New Eurasian Momentum

14 december 2015

How to Make Integration Effective

Timofei Bordachev is an Associate Professor at the Faculty of World Economy and International Affairs, National Research University-Higher School of Economics (HSE), Director of the Centre for Comprehensive European and International Studies (CCEIS).

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Resume: For hundreds of years Eurasia was nothing more than a “bridge” and a place where external actors could realize their interests. But today it is for the first time acquiring its own significance. In the future, it will seek to build a broad Eurasian community encompassing not only the Eurasian Economic Union and China as its “core,” but also other regional players.

This article is based on the results of a situation analysis, “Ways to Integrate the Eurasian Economic Union and the Silk Road Economic Belt,” conducted under the guidance of Sergei Karaganov, Dean of the School of World Economics and International Relations at the National Research University–Higher School of Economics.

Central Eurasia is embarking on a major transformation to change its economic and political system. The growing rapport between Russia and China, progressing Eurasian integration, and Beijing’s reciprocal trade and investment initiatives have added new dynamics to this process. The implementation of the joint statement of the presidents of Russia and China on the integration of the Eurasian Economic Union (EAEU) and the Silk Road Economic Belt (SREB) projects helps not only identify areas of cooperation within the EAEU and with China, but also assess related challenges.

Forming an independent center of growth in Eurasia, predominantly in its central part – Siberia, Kazakhstan, western provinces of China, and Central Asian countries – can become one of the most important geo-economic and geostrategic processes in the first half of the 21st century. For hundreds of years Eurasia was nothing more than a “bridge” and a place where external actors could realize their interests. But today it is for the first time acquiring its own significance. In the future, it will seek to build a broad Eurasian community encompassing not only the Eurasian Economic Union and China as its “core,” but also other regional players.

However this process, driven by constructive cooperation between Moscow and Beijing, has drawn skepticism, especially in the West, where the general assumption is that a new center of power cannot be created because of allegedly intractable differences between Russia and China. In point of fact, none of these purported differences between the two major Eurasian states is objective, deep or antagonistic. And none of them arises out of their vital needs. Russia’s national development goals do not require a conflict with China over Central Asia, and vice versa. Both great powers are trying to find new resources and opportunities in their common neighborhood – labor in one case and broader investment horizons in the other. Both Russia and China are vitally interested in regional security and the stability of their political regimes.

THE SILK ROAD FOR EURASIAN INTEGRATION

This does not mean, however, that there is nothing to jeopardize the EAEU-SREB integration (which can serve as the basis for a Greater Eurasia). On the contrary, Russia itself, without outside prodding, may lose the “Eurasian momentum” due to red tape, interdepartmental competition and inertia. To avoid that, the large Eurasian project should be singled out as a separate aspect of ??foreign and foreign-economic policy, get dedicated expert and administrative resources, and involve interested private partners. As a matter of fact, China has already established a new post of deputy foreign minister for Eurasian affairs.

These efforts must be fully coordinated with those of Eurasian integration institutions, and Russia’s partners in the EAEU should be invited to join in. This is especially important because Eurasian integration is Russia’s leading foreign policy project. The best format for doing that would be a “big” treaty among the EAEU, its member countries, and China. This would help to extend cooperation between the EAEU and China to areas that are not yet regulated by EAEU supranational bodies, take full account of the EAEU member countries’ national priorities, and avoid relegating cooperation with China to bilateral contacts.

Russia’s main goal is to turn the Economic Belt into an instrument for strengthening and improving the EAEU, to prevent their competition and, in the long term, to use Economic Belt resources as the basis for building an economic and political Greater Eurasian Community. Another ultimate priority, also reflecting China’s vision of the Economic Belt project, is the development of meridional transport and logistics corridors and cross-border cooperation clusters.

Every effort should be made to strengthen institutions that coordinate EAEU members’ policies vis-à-vis China during its projects launched as part of the Silk Road Economic Belt initiative. For example, it would be advisable to consider establishing the institution of permanent representatives of the EAEU member states at the Eurasian Economic Commission and creating a new permanent EAEU intergovernmental committee. A negotiating delegation could act as such a coordinating entity pending the conclusion of an EAEU-China agreement. With time, the delegation may be institutionalized within the framework of a Russian-Chinese body that will oversee the implementation of future agreements and the preparation of regular meetings of heads of state and government, a mechanism for which should be provided for in the agreement.

EAEU-China relations cannot be viewed as purely commercial. The Economic Belt initiative is an infrastructure and investment project, which presupposes shifting the focus to harmonization of technical regulations and particularly the adoption of EAEU regulations by China, which is seeking to invest in the Eurasian Economic Union, as well as to mutual recognition of technical standards. The degree of such harmonization and simplification of technical regulations should be determined separately for each commodity group.

