In March 2000 – that’s 15 months ago – Deputy Prime Minister Viktor Khristenko announced that, in retaliation for an EU decision to cut Russian steel imports by 12 percent, Moscow was considering retaliation against EU steel imports to Russia.

Last week, Deputy Prime Minister Alexei Kudrin said exactly the same thing. Time has proved Khristenko’s threat was empty bluff. Should the Europeans think any differently of Kudrin?

According to officials in the Ministry of Economic Development and Trade, higher import duties averaging 17 percent may be introduced for the most popular European steel imports into Russia, including stainless flat products wider than 60 centimeters, some types of pipes, and steel construction materials. The import duty hike is being considered for the period to the end of this year, when the 1997 agreement on steel trade between Russia and the European Coal and Steel Community expires.

"If the negotiations scheduled for mid-June fail to produce a compromise between Russia and the Europeans," a Russian trade official says, "then higher import duties may be introduced in July."

The quota cut was imposed by the Europeans in reaction to Russia’s introduction in May 1999 of a 15 percent export duty on steel scrap. Trade Minister German Gref has said that Russian losses due to the quota cut in 2000 were about $30 million. He won’t say how much revenue the export duty has drawn, but if the semi-official estimate of $120 million per annum is correct, it is four times as much.

It isn’t difficult to understand the inaction of Russian finance ministers if the budget benefits so much, while commercial interests lose relatively little. This, too, is understood in Brussels. According to the Europeans, the Russian scrap duty violates both the EU-Russia economic-cooperation agreement and their steel trade pact. The Europeans claim the scrap duty is a form of protection for the domestic steelmakers, who can exploit the change in supply and demand for scrap by stockpiling the metal for their own production at low prices. Protectionism is outlawed in the EU-Russian trade pact.

On the other hand, the Russian steelmakers argue that their European competitors want to keep the volume of scrap imports up, and the price down, so as to fuel their smelters more cheaply, and make their sales, including exports to Russia, more profitable.

Russia’s steelmakers think this scrap should go to them, and allow them to export higher-value steel products, instead of low-value raw materials. When the EU dispatches steel consultants to Moscow to give advice on reorganizing the Russian industry, that value shift is exactly what the Europeans recommend.

In light of the steel trade dispute, that recommendation is only meant to push the Russian steel industry into buying European-made mill equipment, and to ensure that the new generation of Russian steel products the mills will turn out don’t sharpen competition, or shorten profit margins, for European steelmakers. The argument has been going since May of 1999, when the scrap duty was first imposed. Moscow’s threat to cut Russia’s already limited steel trade with Europe first surfaced in December 1999.

The Russian government argues its scrap duty is lawful, but the EU’s trade cut is not. If Brussels and Moscow cannot agree on the former, then the Russians argue their treaties oblige the parties to take the dispute to court. The steel quota cut is a form of retaliation, according to Moscow, which is impermissible. The way to stop it, Moscow is threatening again, is to retaliate in kind.

The problem with this is that no one believes the Russian government has the gumption to implement its threat. Several years ago now, it did mobilize a credible threat against machine-made carpet imports from Europe, in order to improve the EU’s quota treatment for Russian textiles. But since then the Kremlin has done nothing comparable. The reason is that the Russian import lobby includes the oil and gas companies, which have so far proved more influential than local steelmakers.

Members of the Russian steel industry point out that, if the EU is genuine in its support of Russia’s accession to the World Trade Organization, it will not seek to replace the expiring quota limits with new ones, because these are not legal between WTO members. But a little hypocrisy can go a long way, especially if WTO accession remains at least two, possibly five years away.

And so, what Russian steelmakers like Novolipetsk are advising the government to pursue at this month’s negotiations with Brussels is the replacement of quotas by a scheme of voluntary limits. These would be agreed to by the companies and steel associations on both sides. In a new Russian-EU steel trade framework, industry insiders say, the resort to anti-dumping actions should also be based on treating Russian steel according to WTO rules. If Brussels thinks Kudrin is bluffing like Khristenko, the two-point Russian offer will be greeted politely, but buried in talk.