Permanent Normal Trade Relations (PNTR) Status for Russia and U.S.-Russian Economic Ties

Permanent Normal Trade Relations (PNTR)
Status for Russia and U.S.-Russian
Economic Ties
William H. Cooper
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
At several meetings with Russian President Vladimir Putin, President George W.
Bush stated that his administration will work with the Congress to grant Russia
permanent “normal trade relations” (PNTR) status. The change in Russia’s trade status
will require legislation to lift the restrictions currently applied to Russia under Title IV
of the Trade Act of 1974, which includes the “freedom-of-emigration” requirements of
the Jackson-Vanik amendment. On November 19, 2006, U.S. and Russian officials
signed the bilateral agreement on Russia’s accession to the World Trade Organization
(WTO). This step allowed Russia to move much closer to acceding to the WTO.
Members may confront the issue of whether to grant Russia PNTR during the second
session of the 110th Congress. This report will be updated as events warrant.
President Bush has stated that his Administration would work with the Congress to
extend permanent normal trade relations (PNTR) status to Russia. This effort is part of
a group of bilateral economic, foreign policy, and national security measures supported
by the Bush Administration to forge a closer working relationship between the United
States and Russia. Granting Russia PNTR status requires a change in law because Russia
is prohibited from receiving unconditional and permanent NTR under Title IV of the
Trade Act of 1974, which includes the so-called Jackson-Vanik amendment. This report
examines this legislative issue in the context of U.S.-Russian economic ties.
What are NTR Status and the Jackson-Vanik
“Normal trade relations” (NTR), or “most-favored-nation” (MFN), trade status is
used to denote nondiscriminatory treatment of a trading partner compared to that of other

countries.1 Only a few countries do not have NTR status in trade with the United States.
In practice, duties on the imports from a country which has been granted NTR status are
set at lower, concessional rates than those from countries that do not receive such
treatment. Thus, imports from a non-NTR country can be at a large price disadvantage
compared with imports from NTR-status countries.
Section 401 of Title IV of the Trade Act of 1974 requires the President to continue
to deny NTR status to any country that was not receiving such treatment at the time of the
law’s enactment on January 3, 1975. In effect this meant all communist countries, except
Poland and Yugoslavia. Section 402 of Title IV, the so-called Jackson-Vanik
amendment, denies the countries eligibility for NTR status as well as access to U.S.
government credit facilities, such as the Export-Import Bank, as long as the country
denies its citizens the right of freedom-of-emigration. These restrictions can be removed
if the President determines that the country is in full compliance with the freedom-of-
emigration conditions set out under the Jackson-Vanik amendment. For a country to
maintain that status, the President must reconfirm his determination of full compliance
in a semiannual report (by June 30 and December 31) to Congress. His determination can
be overturned by the enactment of a joint resolution of disapproval concerning the
December 31st report.
The Jackson-Vanik amendment also permits the President to waive full compliance
with the freedom of emigration requirements, if he determines that such a waiver would
promote the objectives of the amendment, that is, encourage freedom of emigration. This
waiver authority is subject to a annual renewal by the President and to congressional
disapproval via a joint resolution.2 Before a country can receive NTR treatment under
either the presidential determination of full compliance or the presidential waiver, it must
have concluded and enacted a bilateral agreement that provides for, among other things,
reciprocal extension of NTR or MFN treatment. The agreement and a presidential
proclamation extending NTR status cannot go into effect until a joint resolution approving
the agreement is enacted.
Russia’s NTR Status
In 1990, the United States and the Soviet Union signed a bilateral a trade agreement.
The agreement was subsequently applied to each of the former Soviet states. The United
States extended NTR treatment to Russia under the presidential waiver authority
beginning in June 1992. Since September 1994, Russia has received NTR status under
the full compliance provision. Presidential extensions of NTR status to Russia have met
with virtually no congressional opposition.

1 MFN has been used in international agreements and until recently in U.S. law to denote the
fundamental trade principle of nondiscriminatory treatment. However, “MFN” was replaced in
U.S. law, on July 22, 1998, by the term “normal trade relations.” (P.L. 105-206). MFN is still
used in international trade agreements. The terms are used interchangeably in this report.
2 For more information on the Jackson-Vanik amendment see CRS Report 98-545, The Jackson-
Vanik Amendment: A Survey, by Vladimir N. Pregelj.