For China, the integration of the EAEU and the Economic Belt projects, and the construction of a new Greater Eurasia are as important as they are for Russia. The United States is trying to restrain China and limit its influence. Theoretically, this policy may change, but rivalry between China and the U.S. on the global level and at sea will keep growing. Beijing is vitally interested in having a safe and friendly environment on land, moving West, and finding new markets there and in the Southwest. However, because of the Asian mentality and China’s lack of experience in implementing large-scale geostrategic projects, these efforts will take more time than Russia would like.

As noted above, the consolidation of the EAEU and SREB projects may face the greatest risk if they are split into unrelated and uncoordinated national lines of cooperation with Beijing. There are some objective and subjective factors that may create such a risk, despite the agreement in principle to develop cooperation between the EAEU and China. Beijing does not seek to divide the EAEU, but it will certainly not object if EAEU member countries choose to cooperate on a bilateral basis. In fact, the latter would generally be most suitable for Beijing. Expert debates held recently at the Higher School of Economics and the Valdai International Discussion Club revealed the need to keep bringing it to Beijing’s attention that the EAEU-China format is the central one and that it should not be reduced solely to trade relations. Also, Russia should be in constant contact and dialogue with its EAEU partners, reminding them that as relatively small and weak states they will gain the most from a multilateral format.

Indirectly, the risk of shifting the EAEU-SREB integration to the bilateral level is increased by the passive position of the Eurasian Economic Commission (EEC) due to its limited powers. On May 8, 2015, the Supreme Eurasian Economic Council authorized the EAEU Council (that is, member countries acting on the basis of consensus) to approve directives for conducting negotiations on the scope of the future agreement. Until then, the Commission may not enter into talks with China on any issue beyond its competence, such as concrete commitments on trade in services, financial cooperation or investment. Its prerogative extends only to the preparation of a non-preferential trade agreement with China, although the latest directive of the Supreme Council of October 16 authorized the Commission to coordinate the activities of the EAEU national governments on cooperation with China. Meanwhile, the Eurasian Economic Commission has been reserved about the possibility of actively using non-tariff instruments (technical regulation, phytosanitary norms and standards, regulation of the labor market, etc.) for interaction between the EAEU and China. The EEC’s competence should be extended to new areas, primarily transport and investment. The Supreme Eurasian Economic Council (heads of state) can do this by amending the EAEU Treaty.

STANDARDIZATION AND HARMONIZATION

The Chinese initiatives are based on infrastructure projects that cannot be subject to regulation under trade agreements. This is why standardization (above all, in construction) and financial issues should come to the fore. The EAEU has already taken some serious steps in the sphere of non-tariff regulation. Article 52 of the EAEU Treaty describes the main goal of technical regulation as “the safety of consumption, health and life.” Working out a common approach in any area of technical regulation within the EAEU would be a major achievement per se, and this should be made clear to the Chinese partners who may want to enter the EAEU market. Since the safety of consumption, health and life is not yet a strong point of the Chinese development model, harmonization with China can only be possible if it adopts EAEU regulations.

On the whole, active harmonization of the EAEU and Chinese technical standards is not yet the most promising aspect of the EAEU-SREB integration process. The EAEU member countries’ own standards present a model of competitiveness worked out through great effort and mutual concessions. They are a kind of non-tariff regulation tool and a mechanism of mirror-image policy towards both Europe and the East. At this point, only individual regulations can be synchronized if they have not become effective yet in the EAEU (and if this is economically advantageous). In general, the EAEU should seek to achieve the goal of Article 52 of the EAEU Treaty throughout the Union and develop a common approach to assessing Chinese investment proposals for their conformity with the “safety of consumption, health and life” requirements. Perhaps, the EAEU should set up a special committee comprising representatives of the EAEU member countries and the EEC in order to make such assessments.

As an acceptable option, the parties could mutually recognize their standards after discussing them at the EEC’s meetings with relevant Chinese ministries and key businesses. But while accepting some of the Chinese proposals, Russia should make sure it does not lose its own negotiating leverage and enjoys reciprocity in areas where the positions of Russian companies were or have recently become strong (for example, metallurgy or some segments of machine-building).

Another advantage of the EAEU is its uniform tariff and non-tariff policy across the vast territory of its five members, as well as information exchanges on common standards. This refers, above all, to tariff regulation for the correct calculation of customs duties for Chinese imports to the EAEU, and to non-tariff regulation which includes technical regulations as well as rules of interstate power transmission and access to the services of natural monopolies, detailed in an annex to the Treaty.

As regards finance, the EAEU should attract Chinese capital into projects to build infrastructure which is of interest to China but on terms that will benefit the EAEU in general and Russia in particular. Experts say that the lack of investment guarantees is a major obstacle to a massive influx of Chinese capital. Investment regulation and protection is a most important issue to be addressed by EAEU and Chinese officials.

