ISSUE 1-2014
INTERVIEW
STUDIES
Yaroslav Shimov Lyubov Shishelina Vladimir Voronov Victor Zamyatin Stepan Grigoryan
RUSSIA AND EUROASIAN PROJECT
Laurynas Kasciūnas Юрий Солозобов Леонид Вардомский Александр Скаков Hasmik Grigoryan
OUR ANALYSES
Томаш Урбан Mykola Riabchuk
REVIEW
Pavel Vitek
APROPOS
Anna Abakunova


Disclaimer: The views and opinions expressed in the articles and/or discussions are those of the respective authors and do not necessarily reflect the official views or positions of the publisher.

TOPlist
RUSSIA AND EUROASIAN PROJECT
THE PROSPECTS OF THE EURASIAN UNION AFTER
THE UKRAINIAN REVOLUTION AND RUSSIA’S ANNEXATION OF CRIMEA
By Laurynas Kasciūnas | Head of the Policy Analysis and Research Division, Eastern Europe Studies Centre (EESC), Lithuania | Issue 1, 2014

Linas Kojala | Policy Analyst, EESC, Lithuania | Dovilė Šukytė | Policy Analyst, EESC | Issue 1, 2014

Before the European Union’s (EU) Eastern Partnership Summit in Vilnius, Ukraine was perceived manoeuvring between two integration spaces, the EU and the Kremlin initiated Customs Union (CU) of Russia, Belarus and Kazakhstan. Only in Vilnius, when refusing to sign the Asociation and DCFTA agreements with the EU, Ukrainian President Viktor Yanukovych revealed his plans to steer Ukraine closer towards the Eurasian project. If not pro-European revolution in Maidan, which came as an opposition to the Yanukovych’s decision, we would be witnessing Ukraine’s geopolitical shift towards East, as well as country’s integration to the CU. Russia’s land-grabbing policies towards Crimea and attempts to destabilize the Eastern and Southern parts of Ukraine are not only pushing Ukraine towards the West but also making its’ membership in the CU nearly impossible. In addition, the crisis in Ukraine has also placed seeds of doubt and fear between Belarus and Kazakhstan, which are set to enter into a deeper integration with Russia and sign the creation of the Eurasian Economic Union on May 1, 2014. Thus, a fresh look into the prospects of the Eurasian Union (EAU) is required, including analysis of dominant motives behind Belarusian and Kazakh decisions to join the EAU, as well as analyzing the EAU’s capacity to follow the footsteps of the European integration. Finally, two possible scenarios of the Eurasian Union will be suggested together with observations on the future policies of Ukraine.

Eurasian Union as a successor of failed attempts to (re)integrate the post-Soviet space

Following the dissolution of the Soviet Union (USSR), there have been various attempts over the past two decades by the Commonwealth of Independent States (CIS) to promote deeper economic integration. However all of these initiatives included clauses allowing member states to choose the depth of integration. This can be explained by the fact that for many countries, the motive behind the establishment of the CIS was not in fact a search for (re)integration, but rather a means to ensure conditions for the former members of the USSR to “part” in an orderly manner.

The CIS trade regime basically consisted of bilateral trade agreements periodically supplemented with exemptions. Meanwhile, multilateral agreements coordinated specific issues, such as unification of customs procedures and rules for determining the origin of goods. All of the multilateral agreements had to be ratified by national parliaments, and this was an additional safeguard for those countries that were apprehensive about deeper integration. As a result, the commitments of CIS members under these agreements were very limited.[1]

Failure to achieve deeper integration forced the architects of (re)integration of the post-Soviet space (whose driving force has always been Russia) to rely on the “multi-speed” formula, whereby countries that are willing or motivated in some way to do so form a core and integrate in a given policy sector. The practical manifestation of such an approach can be witnessed in the Collective Security Treaty Organisation (CSTO) and the economic Customs Union of Belarus, Kazakhstan and Russia (CU).

Unlike the free trade agreements that had previously existed in the CIS, the CU, which launched on 1 January 2010, is a qualitatively different and deeper stage of integration, as it introduced not only a free trade area, but also a common import taxation structure and a common external tariff, as well as the harmonisation of product quality, sanitary and other standards. On the other hand, the CU is still not the ultimate goal of integration: on 1 January 2012, at least formally, the members launched the Single Economic Space (SES), and the Eurasian Union (EAU) is foreseen to come into effect by 2015.

Along with the process of integration, the institutional architecture of the Eurasian Union has started to emerge. Its most important link is the supranational Eurasian Economic Commission (EEC). The Commission has the mandate of the member states in such areas as trade policy, customs, external tariffs and non-tariff barriers, trade protection instruments, and technical regulations. There are plans that in the long term (up to 2015), the EEC mandate may expand to the areas of energy policy, public procurement, sale of services, competition and investment. It should be noted that the EEC architects are learning from past mistakes and are striving to create an institutional framework where decisions taken by supranational institutions would be legally binding for the participating states, and would be applied directly, without any additional internal legislation or ratification.[2]

Obviously, the architects of the Eurasian Union intend to take five years to create what took almost 40 years in European integration. The question is whether this duplication is a facade, or whether it does, after all, contains mutually assured interests, including the goal to integrate?[3]

Creation of the Eurasian Union: Russia’s vision for the Eurasian Union

Assessing the motives behind the establishment of the Customs Union of Belarus, Kazakhstan and Russia and the planned Eurasian Union, many analysts highlight the instrumental importance of this structure in increasing the influence of Russia and its partners in international politics, and quote Russian President Vladimir Putin’s aspirations to create “a powerful supranational structure” which would speak with the U.S., China or such regional structures as the EU on an equal basis.[4] At the same time, other studies note that the economic impact of the launch of this regional union has been undervalued.

