The Eurasian Customs Union: An Alternative to the EU's Association Agreements?

Abstract

The choice for Eastern Partnership countries between the Eurasian Customs Union (CU) and the EU with its Association Agreements (AA) (including the Deep and Comprehensive Free Trade Agreements) is a political decision: the CU will never go as deep into the structure of the economy as the EU-oriented AAs. To a large extent the CU has followed the set-up of the EU, albeit under the institutionalised dominance of Russia. However, many potential CU member states are reluctant to join, especially now, in view of the Crimea crisis. One may ask whether countries are free to join or not join the CU, such freedom being a condition for regional integration.

Introduction

Since the collapse of the Soviet Union, a number of attempts to (re)unite the former USSR countries have been undertaken in the framework of the Commonwealth of Independent States. Yet there have been no significant results, with the initiatives having volatile institutional structures, open windows for exemptions, intergovernmental characters and non-binding effects, signifying the weak enthusiasm and commitment of the member states. The Commonwealth of Independent States has proven to be too inefficient and incompetent to be developed into an integrated economic body with functioning supranational infrastructures and the potential to form a competent political entity (Vilpišauskas et al. 2012, 5). Russia saw an alternative in the establishment of the Eurasian Customs Union (CU).

The CU has its roots in the January 1995 ratification of the first agreements on the establishment of the CU of Russia, Belarus and Kazakhstan (Valovaya 2013, 45). In 1996 Kyrgyzstan acceded and in 1997 Tajikistan followed suit. In 2000 the above-mentioned five founded the Eurasian Economic Community (EurAsEC), to which Uzbekistan acceded in 2006. Finally, in 2007, the Treaty on the Establishment of the Common Customs Territory and Formation of the Customs Union between Belarus, Russia and Kazakhstan was signed, coming into effect on 1 January 2010. Hereby, a free trade area with common import and export duties, as well as approximated standards for the quality of goods, sanitation and so on, was created. Kyrgyzstan and Tajikistan were enabled to join it, once they were ready.

On 4 October 2011, Vladimir Putin (2011)–-then prime minister of the Russian Federation–-stated in an interview with Izvestia that from 1 January 2012 the Common Economic Space of Russia, Belarus and Kazakhstan would be in force and that by January 2015 a deeper integration union–-the Eurasian Union–-would have been established. This union will be based on the Customs Code and the Codified Agreement on the CU and the Single Economic Space (Dragneva and Wolczuk 2012) and demonstrates Putin's aim to form not a simple trade bloc but a supranational regulatory body, a new political actor.

There is a wide-ranging debate about whether this forthcoming Eurasian Union will have the capacity to absorb its member states efficiently and for the productive benefit of all. One sensitive question regards the Eastern Partnership (EaP) partner countries, which Russia is hunting to bring to the threshold of the CU. In light of this, the current paper seeks to show to what extent the two unions are compatible, if at all, and whether the CU can be an alternative model for the countries involved in the EU's EaP. It should be noted that when speaking of ‘Russia’, exclusively the present president and his government and administration are meant, not the people.

The triggers for Eurasian integration

Russia's reasons

When investigating the enthusiasm and purposes that drive Russia towards Eurasian integration and the establishment of a potential Eurasian Union, it becomes evident that its reasons are multifaceted and complex. To begin with, Russia is competitively predisposed towards the EU with regard to the former Soviet Union countries. The Eurasian project is in line with Russia's aspiration to counterbalance the EU's attractiveness and influence with regard to the countries which it considers fall within its sphere of influence. Another objective is Russia's aim to ensure its role in Central Asia and restrict the economic domination that is dissipating from Moscow because of the Chinese presence and dominance, especially in the field of energy. Additionally, Russia's venture is also related to its perception that by guaranteeing its power in the region, it can increase its role on the international level, too. Furthermore, the CU serves as a tool to demonstrate that Russia is a global independent political power. It must, however, be borne in mind that, unlike the EU, the whole ‘jungle’ of customs institutions–-traditionally a trigger for corruption and to some extent a ‘state within a state’ in the CU member states–-and their interactions with CU member states lack any further vision for political integration based on equality and sovereignty, as can already be seen from Russia's automatic majority. (In the EurAsEC Russia has 40 votes, Belarus and Kazakhstan have 15 votes each, and Kyrgyzstan and Tajikistan have 7.5 votes each; Russia therefore has a permanent veto power. The CU is ruled by the following voting ratios: 57 for Russia, and 21.5 each for Belarus and Kazakhstan. Thus, again, Russia is dominant).

