to protect its market from competitive imports.  The USRBC argues that by granting PNTR and shoring up domestic support for Russia’s entry into the WTO, today’s market barriers will be eliminated.  In turn it will give Russia’s domestic industry its best opportunity to bring value to world production markets by attracting investment to those areas of comparative advantage.

Telecommunications: The creation of an investor-friendly infrastructure and legislative environment (e.g., reducing existing tariff and non-tariff barriers that limit foreign participation in this sector) is critical to the development of the telecommunications sector in Russia.  Russia presented a new goods and services offer in March 2001, which included its agreement to accept a WTO accord that commits to binding, pro-competition regulatory disciplines.  The new offer also included an initial offer of 25 percent foreign equity in the mobile telephone sector.  This goods and services offer continues to be revised based on continual bilateral and multilateral negotiations.

Financial Services: The strengthening of Russia’s financial services sector is crucial to the country’s economic development.  Some important steps include a reduction in the number of state-owned banks; increased liberalization to allow mergers and acquisitions; greater access for foreign banks; openness to international participation in the Russian insurance industry (which remains poorly developed and whose members have promoted exclusionary legislation to date); development of a legislative framework governing the leasing industry; and improvement in access to capital and credit relationships.  Another important issue is Russia’s adoption of International Accounting Standards (IAS). 

 Intellectual Property Rights: Protection of intellectual property rights is a key factor influencing Russia’s WTO accession and its ability to attract foreign investment.  IPR violations—including trademark and patent infringement, counterfeiting, copyright violations, and piracy—remain epidemic.  Incomplete anti-counterfeit legislation, lack of enforcement, weak penalties, corruption, and lack of education and training of law enforcement and judicial officials in this area are key impediments to better IPR protection and enforcement in Russia.  Specifically, significant shortcomings remain in the country’s trademark and patent laws, especially provisions dealing with famous trademarks and geographical indications, as well as confiscation and destruction of counterfeit goods.

The WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) covers seven types of IPR: patents, copyright, trademarks, geographical indications, industrial designs, layout-designs of integrated circuits, and undisclosed information.  Each WTO member is obligated to implement the TRIPS agreement through their respective domestic legislation, to incorporate the rights and obligations of an IPR-holder and the manner in which these will be enforced.

Legislative progress is being made in Russia.  The government submitted a legislative package to the State Duma in July 2001.  The package includes amendments to the Law on Trademarks, Service Marks and Appellations of Origin of Goods; Patent Law; Copyright Law; and the Law on Legal Protection of Computer Programs and Databases; among others.  The amendments to the Trademark Law and the Patent Law have passed the first reading in the Duma, but the amendments to the Copyright Law have not.  In most respects, the proposed amendments will bring Russia’s legislation into TRIPS compliance.

Bilaterally, the U.S. government has not hesitated to criticize the Russian government on its failure to protect intellectual property rights: in May 2001, the USTR placed Russia on the Special 301 Priority Watch List.  The USTR also began a review last year of Russia’s eligibility under the Generalized System of Preferences (GSP) program, based on issues raised by the U.S. copyright industry concerning Russia’s intellectual property regime.  (The GSP program is currently expired; however, pending its reauthorization, the review of Russia’s GSP eligibility would continue.)

Agriculture:  Russia’s domestic support for its agricultural sector is a major impediment to accession.  It is important to recognize that the WTO does not prohibit domestic support (a popular misperception in Russia); rather, it limits certain types of support (for example, export subsidies).  In WTO terminology, subsidies in general are identified by “boxes” that are given the colors of traffic lights: green (permitted), amber (slow down or reduce), and red (forbidden).  The WTO Agriculture Agreement has no red box; therefore WTO members with trade-distorting domestic supports in the amber box must make commitments to reduce these measures.

Over the past 10 years, Russia’s subsidies have primarily been amber-box measures.  The government’s main task in current WTO agricultural negotiations is to reduce these measures and focus on green-box measures.  Examples of green-box measures include programs that are not directed at particular products such as environmental protection, rural infrastructure and regional development programs.    

