By the end of 2013, the key participants in the Customs Union of Russia, Belarus and Kazakhstan had largely clarified their positions. The meeting of the Supreme Economic Council held in December 2013 in Moscow had an important significance as it set the limits of possible integration, specifically with regard to endorsing roadmaps for Armenia and Kyrgyzstan. The very fact of adoption of this approach implied that the plan for the Union’s rapid expansion was already on the formalization track, and that the potential members need time to complete membership procedures. This makes the Customs Union similar to the European Union whose establishment envisioned approximation of the member-states’ economic parameters. It also means that a politically motivated rapid expansion is not possible.
POLITICS OR ECONOMICS?
In fact, this is what Kazakhstan’s position was about. In the recent time, it has been emphasizing the economic aspect of integration only, while Russia has been making increasingly obvious attempts to use the Customs Union as an “umbrella” brand to bring together a large number of countries in the post-Soviet space and beyond.
This approach can be explained by Russia’s current interests. Its drive to forge ahead with integration is understandable, as is the displeasure on the part of the Russian establishment at having to seek compromises with Astana and Minsk. The Russian elite partly views it as unwelcome dependence on weaker partners who indirectly impede the realization of Russia’s global interests. Economically, Russia clearly dominates this organization and – theoretically – could disregard the opinion of the two other countries.
Yet it is the Customs Union, i.e. partner states that Russia wants. To stir their interest, it has to offer them attractive conditions, such as relatively equal relations. And that precludes the Kremlin from using the Customs Union potential arbitrarily. But what is Moscow’s interest? If it is purely economic, Russia should be the first to oppose membership of weak participants and insist that all Customs Union candidates be properly prepared before joining the club. Otherwise, economically strong Customs Union members – Russia in the first place – will face considerable expenses, including direct subsidies for newcomers.
And yet Russia keeps adding new candidates to the list. At first, it invited Tajikistan and Kyrgyzstan, then it added Armenia, and after that it considered Ukraine. In all of the above cases, the political factors are certainly more important to Moscow than economic ones.
Moscow takes an obvious interest in Tajikistan and Kyrgyzstan as they meet the need to secure Russia’s geopolitical presence in Central Asia. These countries have been playing a crucial role in the region since the 1990s, especially since Uzbekistan and Turkmenistan opted for the opposite vector of geopolitical orientation. For example, Russia’s military presence in Tajikistan in 1998 was the sole factor securing its influence in the region and in the strategically important Afghan direction. Dushanbe’s and Bishkek’s close ties with Moscow within an integration body would certainly facilitate Russia’s realizing its interests in the region. Consequently, Russia’s bid to include these two countries in the Customs Union is clearly political.
The situation with Armenia is similar. It is Russia’s long-standing ally in Transcaucasia and Russian influence there can hardly be overestimated. True, Yerevan had cultivated ties with the European Union, but the impact was insignificant because of Armenia’s periphery position. In 2013, Armenian leaders made a quite unexpected decision to join the Customs Union, a move that received full support from Moscow. And again, it was a move based on political interests rather than economic ones. From the economic viewpoint, Armenia’s joining the Customs Union is of little sense: it has no common border with other members and its economy is small. On the other hand, Moscow’s geopolitical reason is clear, while Yerevan is concerned with its own security because of persisting Nagorno-Karabakh related risks and the nebulous situation around Iran’s nuclear program.
Another obvious political motivation underlies the possibility of Ukraine’s membership in the Customs Union, which was actively discussed in the last months of 2013. The Customs Union option was viewed as a political alternative to Ukraine’s pro-European orientation. The end of 2013 illuminated the price Russia has to pay for attracting new members. It opened large credit lines to Kiev and Minsk, signed contracts with Belarus for easy-term oil supplies in 2014, and made commitments to fund the construction of hydroelectric power plants in Kyrgyzstan and Tajikistan. Moscow is clearly seeking to bring together a number of countries in the Customs Union regardless of how much it might cost. It is pursuing integration with undue hurry, ignoring the quality of the process. The appearance of ever new candidates with problems of their own aggravates the situation within the Customs Union. Over two and half years of its existence, it, too, has accumulated a wealth of problems, some of which can be referred to as deep systemic contradictions.
