Russia, Belarus, and Kazakhstan Announce Eurasian Economic Union

5 June 2014

Russia, Belarus, and Kazakhstan inked a deal last week to formally establish an economic union between them, capping approximately two decades’ worth of talks. The bloc – termed the Eurasian Economic Union – notably does not include Ukraine, and comes at a time where Moscow’s geopolitical rift with many of its Western partners shows no sign of resolution.

Meanwhile, the Ukrainian government under President-elect Petro Poroshenko has lately reaffirmed its interest in signing a long-awaited trade pact with the European Union. His predecessor, Viktor Yanukovych, had chosen not to sign the pact late last year, in a decision which sparked the Ukraine crisis and ultimately ousted him from office.

Which integration project Ukraine would eventually join – and what it would mean, in both economic and geopolitical terms – has been a hot topic on the international agenda for months. Russia had long lobbied against Ukraine signing onto the EU trade deal, arguing that it would be incompatible with its own Eurasian integration initiative, while European officials had insisted that any decision should be solely up to Ukraine, without outside pressure.

In the wake of the Ukraine crisis, analysts have remarked on an apparent increase in interest on Russia’s behalf on cementing other trade ties, given the growing economic isolation it has faced from partners such as the US and EU.

Along with this latest step in the broader Eurasian integration project, Moscow recently clinched a multibillion dollar natural gas deal with Beijing – one that would give Russia an opportunity to focus its energy trade elsewhere, given the EU’s wariness of continuing its own heavy reliance on Russian gas sources. (See Bridges Weekly, 22 May 2014)

Meanwhile, leaders of the G-7 industrialised countries – Canada, France, Germany, Italy, Japan, the United Kingdom and the United States – are meeting this week in Brussels, where their relationship with Russia is expected to be one of the main items on their agenda.

The G-7 had decided to suspend its participation in the G-8 summit – essentially the same group, together with Russia – in light of recent events, as Moscow holds the rotating presidency of this latter configuration.

2015 launch

The new Eurasian Economic Union would enter into force at the beginning of next year, and is expected to cover a market of 170 million people – a size that could grow should Armenia and Kyrgyzstan also join. The latter two have both expressed interest in the agreement, and leaders from the three current members have indicated that their entry will be approved in the coming months.

The planned economic union, which builds upon an existing customs union between the three same countries, was announced in the Kazakh capital of Astana late last week, with that country’s president referring to the decision as the launch of a “new geoeconomic reality.”

Even so, Kazakh President Nursultan Nazarbayev acknowledged, the process ahead will not be easy for the three neighbours.

“We have succeeded in creating the Union, but now that it is here, our major objective is to prove the necessity and viability of this integration to ourselves and the entire world,” he said last Thursday. “The integration alone does not guarantee an ideal life or manna from heaven; each of the states will need to work hard.”

The deal had stumbled in recent months over a disagreement between Moscow and Minsk on oil duties. However, Russia recently agreed that it would send 23 million tonnes’ worth of duty-free oil this year to Belarus. Meanwhile, Belarus – which exports oil products back to Russia – would be able to keep US$1.5 billion next year of the usual duties it pays on sending those latter goods back across the border.

Russian President Vladimir Putin, who has come under fire from his Western partners in recent months over his handling of the Ukraine crisis, also highlighted that the Union’s members had faced “heated disputes” and “serious disagreements” in their efforts to clinch a deal. However, he noted, the final result has “an enormous production, research, and technological potential and huge natural resources” – one that could prove attractive to others.

“Wherever I go and whomever I meet, everyone wants to know how to establish relations with the new Eurasian union,” he added, noting that “major economies” have already expressed an interest. Furthermore, he said, current Union members are planning to ramp up talks with Vietnam on the establishment of a free trade zone, along with improving cooperation with China.

According to Putin, Union members are aiming to establish a common financial market, along with a gradual harmonisation of currency policy. Furthermore, the three partners would coordinate policies in areas such as agriculture, energy, industry, and transport.

Goods, services, capital, and labour will be able to move unhindered, officials said. However, Belarus’ Lukashenko acknowledged, some issues involving their trilateral economic cooperation – especially those involving trade – will be addressed at a later time in order to facilitate continued work on these areas.

Energy markets, however, would not be integrated until 2025, which was reportedly at Russia’s request, given the importance it places on oil and gas exports. The country is by far the economic heavyweight of the group, and some experts have suggested that lifting trade barriers with Minsk and Astana could come at an economic cost for Moscow.

The respective parliaments of the three countries will next need to ratify the document, in order to meet the target launch date of 1 January 2015.

Ukraine president-elect expresses interest in EU trade deal

The absence of Ukraine from the Eurasian Economic Union was noticeable at last week’s signing ceremony, given Kiev’s earlier involvement in the discussions, with some leaders highlighting the loss. Trade with Ukraine is 4.7 percent of Russia’s annual total, while Belarus and Kazakhstan together account for 7.1 percent, according to Russian customs data.

“Unfortunately, the burden proved to be too heavy for Ukraine,” Belarus President Alexander Lukashenko told reporters last week. However, he indicated, Kiev may wish to reconsider, given that it could serve in the country’s economic interests to do so.

“I am certain that eventually the Ukrainian leadership will see where its happiness lies, or at least would not lose what rightfully belongs to the Ukrainian people,” he said.

The new leadership in Kiev, meanwhile, has given early signs that it may cast its lot with the EU instead. Within days of winning the presidential election in Ukraine, Poroshenko reportedly confirmed to European officials that he hopes to soon sign the long-awaited trade deal with Brussels.

Whether that will happen during Poroshenko’s inauguration this weekend, or later this month at a summit in Brussels, remained unclear at the time of this writing, particularly in light of the continued internal difficulties in Ukraine and the need for the EU to complete its own internal procedures.

At the moment, Ukraine is already receiving unilateral preferential access to the European market, after a decision was passed by the EU earlier this year to lift tariffs on imports coming from its Eastern neighbour.

The move amounted to nearly €500 million in annual tariff reductions, EU trade officials explained at the time, with the goal of providing the Ukrainian economy with a much-needed lifeline. (See Bridges Weekly, 13 March 2014)

Such unilateral preferences will only last until 1 November, in order to give Kiev time to sign and provisionally implement the bilateral version of the deal.

ICTSD reporting; “Russia, Kazakhstan, Belarus form Eurasian Economic Union,” THE WASHINGTON POST, 29 May 2014; “Russia and 2 Neighbors Form Economic Union That Has a Ukraine-Size Hole,” THE NEW YORK TIMES, 29 May 2014; “Uncertainty on date of EU-Ukraine treaty signature,” EU OBSERVER, 4 June 2014; “Belarus won’t block creation of Eurasian Economic Union,” REUTERS, 9 May 2014; “Ukraine Needs Time to Sign Trade Deal With Europe, EU Says,” THE MOSCOW TIMES, 28 May 2014.

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