Efforts to enhance economic integration in the CIS have been complicated by the fact that Russia’s approach has been excessively political. If policy were based more on economic and commercial considerations in terms of costs and benefit for the Russian economy, more progress could be made.
Valdaiclub.com interview with professor Julian M. Cooper, Centre for Russian and East European Studies (CREES), University of Birmingham; Co-Director, Centre for East European Language Based Area Studies (CEELBAS) (SSEES-UCL, Oxford, CREES); Asssociate Fellow, Chatham House.
What prevents trade integration within the CIS? Is it possible to conclude the Treaty on a Free Trade Zone between CIS countries at all?
It is not at all surprising that it has proved difficult to develop trade integration within the CIS and the fact that no agreement was reached at the recent meeting of heads of governments in Minsk was not unexpected. The member countries may have a shared past as former constituent republics of the USSR, but now they are all fully independent, sovereign, nations with their own distinct policies and aspirations. Some, for understandable reasons, see their future in terms of much closer economic relations with the European Union, other with Asia or the Middle East. There is also the fundamental issue of the asymmetry between Russia and the other CIS economies. In terms of GDP (World Bank, current dollar terms) the second largest economy, Ukraine, is barely one-tenth the size of Russia and eight of the remaining ten are less than 3 per cent of Russia’s size. However good political relations with Russia, this disparity of economic power inevitably makes Russia’s much smaller neighbours wary of close integration, with a fear of being overwhelmed.
How justified is the desire of some countries (eg Ukraine) to become members of the CIS Free Trade Zone and European Free Trade Zones?
Entirely justified and it is difficult to see why this should represent a problem for Moscow. If a CIS Free Trade Zone is to be established, then from the outset it must accord fully with WTO expectations and there is no reason why member countries have to make a choice. After all, once WTO accession has finally been achieved, Russia also has the prospect of negotiating a deep free trade area with the EU and no-one in Moscow appears to regard this aspiration as being incompatible with deepening CIS integration.
Will this Treaty become the first and most important step in forming the Common Economic Space in the former Soviet Union or whether it is beneficial to individual countries?
I am sceptical about prospects of forming a Common Economic Space, even on the territory of the Customs Union of Belarus, Kazakhstan and Russia. The likely economic benefits are unclear, even if it could be formed as a space with genuinely free movement of goods, labour and capital. Already, the merits of the Customs Union itself are in doubt, as indicated by the research of Lucio Vinhas de Souza of the World Bank (‘An Initial Estimation of the Economic Effects of the Creation of the EurAsEC Customs Union on its Members’, World Bank, Economic Premise, no.47, January 2011, ). Using a general equilibrium model, his provisional conclusion is that the Union will lead to a reduction of GDP growth in all three member countries (except Kazakhstan in his basic version, with limited harmonisation), with the fall being larger as greater harmonisation is pursued, including conditions in the energy sector. At the same time, current account deficits will increase, especially for Belarus, which in 2010 already had a deficit of over 15 per cent of GDP. His analysis suggests that the biggest loser will be Belarus; the least negatively affected, Kazakhstan. The reason is simple: as de Souza summarises, ‘negative trade diversion effects surpass positive trade-creation ones.’
The creation of the Customs Union could well have unintended consequences. For example, there is already some evidence that businesses are seeking to relocate to Kazakhstan, which, as the latest ranking of the Geneva-based IMD business school shows, has a better business climate than Russia – in the ranking Kazakhstan is placed 36th but Russia 49th. Furthermore, it is not at all clear how the Union will fare now that Belarus has a potentially very serious financial-economic crisis, likely to affect trade flows and the country’s macroeconomic stability. It may well be that further institutional reform and harmonisation will be needed in all three countries before progress can be made in forming a common economic space.
In the view of the current author, from an economic point of view it would be more rational for Russia to secure WTO accession as soon as possible and undertake serious, much-needed, institutional reforms to boost competitiveness, improve the business climate, and kick start some genuine modernisation. Prioritisation of CIS economic integration, with less modern and developed economies than those of the EU and most other G20 countries threatens to put Russia in a less favourable economic situation. The British experience may be relevant here. The phasing out of Commonwealth preferences in the 1960s helped to promote a modernisation of UK industry, boosted further by a deepening economic engagement with the forerunner of the EU, the European Economic Community, on the whole a more developed and demanding market than that of the Commonwealth.
Should Russia abandon the commercial benefits in favour of strengthening the political influence among the parties of the Treaty?
I do not accept the premise of this question. In my view, efforts to enhance economic integration in the CIS have been complicated by the fact that Russia’s approach has been excessively political. If policy were based more on economic and commercial considerations in terms of costs and benefit for the Russian economy, more progress could be made.