Painful lessons of Eurasian integration

Recently the director of the Brest Stocking Plant — one of the largest apparel plants in post-Soviet area— blamed sharp decreases in sales on Belarus’ economic integration with Russia and Kazakhstan.

The accusation has serious grounds: in 2013, the volume of sales from the plant decreased by about 30% compared to the same period in 2012.

The main reason for this and similar sales drops is competition in which Belarusan goods often lose out. For years, tariffs and non-tariff barriers to trade helped Belarusan businesses avoid unwanted competitors on the domestic market. However, the country’s accession to the Customs Union with Russia and Kazakhstan, and Russia’s subsequent accession to the World Trade Organisation (WTO) deprived Belarusan plants of the usual state protection.

Little by little, Belarus’ optimistic expectations about the Eurasian integration turn out to be unrealistic. A few years ago, the director of the Centre of Integration Research of the Eurasian Bank of Development Evgeni Vinakurau estimated that because of the economic integration with Russia and Kazakhstan from 2011-2030 Belarus’ GDP would increase by 15%. The recent performance of the Belarusan economy has cast a shadow on this forecast.  

Integration – not a virtue in itself

The history of international economic relations can teach Belarus a good lesson. Belarus has strong trade links with Russia and was supposed to benefit from joining the Common Economic Space (next step of integration after the Customs Union). The Common Economic Space rules exempt Belarusan goods from nearly all tariff and non-tariff barriers to trade. Exports from Belarus to Russia in 2012 decreased by about 25.5% compared to the last year. Even long-desired Belarusan meat and dairy products now turned out to be 4.5% less popular in Russia than in 2012.

Clearly Belarusan goods are becoming less competitive in Russia. However, in 2010 when the Customs Union de-facto started to function, one could hardly expect such a hardening of competition, mainly because it was not known that Russia would join the WTO on 22 August 2012.

At the same time, the WTO rules are not a suitable excuse for Belarus’ economic poor performance in relations with its big neighbour. In fact, Russia’s tariffs for meat and dairy products with WTO countries have increased after August, 2012. As a result, the reasons for the low level of competitiveness of Belarusan experts must be found elsewhere.

In such a situation, the forecast of the former Minister of Economy and Development of Russia Elvira Nabiullina seems more realistic: integration within the Common Economic Space will increase internal competition and create incentives for the modernization of enterprises.  For Belarus, it really will. Otherwise, the country’s economy will not only lose hope for finding new markets, but will also lose its own market.

Belarus: the gates for foreign investments?

The Belarusan government also hoped that Eurasian integration would boost foreign investments. Official web sites and brochures still list the state’s participation in the Customs Union as one of the main reasons to invest in it.

Indeed, the market of the Common Economic Space can seduce foreign investors. It covers around 170 million people, and eliminates barriers to trade and capital’s movement. But Belarus should be interested in a different question. Rather than “does the Common Economic Space attract foreign capital?” it should be “will foreigners be interested in the Common Economic Space invest in Belarus?”

According to the 2012 Index of Economic Freedom Belarus ranked 153th, while Kazakhstan and Russia were 65th and 144th  respectively. The A.T. Kearney Foreign Direct Investment Confidence Index ranked Russia 12th in the world. Foreign investors willing to do business in the Common Economic Space will most probably prefer investing in Russia and Kazakhstan rather than in Belarus. The negative image of the Belarusan regime in Europe, as well as its recent treatment of foreign investors are taking their toll.

Two hidden rocks

Eurasian integration can also decrease capital inflows into Belarus.

One reason for that is Belarus’ inability to use its traditional methods of investors’ attraction. For instance, Free Economic Zones (FEZs) — six special regions in the territory of Belarus — have been among the strongest arguments for investing in Belarus for years. Foreign goods used for new production in the FEZ did not have to pass customs clearance. As a result, FEZ's residents used to save both customs duties and value added tax.

However, on 18 June 2010 Belarus signed an agreement on free economic zones within the territory of the Customs Union, which has reversed this rule. Belarusan attractiveness for foreign investors has respectively fallen.

According to Belarusan economist Iryna Tachytskaya theoretical and empirical surveys give no clear answer as to whether participation in regional integration encourages foreign investments.  The practise shows that liberalisation and institutional reforms look more important for foreign investments than economic integration. In formations of South-South type (between developing or transition economies) the investments are distributed disproportionately. Tachytskaya concludes that in case of the Common Economic Space the disproportional allocation is hardly to hurt the Belarusan economy.

The lessons of the Custom Union and Common Economic Space for Belarus are simple to verbalise, difficult to follow, and urgent to implement. The country has to increase its competitiveness and continue liberalisation of its economy. In absence of these factors, Belarus will fail to benefit from the Eurasian integration and may end up in a worse condition that before the integration. 

BelarusDigest