Next-generation integration in Eurasia

By bne IntelliNews October 5, 2010

Clare Nuttall in Almaty -

Recent years have seen several major steps toward integrating the markets of the former Soviet Union. The establishment of the Eurasian Development Bank four years ago has been followed by the launch of the EurAsEC Anti-Crisis Fund and this year's creation of the Customs Union between Russia, Belarus and Kazakhstan - the latter a significant move towards the creation of a single economic zone within the post-Soviet space.

Set up in 2006, the Eurasian Development Bank (EDB) has become an increasingly powerful force for this Eurasian integration. Its founding shareholders, Russia and Kazakhstan, have since been joined by Armenia, Belarus and Tajikistan.

In addition to the typical development bank roles of facilitating economic growth and the emergence of healthy market economies, the EDB's mission focuses specifically on the expansion of trade and other economic ties in its member states. It aims to act as a catalyst for integration among its members. The bank's lending in the energy sector in particular has helped to increase integration within the region. The investments into additional capacity at the Ekibastuz GRES power station in Kazakhstan, for example, will increase Kazakhstan's power exports to Russia and assist the reunification of the two countries' power systems.

Other investment projects as diverse as funding the reconstruction of Pulkovo Airport, a co-financing agreement with Rusnano to invest into innovative nanotechnology projects, and the cooperation between Russia's AvtoVAZ, Kazakhstan's Aziya Avto and the EDB, all have an integration dimension.


This year saw the establishment of the Customs Union of Russia, Belarus and Kazakhstan, which became operational on July 1. "Integration processes in the post-Soviet space have accelerated lately, in particular with the establishment of Russia-Kazakhstan-Belarus Customs Union," says Evgeny Vinokurov, head of the economic analysis division within the EDB's strategy and research department.

Vinokurov believes the creation of the Customs Union to be "a more advanced form of integration" compared to previous forms of interaction between the post-Soviet countries. In fact, it is one of the key steps towards the creation of a single economic area in the region along the lines of the EU.

For its members, the establishment of a customs territory with single customs tariffs, and the abolishment of customs duties and economic barriers is set to boost trade and investment between its members, and result in the launch of more trans-border projects. The Customs Union "will provide an opportunity to the member countries to employ the benefits of specialisation and develop production chains, thus increasing the effectiveness of national economies and the union as a whole," says Vinokurov.

Moreover, the creation of the Customs Union is just the start of the process, with Russia, Kazakhstan and Belarus forming a core around which the other countries in the region are likely to gravitate. "The formation of an 'integration core' gained momentum with the establishment of the Russia-Kazakhstan-Belarus customs union, with further prospects of establishing a single economic area," says Vinokurov. "The Customs Union Commission might come to represent the first truly supranational institution in the 20 years of attempts at reintegration in the post-Soviet region. It is obvious that the Customs Union will facilitate trade turnover between its member countries and increase their attractiveness as a destination for investment. The post Soviet 'troika' will strengthen its position in key markets, for example, on the world energy and grain markets."

This gravitational pull has already started, with Kyrgyzstan and Tajikistan being the first countries to show a serious interest in joining. The big prize, however, would be Ukraine, which alongside the three Customs Union members was a signatory to the September 2003 agreement on the formation of the single economic area. "The prospects for the region's economic integration with Ukraine are most thrilling, albeit less certain," says Vinokurov. "It is Ukraine whose presence can impart true completeness to the region's economic integration. Joining the Customs Union and the Single Economic Area, in our view, is beneficial to this country's economy, especially its petrochemistry, metallurgy, mechanical engineering and agribusiness. This fact allows us to hope that 'the eastern direction' will receive due attention in Ukraine's foreign policy."

Silver linings

Despite its overall negative impact on the Eurasia region, the international economic crisis has had a silver lining in that it's spurred on integration. Russia has supported several of the poorer CIS countries, providing substantial packages for Armenia, Belarus and Kyrgyzstan. On an international level, the governments of Armenia, Belarus, Kazakhstan, Kyrgyz Republic, Russia and Tajikistan agreed in June 2009 to set up an anti-crisis fund within the framework of the EurAsEC (Eurasian Economic Community). The EDB was appointed manager of the fund.

Plans to launch the $8.5bn fund were drawn up at the peak of the crisis, with the key aim of minimising the impact of the crisis on economies within the community. To achieve this, the fund has two main areas of activity. First, it provides budget support to low-income member countries, helping their governments to reduce the impact of the crisis on vulnerable social groups. It also provides investment loans, which are to be targeted at projects with the largest growth and job-creation impact. Other factors to be taken into account in selecting projects are their contribution to promoting development and economic diversification, and providing social benefits in terms of poverty reduction and support for vulnerable and low-income groups.

As the manager of the EurAsEC Anti-Crisis Fund, the EDB works in close cooperation with other multinational development organisations including the International Monetary Fund, the World Bank and the European Bank for Reconstruction and Development. "This is very important, because only with such coordination can we make sure that scarce resources are used wisely," says Sergei Shatalov, managing director of the fund.

The first investment from the fund was a $70m budget support loan for Tajikistan, transferred in August 2010. This will be used to support social spending within the country. Tajikistan has the lowest per-capita income among member countries and was quick off the mark to request a loan and prepare detailed project documentation. According to Shatalov, an application from the Kyrgyz Republic for a similar loan is also moving fast. "The other countries are middle income and are more interested in the infrastructure development loans. We are considering financing requests from Armenia and Belarus, and may also provide an infrastructure loan to the Kazakh government," says Shatalov.

In general, Kazakhstan and Russia - the two main contributors to the fund - do not plan to tap its resources for their own ends, but they are interested in using it to support projects with regional benefits. This could include investment into projects to rehabilitate the Central Asian common electricity grid. The loan the Kazakh government is seeking would fund construction of a new transmission loop that would help Kyrgyzstan and Tajikistan, which have power generation capacity in abundance, to export electricity to Kazakhstan. In addition to benefits for the three Central Asian countries, the new grid would also help to stabilise the power supply situation in South Siberia after the Sayano-Shushenskaya disaster.

Just $70m of the $8.5bn fund had been disbursed as of mid-September, but its member countries are already starting to see a recovery. "Russia is expected to have 4% real growth in 2010, while Kazakhstan is clocking in at over 8%. Despite the risks in Kyrgyzstan, growth of 3% or more is expected. Growth has also revived in Tajikistan and there are some green shoots of growth in Armenia and Belarus," says Shatalov. "2010 is the first post-crisis year, but how sustainable that growth will be depends on the policies of the countries. The anti-crisis fund supports sustainable economic policies aimed at a viable budget, viable balance of payments, sustaining social policies and stimulating future growth."

Shatalov hopes the fund will remain an ongoing concern, and points out it is intended not only to help the EurAsEC countries through the current economic crisis, but to provide support in the event of other shocks and natural disasters. Tajikistan, for example, needs funds for rehabilitation work after mudslides and avalanches caused up to $600m worth of damage in May.

Despite these advances in integration in recent years, there are still many more steps that can be taken. The EDB recommends concentrating on priority sectors for the development of its member countries. These include sectors such as transport - Vinokurov points out the importance of Eurasia's role as a land bridge between Europe and Asia, in addition to other infrastructure sectors - power generation and distribution, and telecommunications, as well as the financial sector. The post-Soviet countries have much to gain from investments especially into new infrastructure that will advance each of them, while bringing the region closer together.


#CustomsUnion #EEU

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