Bridging the Dividing Lines in Greater Eurasia

6 june 2017

Competing Unions and Connectivity Wars

Tony Van der Togt, MA in History, is a Senior Research Fellow at the Clingendael Institute, the Netherlands.

Resume: The EU could find a partner in China, which is pushing its New Silk Road initiative to include Central Asian states, Russia, and Eastern European states. This would connect the EU and the EEU in a new broader framework “from Lisbon to Shanghai,” stimulate inter-regional cooperation, and lead to greater prosperity across the whole of Eurasia.

In recent years, we have witnessed increased competition and divergence in development between two forms of regional integration, the European Union (EU) and the Eurasian Economic Union (EEU). This reached a climax in the Ukraine crisis, the most important geopolitical conflict between Russia and the West in the post-Soviet space. Geopolitics is back with a vengeance and now also has serious geo-economic consequences.

Attempts at building a “Common European Home” or a Wider/Greater Europe “from Lisbon to Vladivostok” have come to a complete standstill. Any movement towards greater convergence between the two parts of the Eurasian continent now depends on a breakthrough in finding a solution to the Ukraine crisis.

Whereas the EU supports regional integration in other parts of the world, the EEU is still mainly viewed as a Russian geopolitical project. However, notwithstanding all its internal differences and weaknesses, the EEU will remain the most advanced form so far of (re-)integration in the post-Soviet space. As such, it constitutes an element not only in EU-Russia relations but also in the EU’s relations with other Eastern European and Central Asian states.

The emerging connectivity wars between two “competing Unions” also pose an urgent challenge to the EU as a global actor in trade and finance. There is an increased risk of the two “competing Unions” growing further apart, presenting us with rifts that are difficult to bridge in a climate of increasing protectionism. The countries “in between,” including those in the EU’s Eastern Partnership, will also suffer, as they form the geopolitical and geo-economic battleground and seem destined to remain in some kind of “strategic purgatory.”

TENTATIVE COMPATIBILITY BETWEEN THE EU AND THE EURASIAN ECONOMIC UNION

Against this background, the Clingendael Institute attempted to identify some options for the EU to deal with the new geopolitical and geo-economic realities, in both the short term and the longer term. In our report “From Competition to Compatibility. Striking a Eurasian Balance in EU-Russia Relations” we opted for a strategy of “tentative compatibility” for relations between the EU and the EEU.

Although we fully understand the geopolitical aspects of the most recent Russian attempt at deeper Eurasian integration, the EEU does constitute a new regional organization, to which a number of post-Soviet states have been encouraged (or forced) to transfer part of their competences in developing trade relations with third parties (including the EU). Furthermore, the EEU constitutes the framework in which EEU member states are working towards a greater convergence of norms and standards between themselves. So, whatever way you look at it, the EU will have to take these elements into account.

This is all the more important in that the EEU seems to be focusing first on internal consolidation, before moving towards wider integration and the establishment of preferential trade agreements with its main external economic partners, notably the EU and China. For the moment, this could imply mainly a strengthening of the position and market share of Russian business in EEU internal markets, built on the comparative advantages Russian business has inside the EEU. The competitiveness of companies from (other) EEU member states could be negatively affected, as they would not be forced to modernize in order to compete on a global scale and in more developed markets. Such internal contradictions offer opportunities for the EU, as a main source of modernization and technology transfer, as is acknowledged even in the (now dormant) EU-Russia “Partnership for Modernization.”

As a global actor in trade and finance, the EU remains interested in bringing together “competing regionalisms” and overcoming new dividing lines by stimulating greater convergence of trade and financial systems.

Therefore, we recommended, as a matter of priority, engaging the Eurasian Economic Commission, whether formally or on an informal basis, in order to look for closer approximation of (technical) norms and standards. In these matters, differences between the EU and the EEU often seem to be exaggerated, as some approximation of norms and standards has already taken place at an earlier stage. Some common basis has been developed, on which relations can be built and additional efforts can be undertaken to prevent a further divergence in norms and standards between the EU and EEU member states.

