The EEU: The Economically Egocentric Union?

The regional integration, having obtained a new packaging in the shape of the Eurasian Economic Union, could not only be a one-man show, but also an empty intention, writes Michał Romanowski.

Moscow’s aspiration to reintegrate the post-Soviet area has led to the creation of various organisations and models of cooperation over the past 20 years. It is, however, the latest project of the Eurasian Economic Union (EEU) that has gained considerable political momentum.

The EEU treaty between Belarus, Kazakhstan and Russia is to be signed next month and launched in January 2015.

It will be based on the Customs Union and the Common Economic Space, which were established amid these countries in 2010 and 2012, respectively.

Russia’s President Vladimir Putin declares that this project is not an attempt to revive the USSR.

But it is specifically designed to counterbalance the European Union and the Eastern Partnership programme in particular.

The EEU serves the geopolitical ambitions of Moscow to once more unite its former satellites under one – if not territorial then economic – banner. Both Belarus and Kazakhstan seem to be responding to this initiative out of political fear, not genuine interest. The same situation is with the bloc’s future members. The partner-oriented union is a fiction in which only Russia believes.

Economic rationale

Can the future EEU be perceived as economically advantageous for its members? The effects of the first years of integration in this regard are ambiguous. After significant intra-trade bloc growth in 2010-2011 the impetus has slowed down. In 2013, the countries experienced a 5 per cent turnover decrease in trade compared to the previous year. Being mainly export-oriented markets, with raw minerals accounting for almost 75 per cent of the total external trade, it is worth to present a non-energy figure for the biggest economy in the grouping: Russia. Moscow’s machinery and equipment export to The Eurasian Economic Community (EurAsEC), including Kyrgyzstan and Tajikistan, starting from 19 per cent in 2010 has elevated to 23 per cent in 2011. Yet by mid-2012 the rate rebounded, reaching 16 per cent.

The dynamics within the Customs Union do not point to strengthening internal trade either.

Russia, Minsk’s major trading partner, has noted a decrease in imports from Belarus, which fell by 16.9 per cent from 2012 to 2013. Last year, mutual exchange between Belarus and Kazakhstan constituted only 1.4 per cent of the total CU flows, with no signs of progress over the long term. It is partly due to the distance, but also the lack of commonly beneficial offer.

Finally, following the implementation of the single import tariff, almost 50 per cent of rates in Kazakhstan were changed, mostly upwards, which resulted in price increases in the country. Belarus, whose tariffs were already over 70 per cent unified with Russia’s, was not so drastically affected. Nonetheless, the majority of the duties’ adjustments were favourable for Moscow, not for its partners.

Russia’s supremacy

Another major challenge for the union, next to the bloc’s uneven economic performance, is the domination of Russia.

Both Belarus and Kazakhstan have claimed on many occasions that the hegemony of Moscow is a worrisome component of the integration.

The Eurasian Economic Commission, a supranational regulatory body modelled on the European Commission, is based in Moscow and staffed predominantly with Russians. The EEC has a two-tier decision-making process, encompassing the Commission’s Council and the Board. The Council’s judgments are taken by consensus, whereas the Board, with equal number of commissioners and votes for all three countries, makes the decision based on the qualified majority system. The ECC plays, however, a marginal role, and the most relevant agreements are still reserved for the pressure-sensitive intergovernmental consultations. This was for example the case of a dispute between Russia and Belarus over the oil export duties.

The asymmetry within the grouping is also visible while looking at the economic potentials of the member states. Belarus and Kazakhstan account jointly for only 7 per cent of trade and 5 per cent of investments in Russia, while half of the Belarusian trade turnover comes from Moscow. The distribution of the import duties revenues, of which 88 per cent go to Russia, 7 per cent to Kazakhstan and 5 per cent to Belarus, makes the members’ positions even more unbalanced.

Russia’s domination on the grounds of the size of its economy is unquestionable. It is furthermore linked with direct subsidies, be they in a form of preferential energy prices, loans or duty free oil supplies, which are provided both for Belarus and Kazakhstan. The EurAsEC Anti-Crisis Fund, managed by the Eurasian Development Bank and funded largely by Moscow, has supported Belarus with a total of $3 billion financial credit designed to sustain the balance of payment in the country.

