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Eurasian Economic Union:Achievements,Problems and Prospects

CIIS Time: Aug 19, 2016 Writer: Li Ziguo Editor: Li Minjie

 

On January 1, 2015, the Eurasian Economic Union (EEU) was put into operation. That same year, it signed a free trade agreement with Vietnam, which demonstrated its collective bargaining power. A road map for the medium term has now taken shape. However, the huge differences between the member states mean the union is short of cohesion, and its prospects are not optimistic.

 

The Successful Launch of the EEU

 

With the foundation of the Customs Union and the Eurasian Economic Space, the startup and expansion of the EEU have been successful. Tatyana Valovaya, member of the Executive Committee of the EEU, said that the EEU is an integration organization second only to the European Union. From the perspective of mechanism building, that is not an overstatement.

 

Russia’s years of efforts have finally paid off

First, Russia has got a useful tool to integrate the Commonwealth of the Independent States (CIS). The collapse of the Soviet Union broke the economic ties among the former member states, which created demand for integration. But in the first years after the collapse of the Soviet Union, the states were busy dealing with their own affairs. And the dominant force Russia kept reducing the “energy subsidies” it offered CIS countries, which made the idea of integration merely a concept on paper. After Vladimir Putin took office, with the recovery of its national power, Russia started to vigorously integrate the CIS. In 2000, the Eurasian Economic Community was established. But the mechanism was not very successful: it did not produce concrete results most of the time. In 2010, Russia decided to set up a new mechanism as disguised downsizing. As a result, it launched the Customs Union together with Kazakhstan and Belarus. With a smaller scope, Russia met less resistance against its integration efforts, and it started to yield fruits. The Customs Union has become the lever for Russia to promote the integration of the CIS region. Later, the three countries established the Eurasian Economic Space. And in February 2012, the Eurasian Economic Commission, a supranational institution was established. On May 29, 2014, Russia, Belarus and Kazakhstan signed the Treaty on Eurasian Economic Union in Astana; on January 1, 2015, the Eurasian Economic Union was launched as scheduled, and Russia’s years of efforts paid off.

Second, Russia has successfully enlarged the EEU. In October 2014, Armenia signed the accession treaty and formally became a member in January 2015. In December 2014, Kyrgyzstan signed the accession treaty and formally became a member in August 2015. At this point, the EEU became an integrated organization covering 182.5 million people and an area of 20 million square kilometers. Tajikistan is likely to become the next member.

Third, the EEU has been well received by the majority of the people within the EEU. According to a survey by Center for Integration Studies of Eurasian Development, most of the people in the union support the EEU. Among the countries, the support rate in Kyrgyzstan is the highest at 86 percent, while in Kazakhstan it is 80 percent, in Russia 78 percent, in Belarus 60 percent, and in Armenia 56 percent. Concerning the reasons behind such support, Muratbek Imanaliev Sansyzbaevich, former secretary general of the Shanghai Cooperation Organization (SCO), believes that there is no better option than joining the union, while values, cultural and historical ties also play an important role. The recognition of the people for the EEU shows that the union is not built on the will of politicians, rather, it has some social foundation. From the CIS to the Eurasian Economic Community, to the Customs Union, the Eurasian Economic Space, and then the EEU, Russia, through the tactics of “downsizing, integration of main bodies, and re-enlargement,” has successfully promoted Eurasian economic integration, bringing it to a new stage of development.

 

Mechanical structure of the EEU has been improved

An improved mechanism for decision-making, policy implementation and dispute resolution has taken shape.

The Supreme Council of the EEU consists of the heads of state, who are responsible for the top-level design, planning for the development direction and timely resolving major differences. As all states are authoritarian systems, top-level design has played an important role in the development of the union.  

The Intergovernmental Committee of the EEU is composed of the prime ministers of the countries, who are responsible for planning the development direction in specific areas.

The Eurasian Economic Commission is a permanent supranational executive body, which consists of the Executive Committee. Members of the Committee are all of ministerial level, and each country has three members in principle. The decisions of the Committee are made through a collective vote. The decision is mandatory, and all the governments of the member states must enforce the decisions.