Russia feels comfortable applying ‘stick and carrot’ tactics to persuade countries to join the CU (Mankoff 2013, 2–6). This tactic is applied more than verbally with respect to the post–Soviet Union states currently involved in the EU-launched EaP initiative (Kempe 2013, 3–4). Here, Russia deploys both ‘soft’ power (in the form of preferential gas prices and labour opportunities) and ‘hard’ power (in terms of the positioning of military bases in conflict zones, etc.). Moreover, after the launch of the EaP, which proposed deeper integration with the EU, the urgency behind Moscow's ambition to form an alternative integration model increased.

Differences between the CU and the EaP

The EU seeks to reform the political, economic and social systems of neighbouring countries in compliance with the structures in its member states. Under the EaP it proposed the ratification of Deep and Comprehensive Free Trade Agreements (DCFTA) which would ensure the removal of non-tariff barriers, the liberalisation of the service sector and the abolition of protectionist measures, as well as beneficial conditions for foreign direct investment. In response, the EU expected these countries to approximate their administrative and legislative systems and structures to that of the EU. In contrast, the standards imposed by the Eurasian CU are much lower. This implies that while the EU calls for approximation towards higher and more liberal standards, the CU does not require cardinal changes or transformations to high-quality standards and regulations in the legislations of its member states.

Furthermore, Russia also applies informal tools, such as business–politics related issues, shared culture, oligarchic structures and so on, to bring together the former Soviet states. It combines economic integration with energy sector integration: through proposed privileged prices for energy, credit and access to its internal market Russia is able to dominate crucial economic areas in the CU member states, thereby strengthening its position among the EaP countries. More discrepancies between the EU and the forthcoming Eurasian Union can be identified. The Eurasian Union envisages that its member states will have an identical approach to cooperation with international organisations. In contrast, the EU enables a differentiated approach.

One, more problematic, aspect is the decision-making procedure: the CU adopts decisions based on the principle of qualified majority voting (a two-thirds majority is necessary for decisions), with Russia, as noted above, having 57 % of the votes and Kazakhstan and Belarus 21.5 % each. This means that in combination with just one country Russia can ratify the resolutions that it favours. This structure can thus give way to votes being bought and sold for any project (Kasciunas and Šukyte 2013, 65–79), unlike the qualified vote of the EU which is more balanced, where only case-by-case majorities can be achieved and where one country does not always win every vote.

Incentives for the potential members

Against this background, it is interesting to observe the incentives for the countries to join the potential Eurasian Economic Union.