It should be noted that so far, the advance of Russia’s influence in the post-Soviet space was based on effective instruments of “soft” (preferential gas prices, strengthening the position of the Russian language, etc.) and “hard” (deployment of military bases in separatist conflict zones, the function of the geopolitical arbiter, etc.) power, yet weak binding international agreements did not provide leverage for Russia over the relations of post-Soviet states with alternative integration spaces.

These weaknesses were challenged and put into use by the EU’s “integration without membership” concept, which, through the Eastern Partnership (EaP) initiative, started offering access to the EU internal market in exchange for the adoption of European rules.

Russia was aware that the stimulus offered by the EU would restrict Moscow’s opportunities to retain political control over the CIS space, and aimed to establish an alternative integration model with more favourable conditions of access and participation. It should be noted, though, that after Putin outlined the vision of the Eurasian Union in greater detail, there were no public allusions to competition of this structure with the EU and the EU’s EaP initiative. Moreover, Putin stated, “entry into the Eurasian Union allows each of its participants to, more quickly and from a stronger position, integrate into Europe”.[5] This can be linked to the pronouncement of another Putin vision a decade ago about “a common economic space from Dublin to Vladivostok”.

However, despite Putin’s visions, there is considerable doubt about the relationship between the Eurasian Union and the EU - especially the possibility for EaP countries to harmonise liberalisation of economic relations and adoption of regulations in both directions.

Leaders of the Eurasian Union and its member states declare their intentions to adopt EU regulations, but this is still a theoretical possibility rather than an advanced process. Adoption of EU product quality regulations - particularly regarding production - will be a costly process for businesses in this region. The main motive for them to adopt EU standards would be the need to sell their products on the EU market. If this motive is not strong enough, the adoption of EU rules might stumble, with no guarantees of ever being completed. Thus, it is hardly possible to talk about Putin’s advocated vision of economic integration “from Dublin to Vladivostok”.

EU practice indicates that any significant liberalisation of EU trade with its eastern neighbours and movement of people, capital and services will inevitably be associated with the adoption of European regulations. However, if the countries of the Eurasian Union continue to follow technical standards and regulations dating back to the Soviet era (GOST), differences in regulations will remain for quite some time and will function as non-tariff restrictions on trade between the EU and members of the Eurasian Union. Theoretically, it is certainly possible to imagine a free trade, tariff-free area between the EU and the Eurasian Union, but it would be fragmented and limited to certain products that may be of no interest to Eurasian countries.

Belarusian choice to join the Eurasian project: there was actually no other choice

Unlike Russian, Belarusian motives to join the CU were driven solely by the potential economic benefits. Almost half of Belarusian exports are absorbed by Russia, also Russia is the main provider of energy supplies and the source of foreign investment for Belarus. Thus, forming a common customs union, especially in time of economic crisis, was a plausible solution.

In 2011 Belarusian economy was struck by crisis, which was partly caused by irresponsible economic policies and such politically based decisions as to increase salaries, pensions and other social benefits only to boost pro-Lukashenko electorate in the upcoming presidential elections. Belarus has been also affected by the 2008 financial crisis. However, the major damage to its’ economy came due to the changes in the energy trade agreements with Russia. Since 2007 Belarus was facing gradual increase in prices for Russian gas and oil. Besides, it was deprived of its profits gained from oil products export, as according to the new agreements, the export duty for oil products processed from Russian crude oil had to be paid to Russia’s budget. As a result, Belarus lost around 9 percent of GDP over the period of 2007-2010.[6]  

Membership in the CU was a well-used opportunity to warm up relations with Russia and to renegotiate conditions for energy supply. Due to removal of customs duties, the oil price for Belarus lowered by about $30 a ton. While the average yearly cost of gas felt from $265 per 1,000 cubic metres in 2011 to $165 per 1,000 cubic metres in 2012 (it got slightly increased to $167 per cubic metres in 2014). Belarus’ economy recovered fastly and performed about 5,5 percent increase of GDP in 2012.[7] In return for such generous energy concessions Belarus had to commit to the CU and agree to sell its major gas transit enterprise Beltransgaz to Gazprom. Currently Russia owns almost all the gas pipelines in Belarus.

While Russia is successfully exploiting the economic weaknesses of Belarus in order to secure its’ participation in the CU, it might take a greater deal to achieve similar results in forming deeper integration within the Eurasian Union. Belarusian President Alexander Lukashenko has been putting immense efforts to avoid unification between Belarus and Russia, which is threatening to weaken the Belarusian regime and could turn Lukashenko into a pseudo-leader accountable to Kremlin.

