Since the collapse of the USSR, various attempts have been made to (re)integrate the newly independent republics, but they have proved largely ineffective. These initiatives have been seen as vehicles for Russia’s traditional dominance of the region, expressed in a mix of crude power and institutional weakness, and wrapped up in historical discourses.

The formation of the Eurasian Customs Union (ECU) would appear to change this. While its economic rationale remains debatable, the ECU has been set up as a rule-based organization conforming to World Trade Organization (WTO) regulations and modern international norms. At the same time, it is clearly seen by Russia as a vehicle for reintegrating the post-Soviet space and offering a modernizing alternative to the EU.

‘Eurasian Customs Union …. is clearly seen by Russia as a vehicle for reintegrating the post-Soviet space and offering a modernizing alternative to the EU.’

This is particularly significant for Ukraine, where Russia has been actively promoting the ECU as an alternative to the EU integration mechanism, the Association Agreement. Given the apparent viability of the ECU, this rivalry is likely to grow and will require other international organisations, such as the EU, to adjust their strategies.

The Eurasian Customs Union: continuity or change?

The main significance of the ECU is its departure from previous initiatives for integration in the post-Soviet space.

The first and best-known of these was the Commonwealth of Independent States (CIS), which proved a mere vehicle for channelling the orderly disintegration of the Soviet Union, rather than the re-integration of its former republics. By the mid-1990s Russia’s focus shifted to investing in smaller groupings and the origins of the ECU date back to 1995, when Russia signed a treaty for the formation of a customs union with Belarus and Kazakhstan (Kyrgyzstan joined in 1996 and Tajikistan in 1997). This initiative retained the ineffective CIS institutional formula. Putin’s accession to the presidency, however, added a new impetus to the project and in 2000 the grouping was transformed into a fully-fledged international organization, the Eurasian Economic Community (EEC), although many of the old problems persisted, putting its effectiveness in question.

However, the middle of the 2000s saw the emergence of a vanguard group of states. The leaders of Russia, Belarus and Kazakhstan decided to set up a customs union in 2006, and swiftly established a Customs Union Commission as a permanent executive body. The group launched a common customs tariff in January 2010; in July 2010, the common customs territory was declared and the Customs Union Code, the key regulatory document, adopted. In July 2011, internal physical border controls were eliminated between the member states.

‘…the member states aim to progress towards an economic union with a common market of goods, capital and labour, and the operation of common macroeconomic, competition, financial and other regulation, including the harmonization of policies such as energy and transport.’

Their ambitions did not stop there: the member states aim to progress towards an economic union with a common market of goods, capital and labour, and the operation of common macroeconomic, competition, financial and other regulation, including the harmonization of policies such as energy and transport. This Eurasian Economic Union is due to be launched in January 2015.

Integration with a difference?

While we need to retain a degree of healthy scepticism about the transition to the Eurasian Economic Union, developments so far signal a pivotal change in integration patterns. The ECU offers a forward looking integration model that is a clear improvement on previous initiatives in terms of both design and implementation. The Union operates in the context of Russia’s accession to the WTO: while Belarus and Kazakhstan remain outside it, Russia’s accession protocol is designed to become an integral part of the legal framework of the ECU. So the Union represents a modernized economic regime, very different from previous attempts at regional integration within the post-Soviet space.

Undoubtedly the question remains whether Russia will be bound by this multilateral regime. Previous regional groupings were very asymmetric, allowing Russia to use its superior bargaining power and avoid being bound by potentially costly decisions. Yet there are indications that Russia may be prepared to move towards greater multilateralism and, at least in theory, it can be outvoted by its partners on certain types of decision.

It is clear that much of the progress so far has been dependent on the personalities of the leaders in the three countries (Putin, Nazarbayev and Lukashenko), making the union vulnerable to any leadership changes. But despite the reliance on personalities, the ECU is different from its predecessors not only in terms of the political will that is driving it forward, but also, crucially, in terms of its institutional effectiveness. The removal of internal borders, despite transitional periods in relation to the Russia–Kazakhstan border, symbolizes this. This means that the ECU cannot be reversed without cost. It is likely to stay.

