The Common Economic Space - like the EU, but better

By bne IntelliNews June 7, 2012

Ben Aris in London -

The countries of the former Soviet Union have tried to join forces into a common economic bloc three times since the fall of the USSR with middling success, but with the approaching Common Economic Space (CES), it looks like they have finally cracked it. If things go according to plan, most of the countries of the former Soviet Union will end up in a trading bloc designed to function better than the EU.

The governments of Russia, Belarus and Kazakhstan have already been in a Customs Union since January 2010, but the next step will be to create a CES, which should take shape over the next year or so, with a final foundation agreement drawn up and signed by the beginning of 2015. "We were trying to copy the European Union," says Tatiana Valovaya, who has done much of the negotiating for the Russian side. "We are extremely grateful to the EU for its problems, as they have taught the lessons we need to make the Common Economic Space a reality."

Uniting the markets of Eastern Europe and Central Asia makes a lot of sense. Their economies remain tightly tied together by trade and industrial connections imposed by Stalin that have never been completely undone. For example, nearly all of Ukraine's helicopter engine production is exported to factories in Russia's Tatarstan, and a "Minsk" fridge can be found in the majority of homes from the Baltic Sea to the Pacific coast.

But obvious political enmities have made building a common trade bloc difficult and trade spats abound. Ukraine and Russia had a big row over gas deliveries in 2006 that is still roiling relations. Moscow banned Belarusian dairy products last year and Ukrainian cheese this year. Georgia's salty Borjomi mineral water (a favourite Russian hangover cure) is still absent from stores in Moscow four years after the short Russo-Georgian war. And Moldovans have been unsuccessful in persuading the Kremlin to restart imports of their wine and cognac.

First steps

The first attempt to unite the economies of the former Soviet Union was the Commonwealth of Independent States (CIS), signed by Boris Yeltsin for Russia, Stanislau Shushkevich for Belarus, and Leonid Kravchuk for Ukraine in Brest in December 1991, which brought the Soviet Union to an end. Two weeks later, another eight of the former republics joined the club (the Baltic states stayed out.) The CIS has been a useful body and a badly needed forum for the former states to disentangle themselves, but as an economic bloc it doesn't work very well.

Vladimir Putin tried to restart the process with the Eurasian Union early on in his first stint as Russia's president in 2000, but the idea didn't catch on. Putin has had more success with the Customs Union, which has unified import duties and regulations between Russia, Belarus and Kazakhstan. Since it was founded, Russia has seen trade with the other two members increase by just over a quarter to a total of $91bn in 2010 and it was up again in 2011 by another 35%.

But the CES is the big prize and looking increasingly likely to happen. "The additional growth in Belarusian GDP by 2030 from the CES could be 14%, Ukraine 6%, Kazakh 3.5%, and Russian 2%," predicts Igor Finogenov, chairman of the Eurasian Development Bank (EDB), which is dedicated to promoting regional integration. "Belarus, Ukraine and Kazakhstan are expected to benefit the most in terms of per-capita effects and Russia the most in absolute terms."

Kazakhstan and Belarus are far smaller than Russia, but the benefits for Minsk in particular are huge: despite its small size, Belarus is the most export-oriented economic by far, in not only in the CIS but Europe as a whole, sending 85% of its production overseas. Russia's commitment to Belarus was underlined after Putin snubbed US President Barack Obama's invitation to a G8 summit and chose instead to visit Belarusian President Alexander Lukashenko in Minsk at the end of May as his first foreign trip after reassuming the presidency. He also flew to Beijing, Astana and Tashkent on the same trip. "The choice of countries for Putin's first diplomatic trip is a strong signal of his focus in the coming years," says Lilit Gevorgyan, an analyst with IHS Global Insight. "His priority will be developing trade ties with key EU players and China, while strengthening the relations with those former Soviet counties that could become the core of the Eurasian Union envisaged by Putin."

One serious fly in the ointment of the CES plans is Ukraine. Already a major trade partner with the other Customs Union members, Kyiv wants to integrate further with the EU and has negotiated an EU Association Agreement (though that is currently in limbo and remains unsigned due to the political row over the fate of jailed opposition leader Yulia Tymoshenko). Valovaya says that Kyiv cannot be a member of both CES and the EU at the same - unless the CES as body signs a free trade agreement with the EU, something that she doesn't rule out.

Further integration

The Customs Union caters to 170m consumers, but it is still only a halfway house; the goal of the CES is to create a common economic space where companies will be free to move to any of the member countries and enjoy exactly the same business and trade conditions. "We need a fully integrated space, not like the European Union of 1968. Companies need to be able to choose freely between countries and pick the place that suits them best," says Valovaya, who has consistently argued for a "Separately impossible. Together" approach to regional politics.

And the recent global meltdown has turned out to be a boon for the project. "The crisis that began in 2007 made everyone see that we need to enhance our integration and pushed everyone into acting," says Valovaya, who holds a doctorate in economics and is a professor at Russia's Financial academy. "The Customs Union is now in place. At first no one believed the rhetoric, but they were pleasantly surprised and it is there now."

But there is still a lot of work to do. The CES will be built through signing treaties and 17 already have signatures on them with another 80 under discussion now. Moreover, the CES lacks a basic foundation document - analogous with Europe's Treaty of Rome - to underpin all the other legislation. "Joining up to the CES cannot be an 'a la carte' deal, but a set menu," says Valovaya. "Countries can't pick and choose what they want for lunch; they have to eat everything that is put on the table."

Creating the foundation agreement will take even more treaty negotiation, but Valovaya says there is a concrete plan to draw up the document and get it passed by January 1, 2015. "There is a difference between enlarging the CES and deepening it," says Valovaya, taking an implicit swipe as the 2003 accession of several Central European countries to the EU. "Any new member that joins has to bring benefits for not only itself, but also the existing members."

In practical terms that means full, unfettered access to any members' market where the domestic rules, regulations, registrations and documentation can be used anywhere in the union without restriction - which is more than the EU can currently boast.

The intangible benefit of this freedom of movement is that the countries will tend to converge to the standards set by the fastest reformer. If they don't, their business will simply move to another member country with a more convivial business environment. "The CES is not just about trade, but should create an efficient climate for doing business thanks to the smooth functioning of a single market based on mutual recognition," says Valovaya. "One paper will work in all countries."

All this is fine in theory, but during a panel on the CES during the European Bank for Reconstruction and Development's annual general meeting in London in May, Michael Emerson, associate senior research fellow at the Centre for European Policy Studies and one of the architects of the EU, broached the real issue that worries most observers. "I am going to say the naughty word: 'hegemon'. Can the regional hegemon really organise deep integration in the region?" asked Emerson. "China, the USA and India don't have [free trade] relations with their smaller neighbours, as they are nervous of the power of the largest country. Can a hegemon accept the power of supra-nationality?"

Emerson basically articulated what many are wondering, that all this talk of free trade regions is just a jumped-up ploy by Russia to rebuild the Soviet Union, but on modern terms. Russia, after all, is not shy when it comes to throwing its weight about. "Russia doesn't want to dominate," insists Valovaya. "Any CES decision requires only a two-thirds majority. That means [Kazakhstan and Belarus] can make decisions without Russia. This is the main difference between the CES and EU. Russia has decided that it doesn't want to dictate to the others as the biggest economy in the club."

The Common Economic Space - like the EU, but better

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