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Home , Customs union, Eurasian Customs Union

11 2014 Alexei Druzhinin/AP/SIPA Druzhinin/AP/SIPA Alexei The Eurasian Union: The economics and the by Iana Dreyer and Nicu Popescu

Long ignored by the West, the Eurasian Customs the , at least abides by World Union (consisting of Russia, and Organisation (WTO) rules and respects its ) has recently been brought into the in- members’ and neighbours’ political sovereignty. ternational limelight. The project – an attempt by the Kremlin to create a rival to the and its project – attracted at- The contours of the plan tention when , with its characteristic blunt- ness, began to pressure , , The Eurasian Union is still work in progress, but its and to join the grouping and drop their template – at first glance – looks strikingly similar plans to sign Association Agreements with the EU. to that of the European Union. Within the customs Although Russia has not succeeded in convincing union, most internal trade has been liberalised (bar all these states to join, it managed to do so with certain sectors like sugar, tobacco, alcohol or rice) Armenia in September 2013, and the political tus- and since July 2011, border controls between its sle over the issue with Ukraine played a central role members have largely disappeared. Conversely, in triggering the country’s current crisis. controls were stepped up on the borders with di- rect neighbours in the CIS which opted to stay out The came into force in of the union. 2010 and is expected to become a fully-fledged ‘Eurasian Union’ in 2015. Previous Russian-led Members established a common external trade tar- attempts to create trading zones and customs un- iff in January 2010 and about 85% of duties ions among members of the Commonwealth of are now harmonised. Kazakhstan, initially the most Independent States (CIS) ran into the sand. But economically liberal among the three members, will this one fare differently? In a region where bor- had to raise around half of its tariffs in order to be- der management practices and bureaucracies are come part of the grouping and its average applied notoriously inefficient, the union already works rate nearly doubled from 6.5% to 12.1%. reasonably well. That said, the project has inherent economic and political flaws that could yet cause it Since 2012, the customs union has been run by to derail. In the meantime, the EU and its partners a ‘Eurasian Economic Commission’, which is ex- can work together to ensure that, in implementing pected to become the centrepiece of the eventual

European Union Institute for Security Studies March 2014 1 Eurasian Union. This body sets key rules for the EU-Turkey customs union, established in the mid- customs union and is tasked with handling Russia’s 1990s, excludes agricultural products; trade relations with third countries and relations – founded by Brazil, Argentina, Paraguay and with the (WTO) on be- Uruguay in 1991 – has failed to establish a com- half of all three partners. Designed with the hope mon external (to avoid reversals in trade of eventually guaranteeing the free movement of liberalisation) and avert political tensions; and an capital and labour, the Eurasian Union is expect- East African Customs Union collapsed in 1978, ed to have a say in the macroeconomic, financial, with the ensuing closure of borders contributing and energy policies of its members. to subsequent regional military confrontations. The Commission is also in charge of harmonising the bloc’s technical and sanitary standards, as the Customs union projects are rarely market-liberal absence of shared and mutually recognised stand- in their economic outlook. This explains their ards has proven to be a major obstacle to further frequent failure, as protectionist policies raise . political tensions over the redistribution of rents while failing to raise prosperity. Such unions tend Yet there are significant differences when com- to succeed if underpinned by a wider political pared with the EU. First, whereas the EU is mostly project and genuine willingness by its members a union of middle-size and small countries, the to relinquish their trade policy autonomy as part Eurasian Union is much less balanced in its com- of a broader transfer of political sovereignty. The position. Russia’s dominance of the customs union German Zollunion of 1834 for example, prepared is overwhelming, accounting for 86% of the bloc’s the ground for the unification of Germany forty GDP and 84% of its population. The same figures years later – although neither the Prussian-led for Kazakhstan and Belarus are 8% and 10% and state that emerged nor its trade policies were lib- 5% and 5% respectively. eral. Second, whereas the EU has attracted many ap- The EU has managed to avoid the pitfalls of other plicants with the prospects of membership, the customs unions. It is part of an ‘ever closer union’ Eurasian Union is expanding mostly through a designed to consolidate a liberal political and mar- combination of Russian subsidies and coercion. ket order on the European continent, for the sake Moscow is pressing for other members of the CIS of which member states have agreed to relinquish to join the bloc, and while Armenia and part of their national sovereignty gradually and have agreed to join in principle, Ukraine, even voluntarily. Apart from certain sectors (such as under President Yanukovich, has firmly resisted agriculture), the European customs union can be Russian advances. said to be fairly liberal by international standards. The economic effects of FTAs are two-fold. On Do customs unions work? the one hand, FTAs create trade, because they of- fer a bigger market for producers, thus generating A customs union is a form of regional . On the other hand, FTAs also area (FTA) which seeks to liberalise trade exclu- divert trade. Since there is a preference for trade sively among its members. Customs unions in- with partners from within the zone, less efficient volve, on top of an FTA, a common external tar- and more expensive producers can be propped up iff and, by extension, a common external trade to the detriment of more competitive ones from policy. They are easier to administer than FTAs outside, thus harming consumers and reducing because there is no need to agree on rules of ori- economic gains. gin for traded products. Customs union members, however, cannot pursue their own tariff or trade Trade economists consider that, in order for trade policies with third parties. This restriction on na- creation in FTAs to outweigh inevitable trade di- tional sovereignty is often difficult to accept and version, liberalisation among members must cover partly explains why customs unions are rather un- (close to) all areas of trade. Trade barriers towards common – as opposed to classic FTAs. non-members should not be raised, and ‘behind- the-border’ barriers to commerce (such as trade History is full of failed customs unions, and the restrictive application of technical standards) re- only fully-fledged and well-functioning customs duced. union in the world today is the EU. Other customs unions are either incomplete or plagued by po- FTAs work out best when its members are already litical frictions among members over the distribu- reasonably wealthy or when their economies are tion of costs and benefits of the arrangement: the complementary, as found in so-called ‘North

