Customs Union Project Shows Moscow's Power Deficit

Customs Union Project Shows Moscow's Power Deficit

By Andrea Bonzanni

At the beginning of July, Russia, Kazakhstan and Belarus signed a number of protocols establishing a customs union between the three countries. The union, scheduled to be fully operational in January 2012, will create a single common market of about 170 million people and represents the latest of several attempts by Moscow to create an effective trade bloc with its newly independent neighbors since the break-up of the Soviet Union. In addition to the economic ties maintained through the establishment of the Commonwealth of Independent States (CIS), Russia first committed to a union with Belarus in 1994. That was followed by another in 1996 with Belarus and Kazakhstan, which after gradually expanding to include Kyrgyzstan, Tajikistan and Uzbekistan was renamed the Eurasian Economic Community (EurAsEC) in October 2000. Nonetheless, little concrete action has followed these ambitious announcements, leading Moscow to try again with the restricted formula.

The economic benefits of unions of this kind are questionable, however. Trade blocs among middle-income countries with similar economic structures and natural resource endowments are costly to implement and hardly generate new trade beyond the distortive flows triggered by an inevitable trade-diversion effect. That has led some analysts to speculate over why Moscow has assigned such a remarkably high priority to these projects.

putinAnders Aslund, senior fellow at the Peterson Institute for International Economics, has argued that Russia's customs union plans might be an attempt to sabotage the success of its World Trade Organization (WTO) application. Despite Moscow's vocal desire to join the global trade group, many in Russia consider membership as detrimental to the interests of the country's resource-driven economy -- and the customs union will further complicate Russia's already lengthy accession procedure. For instance, in June 2009, when Prime Minister Vladimir Putin declared that Russia would join the WTO as a single custom territory with Belarus and Kazakhstan, it brought negotiations to a halt just when a breakthrough seemed imminent. The three reverted to separate accession procedures a few months later.

However, even though Russian elites might be divided on the issue, accession to the WTO is a necessary step for Moscow to achieve its main long-term foreign policy goal: to secure a position of primacy in the coming multipolar order. A clear indication of this is the joint statement issued by Presidents Dmitri Medvedev and Barack Obama, which refers to Russia's WTO accession as the "trade priority for both countries" and aims to have the issue settled by Sept. 30.

The customs union figures so prominently on Moscow's agenda not because it is at odds with Russia's WTO accession, but because it is complementary to it. Article 24 of the General Agreement of Trade and Tariffs (GATT), the treaty on which the WTO is based, states that the provisions of a customs union can override multilateral obligations, in particular the principle of most-favored nations. This means that even after acceding to the WTO, Russia can continue to offer preferential access to its partners, and receive it from them -- thus maintaining control over regional strategic trade flows. By appealing to Article 24, Moscow will be able to bypass the depoliticization of trade relations that WTO membership imposes, allowing Russia to go on exerting its influence on its "near abroad" by using market access as a bargaining chip.

Such practices are similar to those employed in the region by the European Union, which routinely offers market access to new members, potential candidates and neighboring countries. However, unlike countries that have entered similar trade agreements with the EU, Belarus and Kazakhstan were reluctant to join their markets with Russia's larger one. Nationalist protests against the customs union were reported to have taken place in Kazakhstan, where Prime Minister Karim Masimov -- aware of Russia's decisive role as the major transit route for the country's hydrocarblukashenkaon exports -- had to dispatch government ministers to remote regions to convince local leaders and the population of the benefits of the union. For its part, Belarus ratified the protocols a week after the scheduled official ceremony. Some Western analysts believe that Gazprom's 50 percent hike in gas prices charged to Belarus, along with the interruption of supplies in late June, played a significant role in pressuring President Alexander Lukashenka to ultimately commit to the union.

In other words, instead of strengthening Russia's ties with the two countries, the customs union has come at a considerable cost in political capital for the Kremlin, and could gradually lead Minsk and Astana away from Moscow. The EU, which is already the largest buyer of Belarusian and Kazakh goods, has long sought to provide an alternative to Russian hegemony in the region. It may now be presented with a new window of opportunity to do so. Italian Prime Minister Silvio Berlusconi's November 2009 state visit to Belarus -- the first-ever for a Western leader -- and German Chancellor Angela Merkel's more recent trip to Kazakhstan are significant signs of Europe's willingness to engage with these countries.

Yanukovich Russia has enjoyed a long series of gains on the "great chessboard" of Eurasia, beginning with the invasion of South Ossetia in August 2008 and culminating with both President Viktor Yanukovich's recent election in Ukraine and the start of construction on the Nord Stream pipeline to Germany. But the customs union highlighted the main limitation of Moscow's regional hegemonic role: In both its near abroad and the EU, Russian diplomacy has been successful when it has used coercive means, or when it has sought to build ties with narrowly limited political or economic elites. However, Moscow is unable to provide sustained economic benefits for its neighbors, especially during periods of low oil and gas prices. With the impact of the global recession hitting Russia and some of its cash-starved neighbors hard, significant geopolitical shifts could be ahead.
Editors Note: Andrea Bonzanni is an international affairs and energy policy analyst based in Geneva. He has worked as a consultant for the United Nations and the World Bank and is currently editor-in-chief at the European Center for Energy Security Analysis (ECESA) of Equilibri, a Milan-based think tank. The views expressed here are his alone. He can be reached at andrea.bonzanni (at) graduateinstitute (dot) ch.
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