Russia, Belarus, Kazakhstan: The Customs Union Agreement Deepens

On July 1, custom controls between Russia, Belarus and Kazakhstan will be lifted. This is the last official step toward implementing the customs union agreement the countries entered into Jan. 1, 2010, with the goal of creating a common economic space by January 2012. Control of customs will be transferred formally from the Russian-Kazakh and Russian-Belarusian borders to the union members' external borders, establishing a unified regulatory system and in theory eliminating internal trade boundaries. With this change, the duties Belarus and Kazakhstan levy on goods imported from outside the customs union will be synchronized with the much higher duties Russia currently charges. This will significantly raise the cost of importing goods to Belarus and Kazakhstan and consequently increase both countries' dependence on the one trade partner unaffected by a tariff hike: Russia. In other words, while the official purpose of the move is to promote two-way trade within the union, in practice it will pull Kazakhstan and Belarus away from the global market and further into Russia's sphere of influence. The Belarusian economy is based on heavy industry and manufacturing, and Minsk has generally aligned its tariffs more closely with Moscow's import duties to protect its domestic industry. Kazakhstan, however, depends heavily on oil revenues and, with little industrial production of its own, imposes far lower tariffs. Thus, the move to unify customs duties and the resulting rise in the price of imports from countries outside the customs union will be felt much more acutely in Kazakhstan than in Belarus. That Minsk and Astana are willingly raising the price of their imports indicates just how powerful Russia has become. In fact, the basic structure of the customs agreement has always held clear economic disadvantages for Kazakhstan and Belarus. Prior to the customs union, shared Soviet-era infrastructure and design, not to mention geography, bound the economies of Russia, Belarus and Kazakhstan, so formalizing economic union was not difficult. When the union came into effect, both Belarus and Kazakhstan had been hit hard by the global recession of 2008-2009 and were seeking economic stability. Russia's ascendance in the region made it clear that Moscow alone could offer such stability. Initially, Minsk and Astana hoped that membership in the customs union would soon lead to better energy arrangements with Russia. However, Moscow has not agreed to any such concession. As Belarus' and Kazakhstan's financial situations deteriorate, Russia's economic clout within the grouping continues to grow. Belarus is facing a financial crisis. Minsk's continued political and economic isolation from the West leaves Russia as Belarus' only real option for a financial lifeline, which Moscow is more than happy to extend — in exchange for control of some of the country's key strategic assets. Kazakhstan has not fully recovered from the global recession. The country's much-indebted banking sector remains particularly vulnerable to a major crisis. If a worst-case scenario forced Astana to consider default, the likely cutoff from international credit markets would leave Kazakhstan with few if any financial options outside the customs union. Full implementation of the customs-control change will take quite some time, but it is already having some effects. The anticipated increase in the cost of imports from the West is leading thousands of Belarusians to try to clear customs at checkpoints on the Belarusian-Polish border with expensive imports like cars before the new tariffs take effect. Belarusians in general believe this move toward reintegration will not have positive implications for the country's economy. However, such changes are also seen as necessary, and there has been no resistance from the general population. There are also political and security-related implications to increasing economic integration with Russia, as evidenced by the reactions of the countries Moscow hopes will join the customs union: Kyrgyzstan, Tajikistan and Ukraine. Russia's stated intention to help Kyrgyzstan and Tajikistan join shows that Moscow's strategic interests in the union are not solely — or even predominantly — financial. Kyrgyzstan and Tajikistan, likely the next two countries to acquire membership, have almost no economic relevance; neither country would be a net contributor to the union or a particularly lucrative market for Russian products. However, both states hold essential transit routes for illicit drugs coming from Central Asia into Russia. Under the aegis of the customs union, Moscow would have a formal structure and authority to impose far stricter regulatory controls upon the countries' extremely porous borders and root out institutional corruption. Ukraine, meanwhile, has a more viable economy than Kyrgyzstan or Tajikistan do. Its strategic position and importance to Russia place it at the center of growing economic competition between Russia and the European Union. Moscow would like to increase its influence over Ukraine by having it join the customs union. Whether or not that happens, it is clear every step forward taken by the customs union strengthens Russia's position in the region.