CU and EU - what’s in a letter?


Moscow’s recent overtures to Ukraine and Armenia concerning membership of  the Russia-led Customs Union have been heavy on threats and hard-ball politics, and rather short on attempts at actually explaining the benefits of joining the Union instead of pursuing European Union integration. Which offer is best? 

Devin Ackles Luke Rodeheffer
23 September 2013

Armenian President Sargysan’s recent surprise announcement in Moscow that he would pursue Customs Union (CU) membership, was preceded by months of backroom malice on the part of the Kremlin, manifested in threats of raising Armenia’s gas prices by 60%, and a potential weapons deals to Armenia’s arch-enemy, Azerbaijan. Moscow has approached Ukraine and Moldova with the same bullying techniques, banning Ukrainian chocolate and Moldovan wine while clumsily attempting to get Belarus and Kazakhstan to do the same.   

In light of these trade disputes and strong-arm tactics, it is worth considering precisely what concrete benefits the Customs Union has brought to Belarus and Kazakhstan, the other current member states. Kazakh citizens have faced price increases on basic goods as a direct result of the imposition of CU external tariffs, which almost doubled Kazakhstan’s average external tariff to 11.1%. Fuel has become much more expensive, and due to protective Russian tariffs, imported car salesmen have been put out of business, as Russian cars push out higher-quality foreign competitors. Furthermore, Kazakh industry has discovered that it is much more difficult for Kazakhs to penetrate the Belarusian and Russian market than vice versa. 

Rather than simplifying trade, the introduction of CU customs regulations on top of national customs regulations, combined with the hundreds of decisions by the Eurasian Economic Commission (the CU’s administrative body), have made doing business much more complicated and unwieldy, according to Nailya Abdimoldaeva, a director at Kazakhstan’s National Economic Chamber. These changes have led Kazakh economist and former government adviser Mukhtar Taizhan to denounce the Customs Union in a May interview in the Kyrgyz newspaper Vechernyi Bishkek, warning Kyrgyzstan (also not yet a member of the CU) to reconsider joining the trade zone as it has not brought Kazakhstan any conceivable benefit, and is “nothing more than Russian imperial ambition.”

The real target of Russia’s expansionist plans for the Customs Union is not Central Asia but Ukraine

That is not to say that there have been no benefits felt by any of the members, though the trade-offs are very costly. Belarusians, for example, have seen their real wages rise largely thanks to their occasionally tumultuous close relationship with Moscow. The Belarusian government’s ability to extract subsidies and acquire cheap oil and gas for refining and export, long the bread and butter of the country’s economic policy, is in jeopardy if the recent crisis surrounding the disintegration of the joint Russian-Belarusian Potash Company is an indicator of things to come. Despite Minsk’s rhetoric, its decision to arrest the CEO of Uralkali, and attempting to secure a warrant through Interpol for the Russian billionaire (and largest shareholder of Uralkali) Suleyman Kerimov, Russia’s poor relation understands full well what opening up to Russian investment means for the country – a complete economic takeover. 

Minsk is aware of this, and Belarusian leader Alexander Lukashenko’s recent public discussion with the Belarusian Minister of Foreign Affairs, Vladimir Makei, is a clear indication that Belarus is again ready to open a dialogue with the West again. Lukashenko’s feverish search for new long-term investment partners such as China and Indonesia, and a move away from the confrontational and less-than-lucrative buddy deals with Venezuela and Iran, should be read not just as a move to check Moscow’s influence but a long-running effort to free Belarus from Russian economic dominance and control. While these efforts have failed and will continue to do so, given the country’s poor investment climate and ham-fisted pseudo-managed economy, its special relationship with Russia is not nearly as rosy as the authorities would have their citizens believe. Moreover, its membership in the CU is not bringing it the benefits that were promised. 

Despite claims of a major increase in trade volume among all member states, the volume of actual trade between Belarus and Kazakhstan has barely increased since they joined the economic bloc – in fact, between January and April 2013, trade between the two states actually shrank by 12% compared with the first quarter of 2012. While the Customs Union has made it much easier for Belarus to sell some of its products in Russia, the Belarusian leadership’s current political and economic tactics also would seem to show that they are very concerned about how Russia’s new WTO membership, and Kazakhstan’s likely accession in the coming year, will impact the competitiveness of Belarusian products. The proposed imposition of a $100 “exit fee” for Belarusian citizens who wish to leave the country, and bring goods back from the EU also speaks to the government’s increasing desperation as to how to boost local consumption of Belarusian products and, with its backwards logic, strengthen its own economy.

