The CIS was devised as a regional union, based on the concept of a state, complete with a centralized economy and cross-border ties at the macro and micro levels. If CIS institutions fail to account for the business interests of its member states, it is doomed to disintegration.

The prestige of the CIS is in steady decline. During the recent election campaigns in Ukraine, Abkhazia and Moldova, issues related to CIS activities remained on the sidelines of public interest and were not raised in the political debates. Notions such as CIS unity and solidarity, it seems, are becoming purely theoretical. This is the result of objective economic processes and not simply the changing sentiments of the elites of the member countries or the work of political spin doctors.

After the 1998 crisis in Russia, it looked as though the CIS would be given a new lease of life. The crisis rapidly affected the neighboring countries, which led to a serious decline in production and the devaluation of national currencies (in 1998, the exchange rates of the CIS countries fell three to five times on average against the Russian ruble, while the Belarusian ruble’s rate was down nearly ten times); this state of affairs testified to the interdependence of the economies of the former Soviet republics and inspired hope that integration efforts would thus intensify in the CIS, especially since by this time rerouting of commodity flows to countries outside the CIS had stopped. Yet there were no major breakthroughs.

The economic recovery, which started in 1999 and led to steady improvements in the macroeconomic performance of CIS member states, promoted decentralizing trends. Paradoxically, the further strengthening of the post-Soviet economies, together with the development of market mechanisms there, pose a real threat to the CIS in its current configuration.

THE BETTER THE WORSE

In the past decade, mutual trade in real value terms grew very moderately, if at all, among the CIS member states. In 2003, in particular, exports within the region reached $39 billion, compared to $37 billion in 1996 and 1997. Imports amounted to $44 billion in 2003, roughly the same amount as in 1996. Meanwhile, supplies to outside countries grew 2.5 times from 1994 to 2003, while imports from outside the region nearly doubled. As a result, the CIS member countries suffered a deficit in the total foreign trade volumes, falling from 30 to 20 percent in exports and from 70 to 37 percent in imports over the decade. The trend was common for all member countries except Belarus. For example, in 1992, 89 percent of Armenia’s exports were inside the CIS, while in 2003 this figure dropped to a mere 19 percent. For Kazakhstan, the figure was 60 and 23 percent, respectively; while for Ukraine the percentages stood at 56 and 26, respectively. Russian exports have never really enjoyed a good market in the CIS, yet it still managed to decrease from 22 percent in 1992 to 16 percent in 2004. The share of CIS in imports was 23 percent on average from 2002 through 2004, compared with 28 percent from 1993 through 2001.

Naturally, foreign trade statistics fail to take account of all economic factors. For example, the region has a high rate of migration flows. In 1991-2000, 6.9 million people arrived in Russia from CIS member states, with a net migration gain of 3.8 million. Yet since 2000 the number of migrants has been declining, even though labor migration remains high. According to recent estimates, Russia’s net migration gain from CIS member states will be approximately 1.2 to 2.6 million in the period 2002 to 2006, with the bulk of the new labor force arriving from Kazakhstan and Central Asia, particularly Uzbekistan. Some 400,000 to 500,000 people are expected to enter Russia from Ukraine, while, simultaneously, approximately 300,000-350,000 people are predicted to leave Russia for Ukraine. A great bulk of the labor flow, which is comprised mostly of seasonal workers, enters Russia as tourists to replenish “slave markets” in Moscow and other major cities. But those spontaneous flows have little to do with formal CIS policy (in fact, the CIS has not dealt with the issue) or a move toward interstate integration. The fact that 6.3 million legal immigrants now live in France, for example, certainly does not mean it is heading for integration with the African or Asian countries. Furthermore, as the economic situation improves in the CIS member states, the number of people forced to search for subsistence abroad will naturally decline.

The significant devaluation of the Russian ruble and national currencies of the CIS member states briefly reduced imports from outside countries and increased CIS share in imports value. But that development was short-lived: in 2000-2001 CIS products could no longer replace the imported goods from outside countries.

