Analytical Review: By Tatyana Slipachuk, FCIArb, Partner, Head of the International Arbitration Practice Group
and Natalia Mykolska, Senior Associate, Vasil Kisil & Partners Law Firm, Kyiv, Ukraine, August 27, 2010

Nowadays, a total ban on grain export from Ukraine (this is what the Ukrainian Grain Association insists on) or introduction of grain export quotas are extensively reported on by the press. The reason is that the grain market of Ukraine is experiencing rather hard times because this year’s harvest is below the harvest projections, which, in the case of significant export volumes, is likely to cause a substantial rise in grain prices in the domestic market and this, in turn, may adversely affect the grain reserve formation by the Agrarian Fund of Ukraine.

The market operators have already declared that customs authorities of Ukraine have had actually blocked the grain export by their actions actually constituting an overscrupulous inspection of grain quality for its conformance with the information set forth in the export documents.

Under such circumstances and in consideration of practicable solutions, the question is quite natural: will the imposition of a ban on grain export or introduction of grain export quotas not contravene international obligations of Ukraine, in particular, those assumed at the time of Ukraine's accession to WTO?! Don’t the actions of customs authorities violate those obligations already as of today?

First of all, it should be considered that Article XI:1 of GATT 1994 contains a general rule, which provides that no prohibitions or restrictions other than duties, taxes or other charges (including quotas, export licences or any other export-related measures) shall be instituted or maintained.

Ukraine, on its part, assumed an obligation laid down in Clause 255 of the Working Group’s Report on Ukraine’s Accession to the WTO that all of the export prohibitions or restrictions, including quotas, would be applied in strict compliance with Article XI of GATT 1994.

This, however, does not mean that there is no exception to the aforementioned rule. Article  XI:2 (Đ°) of GATT 1994 expressly provides for a possibility to apply temporary export prohibitions or restrictions (including quotas) in order to prevent or relieve critical shortages of food supplies.

According to VKP’s lawyers such prohibitions and restrictions should, however, be introduced in strict compliance with certain principles and rules laid down in WTO agreements. If we follow the rules,  Ukraine should substantiate the existence of reasons for applying the respective restrictions and prohibitions.

Pursuant to Article XIII:1 of GATT 1994, such prohibitions and restrictions shall be non-discriminatory, i.e. they shall be similarly applied by any contracting party on the exportation of any product destined for the territory of any other contracting party.

Ukraine should also duly notify the WTO Secretariat of the application of respective prohibitions and restrictions according to a special procedure (detail the products to which such restrictions will be applied; type of restrictions; explicitly specify the reasons for applying these or those prohibitions and restrictions and provide the reasons for the possibility to apply them from the standpoint of the WTO; and also analyze possible impact on trade). 

Since, in this particular case, the matter concerns grain, Ukraine should also comply with additional requirements provided by Article 12 of the WTO’s Agreement on Agriculture, all the more so that, in Clause 391 of the Working Group’s Report on Ukraine’s Accession to the WTO, Ukraine undertook to comply with all the provisions of the aforementioned agreement. In particular, Ukraine will have to give due consideration to the effects of such prohibition or restriction on the food security of WTO members importing grain from Ukraine.

In addition, before instituting an export prohibition or restriction, Ukraine should give notice in writing, as far in advance as practicable, to the Committee on Agriculture comprising such information as the nature and the duration of such measure, and shall consult, upon request, with any other WTO member whose interest will be affected by such prohibition or restriction, and should provide such WTO member with necessary information. 
Speaking about the actions of customs authorities that have virtually blocked the grain export, lawyers believe that they can be treated as de facto export restrictive measures of governmental authorities that were taken without compliance with all of the aforementioned rules, i.e in violation of Ukraine’s obligations within the WTO.

In this connection, there is a reasonable risk that the WTO members whose interests will be affected by the application of export prohibitions or restrictions, are likely to initiate dispute settlement proceedings in the WTO and seek not only the lifting of restrictive measures, but also monetary compensation.

That is why it is very important that the Ukrainian government adopts its decision and takes every reasonable action to implement such decision and remove the restrictions de facto as soon as reasonably possible.

We should also remember about Ukraine’s accession to the Grains Grade Convention in August of this year (the Law of Ukraine “On Accession to the Grains Trade Convention” entered into force on August 9, 2010), wherein Ukraine undertook not only to promote the expansion of international trade in grains and secure the freest possible flow of this trade, but also eliminate trade barriers and unfair and discriminatory practices.

This Convention also provides for Ukraine's obligation to contribute to the fullest extent possible to the stability of international grain markets, to enhance world food security, and to contribute to the development of countries whose economies are heavily dependent on commercial sales of grain.

Lawyers warn that if Ukraine introduces any prohibitions on grain export thereby breaking the rules, it may not only adversely affect the image of Ukraine as a reliable trade partner, but also have negative consequences for the State in the form of the initiation of the WTO dispute settlement proceedings and, presumably, decision making on the violation by Ukraine of the obligations assumed thereby within the WTO and on the recovery of a monetary compensation from Ukraine.

As far as the hopes of Ukrainian exporters are concerned that the export prohibition will be used as a force majeure to revise Ukraine's obligations under foreign economic agreements for grain supply, it should be considered that, [1] first, it is rather ambiguous and disputable that the prohibition or imposition of export quotas will be recognized as a force majeure and, [2] second, in the case of a force majeure, the performance of obligations will simply be extended and exporters will be forced to perform such obligations upon termination of the force majeure.

VASIL KISIL & PARTNERS, 17/52A Bogdana Khmelnytskogo St., Kyiv 01030 Ukraine, Tel. +38 044 581 7777, Fax +38 044 581 7770, Vasyl Hubarets, Head of PR Department, E-mail: hubarets@vkp.kiev.ua, http://www.kisilandpartners.com.

NOTE:  Vasil Kisil & Partners is a member of the U.S.-Ukraine Business Council, Washington, D.C., www.usubc.org.