European Union Institute for Security Studies March 2014 2 Russian 2007-2012

Source: Rosstat

South’ FTAs (e.g. NAFTA involving Mexico plus Russian trade and the Customs Union the US and Canada). These allow the poorer coun- try to attract investment, improve productivity and Like other customs unions, the Eurasian Union access a major wealthy market. FTAs exclusively is underpinned by a wider political vision. between poorer countries, however, tend to exac- Championed by the Kremlin, this vision seeks to erbate differences in wealth among their members, establish a new centre of power in an increasingly frequently spurring internal political tensions. multipolar world. But the other customs union members do not wholeheartedly share Moscow’s Customs unions often initially raise the average stance and are wary of its dominance of the bloc. levels of trade protection of their members vis-à-vis At this stage, it is a union of three post-Soviet the outside world. Yet as the EU has demonstrat- authoritarian regimes, and those countries with ed, this problem can be addressed. Partly because more open political systems in the region have its trading partners feared a ‘fortress ’ when resisted Russian pressure to participate. In addi- the customs union was set up in the 1960s (and tion to the weakness of the political legitimacy the in the late 1980s), EU integra- of the project, its underlying economic vision is tion was accompanied by the reduction of trade not liberal, with Russia having raised protection barriers during global trade liberalisation rounds levels since the onset of the global financial crisis in the GATT (now WTO). When the EU expanded in 2008, and forced the other members to raise to include states in southern and , their tariffs. new members – as a general rule – were required to reduce tariffs in order to match those of the EU. Although the Eurasian Union is incomplete, com- This decision has both benefited their economies pared to previous Russian-led regional trade initi- and contained political grievances over trade di- atives, it is, however, the most effective attempt to version with non-EU trading partners. date. At any rate, internal trade tensions have not disappeared, and Moscow has not fully given up For its part, the WTO regulates FTAs. It says that on the idea of introducing occasional trade barri- FTAs should liberalise ‘substantially all trade’, and ers (for example on milk products from Belarus). that ‘the purpose of a customs union or of a free- trade area should be to facilitate trade between the The ‘deep integration’ dimension of the union constituent territories and not to raise barriers to remains somewhat unclear. The process of har- the trade of other(s).’ The WTO foresees a mecha- monising technical standards has been extremely nism for members to negotiate ‘compensations’ slow and there is no mutual recognition of mem- – either tariff reductions or money – if a coun- bers’ differing standards. Moreover, the prospects try decides to increase its tariffs above the level it of establishing the free movement of labour are has ‘bound’ them in the WTO. This also applies uncertain, with over 80% of Russians currently to countries that join a customs union and, as a in favour of curbing migration through the intro- consequence, have to raise import duties. duction of visas for Central Asians.

