Where does the Eurasian economic community stand?

By: Alexander Plekhanov, Principal Economist

What is the Eurasian Economic Community, where does it stand and how will it likely evolve? There have been significant recent developments in terms of economic integration in parts of the CIS and the regional integration project of Belarus, Kazakhstan and Russia is gradually taking shape.

Customs Union

Common tariff and other arrangements

Since 1 January 2010 Belarus, Kazakhstan and Russia have applied a common import tariff.[1] Later that year they ratified a customs code and other documents establishing a customs union. Internal border controls have been removed, and the import tariff revenues accrue to national budgets in predetermined proportions subject to regular reviews (with Russia entitled to between 88% and 91% of all revenues; Belarus to 5% and Kazakhstan to 7%).

The supranational body of the Customs Union is a Customs Union Commission with around 150 staff. Decisions are taken by a qualified majority of 2/3 whereRussiaholds 57% of the votes andBelarusandKazakhstanhold 21.5% each.

WTO accession

Common import tariff will be adjusted over time to reflect Russia’s WTO commitments. It will also serve as a goods schedule for Belarus’s and Kazakhstan’s potential WTO accession, although the two countries will still need to negotiate their own schedules for services. Kazakhstan expressed hope to agree the terms of WTO accession by end-2012, Belarus is substantially less advanced in its accession process.

Potential new members

Kyrgyz Republic and Tajikistan are currently considering membership of the union. However, as an acceding member of the union must have a land border with the union, membership of Kyrgyz Republicis effectively a prerequisite for Tajik membership (Uzbekistan and Turkmenistan being unlikely “bridges” in the foreseeable future).

Ukraine has been repeatedly asked to join, with the invitation backed by studies that estimate Ukraine’s gains from membership at up to US$ 219 billion over 20 years, largely due to network effects. However, accommodating membership of the Customs Union with a potential deep and comprehensive free-trade agreement with the EU appears to be problematic in practice, even if theoretically possible (the two are not per se mutually exclusive, but the terms and conditions of both must be non-contradictory).

Eurasian Economic Community

Officials announced that the three countries entered the next stage of the project – Common Economic Area of the Eurasian Economic Community – on1 January 2012. Unlike the customs union, formation of the Common Economic Area remains very much work in progress.

The Eurasian Economic Commission, the supranational body of the community headed by Viktor Khristenko, previously Russian Minister of Industry and Trade, has not been effectively formed yet. It is temporarily stationed in Moscow but is expected to move to Astana. National staff quotas will be based on economic weight (84% for Russia) but, unlike in the customs union framework, key decisions will be taken by the Council (of country representatives) based on the “one country one vote” principle. Moreover, in many cases they will require unanimity.

The idea of a Eurasian Economic Community is not new – the term itself was coined byKazakhstan’s President Nazarbayev in March 1994, and the concept was reportedly first put forward even earlier by Grigory Yavlinsky, a Russian economist and currently leader of the Yabloko party. However, numerous previous attempts to launch such a union in the 1990s and 2000s were not successful. Smoother progress of the current initiative is attributed by some analysts to the willingness of members of the union, not least Kazakhstan, to counterbalance the economic rise of China.

The ultimate goal of the Community is free movement of goods, capital and people, as well as harmonization of macro economic and structural policies (with proposed criteria a la Maastricht rules, including ceilings on public debt and inflation). Mechanisms and institutions of the Community appear to be largely modelled on the EU and European Commission.

The Community also has a development bank headquartered in Almaty, the Eurasian Development Bank, with a somewhat broader membership (customs union members plus Armenia, Kyrgyz Republic and Tajikistan). It currently has an active budget support programme with Belarus, which includes IFI-style conditionality and regular programme reviews.

Key issues

For the Eurasian Economic Area to become credible and effective, three key issues remain to be resolved.

(i) Harmonization of export taxes

So far only import taxes have been nearly harmonized. Harmonization has not been complete as Kazakhstan, for example, still enjoys around 70 exceptions from the Common Tariff (including for cars for personal use and pharmaceuticals, down from 400 exemptions applied in 2010). Phasing these out may prove controversial.

