Just expanding and deepening the integration of countries from the post-Soviet space may not be enough to guarantee the future success of the Eurasian Economic Union. What may be needed is the involvement of a major economic player such as China.
From left: Serzh Sarkisian of Armenia, Alexander Lukashenko of Belarus, Almazbek Atambayev of Kyrgyzstan, Vladimir Putin of Russia, and Nursultan Nazarbayev of Kazakhstan arrive for the Eurasian Economic Union summit in Moscow in 2014. Photo: AP
The Eurasian Economic Union (EEU) reached another milestone in its existence with the announcement this past week that Kyrgyzstan will sign its accession treaty in March. Joining Russia, Kazakhstan, Belarus, and the latest member Armenia (who became a full member last month), Kyrgyzstan accedes at a very difficult time for the members of the Union.
With the Russian economy teetering on the edge of a full-blown economic crisis, and with these difficulties threatening to infect the other members of the EEU, it remains to be seen if the trade bloc can help to stave off economic collapse. It is only very recent moves away from a “Soviet lite” focus – including a pivot to China – that may provide the EEU with the reason it needs to continue.
A key issue in the EEU’s disappointing performance as an institution to this point has been its lack of clear direction: Is it meant to encompass many countries, is it meant to deeply integrate a smaller core of countries, or is it meant to do both? What economic issue is it seeking to address that cannot be done by these separate countries, each acting individually?
These questions are not unique to the EEU and, indeed, they bedevil all customs unions. Most prominently, it is a debate still playing out in the European Union, as one only need witness the difficulties with Greece and the Eurozone to see how there are Euro “Ins” and Euro “outs” (but even some Euro “Ins” are not as far “in” as others).
Without a clear reason for the existence of the trading bloc, there are precious few ways to judge its economic success.
In reality, it appears that the EEU has decided that it exists to expand and deepen, going both routes simultaneously. In addition to the incorporation of Armenia and Kyrgyzstan in the bloc, Russian Prime Minister Dmitry Medvedev has promised that the EEU will sign “more than 100 documents” this year, including a Customs Code, a concept related to the development of a common oil and gas market, modalities regarding international agreements from the EEU, and, perhaps most importantly, the manner in which existing trade barriers can be dismantled.
Seen from this vantage point, as a tool for liberalization and removing administrative barriers to trade, the EEU can indeed prove to be effective. And if the EEU can help to smash the walls that many ex-Soviet countries still have blocking economic progress, what is the harm in expanding these benefits to others?
The real issue hasn’t been if the EEU can be utilized for a good purpose (trade liberalization) so much as: Is this set of countries the right set to do it?
The core set of countries that make up the EEU have substantial barriers to trade, but tend to have these barriers with other countries rather than each other. In addition, there seems to be little gain to be had from possibly generating more trade amongst the members, as Russia and Kazakhstan’s economic output are both heavily dependent on natural resources, and there seems to be little reason why the two countries would want to be more economically intertwined.
This reality has been exacerbated by the near-collapse of Russia’s economy in the past year. Russia’s economic malaise needs little further explanation: Western sanctions, a plummeting price of oil, and continued intervention in Ukraine have pulled the already-stretched country to the breaking point.
Difficult as this is for Russia, in the context of economic integration, it may prove an insurmountable wall to other countries outside of the former Soviet Union joining the EEU.
Russia was always envisioned as the economic engine of the trade bloc, with the largest population and the biggest economy by far (Russia’s GDP is 10 times larger than Kazakhstan’s). The enticement for any newcomer to the economic union, then, would then be to gain access to the Russian market.
Current difficulties make that incentive seem less appealing, especially if other countries in the region are showing positive growth, not growling about military expansion, and have more diversified economies.
The real secret to the longevity of the EEU may be reaching favorable terms with China, a possibility that took a step closer to reality last week. Russian Ambassador to China Andrei Denisov told RIA Novosti that China was interested in creating a free trade area (FTA) with the EEU, an important step to lowering trade and non-tariff barriers and increasing the scale and (importantly) scope of trade.
Such a move would be a more concrete signal to a country that actually can help the EEU member economies, rather than the amorphous BRICS grouping that Russian leadership has been pushing.
In reality, the BRICS are nothing without China (whose GDP is bigger than the rest of the BRICS put together), and it is more important for the EEU to drop its barriers to China than it is to attempt to spur more trade with South Africa or Brazil. Making nice with China, a country that is Kazakhstan’s biggest trading partner, can provide some of the important economic benefits thus far lacking in the EEU.
Indeed, irrespective of its current troubles, Russia was always a poor choice of an economy that could lead an economic union. An overly interventionist economy dominated by state-owned and quasi-state-owned entities, the dependence of Russia on commodities has been exposed over the past year.
With China more closely integrated with the EEU, however, a real engine of growth can be hooked up to the EEU train. And if the EEU can help China to lower its own barriers, including macroeconomic ones, then there may be a huge benefit for both sides. Unless this happens, however, the EEU may see less success in integrating broader, deeper, or faster.
The opinion of the author may not necessarily reflect the position of Russia Direct or its staff.