Eurasian Economic Union: An uncertain future?

While the European integration project continues to be battered by numerous crises, Eurasian integration appears to be pushing forward. On May 31, the leaders of 5 countries met in Astana, Kazakhstan for a meeting of the Supreme Eurasian Economic Council. Their objective was to lay out of the plans for the future of the Eurasian Economic Union (EEU). However, the reality is that the EEU is also facing a series of crises, which are largely internal. These include the decline of the Union’s original economic rationale and bilateral disagreements between member states. Further efforts to deepen economic integration are threatened by these problems. At the same time, political realities limit the widening of the EEU to new countries. The result is that the future of the whole Eurasian integration project is unclear.

 

Since its inception, the EEU has been in a perpetual state of identity crisis. Western critics deride the Union as nothing more than a Russian attempt to revive the Soviet Union, a claim that President Putin has vehemently denied. This is based on the argument that the economic rationale for the Union, the revival of economic ties between post-Soviet countries, was against the economic interest of member states. Some economists predicted that this revival and the creation of a customs union would lead to Russian economic domination of the other member states. For these states, external tariff levels would rise, blocking the import of cheaper foreign products, forcing consumers to purchase more expensive products from within the Union. These products would mostly come from Russian producers, as the country’s economy dominates the bloc, accounting for over 80% of the Union’s collective GDP.

 

While initially the customs union of Russia, Belarus, and Kazakhstan resulted in increased inter-bloc trade from 2010-2013, it is now a liability. Closer economic ties have deepened economic vulnerability among the member states; their economic performance is now linked even closer to the health of the Russian economy. The result is that intense pressure on the Russian economy from sanctions and low energy prices has contributed to an absolute decline in intra-EEU since the Treaty on Eurasian Economic Union came into force in 2014. Preliminary data for the first quarter of 2016 indicates that this trend is largely continuing.[i]

 

Despite rhetoric of unity and cooperation, the removal of internal trade barriers is not reality. Trade disputes between member states has resulted in the temporary resumption of customs controls and bans on certain products. Shortly after the creation of the EEU, Belarus and Russia became embroiled an intense trade dispute following Russian’s bans on imports of European food products. The spat is largely a response to the alleged smuggling of prohibited products through Belarus to Russia, despite Russian regulations allowing certain European products to be imported after undergoing ‘substantial reprocessing’ in Belarus or Kazakhstan. In response, both Belarus and Russia have used concerns over phytosanitary standards to prohibit the import of certain agricultural products from the other.

 

Similar conflicts have emerged between Kazakhstan and Russia. In 2015, Kazakh officials seized meat and milk products from Russia, claiming that they were contaminated with bacteria; Russia responded by stopping the import of Kazakh cheese at the border on similar grounds.[ii] In the case of the Kazakh-Russian trade dispute, the driving factor was in fact the Kazakh government’s concern for its domestic producers, as depreciation of the Russian Ruble made imports cheaper, potentially forcing out Kazakh producers out of the market. As a result, excuses for protectionary measures were found. These disputes effectively created artificial restrictions limiting market competition and the functioning of the EEU’s open market. This undermines the fundamental economic rationale for the EEU.

 

EURASIAN ECONOMIC COMMISSION

Map of the Eurasian Economic Union

 

In external trade, critics decry the organization for being inherently protectionist. The common external tariff that came into effect was largely based on Russia’s existing tariff structure in 2010 as the Eurasian Customs Union (ECU). Belarus saw a small decline in tariff rates, but Kazakhstan saw a marked increase in tariff levels. Despite the tariffs, data reveals net growths in trade with third-countries for the ECU from 2010-2013. Since then, the bloc’s trade with third countries has declined in absolute terms. This can be attributed to the economic slowdown triggered in part by falling energy revenues as a result of low oil prices.

 

With both internal and external trade decreasing, the EEU is struggling to reassert itself as a relevant economic actor. One option is to try to strengthen trade ties outside of the bloc. In 2015, the EEU signed a free trade agreement with Vietnam which comes into force this year. At the recent Eurasian Economic Council meeting, the 5 presidents affirmed that establishing strong economic ties with third countries is of vital importance to the Union. There are discussions of future agreements with Iran, Egypt, India, Israel, the ASEAN bloc, and others.  These plans are criticized as a desperate attempt to replace markets that have been cut off due to Western sanctions. Regardless of the rationale, closer ties with Asia and other countries offers the potential for improved access to thriving developing markets as well as established high technology hubs. It is too early to judge whether these efforts will help revive economic growth for the EEU.  