Recent events in Ukraine, including Russia’s annexation of Crimea and further efforts to de-stabilize eastern regions of Ukraine, has worried Lukashenko, according to whom, Russia’s actions towards Ukraine “set a bad precedent”. As a leader of Russophone country with 70 percent of population being Russian-speakers, Lukashenko cannot ignore possibility that the same land-grabbing tactics can be used against Belarus. Especially, when there have been statements from Russian President Vladimir Putin suggesting that at least eastern part of Belarus could be gradually integrated to the Russian Federation. As a result, Lukashenko has never recognized independence of South Ossetia and Abkhazia and has restrained from expressing support for the incorporation of Crimea into Russia.

However, it is not military invasion that Lukashenko is worried about, especially when analysts agree that it is unlikely that Russia would attack Belarus. The major concern is based on the fact that Russia employed its power against the country that was set to join the CU. This brings serious concerns about deeper integration to the Eurasian project. Firstly, Belarus and Kazakhstan have grounds to think that Russia might employ similar hostility and try dominating the Eurasian Union. Russia has agreed upon equal decision-making rights of all member states only to appease concerns of Ukrainian government, which is avoiding unions that might prevent from possibility to join the EU. Secondly, integration of Crimea has added additional responsibilities to Russia’s budget, thus it might limit Russian direct investment in Belarus, as well as subsidies for Russian crude. In addition, any sanctions on Russian oil would hit Belarusian refineries, which generate up to 30 percent of the revenues of the Belarusian state budget.

Ukrainian crisis is also threatening to Belarus’ trade with the EU, which generates almost one third of Belarus’ overall trade, and Ukraine, a second main trade partner per country. In order to sustain these vital economic ties, Belarusian government has to renew its on-off flirtation with the EU. The first signs of Belarusian efforts to warm up relations were demonstrated by accepting EU’s invitation to attend the EU Eastern Partnership Summit last November and initiating talks on Visa Facilitation and Readmission Agreements, as well as discussing EU’s help for the Belarusian economy. The fact that Belarus commenced these actions before Russia’s invasion to Ukraine, suggests that membership in the CU was not meeting all the expectations of Belarus.

Despite positive changes in Belarusian-EU relations, EU economic support to Belarus could never compete with Russia, especially when there are unresolved human rights violations in Belarus. Also, in order to take advantages of the EU Eastern Partnership and sign a Deep and Comprehensive Free Trade Agreement (DCFTA), Belarus would need to undergo many costly and even painful structural changes. While neither the EU nor Russia are be able to offer both economic support and assurances for Belarus’ sovereignty (and survival of Lukashenko’s regime), Belarus will continue deceiving its partners and looking for the most beneficial options. Therefore, Lukashenko signing the agreement establishing the Eurasian Union in May 2014 should not be perceived as irreversible connection between Belarus and Russia.

Kazakhstan and the Eurasian Union: the greatest advocate of economy-based Eurasian integration?

Kazakhstan shares similar fear with Belarus that Russia might not hesitate and use any instruments in its power to dominate the Eurasian Union. Also, an impression that Russia is pursuing the creation of the EAU rather as geopolitical not as economic project is also widespread among Kazakhs. But by being an oil-based economy, Kazakhstan is in a better position to resist Russia’s pressure and oppose any but economic integration of the EAU. Kazakh President Nursultan Nazarbayev has already requested to remove all the political aspects from the Eurasian Economic Union agreements and instead focus on creating a mutually beneficial economic union.

So far the CU membership failed to deliver expected results to Kazakhstan. For example, since joining the CU, Kazakhstan has negative trade balance with Russia and Belarus and is basically flooded with their goods. By 2012, Kazakhstan’s export to Russia increased by 40 percent and accounted for $6.7 billion, but Russia’s export to Kazakhstan reached 55 percent growth and accounted for $17.1 billion. At the same time Kazakhstan’s trade with Belarus remained negligible, only 0.6 percent of Kazakhstan’s total foreign trade.[8] Furthermore, according to the World Bank analysis, based on the 2011 data, Kazakhstan is loosing about 0.2 percent in real income per year as a result of participation in the CU.[9] This is due to implementing the common external tariff of the CU, which required increasing external tariffs from an average of 6.5 percent in 2009 to 10.3 percent in 2010. In a mean time Russia and Belarus experienced small tariffs declines.[10] According to the World Bank, Kazakhstan will be able to profit from the CU membership, if such further steps as reduction of trade-facilitation and border cost barriers, as well as reduction of non-tariff barriers will be taken.[11] Thus, it is why President Nazarbayev has been calling for creation of a quality economic union, before starting discussions on further geographical expansion (to Armenia, Kyrgyzstan, Tajikistan) or even a political integration.    

The other two reasons why Kazakhstan entered the CU was an attempt to establish closer links with European markets and to avoid becoming dependent on China. Both of these aims were highly affected by the implementation of the CU rules and the Ukrainian crisis. Due to increase of external tariff, EU member states’ export to Kazakhstan has reduced by 2-3 percent. Also, because of Russia’s aggression in Crimea, Kazakhstan faces possible outcomes of European sanctions to Russia, which might cause a decline of the Western energy investments and thus increase China’s role in Kazakhstan.

Considering that Russia‘s annual GDP accounts for 88 percent of Eurasian Union’s GDP, while, for example, Germany accounts only 40 percent of European Economic Community’s GDP, Kazakhstan will remain exposed to any domestic or external factors faced by Russia. For example, Kazakh business is already suffering from protectionist policies of Russia. Several Russian companies that are unable to compete with the EU or the United States in global markets are taking up protectionist measures and pushing out Kazakh and Belarusian companies from the common market. 

