09.04.2010
Politics Ahead of the Economy
№1 2010 January/March
Andrey Suzdaltsev

Andrey Suzdaltsev is an assistant professor and Deputy Dean of the School of the World Economy and International Affairs at the State University–Higher School of Economics. He holds a Doctorate in History.

Risks and Prospects of the EurAsEC Customs Union

The notion of ‘integration’ occupies a special place in the political vocabulary in the post-Soviet space. Citizens of former Soviet republics feel positive about pro-integration rhetoric, as many of them associate it with the golden age of the relative Soviet-era affluence. That is why politicians often exploit the favorable image of integration, applying the term to any forms of interstate relations and gaining scores by doing so. In addition, the ruling quarters of the Commonwealth of Independent States view integration initiatives as one of the few instruments for bargaining in foreign policy since the entire territory formerly occupied by the Soviet Union is a field of contention of different geopolitical and geo-economic projects now.

The presence of an actor of world politics or the world economy is a mandatory condition for the viability of any integration project, and only the Russian Federation has had this status in the post-Soviet space to date. Objectively speaking, it is Russia that has to carry the burden of responsibility for integration processes in the region. These processes in their turn should be used in the interests of Russian economic modernization and national security. Moscow’s ability to become the center of gravity for neighboring countries is vital for Russia’s prospects in the arising multipolar world in many senses.

In the meantime, there is no speaking of the success of integration efforts in the post-Soviet space yet. The economies of CIS countries made up an integrated economic complex a mere two decades ago, and yet not a single integration project has currently moved farther than the first or second stage of implementation. The Customs Union, established by the Eurasian Economic Community (EurAsEC) and in effect since January 1, 2010, adds up to an attempt to make a breakthrough towards real integration.

THE PAINFUL EXPERIENCE OF INTEGRATION

Immediately after the Soviet Union’s disintegration (1991 to 1996), the new independent states were interested in maintaining a unified economic space because its collapse (especially in such sectors as transport, telecommunications, energy supplies, etc.) could deal a crushing blow to their economies. The CIS countries sought to restore cooperative ties between industries in former fellow Soviet republics and to use their neighbors’ markets for saving their own industrial sectors. Simultaneously, national economic models were taking shape quickly in each country, which hindered real integration.

A tendency towards a bigger rapprochement emerged in 1996 and 1997. It had a different basis and took account of the political and economic reality of the day. It became clear by then that a universal approach, which would unite the entire former Soviet Union, was impossible. This gave way to an idea of different-pace integration that was embodied in practical terms in several integration initiatives, primarily in the Common Economic Space (CES) and the Eurasian Economic Community (EurAsEC). A project implying a political and economic status – the Russia-Belarus Union State – was launched at the end of the 1990s. At the turn of the century, the CIS Collective Security Treaty Organization (CSTO) began to take the contours of a genuine military and political alliance.

The European economic integration saw four phases of the process – the organization of a free trade zone, a customs union, a common economic space, and an economic union (including in the monetary sphere). However, the bulk of integration projects in the post-Soviet space have not moved beyond the second phase of integration (the Customs Union in the format of the Russia-Belarus Union State). The development of the latter Union State – the only project that provides for a full-fledged political integration – was blocked in 2002-2006.

The failures stemmed from a range of objective factors. As the new countries were rising up, their national elites faced the challenge of consolidating the recently acquired sovereignty and statehood, and this in turn implied control over the economy, albeit to the detriment of purely economic feasibility. The post-Soviet leaders supported integration in words, but in reality they discerned a threat to their own sovereign rights in integration initiatives, especially those that came from Russia, whose economic and political potential hugely exceeded that of all other countries.

Back in the 1990s, there emerged two groups of countries with obviously conflicting interests. These were energy-deficient states interested in integration for getting oil and gas at the exporting countries’ domestic prices, and exporter countries which needed integration to ensure energy transit. However, the formation of a unified energy sector complex is the third phase of economic integration that is possible only if the first two stages are completed.