The Eurasian initiative has been recognised as having key benefits for Kazakhstan (Vinokurov and Libman 2013, 86–7), with the economic benefits being at the heart of the process. In 2009 President Nazarbayev of Kazakhstan highlighted the growth of both the domestic market and foreign investments due to the implementation of the CU. The abolition of customs tariffs with Russia and Belarus provides potential for Kazakhstani producers, enabling more competitive prices. Furthermore, it facilitates the transportation of Kazakhstani oil and gas. On the whole, the interactions and fields of cooperation between the countries are quite dynamic, with Kazakhstan and Russia having quite analogous economic and political systems, as well as similar perceptions of the challenges and opportunities in the current structures of international relations and geopolitics. One of the concerns the two countries share is China, whose economic expansion is a source of concern for both. The Eurasian Union also has strategic meaning for Astana. The country perceives that it can rely on Russian ‘hard’ security should there be a growth in instability among the other Central Asian countries and Afghanistan. However, Astana also has certain concerns regarding integration. First, with its incorporation into the CU the prices for basic goods increased. Undoubtedly, the CU is not the only cause of this, yet its contribution is undeniable. It has caused a rise in fuel prices because of the elimination of customs borders between Russia, Kazakhstan and Belarus. Furthermore, the country fears that the CU and the forthcoming Eurasian Union could undermine Kazakhstan's sovereignty. The rationale behind this statement is evidenced by the voting system of the CU, as well as that of the Eurasian Union. Additionally, with this integration model Russia increases its leverage in Central Asia, thus limiting Kazakhstan's independence.

Kyrgyzstan and Tajikistan also have concerns about being overruled by Russia. Moreover, as World Trade Organization members, accession to the CU will imply tariff increases for them. However, they seem to have nooption but to take the path towards integration, primarily because Russia and Kazakhstan have increased existing customs tariffs. Additionally, labour migration to Russia has played a role. While both Kyrgyzstan and Tajikistan are economically weak and have marginal significance in terms of integration, they are another source of confirmation of the Russian influence. Many Kyrgyz opinion leaders complain, at least in private, that they do not feel very secure in the CU; this is due to the fact that Kyrgyzstan has long been a World Trade Organization member, and the country may be among the first to opt for Central Asian integration (Zahorka 2010, 112–16).

The next Central Asian country, Uzbekistan, has shown cautious interest in joining the CU. As key arguments for this decision, the country points out that Russia is its major trade partner and the working place of much of its migrant population. However, Uzbekistan is very careful to ensure it remains outside of the CU, currently tending to support the West more in foreign policy matters, something which may change again soon.

Turkmenistan preserves political neutrality towards both the West and the integration initiatives within the former USSR area (Oskanian 2013).

As for the EaP countries, the reasons behind Belarus's intention to join are manifold. To begin with, the low adjustment costs for entry to the CU should be mentioned. Furthermore, Belarus would get crude oil and gas from Russia at cheaper prices. Additionally, Russia is the key market for Belarusian exports. One more incentive is that President Lukashenko could use the integration to counteract the Western sanctions against his regime (Vilpišauskas et al. 2012, 22–5). Furthermore, Belarus has expressed willingness to enter the CU because of the ‘soft power’ Russia could deploy over the country. Belarus would receive no tangible subsidies from Russia if it rejected the initiative. In contrast, Moscow has made it clear that by pursuing the integration, Belarus will receive rewards in the form of cheap gas and crude oil, as well as favourable conditions for Belarusian goods in the Russian market. For instance, in the middle of 2011, it was announced that Belarus would get $3–3.5 billion from the EurAsEC. Additionally, also in 2011, Belarus and Russia agreed upon cheaper gas prices for the period 2012–14. Thus, Belarus has often been the subject of Russian economic calculations, while also being dependent on payments and deliveries from its big neighbour.

While Azerbaijan has not initialled an EU Association Agreement, it has also shown no intention of joining the CU either. As a matter of fact, in the long run the country could experience a negative outcome should it join the CU. Among the disadvantages for Azerbaijan would be the ‘loss of control over oil reserves and money, loss of independence in setting economic and energy policy, particularly with respect to the European Union, and damage of reputation in strategic partners’ (Alili et al. 2013, 7).

The next country to snapshot is Georgia. The country considers integration with the EU and NATO as the cornerstone of its foreign policy. Here gradual approximation towards the EU's standards is not a political issue between the parties. It may be an irony of history that Russia, with its short war against Georgia in support of Abkhazia and South Ossetia, has caused a consensus among Georgian political actors and, moreover, that this country is, at present, relieved of major pressure from Russia.

