Wednesday, 27 November 2013

Kazakhstan Increasingly Concerned over Eurasian Economic Union

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By Stephen Blank (the 27/11/2013 issue of the CACI Analyst)

Kazakhstan joined the Customs Union with Belarus and Russia in 2010 and by 2012, it had evolved into a single Eurasian Economic Space known also as EurAsEc. The economic union is Putin’s principal foreign policy goal and Ukraine in the West and Kazakhstan in the East are particularly important to the success of this enterprise. Yet, while Ukraine was poised to instead sign a trade agreement with the EU at the Eastern Partnership summit in Vilnius on November 28-29, it has stopped preparing for that signing ceremony, evidently succumbing to Russian pressure. Meanwhile, Kazakhstan has now registered increasingly vocal complaints about the direction EurAsEc is taking.

BACKGROUND: These complaints truly represent a serious challenge to EurAsEc. Indeed, Nazarbayev originated the idea and program of Eurasian integration and has steadfastly promoted it throughout his tenure as president of Kazakhstan since 1991.  If the sources of Kazakhstan’s dissatisfaction cannot be dealt with, the entire project becomes fundamentally problematic. Several issues lie at the heart of Nazarbayev’s dissatisfaction, which he publicly expressed at the recent Minsk conference of the heads of state of the Supreme Eurasian Economic Council of EurAsEc. 

Even before that meeting, he had made clear publicly that he saw no harm in Ukraine’s signing an Association Agreement or Deep and Comprehensive Free Trade Agreement with the EU. Although this was a major shot across Russia’s bow, it was not unexpected as Nazarbayev, like any Central Asian leader, cannot explicitly or implicitly accept Russia-imposed limitations to any post-Soviet state’s sovereignty in foreign and economic policy. Nazarbayev also used the Minsk conference to warn that Kazakhstan’s growing trade deficit with Russia and Belarus was “very dangerous” for Kazakhstan. He has advised governors of regions bordering Russia to increase exports, but that is unlikely to occur. 

Nazarbayev proceeded to criticize as well the work of the Eurasian Economic Commission, the supreme administrative body of EurAsEc, whose composition is supposed to be made up of independent functionaries acting as agents of the Commission, not individual governments. Nazarbayev complained that the Commission’s work has become excessively politicized, in other words pro-Russian, since Russia furnishes the largest number of officials to the Commission. He accused commissioners of embezzling funds and wasting opportunities to enhance genuine integration; of sending out documents for approval a day before the vote on them is supposed to occur; and of Russian members of the commission participating in Russian governmental meetings and receiving relevant instructions while they are not accountable to any of the other governments in line with past agreements.  Nazarbayev called for abolishing the Eurasian Economic Commission and preserving the Community, albeit in a reformed version.

Lastly he warned against the hasty admission of new members, e.g. Armenia and Ukraine, in a clear warning against Russian pressure on these states. His remarks also made clear that he suspected Russia’s motives for this expansion of being geopolitical rather than economic.

None of these critiques of the project, including his remarks about excessive trade barriers e.g. between Russia and Belarus, could please Moscow. But Putin’s response was equivocal because in the run-up to the EU summit at Vilnius, Moscow cannot under any circumstances afford another imbroglio with a key member of the Customs Union over this program.

IMPLICATIONS: None of Nazarbayev’s criticisms should come as a surprise. If this had not been evident before, the pressure on Armenia, Moldova, and Ukraine as well as on Kyrgyzstan to join the Customs Union and the nature of Russia’s threats against them indicate the fundamentally geopolitical motivation behind this project.  As former Secretary of State Clinton warned, it amounts to a re-Sovietization program and a way for Putin to brand himself as a contemporary “gatherer of Russian lands.”

Neither should we be surprised that the Commission works more as an instrument of Moscow than as an independent objective body of experts and officials. Despite all the Russian talk of modeling the Customs Union after the EU and its European Commission, the Eurasian Commission clearly functions more like an arm of the Soviet or Tsarist sate in attempting to coordinate members’ economies for Russia’s benefit.