Russia and China have an investment protection agreement which allows them to take their disputes to an international arbitral tribunal. However, neither has done this so far, and it would be helpful if such a practice were established at last or there were other ways to ensure the parties’ compliance with the rulings of international arbitral tribunals in investment disputes. Potentially, both sides could establish a new arbitral tribunal (or use the existing one if so agreed) that will have their full trust. One example to follow is Singapore where investment relations are governed by universally recognized English common law and where judicial institutions have political independence. But it would also be possible to consider establishing a special arbitral tribunal under the authority of the Shanghai Cooperation Organization and seated, for example, in the free port of Vladivostok or Hong Kong.

Unfortunately, the Customs Union, the Common Economic Space, and now the EAEU have long been ignoring the issue of special investment regime (even as regards mutual investment). Cooperation with China can expedite its introduction in the EAEU. Nuances concerning investment protection and guarantees, and the settlement of investment and other disputes should be addressed within a legal framework detached from concrete (bilateral) agreements focusing on specific issues.

INFRASTRUCTURE DEVELOPMENT VECTORS AND THE FUTURE OF TRADE

It is crucial for Russia to take an active position on infrastructure development and orient it strategically towards the East. According to expert estimates, 60 to 70 percent of transport infrastructure construction projects in Russia are implemented within fifty kilometers from Moscow. To get the maximum effect from the SREB for the development of Russian regions, the focus should be shifted to the infrastructure of Siberia and the Russian Far East: Russia should suggest that China supplement the key latitudinal route of the Economic Belt with meridional ones in order to link these regions with markets that are truly enormous. This will benefit major producers in agriculture, petroleum and gas chemical industries, not to mention the energy sector, while small and medium-sized businesses will get new opportunities for growth and development.

Experts are already discussing possible ??meridional routes to link Russia with emerging markets in China, and Central and South Asia. The most frequently mentioned routes lie across the Altai, Mongolia, and the Caspian Sea to Iran and India. Beijing insists on building (using Chinese loans) a high-speed railway between Moscow and Kazan in hope to find new markets for its technologies, investments and labor. But Russia (with the exception of certain interested companies) does not need this railway, for it would only increase the country’s debt while producing a minimal or even negative economic effect. It would be much more efficient to use this capital and technologies in Siberia and the Russian Far East, developing the transport network in the region and linking it with prospective markets in the South.

Russia should carefully consider all pros and cons of each route. Interested in the export of goods and services, China will actively lobby for investment projects in Russia to be financed with Chinese tied loans, regardless of whether they will benefit the Russian economy or not.

Russia’s non-resource sectors, including export-oriented ones, are increasingly willing to broaden relations with China. The main reason for such eagerness is the weakening of the Russian ruble, which has made Russian companies more competitive. As a result, manufacturers in certain sectors are ready not only to protect their own markets from Chinese products but even to expand into China.

There are two major obstacles, though. The first one is the underdevelopment of meridional infrastructure, which can be overcome by developing the SREB and integrating it with the EAEU. Simultaneously, the authorities should address problems associated with the operation of Russian Railways and causing entrepreneurs’ complaints about the timing and the cost of its transportation services.

Overcoming the second obstacle may require additional government interference. Russia’s Federal Antimonopoly Service (FAS) until recently  penalized companies that sell their products abroad at prices lower than at home. But dumping appears to be a rational strategy for capturing foreign markets for non-resource exports. So suspending such FAS practices could only benefit the Russian economy.

Russian exporters can be further encouraged through advocacy advertising. Since the future format of relations with Beijing depends, among other things, on the intensity of Russian business relations with China, the slogan “Sell in China” can be accepted and supported both inside the country and by its partners.

A new platform is needed for dialogue among EAEU and Chinese business circles and other countries wishing to join SREB projects in the Eurasian Economic Union. Russian organizations and business associations (for example, the Chamber of Commerce and Industry, Business Russia, etc.) could also be invited to take part. But it is essential that current issues be addressed not in Moscow but in regional offices.

The development of trade corridors cannot be considered without discussing conditions for organizing corridors for the movement of people. It would be advisable for the EAEU and China to pool their efforts in addressing labor migration issues and providing social protection to migrant workers. The EEC (EAEU) has the necessary competence for that under Article 96 of the EAEU Treaty. Although, according to the OECD, Russia was the second largest host for migrant workers in 2013 after the U.S., it has not yet achieved the goals of its migration policy as only low-skilled workers from post-Soviet countries eagerly come to work in Russia, while its economy needs fully trained middle-skill employees.