In the meantime, this has not happened in the region. For instance, Kyiv grew alienated from the CES project after it learned that it would not get crude and natural gas from Russia at the latter country’s domestic prices. Considering this experience, the project of EurAsEC’s common economic space embraces the energy sector in full. Furthermore, the fact that the share of products that Kazakhstan and Belarus can make from local raw materials and components does not exceed 10 percent of the country’s total production volume and that there are no formal barriers to trade within EurAsEC (while they number more than 300 on the territory of the CIS) makes EurAsEC the most appropriate project for the first stage of economic integration.

The idea of a customs union inside EurAsEC provided for creating a united customs territory, lifting customs control on the internal borders between the member states, and unifying mechanisms for regulating the economy and trade. It was formalized in the Treaty on the Customs Union and the Common Economic Space, which the leaders of Russia, Belarus, Kazakhstan, Kyrgyzstan, and Tajikistan signed in 1999 and which laid the groundwork for the creation of EurAsEC in 2000.

At a joint CIS-OSCE-EurAsEC summit in Dushanbe in the fall of 2007, Vladimir Putin announced plans to establish a customs union and a supra-national commission in charge of customs regulations. He also said the parties to the future customs union had agreed to concentrate negotiations on the EurAsEC platform and to refrain from creating a separate organization. As a result, the summit passed a decision to form the EurAsEC Customs Union comprising Russia, Belarus and Kazakhstan.

The Customs Union project that was announced before the onset of the global economic and financial crisis has become especially important now. The desire to protect internal markets from cheap imports stems from the low competitiveness of the goods produced by the participating countries and from the fact that these products are in demand only on the post-Soviet markets. One more reason for the revival of the “customs troika” idea was the realization that the united customs zone within the borders of Russia and Belarus had proved to be of low efficiency. Also, Moscow simply could not ignore the emergence of a contending European project – the plans to create a free trade zone affiliated with the EU and conceived in the format of the EU’s Eastern Partnership initiative, which Azerbaijan, Armenia, Belarus, Georgia, Moldova and Ukraine were invited to join as participants.

RUSSIA-BELARUS CUSTOMS ZONE

Russia and Belarus have gained their own, largely deplorable experience with their bilateral customs zone, opened in February 1995. Belarusian state-controlled industries that had gotten used to financial and tax support from the government received a practically unlimited access to the Russian market. The Russian manufacturers of tractors, agricultural machinery, trucks, sugar, and dairy products felt the impact almost immediately. A tentative result of this could be seen in the vanishing of the tractor industry in Russia. On the other hand, it turned out that the Belarusian government blocked access to its own market for Russian manufacturers by highly composite non-tariff restrictions.

Uncoordinated customs tariffs pose another lingering problem. Even in April 2009, or 14 years after the inauguration of the customs zone, customs tariffs between the two countries remained 95 percent coordinated, according to Alexander Shpilevsky, the chairman of Belarus’s State Customs Committee. The disputed five percent refers to positions that are highly sensitive for the Belarusian side.

As a result, a massive inflow of contraband into the Russian customs territory began as of 1995. Experts usually illustrate this by referring to the company Torgexpo, which used the Belarusian authorities’ umbrella to organize an amassed import of Polish alcoholic beverages to Russia. Russian researcher Irina Selivanova estimated the customs fees levied by Belarus in 1997 alone for the cargoes hauled across the Belarusian section of the Union State border at around $100 million, while estimated losses from the non-delivery of cargoes crossing the same section of the border and bound for destinations in Russia reached $600 million. In 1996, the same losses reportedly stood at around $1 billion. Other assessments say Russia’s losses totaled about $4 billion from April 1995 through April 1997. Consignments of tropical fruit and cane sugar with certificates of Belarusian origin would regularly surface on the Russian-Belarusian border.

In 1998, the Russian authorities installed customs control posts on the border between the two countries to stop the inflow of commodities from third countries to the Russian customs territory from Belarus. Russia did manage to attain at least some degree of order, but various trade wars – the sugar, meet, confectionary, and dairy ones – began since then.

