Eurasian Economic Union – reality or fiction?

Another aspect – the EU is based on a joint agreement between the Member States to delegate some of their powers to supranational bodies and implement their decisions. Meanwhile, the EEU, which currently has as its members Russia, Belarus, Kazakhstan, Armenia and Kyrgyzstan, is a purely Russian project, from its formation, under the supervision of the country’s President Vladimir Putin. Generally, decisions are based on established Russian rulemaking and these principles are transferred upon other union members. In addition, unlike the EU, membership in the Eurasian Union does not pose a significant cost to adopt as many regulatory standards and technical standards are inherited from the past. Membership does not require the protection of human rights, democracy and the fundamental principles of the rule of law.

With this in mind the question arises whether the EEU, compared with other regional integration projects and in particular the EU, is merely an artificial facade or does it present specific content which would lead to genuine declared objectives of a Union – to promote the region’s economic competitiveness, stable development and cooperation in order raise member states living standards. What can the EEU relationship be with the EU and in particular the Eastern Partnership policy?

The geopolitical project

Primarily, the development of these regional integration structures can be interpreted within the perspective of political economic theory, revealing economic goals and the political objectives that bind them. From these objectives rise economic and political benefits to motivate countries to move towards further integration. For example, the EU’s primary integration objectives are related to peace, prosperity and economic development of member states through economic cooperation. Countries wishing to join are aware that the reforms, which must be implemented in the long term are of primary important to them. The greatest benefit of integration is participation in a relatively high purchasing power of nearly 500 million consumers in the single market. The pace of European integration depends on the geopolitical situation because many important decisions are taken in times of crisis. Therefore, integration can be an advantage during economic crisis.

Meanwhile, relative to the Eurasian Union, although created using the EU’s example albeit quite quickly, political motives played a key role in the process. In 2011, Russian President Vladimir Putin, published an article in “Izvestia” that stressed the desire to create a “powerful supranational entity” which would not only enhance the region’s competitiveness, but also have the ability to speak as equals with the US, China, or within regional structures such as the EU, NAFTA, APEC and ASEAN.

However, it should be noted that with this project Russia not only seeks to strengthen its bargaining power – using a full range of levers – also influence the price of gas, credit on favorable terms, strengthening of the Russian languages position, military base deployment in breakaway regions, arbiter of geopolitical issues and so on.

Together, the post-Soviet countries could achieve integration into the EU. This community, creating a safe and stable eastern zone, the Eastern Partnership provides the opportunity for political association and economic integration (which means access to the EU market) post-Soviet countries in return adopt European rules along with the implementation of democratic, economic and legal reforms. Within this geopolitical context, Russia, seeing the post-Soviet countries reduced dependency upon it, announced Eurasian Customs Union with the prospect of development of an economic union. The Russian integration project, as noted, offers simple conditions for membership as the countries do not require adoption of any substantial reforms, high quality standards or regulatory requirements.

The establishment of the Customs Union means that the post-Soviet countries will not be able to balance between the two areas of integration policy. For example, once a country becomes a member of the EEU, the EU can no longer negotiate with it based on the Association and Free Trade Agreement, because it has in effect changed negotiating partners. EEU is also a customs union within which tariffs are established. The EU should be compelled to negotiate with the whole organization, in this case, the Eurasian Economic Union. In this case the negotiated agreement must apply to all of the Eurasian Union members, including those that have not implemented necessary European reforms or not members of the World Trade Organization (WTO), for example, Belarus. Therefore, such a scenario is hardly possible, because it simply would not rise to EU’s principles and values.

From the very beginnings of the Eurasian Customs Union, Russia linked this development project with Ukraine, which would be significantly strengthened the Unions importance in international relations. Moreover, after the Maidan revolution, during which the people of Ukraine, among other things, expressed and defended their decision to take the European path, Russia began military action in Ukraine and annexed Crimea, in order to hinder the country’s Euro-integration.

However, Ukraine, Georgia and Moldova, which faced with the same challenges and that Russia considered potential EEU States, were able to withstand external pressure and decided to link their futures with the EU. The Association and Free Trade agreements with these countries have been signed and have entered into force. Therefore, it is very important to maintain the focus and determination to continue required reforms so that these nations can take full advantage of the opportunities offered by Euro-integration.

Thus, it is clear that the EEU has been designed as a rival to the EU for influence within the Eastern Partnership region. However, for such an integrated project to be successful, it must provide real economic benefits that motivate the country to participate. Even initially, during the creation of a customs union, Russia as the initiator of this inclusive project, the “integration engine” and the dominant member trade policy were transferred to other Member States. As a result, Kazakhstan, Belarus, Armenia and Kyrgyzstan had to increase the number of applied import duties on third country’s (except CIS) imported goods. This means that Russia has a larger free trade area and a favorable tariff structure that is beneficial to its business and industry.

