February 1, 2016
Putin Gets It Wrong Again: Eurasian Economic Union Hurts Russia
By Anders Åslund
This is a Russian initiative, dominated by Russia in all regards. Its secretariat is located in Moscow. Yet this organization does not appear to benefit Russia's interests.
The EEU mimics the European Union (EU), but it is very different. Its declared purpose is economic integration—that is, freer trade—but its proclaimed customs union is not even a free-trade area. Plenty of agricultural goods are blocked from entry into Russia because of Russian sanitary regulations (which seem mainly inspired by certain Russian agricultural producers), and Russian consumers do not benefit from cheaper food. Kazakh officials complain bitterly that they are not allowed to transport oil or gas through Gazprom or Transneft's state-owned pipelines. Import tariffs have been harmonized, but not export tariffs.
In order to become more competitive, economies need to open up to competition from the outside world. The EEU has done the opposite. As the dominant power, Russia forced the other countries to raise their tariffs to the higher Russian level. Kazakhstan produces no cars, but it has been compelled to hike its car tariffs to Russia's level, so that the Kazakh middle class now pays more for cars produced in Russia than for the South Korean or Japanese cars they previously bought. Russia has gained captive markets, but its competitiveness will ultimately be hurt.
Even if the EEU was an open market, its members would not necessarily benefit. It is small—only 1.6 percent of global GDP at the current exchange rate, less than one-tenth that of the EU. Its members are too different in terms of economic development and structure for it to make sense as a customs union. Econometric calculations suggest that the EEU causes more trade diversion than trade generation; that is, it reduces the common value added.
The eleven Eastern European countries that have joined the European Union have benefitted greatly from adopting EU rules and standards, which have modernized their administrations and legislation. The EEU, on the contrary, has reinforced obsolete Soviet standards through an intergovernmental treaty that impedes modernization.
European Commission President Jean-Claude Juncker has proposed closer ties between the EU and the EEU. The Kremlin responded instantly that his proposal was unrealistic. That was probably true: the EU and the EEU are not likely to be compatible partners. While the EU is a truly multilateral organization, Russia dominates the EEU completely. Usually Putin makes its main decisions impulsively, such as admitting Armenia or imposing trade sanctions against Ukraine or Turkey, without even mentioning it to the other EEU leaders. This treatment of its closest allies is damaging its relations with them. Belarus and Kazakhstan firmly oppose trade sanctions against Ukraine and Turkey. Kazakhstan has insisted on the EEU being purely economic and not political, vetoing Russian attempts to rename it the Eurasian Union.
Because of the EEU, Russia has been unable to benefit from the trade liberalization that its 2012 accession to the World Trade Organization (WTO) should have catalyzed. Hence, the EEU is blocking Russia's external economic integration, which is far more important to the country than anything the EEU could produce. Moreover, the creation of the EEU delayed Russia's entry into the WTO by about two years, and Kazakhstan's by roughly four years.
On top of everything, the EEU substantially costs the Russian treasury. Belarus has extracted implicit subsidies of up to $10 billion a year from Russia, primarily of cheap oil and natural gas, which are to a considerable extent conditioned on the EEU. Armenia accepted the invitation to join the EEU when Russia promised it similarly low gas prices. Russia had to commit to various investment projects to persuade Kyrgyzstan to join, and has agreed to give up a disproportionate share of common custom revenues to other EEU members.
The EEU isolates the country from the rest of the world, prevents Russia's economy from modernizing, and aggravates relations with its closest neighbors, while costing billions of dollars every year. In Russia's national interest, such a harmful policy should be ended.
Russia has a better alternative: the Commonwealth of Independent States (CIS) Free Trade Agreement of October 2011. Nine countries have signed it, and since eight countries, including Ukraine, have ratified it, it is formally in force. It is based on the principles of the WTO and would generate rather than divert trade. It would allow the present EEU members to develop bilateral cooperation with the EU to mutual benefit, rather than fencing themselves off from the EU.
But unsurprisingly, Putin has gotten it wrong once again. Just before the new year, he signed into law the suspension of Ukraine from the CIS Free Trade Agreement that the Federation Council adopted on December 25 (excluding Russia's gas exports to Ukraine, as Gazprom is becoming desperate to sell), failing to realize that he is not legally entitled to do so without the agreement of Russia's EEU partners, who refused to join in this sudden action against Ukraine.
The Eurasian Economic Union has been tried. It does not work. Russia and all the other EEU members would be better off without it.
Anders Åslund is a senior fellow at the Atlantic Council in Washington, DC.