Victor Khristenko is Deputy Prime Minister of the Russian Federation.

The contemporary world is a time and a place of strong competition, and the developments of the first three years of the 21st century have provided convincing examples of this fact. The highly developed economies have been forcing their less developed rivals out of promising world markets wherever they can.

However, economies are not the only competitors. There is ongoing competition for a blueprint of the future global system. There is competition of opinion concerning the various modes of development. There is competition for the best methods of arranging international life. And there is competition for the principles underlying relations between countries. The establishment of the European Union has been the biggest breakthrough in the search for new forms of interstate integration. Integration processes have also intensified in the Asia-Pacific region. Clearly, Russia cannot remain aloof from these global processes, even though it must address its own large-scale problems related to the restructuring of its economy and infrastructure, as well as a crucial reform of its society.

In the 1970s-1980s, the Soviet Union’s activities within the global political arena were based on the principles of its absolute economic and ideological independence, its political accords with other nations, and the persistent confirmation of its great power status. Today, Russia’s active and effective involvement in global affairs, in the global division of labor and in world trade is based on different principles – it depends on the efficiency of Russia’s efforts in interstate and supra-state organizations and associations, as well as on the level of Russia’s integration into them.

The modern world is characterized by growing interdependence. Some nations need access to external markets, other require manpower, still other look for technologies and energy imports. Self-sufficiency in the modern world is not compatible with the notion of ‘progress.’

Russia has always been a history-making actor and, therefore, it stands today as a great country. It is particularly important now to add a new quality to its involvement in the global processes. Russia requires a most versatile, multiple-vector cooperation and interaction with the newly independent states from the former Soviet Union, as well as with Europe, the United States, China and the Asia-Pacific nations. It is the reality of the 21st century that in addition to nations, cross-border structures and unions – such as the European Union, WTO, multinational corporations, regional entities, nongovernmental organizations like Greenpeace, and worldwide religions – have turned into the key players and forces on the international scene. Their influence has spread to cover the global infrastructure of finance, communications and transport.

Obviously, if supranational entities grow stronger and more effective than national ones, it is necessary to establish interaction with them and strengthen the multilevel interaction mechanisms. Involvement in numerous and versatile systems of relations provides freedom for maneuvering and does not rule out any opportunity. Partners need only to agree on the principles for conducting this multidirectional integration.

STRATEGY AND SCENARIOS FOR NEW INTEGRATION

There is no doubt that a country’s high competitive capacity should be a critical goal for any state. Consolidation and integration processes are an important instrument for raising competitive abilities. Under conditions of globalization, regional and sub-regional integration tends to become a prevailing trend at all levels – from the corporate to the national. The choice of a particular niche for a nation or union to assume in the global division of functions is decisive. Our goal is creating a structure that is essential for the world; a structure in which the world would be unable to function without Russia and alliances involving it.

In the third millennium, the successful development of any nation depends on its ability to put to use external, as well as internal, growth factors. During the past few years, Russia has fully availed itself of a favorable situation in the world energy markets – it has stepped up its economic growth rate (in 2003, it reached around seven percent) and joined the world’s top seven leading nations in terms of its GDP growth rate. Yet, everyone realizes that the energy resources market has a limited potential. Besides, such a market is not resilient to abrupt fluctuations which are always hard to predict. Thus, it cannot be regarded as a foundation for economic growth strategies. As for manufactured goods and services produced by the post-Soviet nations, presently these cannot compete on the world market.

In such a situation, Russia can take one of two obvious approaches to its foreign-economic policy.

One is encouraging internal investment in capital assets, while protecting – possibly even increasing the level of protection – its national market against foreign competition. This approach would allow for the restructuring of production and saturating the domestic market with high-quality products which, as their competitiveness grows, would eventually find their way into foreign markets. Revenues from domestic and foreign trade would grow, thus ensuring extended reproduction on a qualitatively new basis, thereby promoting economic growth.

But this model has a serious drawback. It is not obvious that there will be enough capital (both Russian and foreign) ready for investment in the rather limited Russian market, while the payback of the investment is not guaranteed and the administration costs are still high.

An alternative approach provides for the rapid liberalization of the market. In this case, Russia could expect certain concessions from its commercial partners, which could let Russian producers – now able to withstand growing competition – trade with the whole world without hindrance. The main risks involved in this scenario may come from the negative social effects of the transitional period, when the Russian economy is adjusting to the new conditions of tough competition. Besides, on many occasions it has been rather obvious that few people really want Russia to enter the foreign markets.

