US embassy cable - 05WARSAW206

UNCLAS  WARSAW 000206 
 
SIPDIS 
 
 
SENSITIVE 
 
STATE FOR EUR/NCE TARA ERATH AND MICHAEL SESSUMS 
USDOC FOR 4232/ITA/MAC/EUR/JBURGESS AND MWILSON 
TREASURY FOR OASIA MATTHEW GAERTNER AND ERIC MEYER 
FRANKFURT FOR TREASURY JIM WALLAR 
 
E.O. 12958:  N/A 
TAGS: ETRD, ECON, ENRG, EPET, PREL, PL, Poland-Russia 
SUBJECT:  Poland Pleasantly Surprised at Upturn in 
Commercial Relations with Russia 
 
 
 (U) This cable is sensitive, but unclassified, and NOT for 
Internet distribution. 
 
1.  (SBU)  Summary:  Polish and Russian firms had feared 
that Poland's EU accession would disrupt trade, in part 
because the EU required Poland to abrogate its bilateral 
trade agreement with Russia.  Despite problems in some 
sectors, trade has expanded significantly.  Polish exports 
were up more than 80% in the first ten months of 2004. 
Poland is lobbying Brussels for some changes in the EU- 
Russian agreement which set tariffs and quotas for the new 
members.  Poland is particularly concerned to resolve issues 
related to meat and agricultural exports, and would like to 
lower tariffs on furniture.  Poland supports Russia's entry 
into the WTO, but would like to see Russia adopt market 
based reforms first.  Poland's relations with Russia on 
energy are more sensitive.  The EU rejected the prospect of 
the two countries concluding a bilateral agreement on energy 
in October.  Poland and Russia plan to meet on the margins 
of President Putin's trip to Poland at the end of January to 
discuss a range of energy issues.  End summary. 
 
2.  (U)  The Director for Bilateral Economic Relations with 
Russia at the Ministry of Economy, Elzbieta Bodio, provided 
an overview of Polish-Russian economic relations over the 
last year.  Poland's entry into the EU forced several 
important changes in the economic relationship, including 
the EU requirement that Poland abrogate its bilateral 
economic treaty with Russia.  Both Poland and Russia wanted 
to avoid a second shock to trade relations, given that 
companies are just now recovering from the drastic shock in 
the wake of the 1998 Russian financial collapse, which 
caused Polish exports to fall $2.2 billion in 1997 to $760 
million.  The big concern was that Poland's EU accession 
would force Poland to abrogate the bilateral economic 
treaty, which governed a number of sectors, including 
setting tariffs and import quotas in some areas.  Russian 
companies were concerned they would lose market share. 
Russian exporters were particularly vocal in airing their 
fears, demanding in the fall of 2003 that the Russian 
government impose punitively high tariffs on Polish exports. 
 
3.  (U)  Despite the fears that the worst would come to 
pass, 2004 turned out to be a year of progressively 
improving relations, at least outside of energy.  It has 
turned out that Russian firms have benefited handsomely from 
the accession.  Bodio said that tariffs on ten percent of 
Russian goods had declined, while they had increased on 5%, 
and stayed the same on energy (85% of the total).  Through 
the first ten months of 2004, Polish exports were up 80%, 
despite problems in food exports.  Some of the biggest 
increases have come in machines and medicines, and even in 
furniture, despite prohibitively high Russian tariffs. 
 
4.  (U)  Poland and Russia had hoped to complete a new 
bilateral agreement which would comply with Poland's EU 
obligations regarding the internal market and competition 
before May 1.  However, this proved impossible.  The EU 
concluded an agreement with Russia on May 21, which set 
tariff rates and quota levels for Polish-Russian trade.  In 
a number of areas, relatively short transition periods were 
set up, some of which will expire early in 2005.  Meat 
exports and veterinary certificates are one of the most 
sensitive issues.  Under the agreement, Russia authorized 19 
Polish meat exporters to enter the Russian market; Russia 
left the choice of firms up to the GOP.  Poland is trying to 
find a more permanent resolution.  Poland is now lobbying 
Brussels on other areas, including pharmaceuticals, 
textiles, fertilizers, construction, cosmetics, furniture, 
meat, sugar and agricultural products.  Poland is lobbying 
Brussels to reduce the current 6% tariff on Russian aluminum 
imports. 
 
Economic Framework and Investment 
--------------------------------------------- - 
 
5.  (SBU)  Poland and Russia have subsequently signed a 
framework document which replaced some of the elements of 
the previous agreement, including setting up a joint 
commission.   Poland would very much like to conclude an 
investment agreement with Russia.  In 1992, the two 
governments agreed to a text, which was presented to the 
Duma in 1994, but never ratified.  On November 1, Hausner 
 
and Gref held initial talks on concluding a new investment 
agreement.  The Ministry of Economy reports that it has 
prepared a draft agreement, but will have to wait for the 
outcome of consultations with the EC and Russia's reaction. 
 
WTO 
------ 
 
6. (SBU) Poland supports the principle of Russia's entry 
into the WTO, which it believes will stabilize both Russia 
and Poland's overall trade relations.  However, Poland also 
wants to see Russia fully implement market reforms to meet 
the requirements of WTO membership.  Poland also has some 
bilateral concerns, particularly related to cotton and wool, 
which it has communicated to Brussels.  Poland is aware that 
Russia is lobbying heavily to join the OECD early, even 
though it has not yet met the basic requirement of WTO 
membership. 
 
Coal 
----- 
 
7. (SBU) Despite fears to the contrary, the Polish 
Government reports that its concerns about Russian dumping 
of coal have diminished considerably.  Bodio said that the 
general increase in world prices has helped, reducing the 
incentive to dump coal at low prices on the Polish market. 
Russian exports are down to between one and 1.5 million tons 
a year, which reflects the previous bilateral quota levels. 
Ministry of Economy Coal Department Director Bogolubow said 
that most of Russia's exports are now soft coal, which is 
less sensitive, as more valuable coke exports have been sent 
elsewhere.  Part of the explanation is that Russia has 
pursued other higher priced markets.  Poland had been very 
concerned that unfairly low Russian coal imports would 
disrupt the government's politically sensitive coal sector 
restructuring program.  However, since January 2004, there 
have been no significant problems. 
 
Energy 
-------- 
 
8. (SBU) Poland had proposed signing an energy agreement 
with Russia, setting out the quantities of oil and gas to be 
imported, and pledging cooperation on related areas.  First 
the Russian Government gave the idea a cold reception in 
November, and then the EU told Poland that such an agreement 
would violate internal market provisions.  Poland is 
concerned that there may be disruptions in the supply of 
Russian oil, connected to the Yukos nationalization, and 
that Russia may be pursuing alternatives to developing the 
Yamal II pipeline.  Polish and Russian delegations will meet 
to discuss energy issues on the margins of President Putin's 
visit to Poland at the end of January for the Auschwitz 
liberation anniversary commemoration. 
 
Ashe