The substantial increase in the price of oil, as well as other commodities (ferrous metals and alloys, copper, lead, aluminum, nickel, precious metals, cotton fiber), increased the export revenues of the post-Soviet republics, thus allowing them to buy Western  products, including foodstuffs, consumer goods, as well as machinery and equipment required for industrial modernization. In the first half of 2004, Moldova imported from outside the CIS 70 percent more tractors as compared to the same period one year earlier, while the import of cars and trucks in Azerbaijan grew 2.5 times. CIS member states have been importing the bulk of their medicines and high added value chemical products particularly from countries outside the CIS. Obviously, as national economies develop and their investment demand grows, their economic ties with the world will further intensify.

The low industrial development level of the CIS member countries has been a serious obstacle to the expansion of mutual trade. As a result, their export potential is comparable across the board: raw materials and low added value products. Most importantly, this scenario reduces the potential for integration, as the division of labor – a key factor in any integration process – is altogether lacking.

Incidentally, this is what economic integration is based on in Western Europe. France and Germany, for example, have supplied machinery and chemical products to each other, but the products vary. An in-depth industrial specialization process has long turned the EU member states into separate links of a single production chain. As a result, their mutual trade does not excessively depend on fluctuations in world prices, their relations can weather the severest political storms.  

The hope still remains that the structure of regional trade will improve and trade volumes will grow. Overall, the share of technologically advanced products in exports inside the CIS is higher than beyond its borders. In 2003, for example, the share of machinery and equipment in supplies from CIS countries to other CIS member states was 4 percent, while this category of export ranked just one percent to outside countries; respective figures for chemical products were 17 and 2 percent. If governmental agencies from the CIS pay more attention to industrial cooperation inside the region, then the CIS economy would strongly benefit from it. CIS institutions should promote direct business contacts, as well as commercial and production ties between enterprises in various member countries. The current CIS model does not encourage this kind of integration.

MODELS MATTER

The CIS was formed as a means of overcoming the adverse effects of the Soviet Union’s disintegration and establishing a new system of relationships among its former parts. The CIS was intended to retain all of the vital elements of its former infrastructure, ward off any militaristic and/or political threats and, when possible, mitigate losses resulting from the breakup of the single economic unit. Under those conditions, a new union could only exist as a state-type integration model designed for a centralized, planned economy with cross-border ties at the macro, rather than micro level. No other model was possible. The Soviet Union had a planned economy and cooperation inside the Council of Mutual Economic Assistance was also strictly planned: every year the governments of the member countries signed bilateral trade protocols, after which they fixed rigid plans for their enterprises, with rigid figures for supply volumes, rigid prices and rigid product ranges. This scheme could certainly only exist in conditions of a foreign trade monopoly. CIS countries’ leaders had no other experience of integration.

An integration model where the governments are the key players was prompted by the very nature of the challenges faced by the member countries: border protection, army and navy restructuring, cooperation in space research, maintaining infrastructures (transport, water and power supply), etc. These areas have been traditionally dealt with on the state level, and experience has shown that the CIS has made a lot of progress in those spheres. Councils formed in particular sectors (e.g. railways, aerospace and air transport, standardization, metrology and product certification) have been working energetically and are able to address issues within their authority. Due to the efforts of the CIS Power Energy Council, a system of mutual energy supplies was launched to minimize power outages in the most vulnerable areas. This goal was achieved through the participation of power plants in the neighboring countries.  

But the CIS proved helpless in spheres where integration was expected to promote the development of enterprises by regulating the quality of the market environment. More than ten years proved insufficient time to establish a free trade zone. Attempts to form a common grain market also failed. As a result, member countries began to suffer from overproduction, grain shortages and uncontrolled hikes in the retail price of bread.

The situation with the currency regime has also begun to deteriorate. An agreement on the payment union signed in 1994, which could have facilitated multilateral settlements among CIS member states, has not been implemented and has been indefinitely delayed. A concept to coordinate efforts of the CIS member states in the currency sphere, adopted in September 2003, reads that the emergence of the payment union – as stipulated by the step-by-step policy – along with the customs union, is only possible after the CIS forms a common market of goods, services, capital and labor. This concept, however, runs counter to international practice. The European Payment Union (EPU) was established by 17 European countries in 1950 from nothing more than political will, the proper elaboration of plans and – frankly speaking – direct pressure from the U.S. The European Economic Community (EEC), which gave birth to the current European Union, emerged seven years later after West-European countries used the EPU to streamline multilateral settlements in national currencies, eliminate barter and restore the convertibility of their currencies for current transactions.