Formally commencing operations on January 1, 2015, Court of the EEU is a permanent judicial organ of the EEU. Each member state sends two judges as representatives. The court aims to constantly improve the laws of the union, resolve disputes arising from the implementation of the union treaty, as well as controversies resulted from international treaties under the framework of the union and decisions made by organs of the union.

An import tariff apportion scheme accepted by all has been formed. The apportioning of tariff income is directly related to the interests of all parties, so it is the area most prone to disagreements. After consultation, particularly Russia’s concessions, an apportionment ratio acceptable for all was formed. At present, Russia takes 85.32 percent, Kazakhstan 7.11 percent, Belarus 4.55 percent, Kyrgyzstan 1.9 percent, and Armenia 1.11 percent.   

The EEU has its own financial institutions. The Eurasian Development Bank can be regarded as a financing mechanism for the EEU, because the member states of the bank are almost the same with those of the EEU. The bank was established in January 2006, with a registered capital of $7 billion. In addition, there is the Eurasian Fund for Stabilization and Development (EFSD), which was established in 2009 with the former name EURASEC Anti-Crisis Fund. With a registered capital of $8.513 billion, this fund is in fact managed by the Eurasian Development Bank.

 

A clear medium-term development road map has taken shape

The free flow of goods, services, capital and labor should be achieved by 2025. Plans for the coming years include: In 2016, the union should build an integrated pharmaceuticals market; start operating an integrated market for government procurement, completely rely on an electronic trading system; build an integrated market for transport services, and gradually form a unified transportation space. Around 2018, all roaming charges for mobile communications should be canceled. By 2019, an integrated power market should be established. Around the 2020, an integrated market for tobacco and alcohol should take shape. By 2025, a supranational institution in charge of financial supervision should be established in Almaty. By 2025, an integrated oil and gas market should be formed.

The timetable for eliminating differences has been partly drawn up. Over the years, out of their own economic interests, the states concerned have made a lot of requests for exceptions and measures for self-protection, which have become the main obstacle to the free flow of the “four major factors.” In response to this problem, the EEU members carried out intensive consultation in 2014 to reach agreement on some exceptions and obstacles. From 2015, 29 exceptions and restrictions were eliminated, and 31 more will be eliminated during the transition period, covering such areas as industrial policies, health, veterinary and quarantine.

 

The EEU has demonstrated its collective bargaining power

In May 2015, the EEU signed a free trade agreement with Vietnam. Viktor Khristenko, chairman of the Executive Committee of the Eurasian Economic Commission, says that this is a historical event as the first FTA deal of the union, which will help the EEU engage in the integration process of the Asia-Pacific region. Putin says that there are nearly 40 countries considering similar trade agreements with the EEU. This shows that the union’s collective bargaining effect has begun to appear.

 

With Obvious Defects, the EEU Faces Huge Challenges

 

Despite the union’s high level of integration, its members do not have a tight connection within the global economy, and they have a low level of industrialization. There are six major problems for the union.

 

Strong geopolitical differences

Although all economic integration mechanisms will have a certain degree of political considerations, there are two outstanding problems faced by the EEU: first, it is overly politicized; second, its structure is highly unbalanced, with Russia being the largest and dominant member that can easily “kidnap” the policies of the union.

All member states have geopolitical considerations, but with different purposes. For Russia, the union is what it relies on strategically to seek national revival and become one the poles in a multi-polar world. On October 3, 2011, Putin published an article in Izvestia entitled “A New Integration Plan on the Eurasian Continent: The Future is Born Today,” in which he said that “We will not stop where we are today, and we have given ourselves a more ambitious task: To advance to a higher level of integration, and embrace the Eurasian Union.” He said, “We propose to build a strong supranational union, which can become one of the poles in a multi-polar world.” For Kazakhstan, it joined the union to make itself safe. The biggest threat to Kazakhstan comes not from outside the union, but rather from Russia. The country needs to “embrace Russia” to avoid becoming the “Oriental Crimea.” In addition, in order to maintain domestic stability, the country also needs Russia’s support. Belarus has had strained relations with the West for years, with the West as denounced President Alexander Lukashenko as Europe’s last “dictator,” and imposed sanctions against senior officials of the country. Both the Lukashenko government and the country need the support of Russia. Armenia is faced with “enemies” on both sides: it has territorial disputes with Azerbaijan over Nagorno-Karabakh. Its relations with Turkey are even worse. Armenia commemorates “Turkey’s massacre of Armenian people” every year, but all Turkish governments have denied this claim. In front of these two “hostile” forces, although Armenia hopes to choose the European Union out of economic considerations, it has to take the side of Russia as it needs its security support. With the lightest gepolitical color, Kyrgyzstan also needs Russia’s support to deal with its domestic and external challenges.