Kazakhstan expected to gain direct links to the European institutions and markets via Ukraine’s membership in the CU. Thus, in the eve of aggression, Astana put immense efforts to avert Russia’s military intervention by suggesting a path of negotiations. First, it did not want similar pro-Russian uprisings in its northern provinces, which consists from 38 to 48 percent of ethnic Russians. Second, by having the longest land border of 7000 km with Russia, it could not afford similar land grabbing of its territory. Therefore, after the invasion, Kazakhstan followed the hard line and did not recognize either referendum in Crimea or the peninsula’s annexation. But it has sustained from criticizing Russia and expressed understanding for its decision to incorporate Crimea. Especially when a decision was taken in accordance to the will of Crimea’s population.  

Despite the fact that the Customs Union has not reached its potential yet, and that without    Ukraine it holds rather Asian not Eurasian face, governmental and public support for the Eurasian Union remains high in Kazakhstan. According to the Eurasian Development Bank survey, Kazakhs are the leading supporters of the CU with 73 percent of respondents expressing support for the membership, compared to 67 percent of Russian and 65 percent of Belarusian respondents (September 2013 survey).[12] Unlike Belarus who has been offered the EU Eastern Partnership initiative, Kazakhstan’s alternative for the Eurasian project is less promising. China, which already accounts for more that one fifth of Kazakhstan’s overall trade, has been increasing its economic influence in Central Asia. Astana has no interests of being “swallowed” by China, thus seeks Russia’s balance in the region. After all, with China building oil and gas links with Central Asian countries, it is in Russia’s interests to sustain its control over the regional energy recourses.

Can the Eurasian Union repeat the steps of European integration?

When initiating the creation of the CU, Russia has aimed to repeat the footsteps of European integration. However it carried no will to follow the same time track and attempted to create the Eurasian Economy Union within a short period of five years. Such a rush from Russia’s side poses a question whether Eurasian Union is only a theoretical project or can it be a real integration project with a relevant content?

Strong supranational institutions are the essential condition for the effectiveness of Eurasian Union. Currently it possesses the Eurasian Economic Commission, which is an analogue of the European Commission. The creation of such institutions demands member states to delegate a substantial level of competence to supranational decision-making and supervisory institutions. In order to do that, a certain level of trust, as well as, political and security culture is required.   The question is, whether the Eurasian Union is able to grant such safety to its members?

There are several significant divisions between the EU and EAU member states:

  • sui generis supranational institution with well-developed relations of interdependence between member states versus states, whose both domestic and foreign policies are directed towards strengthening their sovereignty;
  • liberal democracies versus authoritarian regimes that are only disguised as sovereign democracies;
  • market economy with slight regulation versus centralized and government regulated market economy;
  • security and foreign policies based on interdependence between member states versus security and foreign policies focused on the golden rule of non-interference and maintaining the balance of power.

The EU subjects itself in international relations by applying the inner model of integration to its external relations. Therefore, EU’s relations with the third countries are based on linkage of institutions and increased interdependence. In order to strengthen such links, the EU employs its “economic magnet” i.e. the benefits of accessing the EU single market serves as encouragement for the third countries to apply European standards and rules. This practice continues since 2006, when the EU has aimed to create a broad network of trade agreements with the third countries and trade blocs.[13]

Russia, on the other hand, emphasizes sovereignty as a core principle of security and foreign policy, according to analyst Robert Cooper.[14] Russian political system is based on vertical power with economy being centralized, especially the strategic sectors, and strongly connected to the political elite. The economic model is determined by an agreement between business and government i.e. state guarantees property rights and balance of power among different interest groups while businesses remain loyal to the government.   Similar system of a new “social contract” is also relevant for the remaining EAU member states.

Table 1. Differences between EU and Russia as international actors

Difference

EU

Russia

Formation of the external relations

Institutional linkage: spread of the EU’s norms

Balance of power: dealing directly with central governments

Links between foreign and domestic policies

Mutual voluntary involvement in member states’ internal affairs

Golden rule of non-interference

Links between economy and politics

Separation of business and politics

Merge of politics and business

Given the fact that the member states of Eurasian Union base their domestic and foreign policies on principle of non-interference, it is unlikely that supranational institutions will be provided with sufficient powers to limit member states’ autonomy in the decision making processes. Thus, the Eurasian Union will not be able to repeat the pattern of the European integration. The EU and Eurasian Union are two different political and economic blocs, which are also competing on the scale of values.

Why is it so difficult for the Eurasian Union to follow the footsteps of the EU?

The vision of the Eurasian Economic Union quite clearly echoes stages of the EU’s development. In the course of developing the CU, several steps in creating a single market were also taken. For example, in the area of free movement of labour it was agreed to equally threat the workers originating from the EAU states.

