The First Steps of the Eurasian Economic Union: Disputes, Initiatives and Results

This article was originally published by the Center for SecurityStudies on 7 July 2015.

Abstract

This article examines the first six months of the Eurasian Economic Union from the perspective of its macro-economic development and economic trade relations. It highlights that there are a number of trade disputes between the EEU members, and that the member states have taken steps to protect their national markets.

The Eurasian Economic Union (EEU) is not a completely new attempt at integration between its member states. It rather can be seen as a project that is reshaping old initiatives, both political and economic, into a new form. Its founders do not dispute its historical roots in previous integration initiatives, claiming that the EEU is a fourth institutional step—following the Single Economic Space, Customs Union, and Eurasian

Economic Community ¹. One of the main distinguishing features of today’s Union—the EEU—is its focus on setting common macro-economic, financial, monetary and tax policy. Unlike the previous forms of integration, the EEU has a legal personality. It is also set to provide more freedom of movement of goods, services, capital and workers.

Has Any Progress Been Made Yet?

The plans to create common markets are mainly set with medium-term and long-term perspectives in mind. The most important issues, connected with establishing common markets on oil, gas, electricity, finance have been postponed for 10 years. For example, the EEU has outlined that members should take steps to harmonize their legislation platforms and create common gas and oil markets by 2025, and electricity by 2019. It has also been declared that the members have until 2025 to establish a Joint Center in Kazakhstan to regulate the EEU financial market. That it will take 10 years to form certain common markets illustrates that those economic sectors that are considered strategically important (especially for Russia) continue to function beyond the scope of integration. This situation has been severely criticized by the President of Belarus, Aleksandra Lukashenka ². During the EEU negotiations, he even suggested postponing its creation, because it was not possible to agree about common markets on oil and gas. Most progress is evident within the aim of facilitating free access to the common EEU labor market. The members have agreed to mutually-recognize education degrees in certain areas and established common regulations on paying income taxes.

However, the deterioration in the economic situation in Russia has decreased the demand for further regulation of the free movement of people ³. Some successful steps have also taken place in the development of a common market on construction. Russia, Belarus and Kazakhstan signed a protocol to establish several working groups on the unification of the market on building construction services. Last year, it had been announced that a joint market on building construction services will be established by 2025, but the members have decided to start work on this earlier. It is expected that by the end of this year, construction companies will be able to fulfill their business in countries of the Eurasian Economic Union without having to establish new legal entities ₄ . Belarusian construction companies are interested in this initiative due to the opportunities this would offer them to enter the Russian market. In addition, EEU technical regulations on railway transport were agreed on 3 February 2015 ⁵.

However, the EEU still lacks some basic documents for facilitating integration between its members. For instance, an EEU trade codex has been developed, but its terms have not yet been agreed to by the members. It is expected that Tax Code will come into force by mid-2016. In summary, thus far the members have been unable to form the most important joint markets: oil, gas and electricity. These questions have been postponed and are not listed in the EEU’s list of main priorities. As a result, progress has been restricted to a limited numbers of other spheres.

What About the Numbers?

The EEU’s first 6 months have not delivered results to suggest it is thriving. It has seen fierce bargaining between Russian and Belarus and discussions within Kazakhstan about its virtues. After only 2 months, the President of Kazakhstan said that the EEU faces significant challenges ⁶.

During the first three months of 2015, the volume of internal trade between EEU members—Russia, Belarus, Kazakhstan and Armenia—actually declined by about 36% in comparison with the same period last year ⁷. More recent data is only available on a country level, but also demonstrates the same decreasing trend ⁸ . Such a drop in trade is causing deep concerns in Belarus ⁹. Moreover, trade between Kazakhstan and the EEU also declined by 21% in the first quarter ¹⁰.

Another concern relates to the value of the trade exchange between EEU countries compared to their total trade. In fact, in 2012 and 2013 the trade exchange between the EEU’s founding countries accounted for only 12% of their total trade. In 2014, it constituted around 11%. This trade is mainly based on bilateral agreements between Russia and other EEU member states ¹¹ . Trade between Kazakhstan, Belarus, and Armenia is very limited.