But there is also a third option: expanding the boundaries of accessible markets. For Russia, for instance, in economic terms this means creating a uniform space for the activities of Russian companies outside the political borders of the Russian Federation. The same approach could be implied for our neighbors – Kazakhstan, Belarus and Ukraine.

Suppose this scenario is realized. The most important effect would be the emergence of a strong incentive for investment, which is lacking today. The size of capital investment depends on the capacity of the domestic market, while that capacity depends on the number of the population. For example, China’s population is ten times larger than that of Russia. Therefore, investment in China is ten times bigger, although the two countries may be equal or comparable in other aspects.

Second, if our economic space expands outside the Russian borders, foreign investors would become domestic investors (for example, Kazakhstan banks have already shown their readiness to invest in the Russian economy). This would give a clear signal to Russian entrepreneurs who have ‘frozen’ their money in offshore accounts: the time has come to return your capital to your home country.

Third, it is only possible to expand an economic space if the mechanisms for its proper functioning are modernized. As a result, an impetus would be given to administrative reform based on the world’s best experience. The reduction of the administrative rent would be a separate – and very effective – factor for businesses to improve their competitive capacity.

But there is yet another aspect to this scenario. The expansion of the accessible market should not only be accomplished through the creation of a common economic space involving a number of the former Soviet republics. A space similar in its functions must be formed with the participation of united Europe not only in the East (Common Economic Space, CES), but also in the West (Common European Economic Space, CEES).

The second and third positive effects mentioned above – domestic investment growing more attractive and administration costs going down – would also apply to a common economic space with Europe. At that point, another particularly significant result would be achieved.

The market’s expansion to the Commonwealth of Independent States would restore a market that is traditional for Russia, as well as restore the links that were traditional in the Soviet Union. But this would only change – even if quite substantially – the quantitative parameters of economic activities. Interaction with Europe would launch another process that is also very important for Russia today: qualitative development.

This again concerns employing external sources for development – but this time these are not ties between producers, markets or sources of capital; above all, these are new standards of quality and governance (administration and decision-making). It is an open secret that the observance of quality standards and the development of new generations of goods with consumer qualities meeting the highest world standards present serious problems for Russian producers in industrial sectors traditional for Russia (and the Soviet Union). The expansion of the Russian market to CIS member states and the revival of traditional ties cannot expedite or facilitate those processes – they can only help to accumulate resources for a qualitative technological leap in the future. But close ties with the European markets and the application of European quality standards would help Russian producers create new-generation products (in the automotive and aviation industries, electronics, etc).

Two things should not be forgotten. First, the above does not apply to the primary and traditional sphere of cooperation between Russia and Europe – exports/imports of energy resources. Russia regards this sphere of mutually beneficial cooperation as a main source for its own well-being and accumulation of resources for attaining its large-scale goals – long-term and short-term. This sphere of cooperation must be based on the principle of complementarities. But cooperation in high-technology sectors may require rapprochement and, in some cases, even mutual assimilation. Importantly, these changes must occur not only in Russia but also with its European partners. It is inadmissible to view the harmonization of legislation exclusively as Russia’s unilateral adoption of European legal norms. Russia’s legal system is part of statehood, and the CEES concept does not stipulate Russia’s full or associated EU membership.

Russia has already begun modifying its economic conditions with European standards, and in the future it will find it much easier to expand a common economic space toward the West. But oil and gas exports are too important for Russia; hence it looks to reach special accords with the EU on this issue.

Second, it is necessary to initiate development from external sources very carefully, while not impeding qualitative growth; any potentially negative social effects of the transition period mentioned above must be minimized. To this end, the government has been enacting, step-by-step, new legislation and regulations. It has also been providing state support for activities that are decisive for ensuring the competitive ability for Russian goods and services in the European market (and an ability to move into Europe). Finally, it has been lobbying Russian producers’ interests in the EU.

COSTS AND RISKS

It is necessary to realize the costs and risks (these certainly should not be viewed as strategic losses) involved in the expansion of the economic space. Once again, we are referring to the social aspect of these transitions. An expanded space implies new investors, but also new rivals. So the formation of an economic space must be accompanied by the creation of a social space, i.e. the interests of less developed regions must be taken into account, a social security system must be put in place, special support funds must be established, and an entire infrastructure must be formed for cushioning the social costs. These measures will require much spending.