This ambitious deepening of the ECU has coincided with a drive to widen it by making it a ‘centre of attraction’. Russia has viewed the ECU as a core for the wider integration of its ‘near abroad’, and in Kyrgyzstan, for example, accession to the ECU is high on the political agenda. But the most important battleground is Ukraine.

'This ambitious deepening of the ECU has coincided with a drive to widen it by making it a ‘centre of attraction’. Russia has viewed the ECU as a core for the wider integration of its ‘near abroad’, and in Kyrgyzstan, for example, accession to the ECU is high on the political agenda. But the most important battleground is Ukraine.'

This is not the first time Russia has sought to include Ukraine in a regional integration initiative. But it is the approach to Ukraine that illustrates the shift in Russian policy most clearly, because it is presenting the ECU as a ‘governance-based’ vehicle in direct competition with the EU.

Russia’s export of governance in the ‘shared neighbourhood’

The ECU is the vehicle through which Russia is increasingly engaging in ‘normative rivalry’ with the EU in the so-called ‘shared neighbourhood’ (i.e. Ukraine, Belarus, Moldova, Azerbaijan, Georgia and Armenia). Russia has begun to compete in a domain where until now the EU has exercised a monopoly.

The European Union, which launched the European Neighbourhood Policy (ENP) and the Eastern Partnership in the 2000s, has been seen (and regards itself) as the primary source of modernization and improved governance in the post-Soviet space. It promotes a rule-based, future-orientated economic integration regime designed in accordance with its own governance model via an offer of Association Agreements, Deep and Comprehensive Free Trade Areas (DCFTA), Visa Facilitation Agreements and full visa liberalization in the long term – but not membership.

The DCFTA goes beyond a ‘standard’ free trade agreement, entailing major changes in the regulatory framework of the country associated with the EU in a wide range of areas. The expected benefits of such an agreement are capabilities so far lacking in most of the eastern neighbours: the ability to sustain reforms or a degree of confidence in the economy thanks to improved domestic institutions and system of economic governance. The EU has offered Association Agreements, with the DCFTA, to all post-Soviet countries in Europe which are also members of the WTO (i.e. Ukraine, Moldova, Armenia and Georgia).

Ukraine

Russia has endeavoured to undermine the rationale for Ukraine’s political association and free trade agreement with the EU. Ukraine was the first country to conclude negotiations on an Association Agreement (although it is yet to be signed and ratified). In 2011 Russia came up with its own offer, presenting a forceful economic counterargument.

'The EU has offered Association Agreements, with the DCFTA, to all post-Soviet countries in Europe which are also members of the WTO (i.e. Ukraine, Moldova, Armenia and Georgia).'

Joining the ECU would apparently benefit Ukraine to the extent of $219 billion of increased GDP between 2011 and 2030 (i.e. $12.2 billion per annum at 2010 prices). Joining the ECU would allow Ukraine to retain access to the Russian market, particularly for its agricultural products. As Putin put it, ‘No one is letting Ukraine in; we are.’

So far the EU has not responded in any concerted way to the anti-DCFTA campaign in Ukraine. It is no doubt relying on its own ‘power of attraction’ and Ukraine’s long-standing ‘European choice’. Recurring fatigue and disillusionment with the country mean that the EU has largely failed to promote this flagship and pioneering agreement effectively in Ukraine.