In terms of annual support levels, Russia has offered a $16 billion ceiling on its subsidies, and this issue continues to be negotiated (WTO members prefer a figure closer to $2-3 billion).  Due to the sensitive role agriculture continues to play in the economy, Russian government officials consider agriculture one of the most politically sensitive issues of its accession.

Boeing and Russia

Russia has been a good place for Boeing to build industrial cooperation.  Boeing’s commitment to and investment in Russia are strategic and long-term.  Boeing has invested $1.3 billion in Russia over the last 10 years.  In the civil space sector, the Company has invested in projects such as the International Space Station and the Sea Launch satellite-launching venture.  In aviation, Boeing’s Moscow Design Center contracts with Russian manufacturers to employ more than 350 Russian aerospace engineers who supply unique design capabilities while learning market- and rules-based management practices.  The company also cooperates with 350 scientists in 6 Russian research institutes to explore civil aerospace technologies and ideas, and has begun work with Russian partners to explore the development of a Russian regional-size commercial jetliner. 

There are currently 25 Boeing airplanes operating in Russia, and another 45 in the remaining former-Soviet countries.  The demand for modern aircraft exists, and Boeing aims to grow those numbers significantly. 

Further access to the Russian market is vital.  Aeroflot’s plans to grow and modernize its fleet presents a great opportunity.  In addition, opportunities exist in aircraft and parts sales to the many smaller Russian operators, air traffic control infrastructure, airport development and operation, airline engineering and training, and management training across the entire civil aviation sector.

This potential, however, hinges on a commitment by the governments of both countries to facilitate and expand free and open trade between the United States and Russia.  Graduating Russia from annual Jackson-Vanik review and extending PNTR are consistent with this principle and are indirectly linked to America’s industrial aspirations in the Russian market.

Russian Expectations and American Commitments

Not only does this decision involve the principle of free trade, it also involves the principle of good-faith, upholding one’s commitments, and standing by your allies.

President Putin is out in front in Russia in his policies of alignment with the West and his perceived pro-American positions.  In the hours after September 11, Russian Defense Minister Sergei Ivanov reversed his position on U.S. troops in Central Asia.  After first saying there was not “any basis for even the hypothetical possibility” of a NATO presence in Central Asia, Ivanov backtracked and pledged his support to the president.  There a number of officials in the national security and intelligence apparatus, however, who continue to question the alliance with the West.

These voices of discontent are no longer confined to national security and intelligence circles.  Some who originally praised President Putin’s westward turn are beginning to question how it benefits Russia.  Just last week one of the Duma’s most influential foreign policy and defense experts, Alexei Arbatov, was quoted in an AP story as saying, “The majority, who did not support the President’s plans from the beginning, now are washing their hands of them, and saying ‘we warned you, you won’t get anything from the Americans!”

Also last week, Lenoid Ivashov, a former high-ranking Defense Ministry official, likened Russia’s moves after September 11 to “an attempt at geostrategic suicide.”  Former Foreign Minister Andrei Kozyrev commented to the American Chamber of Commerce in Moscow that, “even state media portray all these cooperative moves by him (Putin) almost as treason.”

These comments suggest the growth of real opposition to the Putin government- opposition rooted in contempt for pro-American policy.  Since Russian support in the war on terrorism is important to its success, it should be important for the US Government to support the Putin government.  In this context, it is even more important that we deliver on our word.  The US government can and should take this step.  It will yield benefits in the strategic bilateral relationship, but, most importantly, it is sound trade policy for the United States.

Conclusion

In conclusion, the US Russia Business Council and its member companies urge the Congress to repeal the outdated Jackson-Vanik amendment.  It is clearly the right time and the right measure.  Removing the restrictions will put healthy political and economic relations between the US and Russia on a faster track. 

The USRBC also urges the Congress to work separately to bring Russia into the WTO as quickly as possible.  In doing so, lawmakers will help ensure healthy US-Russia trade relations.  Accession will codify and strengthen the obligations Russia has undertaken already to align themselves with the global rules-based trading system and provide a firm foundation for progress.

Thank you.