UPDATE 5-Finland's tariff threat overshadows EU-Russia summit

(Adds Swedish trade minister in pararaphs 10-12)

By Tarmo Virki and Gleb Bryanski

HELSINKI/MOSCOW, June 26 (Reuters) - Finland said on Thursday it was considering counter-measures against Moscow in a row over wood tariffs which threatens to delay both Russia's WTO membership and a partnership deal with the EU.

Former Russian President Vladimir Putin imposed export duties on raw timber in 2007 to promote the development of Russia's wood-processing industry -- a move Finland has said would force plant closures and cost up to 16,000 jobs.

Finnish Foreign Trade Minister Paavo Vayrynen said Russia should agree a solution to join the World Trade Organisation and warned that Helsinki may impose a tariff on goods transported across Finland to Russia to compensate its paper makers.

Finland is as large a trading partner with Russia as the United States. Russia is hungry for cars, televisions and machinery, meaning transit routes through Finland, Latvia, Lithuania and Estonia are clogged with trucks.

"A sustainable solution to wood tariffs has to be found as part of Russia's WTO membership," Vayrynen told a news conference in Helsinki before an EU-Russia summit expected to mark the start of new talks on a strategic partnership deal.

Vayrynen's comments sent Finnish paper stocks higher, including those of world no.1 paper and board firm Stora Enso (STERV.HE). Shares in Stora Enso were 3.9 percent higher, while UPM (UPM1V.HE) was up 0.76 percent by 1500 GMT.

EU RULES

An EU official said later on Thursday Finland's tariff proposal could be counter to core European Union rules.

"Any move in this direction by a member state could bring it into conflict with the (European) Community's common commercial policy and/or its internal market rules," the official said.

The head of Finland's forestry industry body, Anne Brunila, said Finland should instead push for finding a more sustainable solution by sourcing more wood domestically or from elsewhere.

Sweden, which also has a large timber industry, shares Finland's frustration and is critical of Russia's policy. But Swedish Trade Minister Ewa Bjorling argued for diplomacy rather than tit-for-tat measures.

"I think that we should keep on with the free trade line and not suggest more things like Finland has done for the moment," Bjorling told Reuters.

She said the European Commission had not yet suggested it would seek to block WTO membership for Russia purely over the wood row. "They have not put that on the table," she said.

Finland's Prime Minister Matti Vanhanen wrote a letter to President of the European Commission Jose Manuel Barroso saying Finland expected the timber duties to be discussed thoroughly and with a sense of urgency at the summit.

Russia, the largest economy still outside the WTO, has been negotiating to join since 1995. A Russian source close to the country's WTO accession talks said retaliatory transport tariffs proposed by Finland may contradict international trade law.

The source cited a rule which he said states international cargo tariffs should match domestic equivalents and be based on actual costs. The source said state subsidies would make Finnish products subject to trade restrictions.

The EU, which negotiates with Russia on Finland's behalf, says Russia's decision to increase export duties for timber breaches a 2004 bilateral WTO deal, which will only be made public after Russia's accession to the group. Russia denies it.

"I hope our partners understand why these export tariffs were introduced and why we will continue to apply them," the Russian source said.

"We had enough meetings with our colleagues from Finland to outline possible ways of solving the problem."

Russia, a key source of wood for Finnish paper producers, increased wood export duties by 50 percent in April to 15 euros per cubic metre, the first step in a series of increases which will hit 50 euros per cubic metre by 2009.

Finnish paper makers buy more than 10 million cubic metres of timber a year from Russia and the new tariffs have cost the industry more than 500 million euros.

Vayrynen said he did not fear losing customers at Finnish ports and transport firms if a new tariff is imposed because the route to Russia is already firmly established. (Additional reporting by Agnieszka Flak in Helsinki, William Schomberg in Brussels and Adam Cox in Stockholm) (Editing by Philippa Fletcher)