The Eurasian Economic Union: a force for good?

Is the EEU a reincarnation of the USSR or a genuine enterprise for regional economic development?

Leaders at the meeting of the Supreme Eurasian Economic Cooperation Council in the Kremlin, December 2013. Some are threatened by the union, believing it to be reminiscent of the USSR
Leaders at the meeting of the Supreme Eurasian Economic Cooperation Council in the Kremlin, December 2013. Some are threatened by the union, believing it to be reminiscent of the USSR 

On January 1, the Treaty of the Eurasian Economic Union came into effect for its four founding members, Russia, Belarus, Kazakhstan and Armenia. For the first time in the post-Soviet space, an economic alliance based on the principle of equal representation has been created, with claims to enable the free movement of capital, goods and labour among member states. A more integrated and evolved entity than both the Customs Union and Single Economic Space, the EEU plans to enforce a single market for oil and finance by 2025. Kyrgyzstan is expected to join the EEU in April, with other prospective members, such as Tajikistan and Vietnam, currently in talks.

The union constitutes a population of 175 million people and a total GDP that is expected to reach $3trn next year; consequently it offers a plethora of investment opportunities for the region. The EEU ranks first in the world for both oil and gas production, and third for iron production, making it a sizeable economic force to reckon with in the international arena. “Countries inside the EEU and from outside are now able to tap into a mammoth depository of industrial, agricultural and natural resources,” comments Dr Marcus Papadopoulos, Editor of Politics First magazine and expert on Russia and the former Soviet Union.

European fears of a Russian imperial takeover of former Soviet countries have been frequently voiced, particularly in light of recent events in Crimea. Disapproval has also been raised by other countries in the region, including societal pockets in the member states themselves who fear a loss of national sovereignty. Yet, Papadopoulos argues that current member states joined the union voluntarily and did so “as they are historically, culturally and linguistically tied to each other”. Whether economic integration and development is legitimate or not, the union will struggle to shake a reminiscence of the USSR and the threatening image that it has so quickly acquired.

Despite ardent cultural and linguistic links, the union faces a multiplicity of challenges, particularly if regulations are
not enforced

Quarrelling neighbours
Belarusian president Alexander Lukashenko has been a driver of Eurasian integration since the mid-nineties. Yet recent trade disagreements with neighbouring Moscow have resulted in a series of public spats, potentially jeopardising the whole project. “The dispute showed frustration of the Belarusian authorities that this institution is not actually working. All decisions are still made on political rather than technical level. Trade restrictions are used as means for political manoeuvring despite legal commitments”, Yarik Kryvoi, Director of the Minsk-based Ostrogorski Centre tells World Finance. Despite a Russian embargo on the goods of 23 companies, Belarus has not pulled out of the EEU. The dominant reason behind eager Belarusian support of the union comes down to oil; with preferential duties for exports, the country can save a considerable amount of its revenue. Presently, the rate negotiated with Russia is extremely favourable, amounting to $1.5bn and approximately two percent of Belarus’ GDP, according to the European Council on Foreign Relations. This figure can be attributed to Russia’s currently weak bargaining position, and so is far from guaranteed for future deals.

As with other countries in the region, Belarus is also facing financial crisis, with indications that mimic its economic collapse in 2011. Given Russia’s present economic climate, the same level of fiscal assistance that was granted to Belarus may not be feasible this time around. This could add to the rising tension between the two member states, as can recent efforts by Minsk to forge closer ties with Kiev. The result could be a scenario whereby Belarus is unable to draw resources from its powerful neighbour, making the union increasingly undesirable.

Challenges for Armenia
Aside from the obvious geographic impediment of Armenia’s partnership with fellow member states, there are other prominent challenges to contend with also. Despite a period of growth following Armenian independence in 1991, recent global and regional pressures have caused the economy to contract. Since December, the dram dropped to its lowest level since 2006, falling 9.4 percent against the dollar. Concerns of Russia’s economic decline spilling over into Armenia are ample now that the countries are more closely tied, particularly given the repercussions that have already rippled across the region. Furthermore, despite recent sanctions that have created a gap in Russia’s agricultural imports, Armenia did not fill this supply shortage as hoped. In fact, Armenian exports to Russia decreased by nearly $10m to $133m in the first half of last year, even though figures reaching over double that amount in 2013. This rouses further doubts of whether a positive economic impact for Armenia can actually be achieved as a result of closer ties with Russia and other member states.