Minsk, suffering also from a permanent foreign trade deficit, is in Moscow’s pocket, which guarantees that president Aliaksandr Lukashenka will toe the line.

Astana, being equally afraid of Russia’s control, has already asked to include the clause on unilateral withdrawal from the EEU into its founding treaty.

Yes but…

Looking at Russia’s activities around the EEU, a certain degree of protectionism can be observed. Moscow on one hand supports project politically, and pushes, or even forces, the initiative forward. But, in parallel, it blocks access to its economy and impedes institutional simplification, both of which should be the very core of economic integration.

Russia for instance requires different licenses from Kazakh and Belarusian transport companies operating inside the country. Individuals need Russian driving licenses to be allowed to drive a car. Moscow also makes it impossible for exporters from Kazakhstan to enter the Russian market with tobacco or construction materials. The Kremlin is not the only one being protective of its own economy. Belarus is trying to secure its interests by limiting alcohol products from Astana.

A carrot-and-stick approach, which Moscow practices within the Customs Union, combines various subsidies with restraining policies and the political pressure.

The question is whether this strategy is adequate and effective. Coupled with a rapid pace of integration and the countries’ failure to comply with all the agreed regulations, it could lead to integration which is solely fragmentary. It is already now believed that the Common Economic Space, formally launched in 2012, will not be fully implemented, if at all, until 2020.

Who is next?

The soon-to-be-established Eurasian Economic Union faces challenges of deepening and becoming a more economically persuasive initiative. There is also an important aspect of enlargement, which to Moscow – for the geopolitical reasons – is especially enticing.

Armenia as one of the candidates is now ready to join the Customs Union.

The roadmap for accession has been accepted and several working meetings with the CU representatives took place. Two other possible applicants – Tajikistan and Kyrgyzstan – are also thought to be greatly interested in the project. Kyrgyzstan submitted its CU roadmap in 2013; talks with Tajikistan have not been initiated yet, but 75 per cent of Tajik society is in favour of the Russian-led grouping. Being of minor economic importance to Moscow, these Central Asian countries may play a key role in undermining, by imposing the common intra-bloc import tariffs, a growing Chinese trade position in the region. The fact that a vast portion of Bishkek and Dushanbe’s GDP flows from the migrants working in Russia is similarly essential. The GDP share of cash remittances to Kyrgyzstan and Tajikistan were in 2012 respectively 19.6 and 45 per cent.

Another country vulnerable to Russian influence is Ukraine.

The future of Kyiv, either within the EEU or the EU, is at the moment uncertain.

The new government is struggling with political and economic crisis. There is also a real territorial threat coming from Moscow. To tilt the balance in his side, Putin has been applying for the past years different tactics, including blackmail, and seemingly beneficial as well as evidently destructive economic incentives. Russia was providing Ukraine with credit money or gas price cuts, and at the same time was – and is to some extent today – implementing anti-dumping tariffs, limiting food import or setting up quotas for steel products. Given that more than one-third of Ukrainian export and import go to the Customs Union countries and that Russia demands a verification of the gas agreement with Ukraine, Kyiv faces a serious internal turmoil.

The recent decision to leave the Commonwealth of Independent States may hit the Ukrainian economy even harder. Russia has already threatened Kyiv with strict sanctions and introduction of visa regime. Meanwhile, the EU has answered with a temporary tariff cuts for Ukrainian exports.

New wrapping, old candy

In theory, the benefits of economic integration go without saying. It is likely that the EEU should be given more time, before the trade ties become more robust, and the results more evident. An effort to make this project work has been already done. Numerous agreements have been signed, and there is a growing need for further codification and harmonisation between the member states. This project may also bring positive outcomes, when it comes to standardisation and relations with third countries.

There is, however, a threat that this politically motivated and Russian-centred bloc, as the Soviet Union, will not prove to be economically justified.

The regional integration, having obtained a new packaging in the shape of the Eurasian Economic Union, could not only be a one-man show, but also an empty intention.

This post was originally published on New Eastern Europe