Furthermore, when discussing trade relations all sides realize that every (future) arrangement has to be fully compatible with WTO obligations, to which the EEU is also subject. This offers another element of commonality on which to build future trade relations.

Apart from the consequences for current trade and financial relations, the present situation of “competing Unions” also implies missing opportunities for closer cooperation which could constitute a most welcome stimulus for increased prosperity on both sides of the divide.

While a Free Trade Agreement between the EU and the EEU remains a remote possibility under the present political circumstances, bridges should be kept open for whenever the situation improves. A lot of research has already been undertaken (and will continue) on both sides of the divide to develop options for a “mega deal” for such a situation in the future, when the geopolitical situation would improve and the EEU would open up towards such a free trade agreement with its major economic partners.

For the moment, the EU envisages only limited cooperation and selective engagement with Russia on issues of common interest and appears to be focusing more on strengthening the resilience of the states in the “Shared Neighborhood,” including those participating in the EU’s Eastern Partnership. However, the proposed “tentative compatibility” could both constitute an element of selective engagement with Russia, based on common interests, and strengthen simultaneously the resilience, position and economic development of the states in the Shared Neighborhood.

THE SHARED NEIGHBORHOOD AND THE OPTION “NO CHOOSING, NO LOSING”

In the context of our strategy of striving for “tentative compatibility” we also recommended that the EU engage more intensively with individual EEU member states. In accordance with a study undertaken by the European Parliament’s research service, states in the Shared Neighborhood should have the possibility of maintaining good relations simultaneously with both sides of the divide: “No choosing, no losing.”

We recommended that the EU strengthen the independent choice of the states concerned, including their multi-vector policies, with the aim of balancing good (trade) relations with both Russia and the EU. After all, the EU did not force states to have an Association Agreement/DCFTA with the EU as the most advanced form of integration available to Eastern Partnership countries. It is only possible membership of the EEU (being a Customs Union) that cannot be combined with a simultaneous AA/DCFTA with the EU. Continuing good trade relations in the context of the CIS FTA has always remained an option, even for Ukraine, until Russia blocked this possibility on a bilateral basis.

Before that happened, the EU had been exploring with Russia and Ukraine whether flexibility in the implementation of the AA/DCFTA could be used to take Russian trade interests into account, making use of longer transition periods and the fact that not every element of the EU acquis communautaire had to be adopted in the same strict manner. It was for geopolitical reasons that Russia blocked an emerging deal, which could have offered Ukraine a way out. It could have allowed Kiev to enable some sectors to produce for the EU internal market, in accordance with EU norms and standards, with other sectors continuing to produce for CIS markets, in accordance with partially different standards.

Unfortunately, such a trilateral deal could not be accomplished. It could have been beneficial, not only for Ukraine but also for the other two post-Soviet states having an AA/DCFTA with the EU: Moldova and Georgia. Whereas their economies are much smaller and trade relations with Russia had already been negatively affected by earlier sanctions imposed by Moscow, some trilateral deal could have been an option for them as well. And with Moldova possibly in limbo after the recent election of a more pro-Russian and pro-EEU president, trilateral negotiations could once again be a real possibility.

Trilateralism being (temporarily) off the table, the only realistic option for the EU is to continue working with the Eastern Partnership countries mainly on a bilateral basis and, if and when possible, on a broader regional basis. In principle, the door for Russia to be included in such a broader regional format remains open, but here everything clearly depends on Moscow’s cooperation in the full implementation of the Minsk agreements.

On a bilateral basis, the EU has started to re-engage more closely with Armenia. After Russia had forced Armenia into the EEU, the EU started a scoping exercise with Yerevan to identify which elements could be saved from the draft AA/DCFTA under negotiation and would fully respect the obligations of Armenia as a member of the EEU. These talks constitute an interesting example of how an EEU member state could still develop good relations with the EU and keep as much connectivity as possible. Furthermore, it also offers opportunities for the EU to assist in the modernization of the economy and society, which is not offered by the EEU, this being a more limited organization and one hampered in its development by Russia’s geopolitical and more protectionist intentions.