The first conspicuous thing is not just the different scales of the economies of the three member-states which make the backbone of the Customs Union, but a mismatch of the principles these economies are based on. The Kazakh and Russian economies have much in common and are integrated – though not to the same extent – in the world economy, living by its rules, whereas the Belarusian economy operates on entirely different principles.
In general, Minsk is trying to keep the Soviet-style economy devoid of Communist ideology. The country has inherited not just former USSR production facilities but also the key Soviet economy problems – general ineffectiveness and uncompetitiveness – which eventually brought about the collapse of the Soviet Union. The Belarusian economy would not have survived but for special relations with Russia and the opportunity to resell petroleum products produced from Russian oil.
The consolidation of two market economies – Russia and Kazakhstan – with the non-market Belarusian economy contradicts the main rule of any integration, i.e. preliminary approximation and harmonization of the participants’ economic parameters. A mere opening of customs borders not only gives access to new sales markets but also increases the level of competition. Hence, after gaining the opportunity to increase sales of its products on the markets of Kazakhstan and Russia, the Belarusian economy would unavoidably steer into rivalry.
Before establishing the Customs Union, Russia and Kazakhstan did not conceal their intention to join the World Trade Organization, and even considered a joint application. Russia became a WTO member in 2012, and Kazakhstan plans to join it this year. Consequently, further liberalization of their foreign trade is inevitable. It is unclear how the Belarusian economy will be faring in these conditions. Its status will become even more uncertain, while the economic situation will worsen. At present, Belarus looks like “a fifth wheel” in the integration bandwagon.
Meanwhile, economic relations between the two clear Customs Union leaders – Moscow and Astana – have not been without a hitch. Supporters of the integration argued that low-tax Kazakhstan (with VAT at 12 percent versus 18 percent in Russia, 10-percent income tax versus Russia’s 13 percent and a far lower social tax than in Russia) had a more favorable economic climate. It was rated 47th by Doing Business, while Russia was ranked 112th, and would certainly reap benefits from integration in the Customs Union. Theoretically, it could have become a platform for the production of goods to be exported to a 170-million-consumer market.
However, Kazakhstan did not meet these expectations. According to the Eurasian Economic Commission, imports from Russia to Kazakhstan have increased from 12 billion dollars in 2010 to 17 billion dollars. Compared with 2009 – the last year before the Customs Union began to operate, when imports from Russia totaled nine billion dollars – they have increased by almost 90 percent. (In the pre-crisis 2008, imports from Russia reached 13.5 billion dollars before plunging to nine billion in 2009). In 2012, Kazakhstan’s exports to Russia were at 6.1 billion dollars, practically unchanged compared with 2008 (6.2 billion dollars). In short, Kazakhstan’s exports to Russia have been stable, unaffected by the Customs Union. The Belarusian-Kazakh balance of trade is even more revealing. Imports from Belarus to Kazakhstan increased twofold to 700 million dollars in 2012, while Kazakh exports to Belarus fell from 100 million dollars to 90 million dollars. The situation changed little in the first ten months of 2013.
Customs Union experts diplomatically speak of an overall increase in trade since the launch of the Customs Union, without referring to the balance of trade statistics, otherwise they would have to agree that liberalization of foreign trade in the Customs Union has not brought any tangible benefits to Astana. Over the years of the Customs Union’s existence, Kazakhstan has become an increasingly important sales market for the Russian economy. This is proven not only by bare facts, but also by qualitative indicators. For example, machinery and equipment made up 26 percent of Kazakhstan’s imports from Russia in 2012, worth 4.5 billion dollars. In Russian exports, machinery, including military hardware, accounted for 5 percent, or 26 billion dollars. In 2012, fighter aircraft were Russia’s largest export item worth 3.1 billion dollars. Machinery for civilian use exported by Russia makes up approximately half of this volume. Kazakhstan therefore provides a sales market for about one-third of exports of non-military Russian machinery, and the Customs Union certainly plays a large role in it.