Belarusian customs officials misused the imperfections of the customs zone law to grab the right to control the Russian customs space. The confiscations of transit goods and transport vehicles at the turn of the century assumed a scale huge enough to enable the Belarusians to open a chain of Confiscated Goods stores in Minsk. The peak of this activity fell on 2005 when the value of confiscated goods reached more than $200 million. The presence of Russian customs officials in Brest did not cool down the confiscatory zeal of their Belarusian counterparts. On several occasions, works of art and antiques were expropriated by Belarusian customs officers and border guards in Brest and consigned to Belarusian museums, which caused a stir among the public. Although no customs formalities are exercised on the Russian side of the border in Smolensk, in keeping with the customs zone law, the return of the values to Russia has never been discussed.

On the whole, the customs zone within the format of the Union State has proven to be inefficient. The structure and regulations of the zone gave unilateral benefits to the Belarusian side, which has brought the economic integration between Moscow and Minsk to a halt.

THE ROAD TO THE CUSTOMS UNION

The pitiable experience of the Russian-Belarusian customs zone should be taken into account in creating the EurAsEC Customs Union. Against the background of Russia’s yet another failure in getting membership of the World Trade Organization, the political rationality of an efficacious regional integration initiative has apparently grown, and the Customs Union project has been a top priority since spring 2008.

A supranational body of the Customs Union – the Customs Union Commission – was established on December 12, 2008. A body of this kind was absent in the Russian-Belarusian customs zone. The member states reached agreement on a unified customs tariff in June 2009 and endorsed a schedule for creating a unified customs territory. As of January 1, 2010, the Customs Union is functioning on the basis of the unified customs tariff, and a unified Customs Code goes into effect as of July 1, 2010.

President Dmitry Medvedev, who spoke at a session of the EurAsEC Interstate Council on November 27, 2009, welcomed the signing of the trilateral Customs Union founding documents by the presidents of Russia, Belarus and Kazakhstan. “This is indeed a very significant event, a long-awaited one, and the product of some very difficult negotiations,” he said. “Despite all the difficulties that we have encountered in this process, we have now reached a new stage of cooperation within the framework of the Eurasian Economic Community.”

Russian politician Sergei Glazyev, one of the main promoters of the Customs Union idea, believes that economic integration with neighbors in the post-Soviet space will rescue the Russian economy. For instance, as he spoke about the Russian leadership’s policies in the conditions of the crisis, he mentioned the importance of setting up “a settlement and payment system and a common payment space for the EurAsEC member-states, with the participation of the CIS Interstate Bank.” This means his plan suggests skipping three steps of economic integration and getting closer to a monetary union – the last economic stage after which political integration follows.

Glazyev proposes sweeping integration measures as a remedy for the economic crisis, including the removal of barriers between CIS countries, the abolition of all exemptions from free trade in bilateral agreements between CIS countries, and the creation of a common transport and energy space. Glazyev also proposes ruling out protectionist measures in trade inside the CIS, introducing a common railway tariff, ensuring the national regime for pipeline transport for enterprises domiciled in EurAsEC countries, and mutually recognizing national product quality certificates, technical regulations, and sanitary and phytosanitary norms. The bulk of these measures have been taken into account in creating the Customs Union. The only exception is a common transport and energy space. Integration in the energy sector is part and parcel of the Common Economic Space, or the third phase of economic integration.

It looks like the experts just did not have enough time to examine the project in the format conventional for the academic community, given the project’s political significance. In essence, Glazyev proposes repeating the methodological error of the Russia-Belarus Union State, as skipping stages was one of the causes of its stagnation – the partner states mired down in the free trade zone (the second stage out of five) and simultaneously tried to step up their political integration, which is the highest form of unification.

THE FIRST PROBLEMS

The main problems that surfaced in the initial phase of the functioning of the unified customs territory can be classified into economic and political ones. It makes sense to analyze the political problems first, since they quickly acquired the quality of inter-state crises. The Belarusian leadership displayed the biggest zeal towards gaining immediate benefits from the Customs Union. Minsk demanded that Moscow supply it with 21.5 million tons of crude oil free of customs duties, which would be tantamount to a subsidy of $5.5 to 6.0 billion on the part of Russia.

