For the first time Russia’s efforts to reintegrate ex-Soviet states might be on a roll
Whilst financial markets continue to lash at Europe’s grudging steps towards tighter economic integration, steady progress in neighbouring Eurasia have gone virtually unnoticed. More than a year after a customs union between Russia, Belarus and Kazakhstan took effect, the three states have now agreed to expand it to a ‘Common Economic Space’, based on free movement of goods, services, and capital. Even bolder, a recent summit committed to formalize convergence in an ‘Eurasian Economic Union’ by 2013, and considered cementing the grouping with a single currency further down the line.
A big thing? Well, for Russia, it probably is. Past attempts to bring the former communist republics closer, such as the CSTO (see yesterday’s Wall), or the Eurasian Economic Community, have yet to produce more than unbinding verbiage and pats in the backs. But this time, it’s real stuff - ‘the first step towards restoring natural and economic ties in the post-Soviet space’, says Putin.
To be sure, the union has already paid good dividends to its members. By creating a single market of 165m people - 60% of the former Soviet population - the removal of tariffs and custom controls has fuelled a 43% increase in trade between the three signatory states last quarter. In the longer run, it will also facilitate business development and help rebuild horizontal partnerships that foundered when USSR collapsed.
But does that matter to the rest of world? It does, for a variety of reasons. On the plus side, it may indirectly force Russia to improve its chilly business climate, where other attempts have either failed or look like mere window-dressing. A single market will instil a healthy dose of competition between business environments: officials in Astana are already talking of luring Russian companies to re-incorporate in Kazakhstan, which they say offer a more stable climate.
On the minus side, countries outside the zone might suffer, rather than benefit, from the deal. Goods and services will be allowed to move freely within the zone, but outsiders will be exposed to higher tariffs and trade barriers. The deal might prove counter-productive even for its members, as regional agreements between developing countries, some economists argue, end up producing welfare-reducing trade diversion.
Yet the biggest caveat is political - it is not clear whether the union will deliver on its promise to stabilize the region, or end up dividing it further. Mainly because Russia’s motives behind forging a union it dominates may have more to do with throwing its influence around than improving everyone’s welfare. On its Eastern flank, Moscow efforts effectively contains China’s advances by tying in the most populous country of Central Asia - Kazakhstan. It is now luring Kyrgyzstan and Tajikistan with the same intent. This will undoubtedly create insiders and outsiders, thus accentuating fault lines in an already flammable Central Asia.
On its Western frontier, Russia’s support keeps near-bankrupt Belarus on a leach and kills in the nest any potential shift of its disgruntled president towards the EU (it has also allowed Moscow to grab some pretty valuable energy assets as a bonus). The next battlefront is Ukraine, where Moscow’s efforts to associate president Yanoukovitch directly targets Kiev’s projects of free trade agreements with Europe. Each time Russia plays on energy-related carrots and - mainly - sticks to persuade hesitant neighbours to sign the deal.
There is a slight chance that Russia’s eventual intentions could be more benign, however. Ultimately, Putin’s stated aim is to form a grand trade alliance with the European Union - and the success of a Eurasian common market would arguably provide Russia with the adequate track record, as well as with a bargaining tool, to help start negotiations with Brussels. After 15 years of failed attempts to access the WTO, this looks like a wise strategy. Yet given Europe’s chilly welcome to the initial project, and its current difficulties at tidying up its own union, negotiations are unlikely to start full throttle.