New Russia-Centered Customs Union with Ex-Soviet Republics

11 July 2010

New Russia-Centered Customs Union with Ex-Soviet RepublicsThe leaders of Russia, Belarus and Kazakhstan took their longest stride to date in linking their economies,

forming a customs union that they say will soon evolve into a more ambitious common

The agreement, for now, eases trade among the three large former Soviet economies without fully abolishing all duties and tariffs.

The three also stopped short of reaching a common position on membership in the World Trade Organization,

something Russia as an individual country has been trying to negotiate since shortly after the Soviet collapse in 1991.

The agreement, celebrated with much fanfare in the Kazakh capital of Astana, eliminates obstacles to trade and investment that went up after the collapse of the Soviet Union.

That alone, analysts said, could give a boost to the region’s economies by introducing them to greater competition.

The signing was also a victory for Russia’s leaders, who have made the customs union a pet project for a variety of reasons,

notably because Moscow stands to benefit as a natural hub for regional finance and trade.

However beneficial for Russia’s regional standing, though,

the agreement seemed to risk again derailing its long-delayed membership application for the World Trade Organization.

Last summer, Prime Minister Vladimir V. Putin said that Russia would abandon its unilateral membership bid

and instead seek to join with Belarus and Kazakhstan in the customs union —

an apparent signal that Russia had other options if W.T.O. conditions were seen as too onerous.

Later, ministers backtracked and said Russia would negotiate for entry separately.

But after signing the agreement, Kazakhstan’s president, Nursultan Nazarbayev, again said Russia, Kazakhstan and Belarus had agreed to apply collectively.

If that indeed reflects policy in Moscow, it would most likely push over the horizon any membership for Russia, by far the largest economy outside the W.T.O.

A Russian first deputy prime minister, Igor I. Shuvalov, clarified to reporters that countries were still deciding their W.T.O. accession strategy,

and hoped to resolve differences on this matter “in the coming weeks.”

The Russian president, Dmitri A. Medvedev, said at the signing ceremony that the three countries would try to open their economies fully by the beginning of 2012.

The first step is harmonizing customs rules.

Later, they will discuss free movement of labor and capital.

For Russia, the push for a free trade pact that began during the financial crisis is a change of tack in its economic policies in the former Soviet space.

Russia, which found itself in the favorable position of holding hard currency reserves even as Western lenders were pulling out of the region during the crisis,

moved away from loans and direct subsidies of fuel, and toward an emphasis on more sweeping economic integration.

“This is a very positive paradigm shift in how Russia deals with the near abroad,”

Yaroslav Lissovolik, the chief economist at Deutsche Bank in Moscow, said in a telephone interview.

“Previously, it was a one-way street where Russia was giving out economic favors in exchange for political favors.”

A free trade pact, in contrast, is an economic strategy to elevate the prospects of the entire region where Russia is a natural center of gravity.

In the short term, Russian farmers could suffer from competition from Belarus,

and Russian steel workers from competition from Kazakhstan.

But in the longer term, the exposure to competition will help Russia diversify away from its dependence on natural resources

while elevating the role of Moscow as a regional financial and business center, Mr. Lissovolik said.

Russian banks, he said, were particularly interested in gaining access to Belarus’s large, unreformed, Soviet-style economy

as it prepares to privatize major industries in need of financing because of the global downturn.

Russia also holds a powerful lure to bring other former Soviet states into the union, if it chooses:

access to its domestic labor market.

With its diminishing population but rising oil wealth, Russia is the world’s second-largest importer of labor after the United States.

Already, the leaders of Tajikistan and Kyrgyzstan — two countries heavily reliant on migrant labor remittances from Russia —

said they were interested in joining the union.

Candidates will surely have in mind failed efforts to create free trade areas on the territory of the former Soviet Union.

The Commonwealth of Independent States, the Eurasian Economic Community and the union state of Russia and Belarus all made little headway toward creating a true common market in the region.

For now, Ukraine has said it will remain outside the union despite the election this year of a president, Viktor F. Yanukovich, who is on friendlier terms with the Kremlin than his predecessor.

Belarus, too, has been a reluctant partner, according to this extremely interesting piece in the New York Times.

The agreement on Monday was to have been in effect by July 1.

However, Belarus had held out amid a dispute over tariffs that Russia charges on crude oil exports delivered to Belarussian refineries,

which caused a brief oil pipeline shutdown last winter.

The signing went ahead, but the disagreement apparently was never resolved.

A Belarussian official said the tariffs would be abolished immediately,

but Mr. Shuvalov said the entire package of treaties forming a common economic space would have to be in place first.

http://www.economywatch.com/in-the-news/new-russia-centered-customs-union-with-ex-soviet-republics-11-07.html

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