Russian leaders have continually pressed the United States to “graduate” Russia from
Jackson-Vanik coverage entirely. They see the amendment as a Cold War relic that does
not reflect Russia’s new stature as a fledgling democracy and market economy.
Moreover, Russian leaders argue that Russia has implemented freedom-of-emigration
policies since the fall of the communist government, making the Jackson-Vanik
conditions inappropriate and unnecessary.
While Russia remains subject to the Jackson-Vanik amendment, some of the other
former Soviet republics have been granted permanent and unconditional NTR. For
example Kyrgyzstan and Georgia received PNTR in 2000, and Armenia received PNTR
in January 2005. Perhaps what has irked Russian leaders greatly is that the United States
granted permanent and unconditional NTR status to Ukraine in 2006.
U.S.-Russian Economic Ties
During the Cold War, U.S.-Soviet economic ties were very limited. They were
constrained by national security and foreign policy restrictions, including the Jackson-
Vanik amendment restrictions. They were also limited by Soviet economic policies of
central planning that prohibited foreign investment and tightly controlled foreign trade.
With the collapse of the Soviet Union, successive Russian leaders have been
dismantling the central economic planning system. This has included the liberalization
of foreign trade and investment. U.S.-Russian economic relations have expanded, but the
flow of trade and investment remains very low, as reflected in table 1, which contains data
on U.S. merchandise trade with Russia since 1997.
Table 1. U.S. Trade with Russia, 1997-2006
(Billions of U.S. Dollars)
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Exports 3.4 3.6 2.1 2.1
Imports 4.3 5.7 5.9 7.8
B a l a nc e s -1 . 0 -2 . 3 -3 . 9 -5 . 6 -3 . 5 -4 . 4 -6 . 2 -8 . 9 -1 1 . 3 -1 5 . 1
Source: U.S. Department of Commerce. International Trade Administration.
The table indicates that U.S.-Russian trade, at least U.S. imports, has grown
appreciably. U.S. imports have more than quadrupled from $3.4 billion to $19.8 billion
from 1997 to 2006. U.S. exports surged somewhat but declined in 1999, because of the
rapid depreciation of the ruble after the1998 Russian financial crisis. Despite the increase
in trade, Russia accounted for only 1.1% of U.S. imports and 0.4% of U.S. exports in
2006. U.S. trade accounts for a small portion of total Russian trade, although it is more
significant than Russia is to U.S. trade. In 2006, the United States accounted for 3.1% of
Russian exports and 4.4% of Russian imports.3

3 World Trade Atlas. Global Trade Information Services, Inc.

U.S. exports to and imports from Russia are heavily concentrated in a few
commodity categories. In 2006, the top five 2-digit Harmonized System (HS) categories
of imports, accounted for over 80% of total U.S. imports from Russia and consisted of
precious stones and metals, inorganic chemicals, mineral fuels, aluminum, iron and steel,
and fish and other seafood. About 60% of U.S. exports to Russia consisted of products
in three 2-digit HS categories: aircraft, machinery (mostly parts for oil and gas production
equipment), and meat (mostly poultry).4
U.S. investments, especially direct investments, have increased since the
disintegration of the Soviet Union, although as with merchandise trade, the levels are far
below their expected potential. The United States accounted for $4.6 billion in foreign
direct investment in Russia in 2006. The United States was technically the third largest
source of foreign direct investment; however, the first two– Cyprus and Luxembourg– are
considered to be largely sources of repatriated Russian capital rather than of original
foreign capital.5
Issues in U.S.-Russian Trade
Besides the lack of PNTR from the United States that has been an irritant for Russia,
a number of issues have plagued the U.S.-Russian bilateral relationship and would likely
be raised in a congressional debate on PNTR for Russia. U.S. agricultural producers have
viewed Russia has a potentially lucrative export market. Russia has been a leading
market for U.S. poultry producers, for example. However, Russia has imposed
restrictions on its meat imports that U.S. producers consider unnecessary and contrary to
international standards. For example, Russia had also imposed restrictions on imports of
U.S. pork, arguing that U.S. processing did not adequately guard pork shipments from
trichina, a parasitic worm despite U.S. pork producers assurances that its freezing of pork
prevents trichina infestation, and that U.S. pork has not been associated with trichina
because of how U.S. pigs are raised. Russia also imposed a ban on beef imports in
December 2003, after the discovery a case of “mad-cow” in the United States. Russian
officials had threatened to not abide by a 2003 bilateral meat agreement that assigned
quotas for Russian imports of U.S. poultry, pork, and beef under a more general Russian
quota regime. Members of Congress raised concerns about Russian regulations of meat
imports and stated they could not support PNTR if the concerns were not addressed.6
Another significant issue for the United States has been the perceived lack of
enforcement intellectual property rights (IPR) protection and had been a major stumbling
block in the bilateral negotiations on Russia’s accession to the WTO. Producers of

4 World Trade Atlas.
5 Tendentsii I perspectiva (Trends and Outlook). 2007.
6 For example, on May 11, 2006, the chairmen and ranking members of the Senate Finance
Committee and House Ways and Means Committee in a letter to the White House expressed
concerns regarding Russian sanitary and phytosanitary regulations and the lack of IPR protection
and urged the Bush Administration to pursue these issues in the WTO accession talks. United
States Senate Committee on Finance. Press release. May 11, 2006.

