30.07.2005
Change or Die
№3 2005 July/September
Olga Butorina

Olga Butorina is a Doctor of Economics, professor, head of the European Integration Department, Advisor to the Director of the MGIMO University of the Russian Foreign Ministry, and a member of the Board of Advisors of Russia in Global Affairs.

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.