It should be noted that such negative trends were partially expected. For instance, the President of Kazakhstan explained that they fully understood the possible challenges of the EEU ¹², while the President of Russia has stated that the EEU countries should unite and establish a common monetary policy, in order to cope with the current challenges ¹³.

Trade Conflicts and the Protection of National Markets?

The EEU has encountered several problems in trade relations between its members in its first 6 months. Most of these problems are not new, but the new instruments of the EEU have not been able to resolve them.

Trade Disputes on Quality of Agricultural Goods

Since December 2014, Belarus and Russia have been struggling with trade conflicts. In early December 2014, Russia declared that Belarusian meat and dairy products contain antibiotics, salmonella and listeria and are therefore dangerous for consumption, imposing an import ban on such products. Secondly, Russia accused Belarus of transferring and repackaging Western goods that are subject to Russian sanctions. Officially these goods are in transit from Belarus to Kazakhstan through Russian territory, but in practice they end up in Russia ¹⁴. Belarus has responded to the politically charged ban on Belarussian meat and dairy imports to Russia by stepping up customs checks on Russian vehicles entering their territory, arguing this is a smuggling prevention action. The meeting between Russia’s Head of the Committee on Standards and the Belarusian Minister of Agriculture on 12^th of January failed to solve this ongoing trade conflict. Both sides agreed on the necessity of normalizing trade relations. However, Russia insisted on continuing its enhanced controls and checks of Belarusian products ¹⁵ . On February 6, Russia allowed the import of frozen and chilled beef from seven enterprises from Belarus ¹⁶. However, products from two other companies—a Minsk and a Bobruisk meat processing plant—remained banned from exporting to Russia. Almost at the same time on February 10, Russia’s Service of Standards (Rosselkhoznadzor) found bacteria in partly salted salmon delivered from Belarus. This product is now banned from the Russian market ¹⁷.Meanwhile, controls on the quality of meat production have already been imposed on Kyrgyzstan. The EEU Veterinary Commission has reported that meat production in 5 local Kyrgyz enterprises do not correspond to existing quality standards. As of now, their production is not banned for export ¹⁸.

The latest mutual restrictions on the trade of certain food products between Kazakhstan and Russia add to this picture of trade conflicts on agricultural goods. For instance, on 31 March Kazakhstan excluded 5 tons of Russian meat products from its market, saying that Russia was in violation of quality standards. In return, the Russian Service of Quality Control stated that Kazakh producers do not fulfill the same quality rules. Such restrictions on imports from Kazakhstan might be partially connected with the depression of the Russian ruble and as a result cheap Russian production in comparison to Kazakhstan ¹⁹ . Although officially both the Russian and Kazakh authorities ask that these disputes are not called “trade wars”, the situation does not promote closer ties between two countries.

Initiatives to Protect National Markets

One of the first initiatives to protect national markets from EEU imports was taken by Kazakhstan on 5th March. Kazakhstan suspended Russian fuel and gas imports (such as light distillates and products, medium distillates, motor fuel, kerosene, diesel fuel, gasoil, hydraulic liquids, light oils, oils for gear wheels, electric isolation oils and other oil products, with exceptions for housing furnace fuel, in order to prevent a critical shortage) to protect its domestic market from a “surplus of Russian oil products” ²⁰ , due to a weakened ruble which has sent ripples of economic uncertainty through Central Asia. After the ban was implemented for 45 days in March, it has been prolonged several times and was still active as of 20^th June ²¹.

Besides Kazakhstan, Belarus has also introduced protection measures. Belarus refuses to supply petroleum products to Russia in the amounts that it had agreed to earlier ²². Over past years, Russia sold oil to Belarus at domestic prices and Minsk supplied Russia with oil products. The plan for 2015 envisaged the supply of 23 million tons of oil from Russia to Belarus and 1.8 million tons of oil products from Belarus to Russia. This agreement was made on establishing the EEU in January 2015. However, Minsk has changed its plans amid the ruble devaluation, as the prices for oil products in Russia became lower than the export parity price (export price minus customs duty and transport expenses). It has become more advantageous for Belarus to supply petroleum to other countries. Sanctions Imposed by Russia and Not Supported by Belarus and Kazakhstan One of the main current issues for the development of trade relations between the EEU member states is the sanctions that Russia has applied on certain goods from the European Union. The sanctions were imposed in August 2014. Russia expected that Belarus and Kazakh stan would also impose the same sanctions. However, these countries refused to do so. As a result, Russia has taken additional measures to prevent European products from entering the Russian market through the other members of the EEU. According to Russian Prime Minister, Dmitry Medvedev, all members should introduce a system of labeling for imported goods, in order to prevent illegal re-exporting schemes.