Here we should remember that a customs union can either form a union of more or less equal states, which is what the European Coal and Steel community and the subsequent Treaty of Rome provided for. Alternatively, they can function as did the nineteenth century German Zollverein (Customs Union) that provided Prussia with a crucial lever by which to effectuate Germany’s economic integration around it. It is very clear in this context that Putin's Eurasian project, the Customs Union and Single Economic space, function according to the latter model, not the former.

Any customs union is by definition an organization diverting members’ trade with the outside world to intra-union channels and this project is no different. To be sure, there are benefits to the members that no doubt Kazakhstan counted on. As a Deloitte study pointed out, “Since creation it has already brought additional benefits for trading partners by insuring the free circulation of goods between the Customs Union countries and providing traders and investors with a larger economic area to operate in and a more attractive market for potential investors.”

On the other hand, almost all studies have shown that the actual trade benefits for Kazakhstan have been modest at best as trade is diverted from either better quality European products or more affordable Chinese goods to Russian goods that are either inferior in quality or more expensive than the alternatives. The same holds true for Kyrgyzstan. Likewise, apart from the Russian studies cited by Sergei Glazyev, Putin’s point man on threatening Ukraine and an exemplar of neo-Soviet economics, as Anders Åslund has shown, most studies show Ukraine not benefiting from membership in the Customs Union and gaining much more from agreement with the EU.

Neither is Kazakhstan's trade deficit with Russia likely to diminish, as Russia's economic stagnation will probably prompt it to export more to its neighbors even as its imports from them decline. Furthermore, if the Commission is functioning as an arm of the Russian government, it will no doubt find ways to impose protectionist rules on imports from other members to protect Russia from cheaper goods.

As the Vilnius summit approached, immense pressure was brought to bear upon Ukraine and will likely continue afterwards, for Moscow is determined to negate Ukraine’s previous freedom of maneuver. And even if Ukraine had signed with the EU, this would only have been the beginning of implementation, the really decisive aspect of this process. We can expect Moscow to continue behaving as a trade bully and a monopolist, not only towards Ukraine. Putin’s concurrent refusal to reform the Russian economy also cannot but have negative repercussions for Kazakhstan’s efforts to rectify this asymmetric trade balance. It is not clear what Kazakhstan will do as it obviously is wary of too close an embrace of both Moscow and Beijing.

But in the meantime, the inherent limitations of Putin’s grand design are already apparent and Russia's increasingly noncompetitive economy cannot be the engine of growth, especially when its own officials are embezzling the Commission’s funds and infecting all of its projects with the endemic corruption of the Russian Federation.  Obviously it is not yet possible to discern how the Customs Union and associated institutions will evolve, if they can evolve at all, and how this will affect all of the members, bystanders and interested participants like China. Yet, it is clear that membership in this Union is already proving to be a sub-optimal choice from both the economic and political standpoints, and that tensions within it are likely to grow rather than to diminish in the foreseeable future, especially as Kazakhstan if not other members join the World Trade Organization (WTO).

CONCLUSIONS: Ultimately, the tensions reflect the fact that these governments cannot conceive of economic issues other than in a geopolitically dominant light and subordinate rational economic considerations in policymaking to the exigencies of short-term political gains and corruption. As long as Russia believes it has a privileged sphere of influence in the former Soviet zone, it will seek to bend economic programs to political imperatives as has been the basic character of its energy and economic policies under Putin. But such decisions invariably end up producing economically sub-optimal decisions and distortions that, in turn, make it harder to achieve the political goals that were originally the driving force behind those decisions. The Customs Union was supposed to be a vehicle for promoting interstate harmony. It is now increasingly clear that it has become the opposite and it is by no means clear whether it can reverse that direction.

AUTHOR'S BIO: Stephen Blank is a Senior Fellow with the American Foreign Policy Council. 

 

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