The issues of regulating exports of energy resources lie outside the sphere of the Customs Union’s operations. In the first phases of the Union’s activity and with due account of the gap between internal and international prices, this kind of trade in energy resources and strategic raw materials, including non-ferrous metals, would imply a covert subsidizing of CIS countries by Russia. Agreements signed in November and December 2009 moved the ‘hydrocarbon issue’ to the domain of the CES. Still, this did not prevent Kazakhstan and Belarus from demanding an immediate and sharp reduction of fees for the transit of Kazakhstani crude to Belarusian oil refineries. “Kazakhstan confirms that the creation of the Customs Union opens broad opportunities for the transportation of Kazakhstani oil to two oil refineries in Belarus,” Anatoly Smirnov, Kazakhstan’s ambassador to Minsk, said in January 2010.

On January 27, the Belarusian government agreed to sign protocols on the supply of Russian crude oil to Belarus and on oil transits via the Belarusian territory on Russia’s terms. Yet Belarus proposes revising the documents after July 1, 2010, when the Customs Union countries endorse the unified customs tariffs and enact the Unified Customs Code. Minsk hopes that the Union will enable it to re-export Russian hydrocarbons. “We must develop friendly relations with Belarus, particularly in line with the decisions taken by our Customs Union between Russia, Belarus, and Kazakhstan,” Dmitry Medvedev said commenting on the signing of the protocols. “We are currently working on a package of new procedures. We will have a unified customs tariff, a Customs Code, and ultimately, we are working towards laying the foundation for the Common Economic Space’s operation.”

The very fact of joining the Customs Union stirred up the activity of anti-Russian oppositionist and nationalistic forces in both Belarus and Kazakhstan. Oppositionists in Minsk have voiced apprehensions that the Union will restrain Minsk’s opportunities within the EU’s Eastern Partnership program, which Minsk joined on May 7, 2009. In Kazakhstan, some quarters claim the country is not ready for the second stage of economic integration. “Kazakhstani industries must take steps to defend themselves against strong pressure on the part of Russian businessmen,” Kazakhstani analyst Dosym Satpayev believes. “Russia’s huge natural resources, the relatively well-developed industrial sector and competitive products will most likely gain preferential positions on Kazakhstan’s markets over the next three to four years.”

The Customs Union has become an economic reality, although it has only one instrument – coordinated customs duties. The coordination techniques were not transparent and mostly took account of the interests of Kazakhstani and Belarusian producers rather than the Russian market, whose volume exceeds 90 percent of the aggregate market of the Customs Union. For instance, the customs duty for agricultural machinery (harvesters) was defined with account of the interests of the Belarusian company Gomselmash, not Russia’s Rostselmash.

The future of the Unified Customs Code is obscure. Under the formal Action Plan for the Introduction of the Customs Code, which the EurAsEC Interstate Council endorsed on November 27, 2009, the document goes into effect on July 1, 2010. Until that date, the customs services of the member-states should act in accordance with their national customs legislations. In other words, the unified customs territory lacks a coordinated policy.

For instance, the emergence of the unified customs space on July 1, 2010, means that all customs offices at the Russian-Belarusian and Russian-Kazakhstani borders must be removed while the customs control formalities will transfer to the Union’s outer borders. In theory, this should bring into existence mixed Russian-Belarusian and Russian-Kazakhstani controls. Yet it appears that only the Kazakhstani and Belarusian customs officers will guard the outer borders of the Union for the time being, thus replicating the situation within the Russian-Belarusian customs territory in the second half of the 1990s. Russia, in fact, once again relegates control over the outer borders to its neighbors, counting on their good faith.

Access to the databanks of Belarus and Kazakhstan’s National Customs Committees – most likely in the framework of an Integrated Information System (INS) – will not solve the problem of control for Russia: in the first place, because the INS has not been created so far; and, in the second, due to the doubts that the information uploaded in those databanks reflects the actual commodity flows crossing the outer border of the Customs Union from the west and from the east.