Russia itself, however, has also been forced to make its share of sacrifices. Even though 92% of the CU customs code has been copied from the Russian customs code, and Russian officials dominate the Eurasian Economic Commission, Russia has suffered financial losses from the need to share customs duties, as well as the need to grant Belarus major concessions. The launch of the Eurasian Economic Union in 2015, with no tariffs on oil and gas exports to member states, will negatively affect Russia’s increasingly oil-dependent budget. The fact that Russian firms can now re-register in Kazakhstan has done nothing to improve Russia’s terrible business climate. The expansion of the trade block to include Tajikistan and Kyrgyzstan in the Customs Union’s free labour market will only feed the flames of the growing xenophobic anti-immigrant sentiment that became a defining issue in the recent Moscow mayoral elections. Furthermore, the need for Russia to shoulder the costs of securing Kyrgyzstan and Tajikistan’s notoriously porous borders, in order to prevent smuggled Chinese goods and Afghan heroin from gaining even easier access to the CU free trade bloc is inevitable as NATO withdraws from Afghanistan. 

The real target of Russia’s expansionist plans for the Customs Union is not Central Asia, however, but Ukraine, the second most populous country in the former Soviet Union. Russia’s accelerating trade war with Ukraine on the eve of the Eastern European Partnership Summit in Vilnius, where Ukraine hopes to sign an association agreement with the European Union, has shown Russia’s waning influence and limited vision, in its crudest form. With the EU carefully considering whether or not to sign its Association Agreement with Ukraine this November due to their misgivings about the current political environment in the country, Russia’s aggressive tactics have actually backfired, and led to an overwhelming response from the European Parliament in support of Ukraine. Russian aggression has also served as an impetus to the supporters of Ukraine’s European aspirations, making them more vocal, and attracting new supporters . 

The Association Agreement with the EU will require serious reform by Ukraine in a variety of fields: public finances, the judicial system, and electoral laws, to name just a few. The signing of the Deep and Comprehensive Free Trade Agreement with the European Union this November, a document that is closely related to the Association Agreement, would put Ukraine on a par with Norway or Switzerland in terms of compliance with the EU’s internal market, once the reforms have been implemented. While these reforms will be very difficult for the country to carry out, with the support of European expertise and EU funds, Ukraine will be setting itself on a path towards establishing strong ties with the world’s most powerful economic bloc. Such an association with the EU will also bring another benefit -- the formal backing of the European community when trade or energy disputes with Russia arise, which summarily eliminates Russia’s preferred means of influencing its western neighbour. 

The only chance left for Russia to pull Ukraine into the Customs Union is through a nationwide referendum, something that Ukraine’s president and his party pay lip service to, but simultaneously abuse the court system to prevent. In fact, a recent referendum on joining the Customs Union by the Communist Party of Ukraine was shot down in the nation’s constitutional court due to procedural violations. One can expect more of the same now that the President and his inner circle have committed themselves to signing the Association Agreement with Brussels. 

Putin claimed in his October 2011 editorial laying out the principles of the Eurasian Union that “we are making integration a comprehensible, sustainable, and long-term project, attractive to both individuals and businesses, that operates independently from fluctuations in the current political environment or any other circumstances.” Mmm, nothing could be further from the truth: the current trade war between Russia and Belarus, combined with the attempts by the Kazakh opposition to hold a referendum on withdrawal from the Customs Union, highlights how the CU free trade bloc brings little in the way of economic benefit to its members. The economies of the current three member states, dominated by raw materials exports, and uncompetitive industry propped up through government subsidies, have little impetus to reform or modernize, as their economies focus on trade with each other instead of expanding trade with the modern economies of the European Union and East Asia. Judging by the Customs Union’s results, what could possibly attract Kiev to Moscow beyond increasingly desperate threats? Better EU than CU.

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