EURASIAN ALTERNATIVE TO EU EMERGES BASED ON HYDROCARBON ECONOMY
The Moscow Times
May 29 2014
By Alexander Panin
Mikhail Klimentyev / RIA Novosti / ReutersRussia’s Vladimir Putin,
right, Kazakhstan’s Nursultan Nazarbayev, center, Belarus’s Alexander
Lukashenko shaking hands in Astana.
With the milestone agreement to create a Eurasian economic union
clinched in Kazakhstan on Thursday, Russia put cheap energy resources
at the head of its drive to pull former Soviet states away from
European integration and into its orbit.
The Eurasian Economic Union agreement, signed by the leaders of Russia,
Belarus and Kazakhstan in the Kazakh capital of Astana, will come into
force on Jan. 1, 2015. It envisages the gradual integration of the
three former Soviet countries’ economies, establishing free trade,
unbarred financial interaction and unhindered labor migration.
The pact combines the previous agreements reached between the three
countries under the Customs Union and the Single Economic Space,
which were formed in 2010 and 2011 and have been generally considered
a success.
At the signing ceremony, President Vladimir Putin said “Today we
are creating a powerful center of gravity for economic development,
a large regional market that unites more than 170 million people,”
according to an official transcript.
He also stressed that the union’s combined territory is a hydrocarbon
treasury, possessing a fifth of all global natural gas resources and
15 percent of all oil reserves.
Russia’s gain in entering the Eurasian union is more political than
economic — particularly as Russia is still smarting from the recent
failure of its attempts to draw Ukraine into the Customs Union. As for
Kazakhstan and Belarus, they are pursuing their own economic interests
rather than any dream of forming super-state between Europe and Asia,
both their leaders and analysts said.
Benefits for Small Ones
A day before flying to Kazakhstan, Belarussian leader Alexander
Lukashenko was not overly satisfied with the preliminary terms of
the agreement, the signature of which Putin would later call “an
epochal event.”
“We offered to conclude a deal with no limitations … But this is
not the agreement we sought and not the one our partners initially
spoke of, Russia in particular, ” Lukashenko said at a meeting with
ministers in Minsk on Wednesday, the Regnum news agency reported.
He also said that in signing the agreement he is seeking first and
foremost benefits for his country, though stressed that Belarus has
never been greedy.
One of Belarus’s concerns is that the single market being developed
does not include energy, meaning that it will have to continue paying
duties to Moscow on its exports of oil products based on oil imported
from Russia, said Julian Cooper, professor of the Centre for Russian
and East European Studies at University of Birmingham.
Belarus buys oil from Russia at Russia’s internal price, which is about
half the price the world pays on average, and then produces petroleum
for export. Until recently, Belarus had to pay customs duties on oil
imports for that purpose of up to $4 billion per year, but it has
negotiated to subtract $1.5 billion from that sum for next year.
Lukashenko also was promised that export duties will be eliminated
when a single market for energy is created, something not planned
until 2025.
Kazakhstan, while being historically very supportive of the Eurasian
union with Russia and Belarus, had also some concerns of its own.
Speaking at the Higher Eurasian Economic Council last year in Minsk,
Kazakh President Nursultan Nazarbaev said Kazakh businesses had
been experiencing difficulties exporting their products, especially
to Russia.
“Technical barriers on our exports still remain, including sanitation
requirements, difficulties with licensing and certification,” he said.
news agency Total.kz reported.
These limitations had been particularly hitting Kazakh meat exports,
according to Nazarbaev.
“Problems arise because the countries within the union have different
technical and sanitation standards for imported products,” said
Alexander Knobel, the head of international trade laboratory at the
Gaidar Institute.
This, he said, should had been solved within the Customs Union,
prior to signing any other agreements.
Hastily Made Agreements
The logical progression of economic integration should have first
established the free movement of products within the Customs Union,
then go on to the Single Economic Space to ensure an unrestricted
provision of services, and only then switched to an economic union
where goods and services, finance and labor circulate without
restrictions, Knobel said.
Instead, the union is hastily leapfrogging to economic integration
while leaving trade issues unsolved, he said.
Initially, the union was slated to have a single market for energy,
finance and other areas by 2015. But the new agreement does not say
how, for instance, the financial market will be regulated. It just
says that it will be a single market starting from 2025. The same
applies to oil and gas. Electricity is set to become one market in
2019 while the market for medical products and pharmaceuticals are
scheduled for unification in 2016.
“All of this could have been done within the Customs Union agreement.
But at least the sides have now established fixed dates by which
they will have to reach further agreements on most important issues,”
Knobel said.
According to the Eurasian Commission — the regulatory authority of
the Customs Union and the Single Economic Space — trade turnover
between the countries of the union in 2013 amounted to $64 billion,
down from $67.8 billion a year earlier. By comparison, Russia’s trade
turnover with Europe last year surpassed $400 billion.
“Trade within the [Eurasian] Union will be less competitive and
demanding in terms of the quality of goods and their technological
level than trade with economically more advanced partners such as
the European Union, U.S. or Japan,” Cooper said, adding that there
is a danger that the union may hold back the modernization of all
three economies.
At the same time, in the long run the economic integration has
high chances of being mutually beneficial for all states, he said:
“In time, there should be gains for all three countries as these
trade and regulatory freedoms develop, in particular a more favorable
business climate may be created with the prospect of increased foreign
direct investment.”
The Past And The Future
Russia is likely to draw more partners to the union by transferring
resources to them in the form of reduced prices for gas and oil. In
this transaction, the incurred loss for Russia is insignificant,
while the gain for its partners would be substantial.
An example of this is Armenia, which was set to integrate with Europe
but changed its mind after it was offered gas in 2014 at the price paid
by Belarus — about $170 to $180 per 1,000 cubic meters, Knobel said.
“For Armenia this is about 1.5 percent of gross domestic product per
year, which is very valuable,” he added.
Economic union with Russia is even more profitable for Belarus,
Knobel said, as the gains from exploiting oil and gas trade with
Russia constitute 10 percent of its economy.
“And with all the discounts underway this figure will grow to 15
percent of GDP, so integration makes a lot of sense,” the analyst said.
Other countries which may join the Eurasian union in the not so
distant future include the Central Asian state Kyrgyzstan, whose
leader discussed the possibility of joining the pact, Putin said
Thursday. Another likely member is Turkey.
“Today, once again, Nazarbaev raised the issue of Turkey as a future
member, an interesting prospect and not impossible now that Turkey’s
chances of accession to the EU are diminishing,” Cooper said.
But one country that Russia wished to see within the union and that
has now been lost is Ukraine.
Russia has already offered Kiev maximum preferences for joining the
Customs Union and was ready to yield on absolutely every issue except
radically low gas prices. But in 2013, rather than agree to join the
Customs Union, Ukraine said it was ready to conclude a landmark trade
agreement with the EU.
Last year, Victor Yanukovych, Ukraine’s former president, tried to
reverse that decision and move closer to Moscow. As a result, he was
ousted by street protests. Today, Ukraine’s entry into a union with
with Russia, Belarus and Kazakhstan looks less likely than ever.
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