The initial advantages Kazakhstan had before the beginning of integration have not been utilized. On the contrary, Kazakhstan becomes an increasingly important sales market for Russia and Belarus. On top of that, the Kazakh economy has encountered a range of other problems. These include the low competitiveness of its business compared with Russia’s. The difference in the economic policies of the two countries in the past 15 years also has played a role. Kazakhstan has easier business terms thanks to the market reforms of the 1990s. It has fewer large companies but more small firms in the services, production and agriculture sectors. On the one hand, it is Kazakhstan’s advantage because a mass of small business people creates the lower middle class independent of the state. On the other hand, it is a disadvantage when it comes to competing with large companies from neighboring Russia.
For Russian companies, the Kazakh market is just a small portion of their business. Paradoxically, they see no sense in launching production in Kazakhstan since they can simply deliver 10 percent of Russian products to that country. Such a situation is standard for certain international companies operating factories in Kazakhstan and Russia, but for Astana it means the loss of jobs and tax revenues.
Overall, a six-billion-dollar-increase in imports to Kazakhstan from Russia and Belarus over the years of the Customs Union’s operation has resulted in noticeable job cuts in Kazakh business, as the imports covered precisely the consumer goods sector.
It should be borne in mind that Russia and Kazakhstan have maintained stable volumes of mutual deliveries inherited from the Soviet past. For example, Kazakhstan supplies to Russia 20 to 30 million tons of power-generating coal from Ekibastuz every year, which accounts for 15 percent of all its exports to Russia.
Also, it supplies iron ore pellets from the Sokolov-Sarbai field to Russia’s Magnitogorsk metallurgical works. Other large export items are uranium supplied by Kazatomprom, natural gas from the Karachaganak deposit for the Orenburg gas processing works, and wheat.
Russian-Kazakh trade is not without problems, though. For example, Russian coal companies reported up to 30 million tons of unsold coal in stock late in 2013. Governor of the coal-producing Kemerovo region Aman Tuleyev believes it is inexpedient to import Kazakh coal. For its part, Kazakhstan has repeatedly stated that it wishes to process natural gas in its territory because its supplies to Orenburg were negotiated under corporate contracts, which meant lower prices. If coal or gas is taken out of Kazakh exports to Russia, the disproportion in the balance of trade will become absolutely improper.
In addition to low taxes, Kazakhstan enjoys more liberal administering with a smaller government presence in the economy than in Russia. It is one of the reasons behind the disproportion. Russian bureaucracy is objectively more effective than Kazakhstan’s, as it was able to create a whole system of restrictions on Kazakh imports even within the Customs Union framework, whereas there are no obstacles to Russian exports to Kazakhstan.
Price hikes on the Kazakh consumer market after the beginning of Customs Union operation are another important factor. Of course, part of the price increases on the domestic market was caused by government policy, such as the funding of energy companies’ investment at consumers’ expense. Nevertheless, the price hikes became a big surprise. Kazakh prices had been lower than Russia’s, and imported products from Russia are often cheaper than Kazakh goods. The situation with imports from Belarus is similar. Theoretically, prices should have fallen: cheap imports always push them down. In our case however, the prices increased, possibly because of approximation of the Russian and Kazakh economies, with Kazakh prices seeking the higher Russian levels.
Lastly, Russia and Kazakhstan pursue different national currency policies. In Russia, ruble fluctuations are considerable: this is how Russia’s Central Bank reacts to changes in the situation. A weaker ruble helps support domestic exporters. Kazakhstan’s national currency – the tenge – is stable. Many claim it is pegged to the U.S. dollar, although Kazakhstan’s National Bank has always denied it. In the Customs Union, this situation is extremely disadvantageous for Astana because a weaker ruble automatically boosts imports from Russia.
Unsurprisingly, local businesses in Kazakhstan have been opposed to the Customs Union in the recent years, except for the large coal and gas exporters or companies interested in transit through Russia. The population and intellectuals’ sentiment is entirely different.