This requires a sectoral approach to labor migration: the EAEU should adopt procedures facilitating entry for engineers, investors and entrepreneurs from China and other Asian countries; revise rigid quotas for temporary employment; simplify migration registration and medical control formalities for Chinese workers to a reasonable level; guarantee mutual benefits for young specialists; define student migration; and give Chinese students in EAEU countries some time after graduation to find a job without the need to return to China for a new visa. In any case, even a declaration of such intent will win China’s support and allow the EAEU to bargain for concessions in other areas.

Although investment and infrastructure are Russia’s focal points in the EAEU-SREB integration process, China will most likely soon raise the issue of a free trade area with the EAEU. The devaluation of the ruble has given Russian businesses certain advantages, increased the competitiveness of some industries even as compared with Chinese companies, and paved the way for advancing Russian goods to the Chinese market. On the whole, however, Russia is not ready for a full-fledged free trade area with China, which the latter views as the next step in the EAEU-SREB integration efforts.

Russia needs to step up dialogue on non-preferential trade agreements with other countries (South Korea, Singapore) or free trade areas (Vietnam, India, Israel, Egypt, Iran). In the future, this will help to attract investments to Russia, create a regional precedent for a trade agreement on terms favorable to Russia and, in the long run, even out Russian-Chinese imbalances.

In the short time since the EAEU was established, its members (in particular, foreign ministries) have developed structural interaction, but coordination with respect to the SREB and its integration with the EAEU is still far from perfect. Paradoxically, the Eurasian Economic Commission has the mandate to conduct negotiations with Beijing, but there is no overall EAEU document on integration with the Chinese project yet. As a result, the EEC has to deal with different interests and positions of EAEU countries which only want to receive multi-billion dollar investments from China. This factor greatly reduces the Commission’s freedom of action. The EAEU members should promptly develop a common approach to all issues pertaining to the EAEU-SREB integration.

Since it is difficult now to consolidate EAEU countries into a monolithic entity, a broader platform is needed for harmonizing their interests. The Supreme Eurasian Economic Council could be a good choice, but its level is too high and rules out regular meetings. So there should be a lower-level platform with enough competence for dialogue. At the initial stage, deputy prime ministers in charge of Eurasian integration could play this role. The EAEU could draw from the experience of the European Union’s Committee of Permanent Representatives which has been working quite efficiently. Geographically, such a “political” committee could be headquartered in one of the EAEU capitals (preferably not in Moscow). Since its establishment is naturally linked with the need for the EAEU countries to consolidate their positions on integration with the SREB, the committee could be seated in Astana or Almaty.

The Silk Road Economic Belt initiative requires the EAEU countries not only to work out common approaches to technical regulation and a coordinated position on a free trade area with China, but also take practical steps to build infrastructure, commission new production facilities, etc. (Competence of the member countries, bilateral track of relations with China). A new treaty (or some other agreement) with China on the EAEU-SREB integration should apparently be concluded as a “mixed” three-level agreement among the EAEU members, the EAEU, and China (SREB), where the EAEU is the main cementing element expected to lead the way for both its members and Chinese partners.

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Russia’s foreign policy is entering its Eurasian period. For it to become a success story, Russia should re-examine cooperation formats and assess threats, both internal and external, that can play into the hands of common enemies or amplify the impact of objective external circumstances. In other words, it needs to know what bricks will be used to build what has been officially called a “Eurasia of common destiny.”


Taking part in the situation analysis were S.A. Afontsev, Professor of the Department of World Political Processes at the Moscow State Institute of International Relations; M. Ya. Blinkin, Director of the Institute for Transport Economics and Transport Policy Studies, National Research University–Higher School of Economics; T.V. Bordachev, Director of the Center for Comprehensive European and International Studies, National Research University–Higher School of Economics; M.N. Yevdokimov, Director of the First CIS Department, Russia’s Foreign Ministry; N.B. Kondratyeva, Associate Professor of the Department of International Relations, National Research University–Higher School of Economics; K.V. Kuzovkov, member of the Board, FESCO Transportation Group, Vice President for Investment and Development; Ye.M. Kuzmina, Head of the Sector for Economic Development of Post-Soviet Countries at the Center for Post-Soviet Studies, Institute of Economics, Russian Academy of Sciences; A.V. Lukin, Director of the Department of International Relations of the School of World Economics and World Politics, National Research University–Higher School of Economics; V.A. Ryzhkov, Professor of a department; I.A. Safranchuk, Associate Professor of the Department of World Political Processes, Moscow State Institute of International Relations; A.S. Skriba, research fellow at the Center for Comprehensive European and International Studies, National Research University–Higher School of Economics; A.N. Spartak, Director of the Russian Market Research Institute; S.V. Chernyshev, assistant to a member of the Board (Minister) of the Eurasian Economic Trade Commission.

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