Russia's Customs Union to Eurasian Union: An Evolution (Part 1)

6 MINS READJul 24, 2012 | 10:01 GMT
Russia's Customs Union to Eurasian Union: An Evolution (Part 1)
Belarusian President Aleksandr Lukashenko (L), Russian Prime Minister Dmitri Medvedev (C) and Kazakh President Nursultan Nazarbayev in December 2011

Editor's Note: This is the first part of a series examining how the expansion of Russia's multinational economic grouping is designed to further Moscow's control in its near abroad. Read Part 2 here.

Mid-2012 marks the halfway point between Russia's formation of the Customs Union in 2010 and its planned debut of the Eurasian Union in 2015. Moscow planned for the Customs Union to evolve in multiple stages over the course of several years. These stages included the introduction of the unified Customs Code in July 2010, the adoption of a unified customs border in January 2011 and the formation of a Single Economic Space in 2012. The Eurasian Union is seen as the extension and evolution of these stages into their final form. 

In a technical sense the Customs Union has not evolved into what Moscow said it hoped for. Still, Russia has made considerable progress in re-establishing influence in many of its former Soviet republics. The ongoing transition from Customs Union to the Eurasian Union is important to watch, but it should be seen as one aspect of Russia's broader strategy to increase its presence and heft within the former Soviet Union. 

An understanding of the context of the formation of the Customs Union and of the proposal of the Eurasian Union is necessary to understand the ongoing evolution of the first into the second.

Russia, Belarus and Kazakhstan formed the Customs Union on Jan. 1, 2010. The union's creation came about in the midst of a resurgence of Russian power in Moscow's former Soviet periphery. The primary development in this resurgence was Russia's war with Georgia in August 2008, in which Russia handily defeated the Western-oriented Georgia. The war also exposed the West's (and especially the United States' and NATO's) unwillingness to defend a country firmly in its camp. This served as a message to all other former Soviet republics that they should reconsider their Western orientation. The war made clear that alliance with or even membership in NATO or the European Union provided no guarantees against Russia — security or otherwise.

Moscow achieved a number of other foreign policy victories in its former Soviet periphery in the next two years, including a reversal of color revolutions in two formerly Western-leaning countries — Ukraine and Kyrgyzstan. Russia also strengthened bilateral security ties with countries such as Belarus, Armenia and Tajikistan.

The Customs Union's Role in Russia's Resurgence

Another key part of Russia's push into its near abroad was institutionalizing its renewed influence and presence in former Soviet countries. The Customs Union was vital to this step. The union's formal purpose is to facilitate and expand trade and economic ties between member countries (and thus be mutually beneficial), but in practice the union has reoriented the member countries' economic systems toward Russia and away from partners outside the union. This is because the integration of members' customs duties meant that Belarus and Kazakhstan largely changed their customs controls to match Russia's. Because Russia's customs were higher on almost all goods, Belarus and Kazakhstan raised their external tariffs and prioritized trade with Russia.

In mid-2011, as Russia continued re-establishing its influence in Moscow's near abroad, Russian President Vladimir Putin — who was prime minister at the time — announced plans for the creation of a Eurasian Union. Specifics about what the union would entail were vague, but the main idea was to deepen the economic and political ties established by the Customs Union while possibly expanding the new union to other former Soviet countries.

The idea is not new — Kazakh President Nursultan Nazarbayev proposed the concept for such a union in 1994. The key difference this time was that Moscow had made regaining influence in the former Soviet Union a foreign policy priority while Putin positioned himself to retake the presidency in 2012. Moscow's plans centered on countries already close to Russia — Belarus, Kazakhstan and Armenia, among others — but expanded to those countries more resistant to Moscow, such as Ukraine and some countries in the Caucasus and Central Asia.

Although Russia has increased its influence throughout much of its former Soviet territory, the Customs Union is not what Russia purportedly hoped it would be. The union's founding members — Russia, Belarus and Kazakhstan — remain its only members. The only country to formally apply for membership is Kyrgyzstan, one of the smallest and weakest former Soviet economies. Many of the steps the Customs Union was set to take, such as the complete elimination of customs duties on all products and a complete synchronization of the Customs Code, have not been completed. However, in order to truly gauge the effectiveness of the Customs Union within Moscow's wider integration plans, Russia's bilateral relationship with each individual former Soviet country must be further examined. 

Current Members 

Russia's initial partners in the Customs Union, Belarus and Kazakhstan, are also typically the most prominent supporters of Russia's plans for economic integration. The formation of the union has had some real effects, such as increased trade among Belarus, Kazakhstan and Russia. Trade among Customs Union members increased by a quarter between 2009 and the end of 2010 and then by two-thirds by the end of 2011. According to the Eurasian Economic Commission (established in December 2011), trade between Russia, Belarus and Kazakhstan was $16 billion in the first quarter of 2012, up nearly 18 percent year-over-year. The three largest trade categories were fuel and power resources (43 percent of total trade), metals and metal objects (11 percent), and transport vehicles, including cars and equipment (9 percent).

However, the synchronization of customs duties has achieved more mixed results, as have other economic policies and regulations. Implementation of the various phases of the Customs Union has not been smooth, and these phases have not been carried out to their completion. For instance, key goods such as oil and natural gas remain exempt from customs elimination within the three countries, since the move would not serve Russia's interest as a major energy producer and exporter. This policy created a spat between Belarus and Russia in 2010 that led Russia to briefly cut off natural gas to Belarus. Other exemptions from customs elimination for strategic or "sensitive" goods apply to Belarus and Kazakhstan as well — these include foodstuffs and pharmaceutical supplies. Other goals — such as the use of a single currency between members and joint customs inspections — have been put off until the formation of the Eurasian Union.

But Russia has been able to use economic tools other than the Customs Union to bring other union members more tightly into its sphere of influence. For instance, Russia acquired a 100 percent stake in Belarusian energy transit firm Beltransgaz. The multibillion-dollar deal gave Belarus a much-needed reprieve from its financial difficulties while raising Russia's profile in the energy sector in Belarus (which is an important transit point to Europe). Minsk thought its Customs Union membership would automatically result in cheaper energy from Moscow. Instead, Russia only lowered natural gas prices after Belarus ceded Beltransgaz.

Kazakhstan is less permeable to Russian influence than Belarus, but the Customs Union has enabled Russia to play a larger role in the country's economy and thus compete more effectively with China's growing influence in Central Asia. There is not much Russia can do to block the expansion of China's economic ties with Kazakhstan, especially in the energy realm. Having more of a say over customs controls (Russia has a majority of the votes within the Customs Union Commission, with Kazakhstan and Belarus having just over 20 percent each) puts Russia in a position to potentially complicate any trade between Kazakhstan and China by driving up the cost of trade between the two countries. 

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