Russian trade and finance officials have decided to recommend that the government introduce 40 percent penalty duties on most categories of Ukrainian pipe imports and 20 percent on large-diameter pipes.

If the government agrees, the new regime will begin April 1, but the decision also gives the Ukrainian government until March 30 to accept a quota limit instead.

Officials at the Ministry of Economic Development and Trade told The Russia Journal that the inter-ministerial committee responsible for protective measures in foreign trade accepted the findings of an inquiry into domestic injury, which the trade industry began almost a year ago. The inquiry was requested by Russian pipemakers.

Last year, Ukrainian pipe imports to Russia were running at a rate of about 65,000 tons per month. The aggregate for the year, industry sources said, was 768,000-788,000 tons. The total represents roughly 70 percent of all pipe imports to Russia and 15 percent of Russian pipe consumption.

The ministers, led by Deputy Prime Minister and Finance Minister Alexei Kudrin, will draft the text of the government's decision by March 30. Until then, officials say, the Ukrainians will have time to accept a quota of 480,000 tons of pipe imports for the year.

The latest decision has been reported as a breakthrough for the domestic pipemakers in their yearlong battle to restrict the flood of Ukrainian imports. According to Maxim Medvedkov, Russia's chief trade negotiator, the decision was not a political one. Rather, he said, it was "dictated by the need to observe Russian legislation on protection of the domestic market."

The move came after Russian pipemakers attacked Kudrin personally, and the government in general, for delaying a decision on the Ukrainian import problem since last December. The pipemakers had threatened to go to court this month unless the government acted according to the domestic legislation.

In its recommendation, Kudrin's committee proposed applying 40 percent duties on 1,020-millimeter and 1,220-millimeter pipes, although the Ukrainian government had proposed equating them with 1,420-millimeter pipes, and excluding them from the quota altogether.

The lower rate of duty was proposed for 1,420-milimeter pipes, because there is strong demand for these imports from Gazprom and other Russian energy producers, which have lobbied the government not to raise their costs.

Alexander Samoilov, chief pipe-industry expert at the Russian Fund for Development said, "It is too early to consider the introduction of duties a fait accompli." He says that before March 30, Ukrainian pipemakers are likely to agree to quotas proposed by the Russian side.

He also said he suspects the Ukrainians will try to introduce into the agreement a mechanism that will enable them to review duties very soon, probably earlier than six months.

However, in the event the duties are introduced, Samoilov says: "Forty percent duties are an adequate protection measure. It is also significant that 1,020- and 1,220-millimeter pipes are subject to 40 percent duties, not 20 percent, because otherwise Ukrainian pipe exporters could have used this as a loophole, declaring 1,420-millimeter pipes as 1,020-1,220-millimeter pipes at customs. Visually it is rather difficult to distinguish the two."

Samoilov said that Volzhsky pipe plant (VTZ), Russia's fourth largest producer overall, produces spirally welded 1420-millimeter pipes of excellent quality. But there is no competition between VTZ and the Kharzyzsk pipe plant, Ukraine's 1,420-millimeter pipe producer. This is because VTZ produces 1,420-millimeter pipes that are up to 16-millimeters in thickness. Gazprom, Russia's leading gas producer, requires 18.7-millimeter thickness, and only Kharzyzsk can supply to this standard.

By focusing the higher duty-level on the 1,020- and 1,220-millimeter pipes, Samoilov said, the new duty regime would protect the domestic industry's large capacity for production. 1,020-millimeter pipes are manufactured at Chelyabinsk Pipe, the second largest producer, Volzhsky, and Vyxunsky Metal Works, the leading producer. 1,220-millimeter pipes are produced at Chelyabinsk and Volzhsky.

An estimate by Alfa Equities in Moscow suggests that introduction of the duty or the quota scheme will lift Chelyabinsk's sales this year by 8 percent. In 2000, the pipemaker had estimated revenues of $198.5 million, an increase of 133 percent over 1999. This year, the company is projecting revenues of $214.5 million.

According to output data for January, just released, total production of seamless and electric-welded pipes in Russia for the month was 396,400 tons, a gain of 27 percent over January 2000. Vyxunsky produced 70,200 tons (up 57 percent); Chelyabinsk, 59,100 tons (up 41percent); Sinara Pipe, 43,800 tons (up 25 percent); Volzhsky, 42,900 tons (up 41 percent); Pervouralsk Pipe, 41,200 tons (up 4 percent); and Taganrog Metal Works, 35,600 tons (up 10 percent). Smaller plants produced another 23,000 tons.

Samoilov said that in the event that the duties are adopted next month, the introduction of a new VAT payment scheme, starting July 1, will require Ukrainian pipe exporters to pay both duties. According to Samoilov, the 20 percent VAT is likely to be enough of a penalty for the 1,420-millimeter imports. "If the 20 percent duty is introduced in April, I expect lobbying will lift this as soon as the VAT kicks in, in July," Samoilov said.

From July 1, Russia and the Ukraine will introduce a new scheme for collection of VAT. Until now, according to the agreement between Moscow and Kiev, VAT is supposed to be paid by the Ukrainian exporters. However, Russian industry sources claim the government in Kiev subsidizes the exports by failing to collect the tax. Starting July 1, VAT will be paid by importers. This will make control over Ukrainian pipe imports into Russia much easier, domestic pipemakers say.