The first tendencies in the functioning of the unified customs zone came forth by the end of January 2010. They were generally unfavorable or even dangerous for the Russian budget. In the first place, a problem emerged concerning the difference in the minimum customs values of various commodity groups in the member-states. For instance, according to the document No. PR 6402121000 of the Federal Customs Service, the difference for footwear is measured by an order of magnitude, and this has already diverted Chinese shoe exports from Russia to the customs offices of Kazakhstan and Belarus. In addition, the VAT rate in Kazakhstan is 13 percent versus 18 percent in Russia. As early as July 1, Belarus and Kazakhstan will be able to launch the re-export of non-energy raw materials, the export duties for which are higher in Russia than in the other two countries. For instance, Russian export duties for round timber are planned to be increased to the prohibitive level of 80 percent from the current 20 percent.

The Unified Register of Goods subject to bans or restrictions for imports to or exports from the EurAsEC Customs Union in the process of trade with third countries took effect on January 1, 2010, along with the Guidelines for the Imposition of Restrictions. For this reason, the import of electronic and high-frequency equipment practically stopped in January, as the procedures for the issuance of import permits for these technologies remained unsettled. The situation began to improve only in the first days of February.

In the field of non-tariff regulation, the parties have coordinated the Unified Register of Goods subject to bans for imports from or exports to third countries, and regulations for applying restrictions to the goods specified in the register. Nonetheless, the practices of monopolistic “special importers” (Belarus) who can bypass any restrictions persist and are even growing. It is not clear, for instance, how the Russian market can be protected against the inflow of Georgian wines that are sold absolutely freely in Belarus.

Russia, Belarus and Kazakhstan have not yet agreed how they will distribute import duties among themselves. Astana and Minsk expect sizable tax payments to their national budgets due to their transit status. To solve this problem, on December 27, 2010, Russia put forward an idea to establish a supranational Customs Union Treasury. The proposal reflects Russia’s concern over the viability of mechanisms for distributing the monies to be remitted to the countries’ budgets after the collection of customs duties.

Of special concern are regulations for the activity of the CIS’ first supranational integration body – the Customs Union Commission, made up of representatives of the three participating nations. It is believed that decisions on crucial issues should be taken by the commission by consensus. Yet the list of such issues has already climbed to a figure of 600, according to Belarusian President Alexander Lukashenko, who seems to be quite content with the fact, although it makes the operation of the supranational agency meaningless. In fact, Russia, whose market forms the backbone of the Customs Union, has found itself in the position of a junior partner of the two transit countries. Nonetheless, it has already submitted proposals to the Commission for changing four positions of the unified customs tariff (January 25, 2010).

The launch of the Customs Union’s operation has revived hopes for quick profits in both Belarus and Kazakhstan, which are reviving old contraband schemes, making calculations and figuring out new routes. The lifting of customs control on the Russian borders will open “a window of opportunities” for a massive commodity intervention. In this connection, the rising activity of customs agencies in Kazakhstan and Belarus deserves attention. For instance, the Belarusian customs agency hopes to regain the powers to regulate supplies of transit goods to the Russian market. It is actively leasing warehouses for the future storage of confiscated goods.

The Customs Union is being formed hastily and on the basis of contradictory written and verbal agreements. The process is clearly politically biased. Integration in this case is used as a political drive engine for external political trends (problems with Russia’s accession to the WTO, certain pressures on the EU, etc.) and internal ones. In the meantime, an error made during the creation of the Customs Union within EurAsEC may have a huge price and serious political – aside from economic – consequences. The tsunami of cheap run-of-the-mill goods from third countries, which may fall upon Russia via Belarus and Kazakhstan on July 1, 2010, may turn this country into a huge bazaar with low-quality merchandise and ruin a big part of Russia’s small and medium-sized businesses.

Integration does not tolerate vociferous political campaigning. It is a double-edged weapon that can bring sizable benefits and heavy political and economic aftermaths likewise. These aftermaths will have to be eliminated at the price of the huge loss of resources and a political crisis. A collapse of the Customs Union project, which is not ruled out if the project is poorly conceived, will mean Russia’s loss of the status of the main force steering integration processes in the post-Soviet space. This will push the CIS into the sphere of integration processes designed by external forces – the EU, China, etc.