Thus far, the CIS has not been able to fully resolve any of these problems. According to estimates, 90 percent of foreign trade deals inside the CIS have been made in foreign currency – primarily the U.S. dollar. That is, the circulation of national currencies is quite limited as they are not actually used in foreign economic trade, even though exchange rates have stabilized and nine (out of 12) CIS member countries have accepted the obligations of Article VIII of the IMF Articles of Agreement, which bans restrictions on current payments, discriminatory currency practices and barriers to convertibility of foreign-held balances. Meanwhile, there really are preconditions for a wider use of national currencies in CIS regional trade. For example, according to Russia’s Sberbank, half of the deals made by its clients with CIS partners stipulate payment in Russian rubles. Contracts, mostly involving imports and based on the Ukrainian hryvnias, Belarusian rubels, Kazakh tenge, Kyrgyz som and Moldovan leu have become more frequent over the past years, although their combined value ranges between 0.1 and 0.7 percent of the total value of imports (according to transaction passports).  

Thus far, daily quotations rates of CIS member currencies with respect to each other have not been fixed; official rates are mostly fixed via the U.S. dollar. Trading volumes are negligible even in the biggest currency markets in the region (Russian ruble-Belarusian rubel, Russian ruble-Kazakh tenge and Russian ruble-Ukraine’s hryvnia). In the second half of 2004, average daily trading volumes of inter-bank cash conversion operations in Russia did not exceed $3 million for the Russian ruble-Belarusian rubel; the figure was just $1 million for ruble-tenge, and even less for the ruble-hryvnia, let alone the hryvnia-tenge or Armenian dram-Azeri manat markets.

A HOUSE WITH ONE WALL AND A ROOF

The integration model now in effect in the CIS is intended for the interaction of states, rather than markets, thus, the number of mishaps may increase as new markets develop. One day this unfavorable situation may bring down the entire structure. The main potential fissures are already visible. First, there is the relationship between the biggest member state and the other CIS members. As Russia accounts for more than two-thirds of the GDP of the CIS, and a likewise share of its population, its say in the region must be greater than that of Moldova, for example, and even of Kazakhstan. This fact gives other member states grounds – real or imaginary – to fear Russia’s diktat. While in the early years of the CIS the complex socioeconomic situation prompted former Soviet republics to reconcile themselves with this natural imbalance, they are now increasingly sensitive to it. As a result, many member states have been energetically seeking support outside the CIS, often failing to take proper account of the political realities. Several member states have voiced their intentions of joining the European Union, even though the EU leadership has clearly stated that further EU enlargement will be suspended after 2007 (after Bulgaria, Romania and, most likely, Croatia, become members). Talks with Turkey will be drawn out for years, and it seems that no other country will be allowed to join the union ahead of it.  

The CIS member states, due to their dissimilarity in size, fear becoming overly dependent on each other; this has had an adverse effect on their ability to display common will and formulate CIS strategy. Russia, while reluctant to pressure other CIS members for fear of attracting scorn, has been extremely careful, while the other states prefer not to be bound by particular commitments. As a result, the working papers and final documents of CIS statutory bodies are full of general postulations and endless mutual concessions.

Due to the obscurity of CIS mechanisms, many business structures have shown little interest in post-Soviet integration. Indeed, how is it possible to support an organization which states that the concept for cooperation and coordination of its member states’ activities in the currency sphere for the period ending 2017, adopted in Astana, “will allow moving to concerted actions aimed at the creation of certain elements of a common currency space”? What will the companies of the CIS receive in 12 years due to “certain elements” of a common space? Perhaps a house with just one wall and a roof?

WHAT’S NEXT?

