IP Source

Friday, 6 February 2015

The Eurasian Illusion

President Vladimir Putin and President Nursultan Nazarbayev of Kazakhstan at the Kremlin in December 2014
On the first day of 2015, Belarus, Kazakhstan, and Russia officially launched the Eurasian Economic Union (EEU), a trade bloc that Moscow hoped would one day bring the former Soviet nations back together. The initiative, however, appears to be a failure. The EEU is nothing more than an illusion—and an unconvincing one at that.


For two decades now, Russia has called for the integration of former Soviet states as equal partners, as in the European Union. Several unsuccessful early attempts toward that goal included the Commonwealth of Independent States (CIS), now a largely defunct conglomerate of Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Ukraine, and Uzbekistan. Russia launched a new attempt in 2010, when it finally managed to produce a customs union with Belarus and Kazakhstan and planted the seeds for the eventual creation of the EEU. From the start, Moscow has voiced its hope that the organization’s economic agenda would ultimately expand to cover political integration as well.

But the idea of universally beneficial integration on equal terms has always been a fa├žade. Long before the EEU was launched, it was clear that gross economic disparities among the group’s members would work in Russia’s favor, with other countries getting secondary roles. Before the ruble’s collapse in December, Russia accounted for 87 percent of the union’s total GDP and 83 percent of its population. By comparison, the EU’s largest economy, Germany, represents about 15.8 percent of its GDP and just six percent of its population. Even if the worst predictions for Russia’s economy come true in 2015—and its GDP contracts by eight percent, inflation spikes by 20 percent, and capital flight reaches $150 billion—the country will continue to dominate the EEU, representing about three-fourths of its total economic weight.

The EEU’s swift absorption of Armenia, which joined on January 2, did little to correct the imbalance, since the country has a GDP of only $10 billion (or less than one percent of the EEU’s total) and adds just 3 million people to the common market (roughly equal to two percent of the EEU population). And the anticipated entry of Kyrgyzstan this coming May—which would bring into the EEU a weak economy largely dependent on the reexport of Chinese products to Kazakhstan and Russia—will raise shared expenses without adding many benefits. The only way that the EEU could become profitable would be if Ukraine joined, but Russia has irretrievably lost that opportunity by annexing Crimea.

On a more immediate level, the EEU lacks any institutions that could help it realize what little economic potential it has. Aside from high-profile meetings among country leaders, there has been little implementation of the actual mechanics of further integration. None of the EEU’s structures, including the Eurasian Economic Commission (the union’s regulatory body) and a common court, has the power to shape policy or influence decisions. In contrast to the EU’s governing bodies, whose decisions must be respected by all members, the EEU’s institutions have only recommendatory powers and lack the political mandate to enforce their decisions. 

Moreover, none of the EEU member states appear ready to delegate power to supranational bodies that would limit their sovereignty. And in any event, Russian President Vladimir Putin, who sees the EEU as a way to increase Russian power, would be unlikely to allow smaller nations to head such structures. Instead, EEU institutions will probably continue to create the outward appearance of deepening integration with only minor action actually being taken. It is also hard to imagine either Belarus or Kazakhstan approving any effort that would considerably change its national economic system. In the long run, the EEU will likely come to resemble the CIS, where formal regulatory bodies exist but remain completely inactive. 

AT LOGGERHEADS

The illusion of economic and political unity, which EEU members had preserved for the last three years, was shattered by the crisis in Ukraine. Russia clearly expected its partners to support its actions there as well as its subsequent sanctions war with the West, or at least to look the other way. But the crisis outside the union’s borders sparked a deep crisis inside them, revealing what member states really thought about one another.  

Ironically, the reason the EEU partners now find themselves at odds lies in their incremental progress toward economic integration. Both Belarus and Kazakhstan initially sought to remain neutral in the conflict. Although they voiced moderate concern when Russia annexed Crimea and encouraged a separatist rebellion in eastern Ukraine, they were wary of taking sides, fearing a Moscow that has no regard for sovereign borders and international law. Moreover, Russia’s clash with the West has shown that, unlike Belarus and Kazakhstan, Russia stands ready to sacrifice economic prosperity and internal stability for a geopolitical cause.

But the sanctions war between Russia and the West has finally forced Belarus and Kazakhstan to take a stance. In retaliation for economic measures imposed on it by the United States and the EU, Russia embargoed a wide range of Western foods without consulting its partners in the customs union—a structure where one partner’s trade policy affects all others.

Neither Belarus nor Kazakhstan agreed to join Russian retaliatory sanctions against the West. Instead, they took advantage of their open trade regimes with Russia by smuggling Polish apples, French cheese, and German beef to Russian territories—and making a decent profit doing so. One common practice, recently banned by Moscow, was to send EU products to Kazakhstan through Belarus via Russian territory. Much of the cargo failed to make it to Kazakhstan at all, getting lost somewhere in Russia.

Over the past month, Moscow shot back by reinstalling border controls and restricting the transit of cargo—thereby undermining the central pillar of the customs union: free movement of goods. It has also banned a group of Belarusian producers from its domestic market as punishment for their smuggling of sanctioned EU goods by pretending to reprocess them and selling them under Belarusian labels. In response, Belarusian President Aleksander Lukashenko lambasted Russia’s policy as “stupid and brainless” and expressed an aspiration to “normalize relations with the West,” including by liberalizing the visa regime.

There is every indication that the customs union is not finished unraveling. A weaker ruble has made Russian products cheaper and therefore more attractive in Belarusian and Kazakh markets, which hurts local producers. To defend domestic industries, Belarus and Kazakhstan would need to resort to protectionism, which would deal yet another blow to integration.

To make matters worse, the overall course of the Russian economy is making Russia’s new EEU partners particularly skittish. In his presidential address last month, Putin claimed that Russia will not change its policy toward the West. But none of the EEU members favors the prospect of being dragged down with its neighbor. The more Russia spirals into economic recession, the more its allies will look toward the West.

In fact, Minsk and Astana have already begun exploring their options. Both Lukashenko and Kazakhstan’s President Nursultan Nazarbayev visited Kiev last month and demonstrated their openness to dialogue with the new Ukrainian government and the West in general. Kazakhstan has agreed to build a new coal supply route from its Ekibastuz coal basin to Ukraine and to revitalize military cooperation between the two countries. And Belarus has voiced its readiness to “comply with any request from Kiev in one day.”

These developments don’t mean that Eurasian integration will disappear anytime soon. As long as Lukashenko, Nazarbayev, and Putin remain in power, they will continue paying lip service to its vision. But without real institutions or opportunities for equal partnership, the union will cease to exist the day those leaders step out of office. To put it more bluntly, the EEU resembles democracy in Russia: It was widely expected to emerge and sometimes might even show signs of life, but it remains, in reality, an illusion.