Why are There Problems in Trade Relations? Do Factors Other Than the Economy Matter?

The current economic problems facing the EEU have been explained in detail by the President of Kazakhstan Nursultan Nazarbaev. He stated that the economic crisis in the region, the decreasing world oil price and sanctions against the Russian economy have had a negative impact on the development of the EEU ²³. Similar positions are evident in Moscow and Minsk. However, it is not only economic problems that are proving a challenge for the EEU. Political relations between its members are another serious issue that is casting doubt over integration in the EEU. The Russian annexation of Crimea and the Ukrainian conflict have sharpened Belarusian and Kazakh concerns about Russia’s political and security ambitions within the EEU. In this context, both are seeking to keep good relations with alternative partners. Kazakhstan is interested in continuing to pursue its self-proclaimed multi vector foreign policy, while Belarus seems to be on its way to partially improving its relations with the European Union.

Currently, public relations between Belarus and Russian are tense. During February 2015, an unusual increase in anti-Belarusian activity in the pro-government Russian media and blogosphere was observed. In the face of the unfolding economic crisis in both Russia and Belarus, and with the Belarusian presidential elections scheduled for 2015, this could signal a new shift in the relations between Russia and the regime of Alexander Lukashenko ²⁴ . At the same time, Lukashenko has activated his so called pro-European rhetoric and even threatened to withdraw from the EEU if it does not suit Belarus’s national interests. According to his statements, Belarus will start to normalize and build relations with EU and USA. However, he also empathizes that Russia remains the closest country to Belarus ²⁵.

Echoing Lukashenko’s threat, Kazakhstan’s President Nursultan Nazarbayev has also said that his country could theoretically leave the Eurasian Union, if membership would threaten the independence of Kazakhstan. This statement came in response to the scandalous statement of the leader of the Russian liberal-democratic party, Vladimir Zhirinovsky, who said that Russia should take on the alleged anti-Russian sentiments in Kazakhstan, after “it will deal with Ukraine” ²⁶. Concerned about possible tensions with the Russian speaking minorities (21.47% of the Kazakhstan population), the Kazakh authorities have increased their control over any issue of inter-ethnic relations in the country. A case about pro-Russian posts on an internet social media site has become the subject of court investigation in Almaty. One author of the incriminating posts has been put under house arrest until the court procedures are finished ²⁷.

What Is the Future of the EEU?

The future progress of the EEU will depend primarily on Russia, as the member state that is both the most interested in its continued existence and with the economic potential to subsidize the economies of the other members ²⁸ . In the short-term, relations between Russia, Belarus and Kazakhstan may worsen as concerns about the speed of further integration are exacerbated. Recently, Russia has begun promoting the idea of establishing a common monetary market and one currency. However, neither Kazakhstan, nor Belarus appear to be ready to even follow the Russian sanctions against certain Western imports. Kazakhstan has denied any discussions on establishing a common currency market have taken place ²⁹. Atameken, a business association in Kazakhstan, has severely criticized the idea of a common currency ³⁰ . Unlike Belarus and Kazakhstan, Armenia and Kyrgyzstan are second-rank members of the EEU, and are not in a position to oppose Russia. Their participation in the EEU is a matter of political necessity and opportunities to obtain subsidies.

In spite of these inter-member problems, Russia is trying to increase the geopolitical role of the EEU. For instance, Russia is promoting further enlargement by starting to discuss EEU free trade agreements with Egypt, Iran, China, India and other countries. On 2th May in Kazakhstan, the EEU signed a free trade agreement with Vietnam. According to the documents, EEU members agreed to simplify trade regimes with Vietnam and provide a liberalized regime for 90% of goods ³¹. As of now, it is hard to predict the effectiveness of such agreements. However, the trend suggests that the EEU will seek to sign free trade agreements with many other countries. Dmitriy Medvedev announced that more than 40 countries are interested in establishing free trade zones with Eurasian Union ³². The main purpose of these agreements would seem to be to boost the geopolitical interests of Russia.