European Union Institute for Security Studies March 2014 3 It is worth nothing that tighter border controls Outlook and implications with non-customs union members after 2011 led to a dramatic reduction of imports from Relations between the customs union and the Russia’s neighbours. According to the data from WTO remain hazy. Russia has been a member Russia’s statistical agency (Rosstat), imports in since 2012 and has been slow in delivering on its 2012 from declined by 1.4%, from commitments to the organisation. What is more, Kyrgyzstan by 33.4%, from by 24.2%, Moscow’s WTO partners are wary of recognis- from by 25.1%, and from Ukraine ing the customs union as the sole representative by 10.7%. of Kazakhstan and Belarus. If Kyrgyzstan and Armenia join the union, other WTO members Due to previous liberalisation efforts, the mar- will also claim compensation. ket access exporters in Kazakhstan and Belarus have gained has been limited, and there has been It is also not guaranteed that the union will gain no trade growth within the zone that is directly any more members. Even Kyrgyzstan and Armenia linked to the customs area. But there have been are having second thoughts as they gauge the po- measurable, if limited, signs of tential consequences of joining: the loss of their to the detriment of Kazakhstan. For example, political autonomy, the economic costs of more Astana is now importing more expensive cars , and the impact this could have on from Russia and reducing imports of more com- their economic and political relations with other petitive German, Japanese, and Korean vehi- WTO members and/or neighbours – not least cles, effectively amounting to the transferring of . Further integration within the union may economic rents to Moscow’s automobile sector. also be hindered by Russia’s military intervention As for Belarus, its economy has largely retained in Ukraine, with other post-Soviet states (includ- its Soviet-era structures, and while this will not ing union members like Kazakhstan) deeply un- change as a result of the union, Russian state- settled by Moscow’s aggressive behaviour. backed companies will be in a better position to get hold of the country’s economic assets. For most trade partners of those states in the customs union, what matters most is avoiding The Eurasian Union is unlikely to bring long- discrimination against their products as a result term economic benefits to its members. Its of greater customs controls. Encouraging Russia member states are neither wealthy nor are their to liberalise its tariffs and services should also be economies complementary. As a result, political on the agenda of its major Western and Asian tensions over transfers of wealth can be expect- trading partners. And ensuring that Kazakhstan ed. Russia’s economy is not developed enough (and perhaps one day even Belarus) can join the to play the positive role that the US and Canada WTO should remain a priority. played for Mexico in NAFTA, or the Western European economies for the new EU members Russia’s behaviour in the context of the customs of central and eastern Europe. union may also have to be monitored in order to ensure its compliance with WTO rules. Moscow’s Several studies on the countries of the former recourse to trade blockades against countries have shown that they have more unwilling to join the Union – like those against to gain by integrating with the outside world Ukraine in 2013 – are contrary to the spirit and than with each other. Applying WTO rules on the letter of the WTO. And if Russia raises tariffs services liberalisation, investment, intellectual against Ukraine if/when Kiev joins the planned property, , and techni- Deep and Comprehensive Free cal standard recognition (among others) would with the EU, as Moscow has threatened to, such be a more effective way of helping the current action would be in breach of its commitments members of the union to modernise and diver- to the WTO. Moscow’s trading partners should sify their economies. not hesitate to launch WTO procedures to tack- le trade diversion and should provide technical Most economists agree that the Eurasian assistance (with regard to WTO dispute settle- Customs Union could bring greater benefits to ments) to any of their eastern partners who suf- its members were its trade regime more open fer as a result of Russian trade sanctions. than it is today. In other words, both politically and economically, the Eurasian Union is a ghost of the past. Yet it can now no longer be ignored, Iana Dreyer is a former Associate Analyst and and must be dealt with in an appropriate man- Nicu Popescu is a Senior Analyst at the EUISS. ner.

European Union Institute for Security Studies March 2014 4

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