 

The weakening of the EEU due its waning economic rationale is exacerbated by the differing views of leaders of the member states. Once again, while observers would claim that the Union is nothing more than a Russian puppet, the reality is that each President has their own vision for how the Union should act and what its role should be. Kazakh President Nursultan Nazarbayev was the first to revive the idea of Eurasian economic integration and cooperation in 1994 and continues to be a strong voice in the Supreme Economic Council. He and Belarussian President Alexsandr Lukashenko became wary of Russia after Crimea. In negotiating the Treaty, Kazakhstan fought hard to ensure that the Union remained purely economic.[iii] Both presidents are likely to continue to drive the EEU towards a deeper economic integration while avoiding the topic of political integration. Above all they want to maintain their political mobility, allowing them to develop their own foreign policies towards the EU and China without interference from the Kremlin.

 

In the medium-term, the Union is unlikely to grow much further, due largely to political not geographic concerns. Moldova, Georgia, and Ukraine have made their intentions clear, striving for greater cooperation with EU through the Eastern Partnership program. Ukraine’s drift toward the West following the fall of the Yanukovych government is particularly debilitating. The Union lost the 3^rd largest former-Soviet economy, which in 2011 accounted for almost 7% of the Custom Union’s trade with third countries. This was a significant blow to the economic basis of the Union. At the signing of the Treaty on Eurasian Economic Union, President Lukashenko simply commented that “We lost some along the way: I mean Ukraine.”[iv]

 

The other post-Soviet states are unlikely candidates for joining the Union. While membership is not contrary to Azerbaijan’s economic interests, the unresolved conflict with Armenia over Nagorno-Karabakh is a major obstacle to integration. Uzbek President Islam Karimov has rejected the idea of Uzbekistan ever joining the EEU due to concerns over the loss of sovereignty. Turkmenistan remains committed against the organization, sticking to its UN recognized “permanent neutrality”. This is unlikely to change in the future.

 

Tajikistan is the sole remaining former Soviet republic being drawn into the orbit of the EEU. For Tajikistan, joining the EEU offers enormous benefits. Their primary concern is for thousands of Tajik migrant workers in Russia. Their remittances account for nearly one third of the country’s GDP. EEU membership promises that these workers will get official recognition and legal protection, as well as ensuring their continued employment. Other benefits include easing market access for the country’s agricultural products and non-ferrous metals.

 

However, there are costs to Tajikistan joining the Union. The country’s trade flows are likely to be negatively affected by entry in the Union. Higher external tariffs could create trade diversion, as tariffs reduce trade with third countries, limiting competition and potentially driving up prices on basic goods. Another point of conflict is Tajikistan’s WTO member status. Like Kyrgyzstan, the country will have to reconcile its new external tariffs with its WTO agreements. This could result in claims being brought against Tajikistan by non-EEU members under the WTO’s dispute mechanism.

 

Outside the former Soviet geography, membership plans are not any stronger. Afghanistan and Pakistan remain unstable. China has its own plans for the region. It is committed to the Silk Road Economic Belt, a largely ambiguous plan that promises a new age of East-West economic cooperation and connectivity. Turkey, once invited to apply for membership by Kazakhstan, is blocked by declining relations with Russia and its refusal to establish diplomatic ties with Armenia. Iran’s future is less clear, with its economy only now opening more to rest of the world. In the short-term, the country is likely only to continue discussions of a free trade agreement with the EEU, its primary focus the crises in the Middle East and domestic economic recovery.

 

OFFICE OF THE PRESIDENT OF RUSSIA

Supreme Eurasian Economic Council meeting in narrow format in Astana on May 31, 2016

 

So what vision for their future did the leaders of the EEU lay out in Astana? As stated above, the primary focus of the conversation was on strengthening cooperation with third countries and other integration organizations including the UN, SCO, and ASEAN. President Nazarbayev highlighted that the EEU could serve as a bridge between the east and west, in line with China’s New Silk Road Economic Belt.[v] Talks of deeper integration were largely sidelined, but the leaders did approve concepts for the creation of a common market for oil and petroleum products and a common gas market.

 

This is the future planned for the Union. Instead of focusing on resolving internal conflicts and contradictions, the EEU is turning outward. External economic reorientation is promised as an opportunity to help resolve internal economic woes. But this is only a temporary distraction from the real issues that have stalled deeper integration.

 

The Eurasian integration project does not have an easy road ahead. The EEU fraught with internal conflicts that threaten to undermine its already weakening economic rationale. In the long-term, the EEU is to widen further to include Tajikistan. Widening will likely stop there. Deepening of economic integration continue but only on issues that ignore existing grievances. The EEU’s pivot towards focusing on external economic affairs is a gamble. The new policy must produce favorable economic conditions for the member states, otherwise they will continue to lose faith in the economic rationale of the Union itself. If the leaders of the EEU truly desire to improve the association’s future prospects, they must first look inwards before looking outward.