In other areas, however, there are number of obstacles, including non-tariff barriers to free movement of goods. Barriers to free movement of capital should be phased out by 2020.[15] The sector of services also remains fragmented and, despite intentions to apply the principle of mutual recognition in several areas, some services (audio-visual, air transport etc.) will be exempted from it. As a result, regulatory differences in each country are likely to remain, creating discriminatory restrictions. As shown by some assessments, although the synchronisation of business cycles among the three members of the CU is growing, significant differences of business cycles remain and the economies are not sufficiently flexible to apply internal adjustment to respond to external shocks.[16]

This restricts opportunities for the realisation of a successful monetary union. There are also political barriers for such union, primarily due to the political regime in Belarus, which is reluctant to give up its chances to manipulate independent monetary policy and currency exchange rate. So, while the process of the creation of the Eurasian Economic Union proceeds at a fairly rapid pace, it is too early to talk about smooth functioning of the CU let alone of other freedoms of the common market. Further integration process by removing barriers not only to the movement of goods, but also to services, capital and labour will inevitably be confronted with the issue of common regulations, their enforcement, dispute settlement procedures and compliance with judicial decisions.

In addition to elimination of trade barriers, harmonisation of market and, in particular, economic regulations, the greatest challenge (compared to previous integration initiatives among CIS countries) awaits in formation of supranational institutions and enforcement of their decisions. It should be noted that decisions of the Eurasian Economic Commission are binding and do not even have to be transposed into the national law of the Eurasian Union states (similar to the EU directives). Like in the EU, companies can bring actions into court against institutions of the union member states and court rulings are binding.

When supranational institutions responsible for the preparation of the regulations and control of their implementation start to function, the following question arise: which parties involved in the Eurasian Union will have the biggest influence on the content of general “rules of the game”?

Two scenarios of the Eurasian Union and the responses of the EU

Given the wide range of driving forces of integration in post-Soviet space, it is possible to distinguish two following scenarios for the further development of the Eurasian Union:

Scenario 1. Rapid and relatively successful integration of the Eurasian Economic Union but much later than 2015. This scenario would mean integration “on paper”, i.e. political decisions to remove barriers for free movement of services, capital and labour, also harmonising such policy areas as competition, but also agreeing to postpone their implementation for decades, can be in place within the next two years. Such scenario is realistic only if Russia could persuade Kazakhstan to accept the integration within the framework of the Eurasian Union as a security guarantee (perhaps post-2014 instability in Afghanistan, increase of China’s influence etc.). This scenario would be most disadvantageous with respect to the EU’s interests.

Under this scenario Ukraine’s membership in the Eurasian Union becomes plausible under to following circumstances: in case of Russia’s economic pressure, for example, forcing Ukraine to pay market price for the energy supplies; and in case of Ukraine’s federalisation, which would create unfavourable domestic political environment for European integration. Any of these circumstances would pose fundamental challenges or even a suspension of Ukraine’s agreements with the EU that have been reached within the Eastern Partnership format.

Possibility to create “a Single Economic Space from Dublin to Vladivostok”, as suggested by Russian President Putin, would also be possible, but only in case of EU’s decision to “freeze” enlargement process in post-Soviet region and include Russia in the realization of Eastern Partnership’s Deep and Comprehensive Free Trade Agreement. Separation of Association Agreement and DCFTA in case of Ukraine proves that this scenario is likely. Seeking to limit influence of the zero-sum perception, EU could change bilateral type of negotiations (EU - Eastern Partners) to tripartite negotiations (EU - Eastern Partners - Russia). Such policy would open a door for Putin’s vision of Europe “from Dublin to Vladivostok”. Furthermore, it would recognize the Eurasian Union as the economic bloc. Therefore, Russia would seek to modify negotiations into the format EU – Eastern Partners – Eurasian Union.

On the other hand, negotiations between the EU and Eurasian Union would be conducted according to European rules. The reason is that EU not only seeks to eliminate tariff barriers, but also to spread European standards and regulatory norms. The concept of a deep and comprehensive free trade area is based not only on removal of tariff barriers between the EU and neighbouring states, but also on the adoption of a large part of EU regulations.

Adoption of the EU’s product quality, particularly production regulations, will cost businesses of Russia and other Eurasian countries and increase end-product prices. Income levels in these countries are much lower than those in the EU and the transposition of stricter regulations will be too costly. This is why is hardly possible to talk about Putin’s advocated vision of Europe “from Dublin to Vladivostok”. A less costly solution would be an agreement with the EU on mutual recognition of regulatory differences, encompassing only more prominent regulatory differences than those existing between the EU member states. This, however, is hardly likely, due to traditional EU external policy based on the extension of EU regulatory norms and common democratic and market economy principles to the third countries.

Scenario 2. The Eurasian Union as yet another stagnating project of the CIS area.

This scenario describes the situation where implementation of the goals of integration is neither achieved by 2015 nor over the next two decades and not even “on paper”, i.e. the goals are implemented inconsistently, only in some areas and completely depending on the electoral and economic cycles, which traditionally in the CIS space mark the strengthening of Russia’s influence. This is most realistic scenario, which would allow EAU member states (in particular, Belarus) to exchange their support for deepening of integration.

On the other hand, such exchange also has its limits. It is clear now that the Eurasian monetary union would not be favourable to Lukashenko’s regime, because the regime would lose an opportunity to lift its backward national economy by using monetary means. While this scenario would mean stagnation of the Eurasian Economic Union, it does not eliminate threats to the implementation of the Eastern Partnership: Ukraine may also have to regularly trade certain elements of integration with Russia in exchange for prices of energy resources, but without departing too far from the EU.

This scenario would foster Eastern Partnership’s transformation into EU’s enlargement policy. As Eastern European and Caucasus states would integrate into EU, Eurasian Economic Union at the same time would be pushed into periphery. It is because the post-Soviet states would take up European rules and standards. Another impetus for this would be EU’s decision to give a clear integration perspective to Ukraine, Moldova and Georgia.