Russia has not only put pressure on Moldova but has also tried to lure it as well. Among the levers Russia has used are the backing of the opposition Communist Party and the imposition of embargoes on Moldovan agricultural products, such as the embargo on Moldovan wine in September 2013. One more area that Russia exploits is the large number of Moldovan migrant workers. Furthermore, Russia is the country's key gas supplier. However, there is no basis to believe that CU membership would improve the country's economic stance. Moreover, it could result in an ‘increase in customs duties, and would lead to national currency appreciation, rising production costs and worsening of Moldovan export competitiveness. In this scenario, general welfare would decrease, paralleled by a significant drop in output’ (Prohnitch 2012, 11). Hence, the country has shown no sign of any intention to join the CU, and this has not only been determined by the frozen Transnistrian conflict.

The case of Armenia is of particular interest. While the country was included in the EU's EaP and was to ratify an Association Agreement, including a DCFTA, at the EaP Summit in November 2013, on 3 September 2013 President Sargsyan declared that the country would join the CU and also participate in the establishment of the Eurasian Union. This decision was the result of Russian threats over gas prices and the restriction of Armenian labour migration to Russia, as well as Russia's sale of arms to Azerbaijan. However, as a result of this opportunism, the country has lost the chance to enter the larger European market. Only the oligarchs will benefit from joining the CU: such a big market as the European one threatens them, while joining the CU will require no changes from them and they will continue to act within the same rules (Sargsyan 2013). With accession to the CU, Armenia endangers its European future (Sargsyan 2014). This accession will lead to the even greater subordination of Armenia's domestic and foreign policy to Russia. Moreover, the country may even experience degradation of the political and economic reforms that it has made through cooperation with the EU.

The key target for Russia is Ukraine. This country's accession to the CU would mean Russia's victory over the EU in the shared neighbourhood and would push forward the CU integration process per se. Hence, Russia has launched broad trade sanctions against the country. Incontrast, if Ukraine had joined the CU, Moscow had offered it at least $5 billion of aid and a significant discount on the price of natural gas. Notwithstanding Ukraine's significance for Russia in its integration endeavours, the Crimea ‘referendum’ of 16 March 2014 and its accession to Russia has made Ukraine's entry to the Eurasian Union highly improbable.

Conclusion

Both the Eurasian Economic Union's set-up as well as Russia's tough policy to bring the countries into the CU suggest that Russia's incentives for integration go beyond lowering trade barriers (in fact, the case of Armenia shows that while any customs union should abolish existing tariffs and trade barriers, Armenia would have to raise its customs tariff from an average of 2.7 % to 6.5 % and cope with economic sectors which have so far been sound but are likely to face heavy turbulence in the future). Russia perceives Eurasian integration to be a political and economic, but also ideological, benefit, a tool through which it can counterbalance the EU and the East Asian economies, as well as promote its conventional values over Western ones.

The EU has become more extensively engaged with the EaP states since 2004, becoming a source of modernisation and reformed governance in the region. It has incorporated these countries into its European Neighbourhood Policy and EaP, aimed at promoting the European governance model, without getting into a rivalry with Russia.

The formation of the Eurasian CU may alter this state of affairs. The CU can hardly have a modernising and reforming effect on its member states. And in no way can the Eurasian Union be seen as an alternative to the EU or to the agreements suggested by it. The two have quite different political and economic structures, procedures, regulations, standards, values and norms. In contrast to the EU, the Eurasian economic space has clear hierarchical and oligarchic tendencies, as well as junctions between politics and business.

To summarise, in competing with the EU (if there is a competition at all), the CU is in a situation fraught with difficulties. Collecting the semi-developed countries into one bloc will ensure that all its economies continue to move backwards, including Russia's. And it is evident, from what can be heard from potential CU member states, that since Russia's actions regarding Crimea these countries have become even more cautious about joining–-and this includes reluctance among existing member states.