Of particular concern for the Armenian economy is the sacrifice of its Association Agreement with the EU in order to join the EEU. The benefits of less stringent standards, as well as more flexibility in terms of investment opportunities, allured the economic elites in Armenia. Yet, by joining the union, the country must now engage in risky trade reorientation from Europe to Eurasia. Armenia’s traditional liberalised economy is also obligated to embrace higher tariff rates and more protectionist policies, whereby a loss of trade output is likely, particularly as the country must now renegotiate its terms with the WTO. Perhaps most at risk is Armenia’s thriving IT sector, which accounted for a third of exports in 2013 and a fifth of the country’s GDP. The EEU’s additional regulations for IT and less sophisticated intellectual rights therefore pose a threat to the promising sector, as well as to continued investment from the US. Prices are also expected to rise, indicating a further reduction in exports and making Armenia’s membership with the EEU even more questionable.

Landlocked Kazakhstan
President Nursultan Nazarbayev instigated the idea of the EEU in 1994, and has been a long-standing enthusiast for Eurasian integration. This level of support ties in with the widespread belief that Kazakhstan will benefit the most from the EEU, particularly as it enhances its position within the global market and increases cross-border trade along the 6,846km frontier it shares with Russia. Of particular fiscal significance to landlocked Kazakhstan are the transportation links that the EEU can provide; an evident incentive for membership with the union. Greater prospects for export opportunities lie ahead as the country gains access to each member state’s transport infrastructure by 2025.

In spite of consistent support for the union, Kazakhstan’s economy has developed considerably in recent years, making EEU membership less pivotal for the country. “Now, the principle of acting as an equal partner in the region most likely drives his commitment,” argues Zach Witlin, Eurasia Associate at the Eurasia Group. This is further illustrated by Nazarbayev’s devotion to the project despite growing division within Kazakh society and the creation of an anti-Eurasian Movement in 2014. This internal discord raises the question of whether membership will continue if a new regime is elected in the future; thereby presenting another channel of scepticism for the future of the EEU in the event of an exit by its second largest economy.

Russian epicentre
Accusations of the strongest member of the union attempting to revive the legacy of the Soviet Union are rife. The annexation of Crimea and tension with Ukraine fuelled such concerns over the last year, both within and outside of the region. Moscow has attempted to dispel this notion by granting equal representation to each member states. All four countries have two representatives, thereby illustrating Moscow’s endeavour to create an equal union and to arouse Eurasian integration, despite its considerably larger population.

Russia benefits economically from the union and by creating a trade bloc around itself that enhances cross-border trade with its neighbours

Of course, Russia benefits economically from the union and by creating a trade bloc around itself that enhances cross-border trade with its neighbours. Yet with Russia’s economy currently facing numerous challenges, the viability of the EEU is now under question. As a result of Western sanctions and a drastic drop in oil prices, the rouble has fallen drastically against the euro and the dollar, losing over 50 percent of its value last year. With sharp increases to interest rates and inflation, the current economic climate in Russia echoes that which induced the crisis in 1999. As a result, interest in joining the EEU has waned, for both prospective members and even current members. Another detrimental product of tension with Ukraine has resulted in Russia losing a significant trade partner and prospective member state. The idea of Eurasian integration now faces a stumbling block, thus presenting an ideological misstep in the project.

Chances for success
In theory, the EEU is a promising supranational organisation, with the potential for significantly enhancing economic cooperation within the region. Given its vast population and natural resources, the union has the capacity to become a powerful economic force, with considerable clout in the international arena. The principle of regional integration is compelling, as it is for the EU, yet with a greater historical significance to the amalgamation. Despite ardent cultural and linguistic links, the union faces a multiplicity of challenges, particularly if regulations are not enforced. “With no concrete plans for common financial regulation, and regulatory harmonisation still in progress even after the creation of the Single Economic Space in 2011, the formation of the EEU will not by itself have significant near-term impact on its members’ trade and economic output,” Witlin tells World Finance.

In addition, each member state faces its own financial hurdles, and so banding together at this time may not result in the economic prosperity that advocates propose. The bureaucratisation of integrating the four countries may also delay economic development for each country; as could the enlargement of the union, with less developed economies drawing resources from stronger member states.

The aspect of power sharing between authoritarian leaders also raises doubts about a conducive climate for cooperation, with different objectives and outlooks for each member state potentially inducing tension in the future. The most disheartening factor regarding the viability of the project is the ongoing trade disputes currently in play within the EEU. Russia’s dispute with neighbouring Belarus shows no signs of subsiding yet, bringing to question its obligation to the union’s rules; an imperative factor for the long term success of the project. “They reflect the long shadow politics will cast over each member’s commitment to the union’s rules at any given time,” says Witlin. With indications of a readiness to default on regulations and a lack of obligation to the principles of the union from the outset, the signs of an ineffective partnership loom, making the organisation seemingly more symbolic than tangible at this present time.