In this case, the EU will not (and should not) treat the Eurasian Union as an equal partner until all its members become members of the World Trade Organization. Otherwise, Russia, which has completed its WTO accession negotiations, will have authority to renegotiate the WTO terms at the expense of other members of the Eurasian Union. Furthermore, differences in the WTO status of the three members of the Eurasian Union could lead to legitimation of the Belarusian regime (i.e. may provide conditions for Belarus to enter the EU’s internal market “through the back door”) and further reduce potential measures directed against the regime.

Ukraine after aggression: no dilemma between the EU and the Eurasian Union?

As the EU Eastern Partnership Summit in Vilnius approached, Ukrainian indecisiveness on whether to sign Association Agreement was regarded as a “choice of civilization”[17]. It was thought that Ukraine is on the brink of choosing one of two incompatible integration projects: Eurasian Union in the East or European Union in the West. Yet the consequences of Ukrainian President Viktor Yanukovych’s last minute decision not to sign an agreement (seemingly preferring Eurasian Union) were unforeseeable: after months of protests he was removed from office while Russia annexed Crimea, threatening to invade Eastern Ukraine.

Eurasian Union is the most effective integration project in the post-Soviet area to date. Yet Russia’s aggression could have a negative effect on the future of Eurasian Union: even one of the closest Putin’s allies Lukashenko revealed political frictions by voicing support for Ukraine's territorial integrity while the public support for joining Customs Union in Ukraine fell from 36 percent (January 2014) to 27 percent (March 2014) – at the same time number of people supporting integration to EU grew from 41 to 52 percent[18].

However, as Ukraine is crucially important for EAU in terms of economy, geopolitics and infrastructure while the number of people supporting integration towards East remains rather significant, the choice between Eurasian Union and European Union may be still viable. According to William Pomeranz, Deputy Director of the Wilson Center’s Kennan Institute, “If the current crisis does not escalate beyond Crimea, then the next major clash between the U.S. and Russia will be the trade front.”

Economically, Eurasian Customs Union may seem less attractive to Ukraine than EU. For example, the combined gross domestic product of Customs Union countries is eight times smaller than EU’s GDP; moreover, EU’s average per capita income is almost twice as big as that of Russia. Hence, European integration would enable Ukraine to access a rich market for goods and services. Another obstacle is Ukraine’s membership in WTO: currently, Ukraine’s bound tariff rate is around 5.8 percent, while Russia’s (similarly to that of Belarus and Kazakhstan), which is also a member of WTO, is considerably higher - 7.8 percent. [19] Therefore, Ukraine would have to compensate the estimated losses of almost $2 billion incurred by other WTO members and it would lose independent trade policy with third countries and trade blocs.[20] European integration would also play a big pat as a facilitator of structural reforms, which would create a more favourable business environment.

On the other hand, there are arguments in favour of joining Eurasian Union. For example, there is a possibility of elimination of domestic market protection measures on behalf of Russia; furthermore, Russia could offer discounts on export duties for energy trade, which currently cost Ukraine $3-3.5 billion per year. [21] Furthermore, any reforms which would be implemented after signing treaty with EU would be costly.

However, after Ukraine’s revolution the political dimension of Eurasian project became essentially important. Russia’s actions in Crimea denied Eurasian Union an image of economically-effective and pragmatic project rather than another effort to maintain influence in post-Soviet space. According to Alena Vysotskaya and Guedes Vieira,

  • Military and propaganda measures, which were implemented in Eastern Ukraine are not a matter of economic calculations;
  • Annexation of Crimea brings significant costs for Russia, which may amount to $3 billion per year [22]
  • Russian foreign policy proved to be driven by other forces than effectiveness and pragmatism   [23]

Therefore Kremlin’s effort to strengthen supranational institutions of Eurasian Union could be regarded as a way of using its influence to restrain the sovereignty of other member states. Even current member states seem to be cautious in terms of political integration: Kazakhstan and Belarus rejected proposals to initiate monetary union, Eurasian Council and Eurasian Parliament by limiting themselves to economic dimension. [24]

Aggressive actions in Crimea proves that Russia still regards “near abroad” as a region of its influence. Russia may offer short-term benefits to Ukraine (e.g. energy price reduction), but the project lost its emphasis on pragmatic economic benefits by proving to be one-sided politically. Furthermore, “Eurasian Union is unlikely to bring long-term economic benefits to its members states, because they are neither wealthy nor their economies complementary.”[25]

As Eurasian Union is expanding through Russian subsidies and coercion[26], European Union may seem to be a more reliable partner. Yet even though Ukraine signed a political part of Association Agreement in March[27], it is still unclear when the whole project could be implemented. To add to that, EU (and, to some extent Ukraine itself) could delay any further progress by using status quo (Ukraine has not signed a full Association Agreement) as a diplomatic measure in efforts to stop further escalation of conflict. Therefore, as Eurasian Union is unsuitable, while European integration is complicated and may take several years, Ukraine could find itself in a third path: balancing between EU and Eurasian Union and not participating in either of them.