DVDs, CDs, and other products of intellectual property have consistently cited Russia as
a leading source of pirated materials. The Office of the United States Trade
Representative has also placed Russia on its priority Special 301 watch list, indicating
potential problems that need to be monitored and that may require further action.
Russian economic policies and regulations have been a source of concerns. The
United States and the U.S. business community have asserted that structural problems and
inefficient government regulations and policies have been a major cause of the low levels
of trade and investment with the United States. Russia maintains high tariffs on some
goods that U.S. manufacturers try to export. For example, tariffs on cars plus the excise
tax that is prorated for engine displacement adds close to 70% on the price imported U.S.
passenger cars and sports utility vehicles. Russia also maintains a 20% tariff on aircraft.
U.S. exporters have also cited problems with Russian customs regulations that are
complicated and time-consuming.
While they consider the investment climate to be improving, U.S. investors and
potential investors still cite some barriers. For example, U.S. financial services providers
have criticized Russian government restrictions on foreign investment in the banking and
insurance sectors and prohibitions on the establishment of branches of foreign-owned
insurance companies and banks.7 Investors have been also been wary of Putin
Administration actions in reestablishing Russian government control over oil and natural
gas operations and over other natural resources.
Russia’s Accession to the WTO
President Putin has made Russia’s entry into the World Trade Organization (WTO)
a high priority. The issue is closely tied to PNTR since unconditional nondiscriminatory
treatment, or MFN, is a fundamental principle of WTO membership. President Putin and
his government see WTO membership as an important step in integrating the Russian
economy with the rest of the world and promoting economic reform. It would also
symbolize another break with Russia’s Soviet past, as the Soviet Union had refused to
join the General Agreement on Tariffs and Trade (GATT), the predecessor of the WTO.
China’s accession to the WTO in December 2001 has probably intensified Russia’s
determination. The United States has continually supported Russia’s accession to the
WTO as a way of encouraging the development of a market economy in Russia and to
obtain greater access to Russian markets.
On November 19, 2006, Russian and U.S. officials signed a bilateral agreement as
part of the process for Russia’s accession to the WTO. The United States raised many of
the above-mentioned issues during the negotiations. Russia stated that it would uphold
the 2003 bilateral agreement on quotas on imports of U.S. meat, would accept U.S.
methods of controlling trichina if those methods are considered internationally acceptable,
and would allow imports of beef from cattle younger than 30 months. Russia also agreed
to strengthen enforcement of intellectual property rights, and reduce restrictions on

7 Members of Congress also raised this issue in the context of Russian PNTR. See for example,
Oxley, Frank: Financial Service Offer May Jeopardize Russia PNTR. Inside U.S. Trade.
September 22, 2006.

foreign investment in financial services. It is unclear whether the agreement will satisfy
those most concerned about these issues.
Implications and Legislation
Granting Russia permanent and unconditional NTR status will have little direct
impact on U.S.-Russian trade. Russian imports have entered the United States on a NTR
or MFN basis since 1992. The initiative would be a political symbol of Russia’s
treatment as a “normal” country in U.S. trade, further distancing U.S.-Russian relations
from the Cold War. It would also be a step in the direction of Russia’s accession to the
WTO. For investors and other business people, permanent NTR may mean a more stable
climate for doing business.
With the signing of bilateral agreement on WTO accession with the United States
on November 19, 2006, Russia completed a major step towards joining the WTO. It still
must compete negotiations with a WTO Working Party on conditions for its accession.
Members of the Working Party, including the United States, have raised concerns about
Russia’s position on agriculture subsidies and the failure to enforce intellectual property
rights, among other issues. If Russia’s accession to the WTO to completion, the issue of
PNTR for Russia may emerge during the second session of 110th Congress. In a possible
debate on PNTR for Russia, Members of Congress may very well consider whether their
concerns regarding Russian regulations on agricultural imports, intellectual property rights
protection, or limitations on foreign investment have been sufficiently addressed in the
bilateral agreement. Other issues regarding overall Russian economic or foreign policies,
such as Russia’s economic ties to Iran, could also emerge.