The level of risks here depends on our ability to ensure the required pace of structural reform. On the one hand, new investors will provide money required for that reform. On the other, the national economy may fail to stand growing competition if the pace of restructuring is insufficient (this is especially important en route to Europe). Therefore, a common space should be formed gradually as each of its elements ripens in real economic life – step by step and proceeding from economic expediency, rather than political ambitions.

Obviously, the creation of such a space is not a task and priority for Russia alone. Russia cannot and will not impose its plans on anyone; it has no intention of expanding into foreign lands. A common space is only possible as a product of the realization of common interests, or rather a balance of interests. The format of this article does not allow analyzing the reasons for this or that country to be our potential partner in a common space. Let me just note that this analysis takes account of a complex combination of political, economic, legal, historical, cultural and civilizational factors, which is unique for each country.

PROJECT FOR A COMMON ECONOMIC SPACE

The CIS member states account for around a quarter of Russia’s foreign trade. In many respects, cooperational ties have not been lost, or may be restored, and close contacts between people have been preserved. Moreover, there exist common cultural and social traditions. A course toward mutual economic rapprochement is an official policy of both Russia and the CIS countries. The CIS space is a sphere of Russia’s strategic interests. In turn, Russia is a zone which comprises the national interests of CIS states. Russia is interested in economic progress throughout the CIS, as mutual interdependence in our developmental processes is obvious. Originally, the infrastructure of the CIS was a common one; these countries have virtually always been the only markets for the products of their neighbors.

Meanwhile, the formation of a Russia-CIS common economic space has been impeded by objective problems. First, the consequences of a profound systemic crisis have yet to be overcome. The crisis was caused by a breakdown of economic ties established in Soviet times, and was aggravated by the transition to a market economy, as well as by interstate and ethnic conflicts. The CIS member states began coordinating their efforts to establish a common space on a new basis almost immediately after they gained independence, but their moves were contradictory. As a result, numerous accords have not led to a new quality of economic interaction between them.

Analysts often cite the drawbacks of economic interaction of the CIS and Eurasian Economic Community (EurAsEC); our unworkable “assets,” problematic “liabilities” and various shortcomings have become increasingly visible. We accept the criticism. Still, it is obvious that we are moving toward a successful integration. This is one of the main ‘assets’ of the above two organizations: they have prevented centrifugal forces from pulling us irreparably apart. This permits us to continue with the move toward integration.

Initially, documents signed in 1993-1994, primarily the Economic Union Treaty, stipulated that the CIS would develop along a ‘linear’ scenario of regional integration: a free trade zone would emerge first, followed by the formation of a customs union, and then economic and currency unions. But the understanding that it was yet impossible to create a common customs space for all the CIS member states led in 1995 to the formation of a Customs Union for five CIS member states. At the end of 1999, the Customs Union was reorganized into the EurAsEC. The appropriateness of the decision to form the ‘Customs Five’ has been confirmed by a higher growth rate of mutual trade among its members, compared with other CIS member states.

Without the CIS and EurAsEC, trade between our countries would have been substantially lower. And it is not obvious that Russia would have gained a niche for itself in the markets of third countries – no one really wants us there.

The creation of a Common Economic Space is aimed at coordinating efforts for the rapprochement of the interested CIS countries; it provides a real opportunity for improving the situation. Presently, the real economic effects on the CIS since its inception are not very noticeable, even though a great number of agreements and other joint documents have been signed. This explains the willingness to launch new integration mechanisms. The pragmatic economic benefits are obvious for all of the participating nations.

Trade with Belarus, Ukraine and Kazakhstan – our main partners in the CIS – comprises the bulk of Russia’s trade with the CIS. The above three nations, plus Russia, account for 94 percent of the GDP, and 88 percent of all trade in the CIS. Together we can be the driving force for long-term integration processes.

Today, Russia is a member of both the CIS and EurAsEC, but we find the boundaries of those alliances too narrow. In forming a common economic space for the above four countries, we proceed from the assumption that the existing free trade zone is rather narrow for us. We are now in a situation when the growth rate of trade between our countries is lower than the growth rates of our markets. The CES concept stipulates that, along with a common space for the movement of goods, a common space must be formed for the movement of capital, services and manpower. There currently exist very many barriers in this space, as each state – being quite sophisticated – erects them on the absolutely legitimate grounds of protecting its local businesses.

Therefore, we must consolidate our potential. We must harmonize our economic norms related to the turnover of goods, services and investment, and form a real economic union. The CES will permit us to broaden the opportunities and improve the competitive capacity of our economies to trade with third countries.