Conclusions and recommendations

Before the Ukrainian crisis, Russian officials kept suggesting that negotiations on a new partnership and cooperation agreement between the EU and Russia should be replaced by negotiations on regional agreement between the EU and the Eurasian Union. [28] Thus, Putin’s vision of common market “from Dublin to Vladivostok” would flourish. Any attempts of such discussion would pose immense threat to the European ideals and would devalue the core principle of its integration – only countries that have committed to the implementation of the EU norms and standards are able to benefit from the EU internal market. It would also de-motivate the EU Eastern Partnership countries from continuing with democratic reforms.  

Therefore, the EU’s strategy vis-à-vis the Eurasian Union should be based on the following:

a) no inter-regional negotiations or other cooperation initiatives (so as not to legitimate potential power imbalances between member states or create loopholes for authoritarian regimes such as the one in Belarus);

b) maintenance of a bilateral approach and the European Neighbourhood Policy as an unequivocal priority that cannot become hostage to regional integration among the three countries;

c) regular monitoring of the development of the Eurasian Union, support for the rule of law, judicial independence, political and economic freedoms and other elements of liberal democratic order, and assessment and neutralisation of potential risks; and

d) a commitment on behalf of the EU to constantly strengthen visibility and accessibility of the advantages of the EU’s political and economic model in the eastern neighbourhood.

This final objective – to cultivate eastern neighbours’ interests in entering the EU economic space – should be pursued in the following ways:

First, the EU should abandon the “Russia first” principle whereby all EU initiatives are first implemented with Russia and only later become available to countries in the eastern neighbourhood. The EU will find it difficult to prove the advantages of the Eastern Partnership initiative to partner countries if Russia, which is not part to the initiative, gets access to the EU internal market (or visa-free regime) before they do. This weakens the role of the EU as a regulatory power centre in the region.

Second, the EU has to find a formula for how to reduce the cost for partner countries to access the EU internal market. A clear reward in the EU internal market must be offered to partner countries in exchange for the adoption of European rules and high standards.

Third, the EU must learn to offer incentives to major business structures in partner countries that might profit from access to the EU markets. These businesses might serve as “locomotives” for EU integration of the partner countries.

Fourth, the EU must use its capacities to support the strategic economic sectors of the EaP countries – particularly those of energy and transport. For example, extension of the Connecting Europe Facility to embrace EaP countries would allow for direct EU participation in development of the energy and transport infrastructures.  


[1] “Kodėl Ukraina negali tapti ES nare?” [Why is Ukraine Unable to Become an EU Member?] Eastern Europe Studies Centre, Centre for Eastern Geopolitical Studies, Analytic Review No 1 (1), 2009. Available at: www.eesc.lt/uploads/news/id451/Analitine%20apzvalga%202009%20Nr%201.pdf.

[2] Rilka Dragneva and Kataryna Wolczuk, “Russia, the Eurasian Customs Union and the EU: Cooperation, Stagnation or Rivalry?” Chatham House Briefing Paper, No. 1, 2012, p. 6. Available at: www.chathamhouse.org/sites/default/files/public/Research/Russia%20and%20Eurasia/

0812bp_dragnevawolczuk.pdf

[3] Katharina Hoffmann, “Eurasian Union—a   new name for an Old integration idea ”, Russian Analytical Digest, No. 112, 20 April 2012. Available at: www.css.ethz.ch/publications/pdfs/RAD-112.pdf .

[4] See Uwe Halbach, “Vladimir Putin’s Eurasian Union. A new integration project for the CIS?” Stiftung Wissenschaft und Politik, SWP Comments, 2012. Available at: www.swp-berlin.org/fileadmin/contents/products/comments/2012C01_hlb.pdf ; Hannes Adomeit, “Putin’s ‘Eurasian Union’: Russia’s integration project and policies on post-Soviet space”, Center for International and European Studies (CIES) at Kadir Has University, Neighbourhood Policy Paper, No. 4, 2012. Available at: www.khas.edu.tr/cms/cies/dosyalar/files/black_sea_04%281%29.pdf ; Iwona Wisniewska, “The Customs Union of Belarus, Kazakhstan and Russia: a way to strengthen Moscow’s position in the region”, ISPI Analysis, No. 146, 2012. Available at: www.ispionline.it/en/pubblicazione/customs-union-belarus-kazakhstan-and-russia-way-strengthen-moscows-position-region .

[5] Hannes Adomeit, “Putin’s ‘Eurasian Union’: Russia’s integration project and policies on post-Soviet space”, p. 2.

[6] Ales Alachnovic, Sierz Naurodski, “Belarusian economy: structural crisis”, Centre for Social and Economic Research Belarus, July, 2011. Available at: http://case-belarus.eu/wp-content/uploads/2011/08/Belarusian-Crisis-CASE-Belarus-July-2011.pdf .

[7] Anna Maria Dyner, Natalia Ryabova, “Belarus in the CES: advantages and disadvantages of economic integration”, Eastern Europe Studies Centre, The Bell, Issue No 10(40), 2013. Available at: www.eesc.lt/uploads/news/id669/Bell%202013_10%2840%29.pdf.

[8] Joanna Lillis, “Kazakhstan: Debating the Fruits of the Customs Union”, Eurasianet, October 11, 2013. Available at: www.eurasianet.org/node/67622.

[9] The World Bank, “Kazakhstan in the Customs Union: Losses or Gains?“ April 18, 2012. Available at: www.worldbank.org/en/news/feature/2012/04/18/kazakhstan-in-the-customs-union-losses-or-gains.    