Meanwhile, Kazakhstan has experienced the greatest negative impact. Total Eurasian Customs Union external tariff of about 80 percent. coincided with the Russian application of custom tariffs. Therefore, Kazakhstan joint customs level had increased from 6.2 to 10.6 percent weighted average.

Of course, in the long term, Kazakhstan’s trade with Russia and other members of the EES may increase, increased foreign direct investment for the removal of non-tariff barriers, services trade liberalization, and thus reduce the total EPS external tariff. However, progress in this area is quite small, and the Russian Federation from the very start of its WTO membership, began violating the rules of the organization.

So while Kazakhstan EEU membership provides access to important Russian markets, this determination to become a member of the EEU block resulted from political motives – the aim of maintaining the strategic partnership with Russia, to balance between Russia and China. In addition, in 1994 the President of Kazakhstan Nursultan Nazarbayev was the first to offer the idea of a Eurasian union, made up of more of the CIS countries, and participation in the EES is the extension of his original idea.

For Belarus, about 90 percent of the country’s tariff coincided with those used in Russia, so the changes were minimal in reducing the rates of Belarus. However, some products, mainly used cars, had their import duty increased. As a result, Belarus imports from third countries decreased by about 1.1 billion. US dollars.

Belarus is quite dependent on the Russian economy – Russia offers Belarusian enterprises reduced prices for both oil and natural gas. Exports to Russia account for about 40 percent of total Belarus exports. Imports – more than 56 percent. Russia is the largest foreign investor in Belarus, the foreign direct investment accounts for more than half of the countries foreign direct investment. Therefore, all of this resulted in small adjustment costs, undoubtedly due to its decision to participate in the EEU project. It is important to note that this decision was made in 2010, when Russia committed to reduce the price of oil sold to Belarus to the Russian domestic market cost level. Later, Putin announced new pricing of natural gas, calling it an “integration discount”. However, Belarus had position shares of some of it infrastructure companies to Russian companies. Belarus also receives financial support from the EEU to reduce the economic impact of Western sanctions.

Political motives played an important role. Belarus is an EU Eastern Partnership country, but a closer relationship with the EU would require the country to not only adopt European standards, but also to implement significant democratic, economic and legal reforms. That would reduce the Belarusian regimes rule over the country and ultimately presents a challenge to the regimes survival. Thus, the decision to join the Eurasian Customs Union was politically convenient for the regime. On the other hand, Belarus does not show enthusiasm for further deepening integration of EEU initiatives supported by Russia, because this is, again, effectively limits the sovereignty of the regime, such as the use of monetary policy instruments to create the illusion of economic growth.
Kyrgyzstan’s increase in duties also created a negative impact of imports from third countries, mainly in China. China is the second largest importer of goods from Kyrgyzstan, accounting for more than one fifth of Kyrgyz exports. However, in order to reduce the negative impact of trade with China, Kyrgyzstan has negotiated an exception allowing the application of different tariffs on imports of Chinese goods that are intended for internal consumption in the country.

One of the main reasons that led to the Kyrgyz decision to connect to the EEU – free movement of labor. More than 500 thousand Kyrgyz work in Russia and Kazakhstan annually. Those workers wages in Russia account for about 31.5 percent Kyrgyzstan’s GDP. Some of those workers work in Russia illegally. Membership within the EEU removes these obstacles and allows the labor migrants in Kyrgyzstan to work legally in Russia and other bloc states.

Another important motive – during EEU accession negotiations, Russia provided 1.2 billion US dollars in financial aid to Kyrgyzstan, channeled through Eurasian institutions and removing non-tariff trade restrictions; commitments to ensure a steady supply of gas and 0.6 billion US dollars of Gazprom investments into Kyrgyz pipeline modernization. These Kyrgyz decisions also generated Russia’s benevolent 500 million US dollar debt write-off in 2012. And probably not coincidental, that in 2013 Kyrgyzstan decided to close the Masano US military base.

Not only economic, but also geopolitical moves, and EEU membership for Kyrgyzstan has provided security guarantees that the country was seeking due to repetitive strained relations with Tashkent. It also enables the country to strengthen its bargaining position with China, which wields considerable influence in the region.

As for Armenia, the EU quite successfully negotiated the Association and Free Trade Agreement was signed running up to 2013. During the Vilnius summit, Armenia suddenly announced that it has elected to not sign the EU agreement and to join the Eurasian Customs Union instead. Such a decision was undoubtedly due to Russian pressure.