The foundation of the economic union is not stable as the economic driving force is weak while its political motivation is obvious.

 

The awakening of national self-determination awareness is in conflict with the transfer of sovereignty as necessary for integration

The in-depth development of the union will inevitably require member states to transfer more sovereignty. But as newly independent countries, these union members have a strong sense of self-determination. They cherish sovereignty so much that some even need to “de-Russianize” to safeguard national independence. For example, Kazakhstan plans to change from the Cyrillic to Latin alphabet. And the Tajik President proposes to remove suffixes in names. The Kazakh President Nursultan Nazarbayev made clear that, “In any case Kazakhstan will not transfer its political sovereignty.”  Kazakhstan will not stay in organizations that threaten its independence. First Deputy Chairman of the Liberal Democratic Party of Belarus Oleg Gaidukevich said that sovereignty was sacred and was the foundation of Eurasian integration. Any topics concerning transfer of sovereignty, particularly political sovereignty, make all countries vigilant.

Besides their unwillingness to transfer political sovereignty, the members are also extremely cautious on the transfer of economic sovereignty. One good example is their rejection of the single currency proposal made by Russia. In March 2015, during the press conference of the Supreme Council of the EEU, President Putin said that “It is time to discuss the establishment of a monetary union.” But this proposal was treated coldly by other countries. Kazakh Deputy Minister of Economy and Budget Planning Timur Zhaksylykov said that his country did not agree with the idea of single currency. Belarus President Alexander Lukashenko had already declared in January 2015 that “a single currency is not a topic for discussion during my presidency.”

 

There are too many exceptions, obstacles and loopholes in the single market

There are many exceptions within the union, and the tariffs are not unified. (1) Member states are actively applying for preferential tariff policies. Before joining the union, Kyrgyzstan applied for preferential import tariffs for 2,600 items. As a result, it witnessed about 170 products enjoy tariffs lower than the tariff rate of the union. Meanwhile, Kyrgyzstan’s three free economic zones and six companies’ bonded warehouses are qualified to import goods for processing free of tariffs. As Kazakhstan joined the union, it asked to set up a “transition period” for over 400 commodities, while Armenia asked the same for around 800 commodities. (2) Special projects can apply for special policies. When a country has major projects, it can apply for special low tariffs. For example, the EEU has a preferential tariff policy for imported goods necessary for the construction of Kyrgyzstan’s Bishkek thermal power station and the “North-South” road. Russia, Belarus, and Kazakhstan have also applied for special preferential tariff policies. (3) Kazakhstan’s accession to WTO has brought new shocks. According to the materials of Kazakhstan National Entrepreneurs’ Chamber of Commerce, the average tariff of the country will fall from 10.4 percent to 6.5 percent after its entry to the World Trade Organization, close to the average tariff level of 6.2 percent before joining the union. Within the union, there are already many “exceptions.” As Kazakhstan reduces the threshold itself, the tariff levels will be more uneven. (4) There are lots of vulnerabilities on the operational level. Due to the serious corruption problems existing in all member states, tariff rates are different in different customs. At the operational level, it is even harder to implement a unified tariff.

There are many obstacles to trade within the union. (1) Quota limit. Belarus looks forward to the complete elimination of limits to the quota of tariff-free oil supplied by Russia as soon as possible. But the energy producer insists that the quota system should be kept until 2025. (2) Technical barriers. For example, Kazakhstan is a large alcohol producer. But the protection of their own wine markets by Russia and Belarus makes it difficult for its alcohol products to be exported in large quantities to the two countries. And Kyrgyzstan complains that its quarantine certificate is not recognized by other countries. (3) “Connected but not smooth.” For example, to prevent sanctioned Western goods from entering Russia through Kazakhstan and Belarus, Russia has strengthened its border checks. Due to Russia’s sanctions on Turkey, goods exported from countries like Kazakhstan cannot travel through Russia.