[10] Arevik Mkrtchyan, “The Customs Union between Russia, Belarus and Kazakhstan: Some Evidence from the New Tariff Rates and Trade Flows”, FREE, October 7, 2013. Available at: http://freepolicybriefs.org/2013/10/07/the-customs-union-between-russia-belarus-and-kazakhstan-some-evidence-from-the-new-tariff-rates-and-trade-flows/.    

[11] The World Bank, “Kazakhstan in the Customs Union: Losses or Gains?“ April 18, 2012. Available at: www.worldbank.org/en/news/feature/2012/04/18/kazakhstan-in-the-customs-union-losses-or-gains.  

[12] Eurasian Development Bank, EDB Integration Barometer – 2013. Available at:   www.eabr.org/e/research/centreCIS/projectsandreportsCIS/integration_barometer/index.php?id_16=32346.

[13] Rodriguez, Enrique Valerdi, “The European Union Free Trade Agreements: Implications for Developing Countries,” RIE Working Paper, 8, 2009. Available at:                                                                                                                      www.realinstitutoelcano.org/wps/wcm/connect/a85925004f018b93b9dafd3170baead1/WP8-2009_Valerdi_EUFTA_Developing_Countires.pdf?MOD=AJPERES&CACHEID=a85925004f018b93b9dafd3170baead1.

[14] Robert Cooper, “The post-modern state and the world order”,   Demos, 2003, 17. Available at:   www.demos.co.uk/files/postmodernstate.pdf.

[15] Iwona Wisniewska, “The Customs Union of Belarus, Kazakhstan and Russia: a way to strengthen Moscow’s

position in the region”, ISPI, No. 146, 2012. Available at: www.ispionline.it/it/documents/Analysis_146_2012.pdf.

[16] Yulia Vymyatnina, “Customs Union of Russia, Belarus and Kazachstan – economic interdependence and resource curse influence”, BOFIT seminar, European University at St. Petersburg, 2012. Available at: www.suomenpankki.fi/bofit_en/tutkimus/seminaarit/tiistai/Documents/20121002_Vymyatnina.pdf.

[17] Johan Lloyd, “In Ukraine, a choice of civilizations”, Reuters, October 16, 2013. Available at: http://blogs.reuters.com/john-lloyd/2013/10/16/in-ukraine-a-choice-of-civilizations/.

[18] International Republican Institute, Public Opinion Survey Residents of Ukraine, March 14-26, 2014. Available at:   www.iri.org/sites/default/files/2014%20April%205%20IRI%20Public%20Opinion%20Survey%20of%20
Ukraine,%20March%2014-26,%202014.pdf.

[19] Bill Krist, Samuel Benka, „Trade Agreements and the Russia-Ukraine Conflict“, Wilson Cener, March 21, 2014. Available at: http://americastradepolicy.com/ukraine/#.U0sM1dIW0qw.

[20] Veronika Movchan, Ricardo Giucci, “Quantitative Assessment of Ukraine’s Regional Integration Options: DFCTA with European Union vs. Customs Union with Russia, Belarus and Kazakhstan”, German Advisory Group, Institute for Economic Research and Policy Consulting, Berlin/Kyiv, 2011, p. 8. Available at: http://www.beratergruppe-ukraine.de/download/Beraterpapiere/2011/PP_05_2011_en.pdf

[21] “Решение об интеграции в Таможенный союз нужно принимать уже в первой половине 2011 года” [Decision to integrate into the Customs Union should be taken in the first half of 2011], Kommersant, April 5, 2011. Available at: http://kommersant.ua/doc.html?docId=1615189;   quoted in Maksim Bugriy, “Strategic Flexibility a Key Issue for Ukraine in Trade Relations with Russia and the EU”, Foreign Policy Journal, 2011.

Available at: www.foreignpolicyjournal.com/2011/04/09/strategic-flexibility-a-key-issue-for-ukraine-in-trade-relations-with-russia-and-the-eu/.

[22] Will Englund, “Crimea as consolation prize: Russia faces some big costs over Ukrainian region”, The Washington Post, March 15, 2014. Available at: www.washingtonpost.com/world/europe/crimea-as-consolation-prize-russia-faces-some-big-costs-over-ukrainian-region/2014/03/15/a807ea20-230e-4f08-8d39-a8f090eb3fba_story.html.

[23] Alena Vysotskaya, Guedes Vieira, “Ukraine's Revolution: A Challenge to Russia's Eurasian Integration Project”, IPRIS, 2014. Available at:   www.ipris.org/php/download.php?fid=786.

[24] Ibid.

[25] Iana Dreyer, Nicu Popescu, “The Eurasian Customs Union: The Economics and the politics”, ISS Briefs, No11-21, March 2014. Available at:   www.iss.europa.eu/publications/detail/article/the-eurasian-customs-union-the-economics-and-the-politics/.

[26] Ibid

[27] Kyiv Post, “Ukraine, EU sign political part of Association Agreement”, March 21, 2014. Available at: www.kyivpost.com/content/ukraine/ukraine-eu-sign-political-part-of-association-agreement-340270.html .

[28] “Putin to visit Brussels as 'Eurasian Union' leader“, EurActive, 4 December, 2012. Available at: www.euractiv.com/europes-east/putin-comes-eu-eurasian-union-le-news-516419

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