Let us try to imagine what will happen if the CIS disintegrates. There is no doubt that some of its member states, or rather part of their elites, will feel liberated from the attention of their “bigger brother” and turn their eyes to the European Union. “If the EU is holding talks even with Turkey, then we too are destined to join this club of the rich and respected,” they may think. They will immediately recall that Ukraine, Moldova, Georgia, Armenia and Azerbaijan are members of the Council of Europe and other European organizations. But, as has been mentioned above, the EU plans to suspend its enlargement. Moreover, Turkey’s accession is likely to be a lengthy and messy process full of unexpected twists. It is no secret that saying “yes” to the Turkish authorities at the initial stage of the negotiations has strong political rationale. The EU’s current goal is to prevent Turkey, with its unique strategic location, from drifting away from the West and thus away from secular state principles and toward the Muslim world; that is a highly probable scenario if the EU rejects it. Therefore, the EU sees negotiations with Turkey as a goal in itself, and is less concerned about their immediate results. It is no coincidence that, in addition to the three Copenhagen criteria which the Central and East European countries had to observe to be allowed to join the EU (democracy and the rule of law; a functioning market economy; commitments concerning membership in the currency union), three new conditions were invented for Turkey. In particular, negotiations on separate issues will be held in succession, rather than simultaneously, as was previously the case. Therefore, any EU member country will be able to suspend the negotiations at any moment.  

The prospects for CIS member states joining the EU are unlikely. Equally unrealistic are their hopes for receiving ample financial assistance from the EU budget, which in 2005 is ?117 billion; ?15 billion of that sum is already allocated for the development of ten new member countries and ?80 billion for aid to farmers and the EU-15. In the future, the EU’s budget will grow very slowly. Germany, for example, exhausted from its unification with Eastern Germany and the EU’s eastward enlargement, can no longer act as the main donor – this is apparent from its above-average budget deficit and chronically low growth rates.  

CIS member states, even if they have an opportunity to join the EU, will find themselves on the periphery of European integration. Their economic cycles and structure are markedly different from those of the leading EU member countries, thus making it impossible for them to join the currency union, not to mention a whole range of other projects. EU financial resources will continue to be allocated largely to Western, as opposed to Eastern, countries and areas (Brussels has reasonably deemed the economies of the new member states as “low absorption capacity”).  

The disintegration of the CIS, or its lingering in a state of latent disintegration (which often happens to unions comprised of developing countries), will have adverse effects for all member states and concerned parties. The fragmentation of the existing system will drastically reduce the potential of the countries in the region – as well as the international community – to control various processes there. Social and political instability will intensify. Armed conflicts, expansion of drug trafficking, illicit weapons trade, illegal migration and terrorism will become more frequent occurrences. Certain countries may collapse into failed states (the numbers of which have been growing recently, despite globalization, as well as humanitarian and military intervention by the world’s leading nations). Neither the EU nor the U.S. will be able to impose their system of governance in the CIS territory.  

The above factors lead us to certain conclusions.

First, the CIS should draw up a new agenda as soon as possible, which will be in line with current realities and proceed from the actual (officially stated or de facto existing) interests of its members.  

Second, a new integration model is required, based on the market environment as well as democracy. The mobilization model that emerged more than a decade ago as an emergency procedure to control the Soviet Union’s disintegration has served its functions and must be replaced. When forming a new integration model, the CIS should proceed from regional specificities (including the specificities regarding transitional economies) and the region’s real objectives, while effectively making use of the practices of the EU and other international unions. The CIS should finally build a normal and advanced legislative foundation, together with a system of mechanisms that would allow it to make common decisions and successfully implement them.

Third, the CIS cannot do without a new leadership concept. It is Russia and only Russia that can serve as the driving force of integration. To be able to perform this function, it should make relevant political and financial commitments. Otherwise, regional integration will be impossible. In the European Union, France and Germany have moved the train of integration for half a century, and there does not seem to be any other way even now after the EU has enlarged extensively. Russia must generate new ideas in the CIS and lead the development of CIS strategy. This requires rejecting the false “paternalism or weak will” dilemma. It must learn to look for associates – convince them with sound arguments, compromise with them – and reach a wide consensus within the framework of democratic procedures.  

In conclusion, in order to gain a clear foreign policy perspective, the CIS should devise a common strategy for the development of relations with the European Union. Today, all existing agreements have been signed between the EU and individual CIS member states. There is no EU-CIS framework agreement, nor has it been discussed so far, even though the EU has signed a range of similar accords, for example, with ASEAN and Mercosur. (An agreement acknowledging the formation of the European Economic Area was signed between the EU and EFTA in 1992 and remains in effect. Under the EEA Agreement, most of the freedoms of the EU internal market apply to EFTA member countries.) Shifting bilateral relations to a framework format would substantially strengthen the positions of the CIS member states in their dialog with the EU. This would provide them with more freedom to cooperate with the EU without official EU membership, thus removing the need for the CIS to make heavy commitments.