Even more challenging is agreeing on a harmonized export tariff – a prerequisite for a meaningful common economic area. Russia’s taxation of natural resources is unique in that it heavily relies on export duties rather than corporate income taxes or production sharing agreements. Kazakhstan’s export duties are currently an order of magnitude lower. Belarus is a net importer of energy. Harmonization will likely require a move to some form of profit-based taxation in Russia, which in turn would necessitate strengthening tax administration and implementing legislation on transfer pricing, as well as move towards an alternative support scheme for the refining industry (currently benefiting from substantial differential between export taxes on crude and refined oil).

(ii) Credibility of legal framework and dispute resolution mechanism

The legal framework of the Customs Union and Eurasian Economic Area is complex and far from clear. It is based on a “spaghetti bowl” of various agreements, of which to date there are at least 76 (the Customs Code and 75 others). This approach is similar to the one underpinning NAFTA (North America Free Trade Agreement).

Legal framework is further based on a direct application approach, whereby decisions of the supranational bodies of the union become legally binding for member countries (generally 30 days after their publication) and prevail over any national norms that may be inconsistent. The Customs Union Commission has already passed about 850 acts, which should have legal force but often include cross-references to national law and rely on national interpretation.  All this creates a regime that may be confusing for businesses, in particular small and medium-sized enterprises.

It also raises a question whether the dispute resolution mechanism is credible. At the heart of dispute resolution is the Economic Court of the Eurasian Economic Community, a successor to the CIS Economic Court established in 1993. Unlike in the case of CIS economic court, the decisions of Eurasian Economic Courtare meant to be legally binding on member states, and private entities are entitled to file with the Court. However, its effectiveness and willingness of member states to abide by its decisions are yet to be tested. The track record of its predecessor is not very encouraging, as highlighted by Belarus’s unsuccessful attempts to sue Russia in 2010 for violation of various earlier treaties.

(iii) Asymmetry

While there are a number of regional economic unions dominated by a single member (Gulf Cooperation Council – Saudi Arabia, Mercosur – Brazil), the asymmetry of the Eurasian Economic Area is arguably unprecedented (Kazakhstan’s population and GDP are around one tenth of Russia’s; Belarus is smaller still). The countries are also less economically integrated than commonly perceived: Belarus and Kazakhstan account for under 7% of Russia’s exports and imports. Belarusian imports, over half of which comes fromRussia and Kazakhstan, are perhaps an exception.

This asymmetry adds to the fragility of the union and raises question about its survival once political succession occurs in one or more member states, given that the current leaders have been personally highly committed to the project.

Indeed, it is legally possible to leave the Eurasian Economic Community and the Customs Union, but only through block withdrawal from all treaties (i.e. it is not possible for member countries to selectively suspend application of certain provisions).

Long-term impact

Perhaps the greatest potential benefit of the Customs Union and Eurasian Economic Community could come from their becoming a credible external anchor for economic policies, liberalization of the services sector, and business environment reforms. The partial integration has already arguably imposed a degree of discipline on Belarus’s economic policies, as price controls and multiple exchange rates are hard to sustain with open borders. To reap these benefits the Common Economic Area will need strong institutions. Its longer-term success will ultimately depend on whether it will be able to create institutions stronger than any of its member states currently have—by no means an easy task. 

---

Share on Facebook

Comments

• Tags

  Add new tag analysis banks Belarus bis blog Bourneville Cadbury central banks cold war communism corporate blogging credit crunch currencies EBRD ECB economic diversification economic growth economics emerging markets EU European Central Bank forecasts Georgia history Hungary IFI IMF industrial policy Kazakhstan Latvia Manufacturing media Mining Mongolia non-performing loans One-company towns Port Sunlight Press press freedom rail Russia stress testing TVE Ukraine

• Recent Posts

  • The syndicated loan market in 2011: A game of two halves
  • Postcard from Davos