 

Building and enlarging the union with “benefit lures,” Russia’s burden will only be heavier

To promote the establishment and enlargement of the economic union, Russia has made economic sacrifices. Both Russia as a nation and its businesses shoulder greater burdens.

 First, attracting Kyrgyzstan to join the union by offering huge benefits. Kyrgyzstan’s accession has been a process of bargaining with Russia. In 2013, Kyrgyzstan put forward entry conditions worth nearly $2 billion to Russian. After many rounds of consultations, the “subsidy for union accession” was finally turned into the “Kyrgyzstan-Russia Development Fund,” and Russia promised to provide about $1 billion for the economic development of Kyrgyzstan. While the European Union puts forward various requests to applicant countries if they want to join the union, the situation in the EEU is totally opposite: applicant countries put forward various requests before they agree to join the union. The difference is obvious.

Second, Russia has made the greatest compromise on tariff appor-tionment. Along with the accession of Armenia and Kyrgyzstan, tariff apportionment has changed, and the one to make the greatest compromise is Russia. 

Third, subsidize the fossil fuel energy starved countries. Belarus, Armenia, and Kyrgyzstan lack fossil fuel energy, and mainly get tariff-free energy products from Russia. In terms of natural gas, the price of natural gas provided by Russia to Kyrgyzstan is $160 per thousand cubic meters or so, while the former price was $224 to $290. The natural gas sold by Russia to Belarus was $266 per thousand cubic meters in 2011, which fell to $168 in 2012, and to $166 in 2013, and then increased to $171 in 2014. However, the prices for European countries during the same period were always above $400. Armenia has witnessed a similar situation. The price before it joined the union was $271 per thousand cubic meters, but it fell to $189 after its accession, and then further to $165. As for oil, the biggest beneficiary is Belarus. Russia provides Belarus with about 23 million tons of duty-free oil on a yearly basis. Kyrgyzstan and Armenia also receive different amounts of duty-free petroleum or petroleum products. The formation and enlargement of the union is basically a process of Russia’s “shouldering a bigger burden,” with both the nation and its enterprises paying no small price.

 

Without a significant trade diversion effect, production transfer and labor transfer are also faced with difficulties

First, there is no significant trade diversion effect. (1) The proportion of mutual trade is low. In 2014, the mutual trade among member states only accounted for 11.7 percent of total trade, while the number for the EU was 60 percent. Russia fared even worse, with its trade with other member states only taking 8.2 percent of its foreign trade.  This reflects the low level of interdependency among the member states when it comes to trade. All members rely more on the outside. (2) The proportion of mutual trade in total foreign trade is declining. The proportion in 2013 was 12.1 percent, and it fell to 11.7 percent in 2014, and to 11.5 percent  in the first quarter of 2015. This shows that foreign trade with each other has not increased because of the union, but rather declined. The trade diversion effect of the Customs Union is not obvious.

Second, with similar economic structures, production transfer is limited. Apart from Russia’s large investment in Belarus, mutual direct investment among the member states is very limited. From 2005 to 2014, Kazakhstan attracted $141.5 billion of foreign investment, among which only $9.081 billion came from Russia, only accounting for 6.4 percent.  Russia is Belarus’s largest direct investor, with its direct investment taking up over 50 percent of all the foreign investment the country attracted. But the amount of investment has fallen in the last two years, which indicates that there is not much new investment. By January 2014, other member states invested less than $2 billion in Russia, accounting for only 0.35 percent. Reasons leading to this phenomenon are as follows: (1) Big countries have similar industries. Russia and Kazakhstan are both resource producers; Russia, Belarus and Kazakhstan are energy and chemical producers and exporters. All countries have the need for trade on raw materials, but the manufactures are of the same kind rather than complementing each other. (2) Big countries are short of money. They have neither the funds for foreign investment, nor the spare capacity for outward transfer. (3) Resource producers are more willing to do processing locally, rather than doing it in other countries. (4) Generally, all member states are technology-importing countries, which need technical cooperation with external countries rather than other EEU members.

 Third, labor transfer faces difficulties at the moment. With labor shortages, Russia can enhance its economic competitiveness by attracting labor from other member states. But because of the economic downturn, Russia’s attractiveness for foreign labor has weakened. Worse still, the devaluation of the ruble has reduced the remittances of foreign workers in Russia. This being said, remittances and employment are exactly what attract countries like Kyrgyzstan most.