The start of the Customs Union’s operation caused acute discussions, although they hardly involved the public at large because of the efficient government information policy. Among intellectuals, however, the debates took a tough tone.
In Kazakhstan, the government and society have traditionally supported friendly relations with Russia. This also holds true for the Russian authorities and society. In both countries criticism only comes from nationalist-minded politicians. The very idea of integration was sown into fertile ground as Russia and Kazakhstan had been nostalgic for Soviet times, eager to see the Customs Union as a replacement for the once powerful state. Hence the hope of Kazakhstan’s minorities – ethnic Russians, Ukrainians, Belarusians and some other ethnic groups – for the comeback of old times. The concept of joint restoration of industrial production while reducing reliance on raw materials seemed attractive, too.
Both Russian and Kazakh supporters of integration dramatically stepped up their campaign, creating a powerful propaganda to impact the public opinion.
The problem is that in Russia, the advocates of restoring the imperial statehood saw the Customs Union as a prototype of a new empire and a method to revive Russia’s former might. They can be divided into “Eurasianists” and “Imperialists.” The “Eurasianists” have always been tolerant towards Kazakhstan. They proceed from common interests and destinies, following Lev Gumilyov’s logic. He held nomads in high regard, seeing in them a serious source of Eurasian imperial statehood. The “Imperialists” would rather be intolerant of Kazakhstan’s independence. They question its sovereignty because their logic dictates that Kazakhstan is a casual, failed state and that the Customs Union is the only opportunity for it to rejoin Great Russia.
This pressure from both “Imperialists” and “Eurasianists” caused a sharp growth in the number of Kazakh opponents to integration with Russia, who included both nationalists and quite moderate citizens. Sovereignty became the key issue which ethnic Kazakhs, especially intellectuals, found very sensitive. They voiced concern every time Russian experts questioned Kazakhstan’s sovereignty and its development success.
Russia’s pro-active role also contributed to these concerns. In 2012, it brought forward a range of initiatives aimed at creating supra-national bodies within the Customs Union, including the so-called Eurasian Parliament. It was suggested that MPs should be elected proportionate to the size of the population. The parliament’s resolutions were expected to enhance the legitimacy of the Eurasian Economic Commission viewed as a joint government of the Eurasian Economic Union. However, Kazakhstan would only get a 12-percent quota in this parliament. The authority eventually vested in the Eurasian Economic Commission would make the Eurasian Economic Union look like a federation. Taking into account Russia’s absolute domination in the association, it would merely become a new “enlarged edition” of the Russian Federation.
In addition, Moscow offered a single currency. During the protracted negotiations with Minsk in the 2000s Moscow had insisted on a single bank of issue. This suggested that the currency unit proposed for the alliance was the Russian ruble.
Kazakhstan took a different position. It insisted on using the EU practice: first introducing some sort of “unit of account” (an equivalent of ECU), and then working towards creating a common currency similar to the euro. In other words, Kazakhstan would not agree to the ruble as a common currency. Giving up the tenge would mean the loss of part of state sovereignty for Astana. Understandably, Russia will never agree to such an option.
Contradictions tend to pile up over time. Occasionally, they emerge as open conflicts, such as the tense controversy over the Baikonur spaceport or the incident involving a Dagestani poacher who was killed when resisting arrest in the Kazakh part of the Caspian Sea. Kazakhstan and Russia have similarly strong vertical systems of power, so all emerging contradictions are resolved at the level of the heads of state. In late 2013, they settled a majority of issues at meetings in Yekaterinburg, Minsk and Moscow. The parties clearly stated their positions. Specifically, I would note Article 10 of the Friendship and Cooperation Treaty signed in Yekaterinburg in the fall of 2013. It mentions Eurasian integration, the Customs Union and the Common Economic Space, but says nothing about the Eurasian Economic Union.
By and large, this was a fare decision, because bilateral relations have always been of tremendous significance to Kazakhstan and Russia, and they will always be. In a sense, they are more important than a multi-party integration. Our relations had existed before the establishment of the Customs Union and will continue even if the latter suddenly disappears.