This will require the formation of supranational structures to regulate and make decisions in certain areas of economic policy. We have to act sensibly. World experience shows that without such steps it is impossible to reach the level of integration we desire.

In September 2003, the parties to the CES project – Russia, Belarus, Ukraine, and Kazakhstan – signed a final document on the principles for the formation of such a common space (Ukraine signed it with certain reservations – it stated that it would participate in the CES within the limits set by its constitution).

The final document provides for the formation of a common economic space with the following properties: common economic regulation mechanisms; free movement of goods, services, capital and manpower; a common foreign-trade policy; and concerted tax and financial policies.

Second, the parties proclaimed and adopted the principle of multilevel and multispeed integration, but the parties must observe the succession of joining the agreements (which is yet to be worked out).

Third, the Council of the Heads of State (CHS) will be the governing body of the CES, and the Commission, its working body. The authority of the CHS and the Commission will grow gradually as the level of supranational regulation grows.

The parties have defined the common principles for the member countries’ WTO accession, which is sought by every country. Progress in the negotiations on the issue will be discussed during quarterly consultations.

When forming the CES, it is important to avoid the mistakes that have been made in the past. We should not be tempted by apparently ‘simple’ solutions, as they would wipe out the effects of integration, whereas complex, systemic solutions are important. The parties should move ahead only concurrently, while creating conditions for the realization of the ‘four freedoms’ (movement of goods, services, capital and manpower). This would require a different logic of regulation based on efficiency, cost reduction, return on investment, and the ability to compete in external markets outside the CES. The result would be a qualitatively different growth of the national economies and living standards.

There is yet another, very important goal pursued by Russia in the formation of the CES. As I mentioned above, supranational and interstate alliances, rather than separate nations, now compete on the world markets, and they are all based on special principles of interaction. Russia cannot compete with major global players like the EU, the Asia-Pacific countries or the United States alone. As part of a common economic space, Russia would be more confident in pursuing its interests, while relying on common resources. Having mastered the integration principles, it would be able to participate in future integration processes. And once it has formed the appropriate interstate infrastructure ensuring the realization of the above ‘four freedoms,’ it would be able to switch to global infrastructures in such spheres as transport, energy, trade, capital and manpower.

So the only possible path for Russia’s intensive development is real and institutionalized economic integration.

PROJECT FOR A COMMON EUROPEAN ECONOMIC SPACE

The European Union’s 25 present and future member countries (from May 2004) account for half of Russia’s foreign trade; combined, they are Russia’s natural partner for joint activities in spheres that give Russia opportunities to fully realize its competitive advantages – in energy, space research, science-intensive technologies, chemical production, and metallurgy.

At the same time, the European Union has advanced know-how – most agreeable to Russia – for creating a supranational economic space and an integrated economic regulatory system. The Partnership and Cooperation Agreement (PCA) between Russia and the EU has determined Russia’s intention of gradually bringing its economic legislation closer to that of the European Union. Bilateral agreements with the EU – signed by virtually all of the CIS member states – contain similar provisions, and many of the CIS countries have targeted further integration – up to eventually joining the European Union.

Russia has no intention of joining the EU: its goal is uniting economic spaces while retaining its sovereignty. The latest Russia-EU summit meeting in Rome on November 6, 2003, expanded on the strategic partnership decisions made during the May summit in St. Petersburg, Russia. The main result of the Rome meeting was securing the strategic course toward the formation of four common spaces – in the fields of economy and trade, internal and external security, freedom and justice, science and culture. The documents and decisions of the summit meeting have defined a vector for cooperation between Russia and the expanding European Union for the foreseeable future.

The idea of forming a common European economic space was first voiced in May 2001, during a regular Russia-EU summit meeting. The Rome summit approved the CEES concept that was drawn up by the High-Level Group. The concept now must be translated into active plans and ‘roadmaps’ for particular spheres.

The CEES concept can be summarily interpreted as “WTO Plus.” This means the parties’ activities in spheres covered by the WTO with further joint headway toward the creation of a free-trade zone and deeper cooperation in certain priority sectors.

We proceed from the assumption that the economies of Russia and the EU complement each other (cooperation in the energy sphere provides clear evidence of this). But what does “complement” mean in this case? In my opinion, it means that the economies of Russia and the European nations can only develop together. At the very least this means that the pace and quality of their development would be substantially higher if the mechanisms of mutually beneficial employment are used, as opposed to simply developing them separately.