Gradually, the EU’s Eastern Partnership is evolving in such a way as to engage partner countries in a more differentiated manner, taking into account their obligations towards third parties and other organizations.

The next interesting example of selective engagement, based on “principled pragmatism,” could be Belarus. In its relations with Belarus the EU has dropped most of its earlier sanctions and has started to engage with civil society, private business and gradually also higher levels of the authorities. In as far as Minsk opts for multi-vector policies and strives for stability and prosperity, based on an “integration of integrations,” this clearly serves the EU’s interests as well. Here too, the EU could offer support for modernization and financial support, which the Russian side is at present unwilling or unable to offer. Both for the EU and for Belarus, there seems to be an emerging “win-win” situation, which does not necessarily encroach upon Minsk’s close relations with Moscow or its standing in other regional organizations, such as the EEU.

As long as the present geopolitical and geo-economic conflict with Russia continues, engaging with individual EEU member states, including in the context of the Eastern Partnership, offers the EU a real possibility of retaining at least some small bridges across the geopolitical divide.

GREATER EUROPE, GREATER EURASIA AND GREATER ASIA: ENHANCING CONNECTIVITY

Although the momentum towards a Greater Europe from Lisbon to Vladivostok has been completely lost (and there is a real danger of a widening of the divide inside Europe), the economic realities of proximity and complementarity remain. Russia will remain at least an important provider of energy and other natural resources to Europe and Europe can still be an important source of high technology needed for the modernization of the Russian and Eurasian economies.

At the same time, broader Eurasian integration in a number of sectors (at present mainly related to infrastructure connectivity) has been proposed by China’s One Belt, One Road (or New Silk Road) initiative. In our report we therefore deliberately widened our analysis to include options for greater Eurasian integration as well.

Russia’s “pivot to Asia” has forced Moscow not only to take this initiative seriously, but also to explore possibilities to connect the New Silk Road to the EEU. At this point, Russia does not wish to aim for a complete Free Trade Agreement under development between the EEU and China, only offering a bilateral non-preferential trade agreement, but things may change.

The EU’s engagement with China is at present mainly focusing on investments. But the New Silk Road offers a new challenge, as it aims to connect China via Central Asia to (South)Eastern European markets. The recent 16+1 summit in Riga sends a clear signal to Brussels that the EU as a whole must take trade and investment relations with China more seriously and elevate them to a higher level. The fact that Belarus was attending as an observer offers the prospect of involving Eastern Partnership countries in the future as well.

The Chinese push for Greater Asian and Eurasian connectivity runs counter to Russian protectionist tendencies and could offer the EU another opportunity to push for an even wider Eurasian integration “from Lisbon to Shanghai,” working in tandem with Beijing.

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Eurasian integration as embodied in the EEU poses a challenge to the EU, risking less connectivity, more protectionism and a further divergence in norms and standards. As the EU’s main interest remains enhanced connectivity across the Eurasian continent, “tentative compatibility” would serve us best. Therefore, the EU should take the EEU seriously and strive for closer approximation of norms and standards.

Furthermore, the EU should intensify constructive relations with individual member states of the EEU and other Eastern Partnership countries, based on the principle of “no choosing, no losing,” enabling them to sustain good relations with both sides and strengthening their resilience. The EU could also contribute to the modernization of the countries concerned, potentially leading to their greater competitiveness and orientation towards European and global markets.

In principle, the same could be on offer for Russia, reviving the earlier Partnership for Modernization and developing trilateral and wider connections across the Shared Neighborhood. Once Russia tempers its present geopolitical ambitions of forcing friendship/partnership on post-Soviet states, which prefer multi-vector policies to being constrained inside a Russia-dominated EEU, the prospects for a future Greater Eurasian Free Trade Area will be enhanced.

Finally, in a search for increased connectivity across Greater Eurasia the EU could find a partner in China, which is pushing its New Silk Road initiative to include Central Asian states, Russia and (South) Eastern European states as well. This would connect the EU and the EEU in a new broader framework “from Lisbon to Shanghai.” It could counter the present protectionist tendencies, stimulate inter-regional cooperation and lead to greater prosperity across the whole of Eurasia.

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