Overall, the EEU has started with caution and mistrust in economic trade relations, as well as against a background of fears about giving up sovereignty. With Russia’s hard currency reserves rapidly depleting—due to low oil prices, Western sanctions and monetary interventions—the carrot and stick approach might soon become a one sided approach. And, if Russia refuses to provide financial support to the EEU, it may well follow the destiny of the Commonwealth of Independent States.

1 Evraziyskiy Ekonomicheskiy Soyuz: Zachem Eto Rossii.

2 Lukashenko Grozit Otkazom ot Evraziyskogo Soyuza, Trebuet Lgot na Neft.

3 Jarosiewicy A., Fisher E. The Eurasian Economic Union—more political, less economic. January 2015, Center for Eastern Studies. OSW. Commentary.

4 Kazakhstan, Belorussiya i Rossiya Sformiruyut Edinyi Rynok Stroitelnykh Uslug.

5 Utverzhdeny Perechni Standartovk Tekhnicheskim Reglamentam Tamozhennogo Soyuza v Oblasti ZheleznodorozhnogoTransporta.

6 Evraziyskiy Soyuz Seychas Perezhivaet Bolshie Ispytaniya—Nazarbaev.

7 Torgovlya Mezhdu Stranami-Chlenami EAES Sokratilas.

8Evrazaiyskiy Soyuz Ne Spas Belorusskuyu Ekonomiku.

9Dinamika Tovarooborota Mezhdu Stranami EAES Vyzyvaet Ozabochennost

10 Tovarooborot Mezhdu Stranami EAES v Pervom Kvartale 2015 Upal na21%

11 Zayavleniya Dlya Pressy po Itogam Vstrechi Presidentov Rossii , Kazakhstana i Belorussii.

12 Nazarbaev: Evraziyskyi Soyuz Neobkhodim Nesmotrya na Padeniye Tovarooborota.

13 Putin: Strany EAES Mogli by Protivostoyat Skachkam Valyut.

14 Ryhor A.,Belarus Reinstates Customs Control on the Border with Russia: The End of the Eurasian Union?

15 Torgovaya Voina RF Protiv Belorissii Nabiraet Oboroty.

16 Rossiya Vozobnovlyaet Postavki Govyadinys 7 predpriyatiy Belorussiyi

17 Rosselhoznadzor Obnaruzhil parazitov v Partii Belorusskogo Lososya .

18 Vetkomissiya EAES Vyyavila Nedostatki v Myasopererabatyva-yushchikh Predpriyatiyakh Kyrgyza.

19 Torgovyi Tupik Rossii i Kazakhstana. Voyny Poka net, no Konflikt Nalitso.

20 Russian Oil Products are Under Embargo in Kazakhstan.

21 Zapret na Vvoz iz RF Dizelnogo Topliva Deistvuet v RK do 20 Iyunya.

22 Belarus Refusing to Supply Oil Products to Russia in Agreed Amounts.

23 Nazarbaev: Snizhenie Eksportnykh Tsen na Energonositeli i na Tovary Stalo Ispytaniem dlya EAES .

24 Zapadnye Spetsslyzhby Pytayutsya Possorit Lukashenka s Moskvoi.

25 Lukashenko Poprosil Moskvu ne Napryagatsya iz-za Resheniya Minska Normalizovat Ontnosheniya s Zap.

26 Nazarbaev Napomnil o Prave Kazahstana Pokinut Evraziyskiy Soyuz .

27 Pod Domashnij arrest Vzyata Obvinyaemaya v Razzhiganii Mezhnatsionalnoj Rozni .

28 Jarosiewicy A., Fisher E. The Eurasian Economic Union—more political, less economic . January 2015, Center for Eastern Studies. OSW. Commentar y.

29 Edinoy Natsionalnoy Valyuty v EAES ne Budet.

30 Kazahstanskij Biznes Schitaet Besperspektivnoj Ideyu Valyutnogo Soyuza .

31 Gosudarstva Evraziyskogo Ekonomicheskogo Soyuza i Vietnam Podpisali Soglashenie o Svobodnoi Torgovle .

32 Medvedev: Torgovue Otnosheniya s EAES Khotyat Ustanovit Svyshe 40 Stran.