Russia has adopted this thesis. We realize perfectly well that unless external development mechanisms are employed to push the country’s economy ahead, the goal of radical growth cannot be attained. But Russia cannot afford to live through new social upheavals. Therefore, the local and controlled application of the above mechanisms will be required.

The ball is now in our European partners’ court. If they accept the thesis of a mutually complementary functioning of the economies of Russia and the EU and their organizational principles, many arbitrary, or ideological barriers will be removed and will no longer impede the development of our relations.

This change of attitude to the CEES issue would be a most important step at the current stage. Anyway, we will still have a long way to travel.

TWO ECONOMIC SPACES

Obviously, Russia would benefit from the creation of a common economic space both in the East (the CIS) and the West (the EU). Those two processes must be coordinated with each other, enrich each other and gradually consolidate a zone of economic integration, whose population is three times larger than that of Russia. I believe that this is quite a realistic objective for Russia, as witnessed from the experience of consultations with our partners – Belarus, Ukraine and Kazakhstan (on a common economic space) – and with the European Union (on a common European economic space). An analogy between the CES and the CEES prompts another question: How will different aspects of Russia’s integration policy match? Will successful headway to the CES impede economic integration between Russia and the EU?

Indeed, such a threat does exist – if the pursuance of purely political interests in forming the CES results in the neglect of our commitments related to European partners (and vice versa). But if a certain balance of interests and commitments is observed with respect to both the ‘CES Four’ and the EU, concurrent development of the two ‘spaces’ would be quite possible. There are examples of such multilevel integration blocs in the world. While being a member of NAFTA (the North American Free Trade Agreement whose parties are Canada, the United States and Mexico), Mexico has signed an agreement on a free-trade zone with the European Union. The European Union itself provides a good example, having signed integration accords (free-trade zones, customs unions) with dozens of nations, while at the same time building up a level of internal integration.

I repeat: the creation of a common economic space – with CIS member states or the EU – is not a goal in itself. While removing obstacles to trade and investment, it would expand the markets we can access, and promote economic growth and qualitative development.

Second, a common economic space would facilitate the realization of the four freedoms – free movement of goods, services, capital and manpower. This apt formula, in addition to other variables, is convenient for structuring possible scenarios for achieving our goals.

Third, the level and pace necessary for the realization of the four freedoms are not prescribed values. The only limitation is the deadline, which has been set at 10 years. At the end of this time, the parties are to have created a free trade zone or customs union; furthermore, there are certain requirements to parties, ensuing from WTO norms (such as the requirement that a schedule must be published for a repeal of tariffs in mutual trade). All other steps can be taken in a mode considered economically efficient and most acceptable for the removal of real trade and investment barriers.

Fourth, the creation of a common space should not run counter to any commitments the participating countries may have with the WTO (nor should it be an obstacle to WTO accession in the future).

Fifth, the realization of the four freedoms should not be limited to the removal of border barriers or, in other words, market entry barriers – tariffs, quotas, investment restrictions, etc. The absolute unity of an economic space can only be attained through the harmonization of all economic regulations. For example, anti-dumping measures can only be dropped if common legislation regulating competition works effectively. Common legislation on state support and a unified price policy would make it permissible to toss out countervailing duties in mutual trade. Certain harmonization measures can produce immediate results at the initial stage of the common economic space – for instance, the unification of requirements set for products, veterinary and sanitary norms, and customs rules and documentation.

The above considerations equally apply to both ‘spaces’ negotiated by Russia. Obviously, the integration of the CIS member states will go faster than the CEES creation, as the CIS countries are similar in terms of their economic development levels and their competitive abilities. Besides, much has already been done to open their markets to each other; economic legislation in the CIS is still in the making and it is easier to harmonize. Therefore, it is important to thoroughly elaborate certain measures so they would later be applicable in the dialog with the European Union.

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The construction of a homogeneous and mutually complementary economic space involving Russia and its neighbors in the East and the West is a long-term objective. Some of its interstate components will materialize faster than others, as the level of readiness of individual countries for deeper integration is not uniform. An analogy with a ‘multispeed Europe’ is quite appropriate here. This model has been successfully applied in the European Union’s development during the past two decades and has promoted its evolution toward a supranational union which is unique in its number of participants and the depth of integration. There are grounds to suggest that as this ‘trans-European space’ emerges, centripetal forces will increase and attract new nations to it – both CIS member states and our other neighbors. This will result in a new quality of economic interaction within the vast space of Eurasia. This interaction could be the source of growth that Russia needs in order to rejoin the ranks of the rich, developed, strong and respected nations once again.