 

The union lacks solidarity

The capacity and attractiveness of Russia as the leading force of the EEU determine the solidarity of the whole union. But the countries are plagued with such problems as economic downturns, backward development models, and a lack of attractiveness.

First, Russia is likely to suffer from long-term economic downturn. Russia’s economic growth rate was 3.4 percent in 2012, +1.3 percent in 2013, +0.6 percent in 2014, and -3.7 percent in 2015. The economic downturn will be long-term mainly due to the following reasons: (1) Its reliance on energy cannot be changed in the short run, but it will be normal for the energy prices to remain at medium and low levels. (2) Russia’s relations with the West can hardly be substantially changed for the better, which adds to its bad external environment for development. (3) Russian is witnessing reduced workforce and an aging population, which will restrict it production and consumption. Russia’s resource-driven growth model is backward and not attractive. And it is apparently unwise to follow that model.

Second, countries such as Kazakhstan pursue pluralist diplomacy, and there is a strong centrifugal force. (1) All the other member states did not follow Russia in imposing sanctions on Ukraine and Turkey. Belarus President Alexander Lukashenko has said on many occasions that his country is willing to work with Ukraine to maintain friendly relations. In October 2015, the Ukrainian President visited Kazakhstan, during which both sides talk about friendship and cooperation. In November 2015, Russia imposed sanctions on Turkey, but it was not followed by any union members. (2) Countries like Kazakhstan continue to enhance diplomatic pluralism by keeping sound relations with the West. In contrast to the chilled relations between Russia and the West, the relations between other EEU members and the West are turning better or are even very strong. In March 2015, Kyrgyzstan applied to the EU for Generalized Scheme of Preferences (GSP+) treatment. In May 2015, Armenia and the United States signed a trade and investment framework agreement. In October 2015, the EU announced the suspension of sanctions on Belarus for four months. In November 2015, US Secretary of State John Kerry visited Central Asia, and launched the “C5+1” mechanism with the five Central Asian countries. In December 2015, the “EU-Central Asia” Ministerial Meeting which had been suspended for two years was held in Astana, during which Kazakhstan signed a new agreement on deepening partnership with the EU. The independent diplomatic approach of the EEU member states has formed a sharp contrast with the highly united EU when it comes to imposing sanctions on Russia.

Third, every country needs to integrate into the world, rather than limiting themselves to just one corner. With weak economic competitiveness, EEU countries are not well engaged in globalization. To change this, it is necessary for them to integrate themselves into the world economy, which has already become a consensus. With the troubled Rus-sian economy, other member states have started to place their hopes on outside the union. While the union covers a population of 182 million, this figure only accounts for 2.47 percent of the world’s total. And the combined GDP of $2.2 trillion only takes up 3.2 percent of the world’s total. That is, both the population and market size are not big enough. So the member states will not only focus on the sesame and ignore a watermelon.

When commenting on the first anniversary of the EEU, Russia’s famous news website Gazeta.ru commented that the first year of the EEU, which was established to fight against the EU, has been a failure. [1]

 

Prospects of the EEU and Its Influence on China

 

The influence of the EEU on trade between China and EEU countries is not yet obvious. It should, however, be noticed that the union is now identifying Chinese goods as major targets subject to its anti-dumping investigations. Given the fact that Russia and China have signed a joint statement on aligning the Silk Road Economic Belt with the EEU, it can be seen that both sides are in favor of cooperation rather than competition as the international order is being restructured.                                                                                          

 

The EEU’s Influence on China

First, the EEU will not have a significant impact on trade between China and the EEU members. In 2015, China’s trade with members of the EEU declined sharply. But to be objective, as Russia, Belarus, and Kazakhstan already raised tariff barriers against China during the times of the Customs Union, the birth of the EEU is not the major cause for current trade decline. This being said, from 2010 to 2014, after the establishment of the Customs Union, the share of China’s trade with Russia and Kazakhstan as well as imports from these countries increased slightly.  

The situation in Russia is basically the same with that of Kazakhstan.