Russia, meanwhile, is not relying solely on promised economic gains for Ukraine, and is backing up its invitation with a traditional ‘carrot-and-stick’ approach. The incentive comes in the form of a reduced price for gas, benefiting Ukraine by up to $8 billion per annum. The penalty, on the other hand, would consist of economic sanctions against Ukraine, which would be primarily justified in terms of the negative implications for Russia of the EU–Ukraine DCFTA. Russia is hinting at deploying a range of mechanisms to ‘persuade’ Ukraine of the ‘benefits’ of the ECU. This reinforces the perception of the initiative as a vehicle for projecting Russian power, particularly as the Russian approach also makes it more difficult to resist the ‘offer’.

What punitive measures could Russia introduce? These could range from applying anti-dumping tariffs and limiting imports of Ukrainian food products through the application of phytosanitary standards for plant and plant products, to lowering the quotas for steel pipes – a key export for Ukraine. Selective, targeted sanctions have already been repeatedly deployed by Russia against states such as Moldova, Ukraine or Georgia, which are deemed to be pursuing unfriendly policies.

But how far could Russia go in ‘punishing’ Ukraine? Russia’s membership of the WTO precludes it from using certain punitive trade measures, and Ukraine, as an existing member, could resort to WTO mechanisms to address politically-motivated trade sanctions. However, Russia may take extra-legal measures, in contravention of WTO rules. Ultimately, it is difficult for Ukraine to make a choice based on a prediction of Russia’s propensity to break the rules of the organization to which it has just acceded.

This campaign complicates Ukraine’s already difficult relations with the EU. The signing of the Association Agreement has been put on ice owing to the deterioration of democratic standards in Ukraine, as evidenced above all by the political prosecution of opposition figures such as former prime minister Yulia Tymoshenko. These prosecutions have been loudly condemned by EU institutions and member states as a clear breach of democratic standards and the rule of law.

By contrast, the ECU does not require its current and prospective member states to conform to any democratic standards. Ukraine is being invited to join with no political conditions attached, and given that Russia’s offer comes at a sensitive moment in Ukrainian–EU relations, it represents a significant counterweight to the EU’s democratic demands.

The campaign to persuade Ukraine to abandon the Association Agreement with the EU could be seen as a short-lived attempt to attract the country at a time when the authorities have declared their interest in concluding the Agreement rather than opting for the ECU. However, this is not just a matter of short-term choice but also a longer-term conflict of interests. Even if and when the Association Agreement is concluded, its implementation will be prolonged, costly and highly sensitive for Ukraine in both political and economic terms. Ukraine’s dependence on the Russian market means that the country has to adapt simultaneously to two competitive integration regimes, the EU and the ECU.

'Ukraine’s dependence on the Russian market means that the country has to adapt simultaneously to two competitive integration regimes, the EU and the ECU.'

This context gives Russia plenty of opportunities to offer incentives and disincentives to slow down or jeopardize the implementation of the Association Agreement. Integration with the EU is certainly premised on the lengthening of the time horizons of Ukraine’s political class, essential if the country is to embark on the political and economic reforms that would generate benefits in the medium to long term (5–10 years). Russia is well positioned to offer beneficial mutual conditions, changing the stakes and shortening the time frame.  

Conclusion

While EU–Russian relations have remained static in the last decade, the same cannot be said of their respective relations with the countries in the ‘shared neighbourhood’. Recently, Russia has been putting a premium on rule-based economic integration with robust institutional regimes. It is, however,  highly uncertain whether such a rapid pace of integration can be maintained, to allow the  projected creation of the Eurasian Economic Union by 2015.

Yet what has been achieved so far provides a firm institutional basis for economic integration. As such it means that a viable form of advanced economic integration has emerged in the post-Soviet space, in direct competition to that offered by the EU, and has, moreover, moved Russia into rivalry with the EU in a domain in which the EU has not yet been challenged on the European continent.

For more detailed analysis see R. Dragneva and K. Wolczuk, 'Russia, the Eurasian Customs Union and the EU: Cooperation, Stagnation or Rivalry?' (August 6, 2012). Chatham House Briefing Paper REP BP 2012/01 available at http://www.chathamhouse.org/publications/papers/view/185165