Russia’s application of influence was not difficult. First they used the frozen conflict card relative to Nagorno-Karabakh. In addition, Armenia hosts a Russian military that Armenia sees as an important guarantor of security. Relationships with surrounding countries are strained, particularly with Azerbaijan over Nagorno-Karabakh, which is legally part of Azerbaijan but controlled by Armenia. Thus, geopolitically for Armenia this was a hostage situation and had practically no other choice.

Economic factors also played a role. Armenia is totally dependent upon Russian gas, for which pays a low price similar to Belarus. Russia is the main trading partner of Armenia, Armenia’s economy depends on remittances from migrant workers in Russia. On the other hand, Armenia has not yet completely walked away from the EU. It is negotiating a new legally binding agreement with the EU, it cooperates with the EU Twinning Programme and the EU supplies financial assistance to Armenia.

Thus, it is clear that the EEU’s geopolitical rather than economic project is designed to strengthen Russia’s economic and political influence in the region. Although EEU provides some economic benefits especially for the smaller, interdependent nations, the EEU brings the greatest benefit to Russia.

Union sustainability – questionable

Of course, the EEU has the capacity and potential to become a genuine economic and political union, providing real benefits to all its members, but some countries have to resolutely implement reforms. Russia should take leadership in promoting reforms and mobilizing other Member States. However, it is only possible to imagine this in theory. Knowing EEU members, especially Russia, Belarus and other countries where tenacious oligarchic and authoritarian habits and attitudes are used by all the regimes in practice. In the near or longer term, reforms within such a scenario is highly unlikely.

Currently priorities, discounting political and economic pressure, the EEU integration process is based on the principle of “top-down”. The most notable example of this – in 2014 it imposed an embargo on food and agricultural products from countries applying sanctions against Russia for its military action in Ukraine. Russia did this unilaterally, without consideration of Belarusian and Kazakh opposition. Western products intended for the Russian and Eurasian market enter through Belarus. In response, Russia restricted imports from Belarus and the latter responded by updating the customs checkpoint at the border with Russia.

Russia allows itself to depart from the common “rules of the game”, which it essentially set. Therefore, this EEU, where the dominant member tends to use it as an instrument of foreign policy in benefit of their own goals, regardless of the other Member States’ position, is not a sustainable arrangement.

Constructive cooperation puzzling

Putin stated within his published article in “Izvestia”, drawing attention to an EEU-EU partnership, that “membership in the Eurasian Union would allow its members to more quickly, and in a stronger position, integrate into Europe. It is certainly relative to their common economic space from Lisbon to Vladivostok “. The EU also makes claims to cooperation and suggestions to start “major negotiations”, assuming that this could calm Russia and lead to peace in Ukraine. German Foreign Minister Frank-Walter Steinmeier noted that this would reduce choice between the two integration spaces dilemma for Eastern Partnership countries, because now “there are too many choices between Europe and Russia.”.

While such a prospect would be economically useful to business within the EU and EEU countries, this remains unlikely for a number of reasons. First, both integration spaces support different technical standards and regulatory norms. Migration to European rules would create a significant cost to EEU businesses and would stall. It’s true that the EU could come to agreement with EEU, recognizing their regulatory differences, but it is highly unlikely due to the EU’s external policy, based not only on European norms and standards, but also their general democratic principles, market economy, the rule of law and human rights principles in the developing countries, as well as knowing that within the EEU, some members may not abide by the agreed rules.

Secondly, EU agreement with the EEU opens the way for normalization of relations with EEU States that the EU is currently applying sanctions to – in this case, Belarus and Russia. This is inconsistent with EU principles. Also, not all EEU countries are members of the WTO, and the latter’s membership in the organization is considered an important trade liberalization. Therefore, the EU could develop closer cooperation, not with the EEU itself but with individual member states where the intensification of economic relations tend to link the two democratic principles, and are WTO members, such as, for example, Armenia.

Third, and perhaps most importantly, any broader cooperation with the EEU would allow Russia to legitimize the annexation of the Crimea. There is no guarantee that, after Ukraine, Russia will not go further. For example, after the 2008 Russian-Georgian war the EU normalized relations with Russia. This did not limit the occupation of Georgian autonomous regions – Abkhazia and South Osetia. In order to prevent the Eastern Partnership nations themselves from deciding their own future and to keep Russia’s influence intact, it went in to Ukraine. Although a truce was achieved in 2015, it is fragile – the Minsk agreements are not fully implemented.

Therefore, while Russia continues its economic embargo on the EU and Eastern Partnership countries, continues it aggressions in Ukraine and violates international trade agreements, constructive cooperation with this country, and its creation the EEU, is not possible. EEU itself is by far the more of a facade than project, the economic benefits to Bloc States are limited since not all of them are inclined to implement the necessary institutional and structural reforms. This makes it very difficult to achieve officially declared EEU goals. And all this because of one countries – this integration project’s initiator – geopolitical ambitions.