Second, the anti-dumping investigations of the EEU Committee are mainly against Chinese products. While trade has not been significantly affected, it cannot be ignored that the union’s anti-dumping investigations mainly focus on Chinese enterprises. In 2014, the EEU launched eight anti-dumping investigations, among which six were against China and two against Ukraine. In 2015, the Eurasian Economic Commission made another three decisions against Chinese enterprises: imposing anti-dumping duties on China’s citric acid, bulldozers and truck tires. In the future, Russian businesses are likely to use more anti-dumping investigations to prevent Chinese goods from entering the whole EEU market.

Third, the birth of the EEU has had positive influences on the economic cooperation between China and EEU countries. (1) To attract investment, countries have made efforts to improve their business environments, which will facilitate the production capacity cooperation under the framework of the Silk Road Economic Belt. (2) Investors can choose the best destination in the single market. For example, Kyrgyzstan’s market was small in the past, which was not attractive for Chinese manufacturers. But after its accession to the union, enterprises in the country can in principle enter the whole market without barriers. Moreover, the tax policy of Kyrgyzstan is the most favorable. So investors can choose Kyrgyzstan as the springboard to enter the other countries. (3) A single energy market can help other countries supply low-price energy for energy-starving countries such as Kyrgyzstan and Belarus, which will reduce production costs. (4) From the geopolitical point of view, the union can to some extent prevent the penetration of the West, which will contribute to regional security and stability.

 

Prospects for the development of the EEU

While making achievements, the EEU is also faced with huge challenges, and its prospects are not optimistic. In the year when the EEU was first launched, all member states were faced with economic problems. Russia in particular encountered a great economic slump, which was really a frustrating start. At present, the union is plagued with obvious weaknesses. Russia can definitely give others delicious fish, but it does not have the ability to teach them how to become good fishermen. That being said, as Russia strategically relies on the EEU to achieve its national rejuvenation, it will not give up despite all the difficulties. Therefore, the union will live on.

Possibility I: The EEU may develop in the short run, but will stagnate in the medium term

Driven by Russia, the union has continued to expand, and is making progress according to the existing road map, including to achieve the “conditional” free flow of the “four major factors” with “exceptions” by 2025. The key to EEU development lies in harmonized monetary and fiscal policies. A single currency means major transfer of sovereignty: member states’ economies will no longer be independent, and are prone to be affected by other countries, and they will lose the ability to use their own currencies to regulate the economy. When a country faces economic difficulties, it will not be able to adopt independent monetary policies. That is, it cannot enhance the competitiveness of its products by devaluating its currency.

What the EU has been through also adds to the doubt of countries on a single currency. For example, in Greece’s debt crisis, the country could not devaluate the euro. Instead, all it could do was to “live frugally” while paying its debt, including financial retrenchment and raising taxes. But that further triggered economic decline and social discontent. Therefore, the possibility of the EEU adopting a single currency is low. The possibility of achieving uniform social and economic policies is even less. There is almost no chance of the Eurasian Economic Union becoming a Eurasian Union.

Possibility II: With Russia’s economic downturn dragging on, the EEU gets “stiff but not dead,” and slowly becomes part of the “Pan-Eurasian Integration”

Due to Russia’s economic weakness, the development of the EEU has become stuck. As a result, the member states have turned to the outside world for strengthened cooperation one after another. Despite the continued existence of the EEU as a whole, various integration road maps are being implemented at a slower pace. While the internal links of the union have not been tightened, member states have made their own plans and given priority to economic and technical cooperation with the outside. But given the unfortunate experience of Ukraine, countries will not propose leaving the union. In December 2015, Putin proposed in his state of the union message that the EEU should carry out consultation with the SCO and ASEAN on establishing economic cooperation ties. This new initiative shows that even Russia has realized that if the union stays conservative, the centrifugal tendency of its member states will become stronger, which will not be conducive to the development of the union. As both internal and external environments are undergoing significant changes, the former “European New Economic System” from Lisbon to Vladivostok is now turning into a “Eurasian Economic Partnership.” The alignment of the EEU with the Silk Road Economic Belt will become more down-to-earth, and the focus will change from projects to institutional arrangements. In the end, the EEU as a small group will integrate into the “pan-economic integration” of the whole Eurasia region.

 

 (China International Studies, May/Jun. 2016)


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