17.02.2004
Making Headway to Integration
№1 2004 January/February

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.

* * *

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.