Last week, the U.S. Department of Commerce (“DOC”) concluded that the Russian Federation will be considered a non-market economy (“NME”) for future antidumping duty (“AD”) proceedings. This decision reversed the DOC’s 2002 conclusion that Russia was a market economy country, a conclusion that had been reaffirmed by the DOC as recently as 2021. This decision could have significant consequences for companies importing products from Russia subject to AD orders as, generally speaking, the use of the NME methodology results in higher AD margins. As a result, companies involved in certain industries, particularly in the steel, fertilizer and chemical sectors, could feel an impact from this decision after it begins to take effect.
In AD proceedings involving market economy countries, the DOC calculates a foreign producer/exporter’s dumping margin using the company’s own sales and cost data – that is, data on its sales in a relevant comparison market (typically its own home market) and its own cost of production data. But for NMEs, the DOC rejects the use of this information if it finds that the country “does not operate on market principles of cost or pricing structures, so that sales of merchandise in such country do not reflect the fair value of the merchandise.” In such cases, the DOC replaces the company’s home market sales and cost of production data with a normal value based on a surrogate cost of production calculated using input costs taken from a country at a comparable level of economic development. All things being equal, the use of the NME methodology generally results in higher and less predictable dumping margins for respondents.
In determining whether a country should be considered a market economy for AD purposes, the DOC looks at six statutory factors:
- The extent to which the currency of the foreign country is convertible into the currency of other countries;
- The extent to which wage rates in the foreign country are determined by free bargaining between labor and management;
- The extent to which joint ventures or other investments by foreign firms of other foreign countries are permitted in the foreign country;
- The extent of government ownership or control of the means of production;
- The extent of government control over the allocation of resources and over the price and output decisions of enterprises; and
- Such other factors as the DOC considers appropriate.
The decision to reconsider Russia’s status as a market economy country initially arose in 2021 in the context of an AD investigation of imports of urea ammonium nitrate (“UAN”) from Russia. In that case, the petitioning U.S. industry asked the DOC to reconsider whether Russia should be able to retain its status as a market economy country. In an early phase of that proceeding, the DOC concluded that, while there were concerns about Russia continuing with its market-oriented reforms since the time it was graduated to market economy status in 2002, on balance, Russia remained a market economy country.
Toward the end of that investigation – and importantly, after Russia’s invasion of Ukraine – the petitioning U.S. industry again asked the DOC to reconsider Russia’s market economy status. Since insufficient time remained in that investigation to conduct a full analysis, the DOC agreed to initiate a changed circumstances review (“CCR”) under the UAN investigation to consider the question. However, before the CCR could be completed, the U.S. International Trade Commission issued a final negative determination, thus terminating the UAN investigation and, by extension, the CCR. The DOC then announced it would consider this issue in the context of a separate AD investigation (this one involving emulsion styrene butadiene rubber). It transferred to that investigation all of the submissions previously made in the UAN CCR and allowed interested parties the opportunity to comment. While the DOC’s memorandum was issued in the context of this investigation, it has general applicability to all present and future AD proceedings involving Russia.
In its memorandum, the DOC reviewed the six factors described above and concluded that, for each one, the Government of the Russian Federation (“GOR”) had significantly backtracked on its commitments to market economy reforms, particularly since the time of the invasion. The DOC’s analysis is extensive and thorough, but some of the factors upon which the DOC relied for its decision are:
- The GOR’s extensive involvement in currency markets, which has had a significant impact on the ruble’s convertibility and exchange rate;
- Increasing limitations on investment by non-Russian firms in Russia;
- Increasing involvement of the GOR in the economy, including its increased use of state-invested enterprises, particularly in the energy sector, to support its war in Ukraine;
- Increased control over domestic prices by the GOR and the rise of GOR influence in the banking sector; and
- Increasing levels of corruption and decreasing respect for the rule of law and freedom of expression.
The impact of this decision may not be immediately felt. The DOC announced that it will use its NME methodology to calculate the dumping margin for Russian producers in any “segment” (i.e., a new investigation or an administrative review of an existing order) with period of investigation/review beginning after November 1, 2022. Since these periods are typically 12 months long, this means that the DOC’s decision will not have full effect until these new segments are initiated in late 2023 or early 2024.
For proceedings whose periods straddle the November 1, 2022 date, the DOC stated that the decision of which methodology to use would be considered on a case-by-case basis, but gave little indication of what factors it would consider in determining which methodology to use. Given that the DOC consistently characterized the market economy conditions in Russia at the time of its 2021 review as a close call in terms of whether Russia remained a market economy, it seems possible that, in many cases that straddle the November 1, 2022 date, the DOC will use its NME methodology. And this seems particularly likely for those cases where the majority of the period falls after February 2022, i.e., the date of Russia’s invasion of Ukraine, which the DOC identifies as a major contributor to the backtracking of the GOR’s market-oriented policies.
As noted above, while AD investigations using the NME methodology generally result in higher margins, the impact of this decision could be particularly acute as to producers in Russia. While the methodology described above itself generally contributes to higher margins, even before getting to that point, all respondent companies in an NME country must establish that they are separate from the government in law (de jure) and in fact (de facto) in respect of their export activities in order to obtain their own calculated dumping margin. A failure to demonstrate independence from the government will in almost all cases result in the application of a punitive adverse “facts available” rate.
The DOC’s analysis of Russia’s market economy status raises the question of whether major Russian producers will be able to achieve separate-rate status. One of the DOC’s findings was that the GOR was imposing policies on its domestic companies to support the Ukrainian war effort that are contrary to the interests of those domestic enterprises: “the choice the GOR has made to launch and sustain its war against Ukraine, despite domestic firm-level concerns about effects on their global outreach, is suggestive that the economic priorities of the private sector are subservient to the GOR’s political objectives.” While the NME test and the separate rates test are not identical in their factors or in their purposes, the DOC’s observations about the influence of the GOR on Russian businesses suggest that it may be skeptical of assertions by Russian producers that they operate independent of governmental control.
Finally, while the DOC’s decision to treat Russia as an NME may not affect trade broadly, given the relatively limited volume of Russian imports in the U.S. market, certain sectors may feel a more pronounced impact. The AD/CVD orders currently in place against Russia are highly concentrated in the steel, fertilizer and chemical industries, and, as administrative reviews under these orders are initiated, the resulting margins may increase. While this impact may not be seen in the market for some time, companies in these sectors should be particularly aware of the impact that the DOC’s recent decision could have on the price of imports of affected products from Russia.