Customs Union judged a success by the EBRD

By bne IntelliNews November 8, 2012

bne -

The European Bank for Reconstruction and Development (EBRD) says that the Customs Union between Russia, Belarus and Kazakhstan that went into operation at the start of 2010 has been a success in its latest "Transitions Report" released on October 7.

"The Customs Union of Russia, Belarus and Kazakhstan is the first successful example in regional economic integration between countries of the former Soviet Union, according to EBRD economists," the EBRD says in a press release ahead of the release of the report. "While many benefits of the union remain to be seen, it is clear that common tariffs and reduced non-tariff barriers are affecting trade both internally, between the three members, and externally with the rest of the world."

The Customs Union and the Common Economic Space that followed in 2012 is the latest and by far the most successful attempts to bring the countries of the Former Soviet Union closer together. "Previous attempts towards economic integration in the post-Soviet space, such as the CIS free-trade agreement, created little actual integration," the EBRD says. "However, the Customs Union has in fact introduced mechanisms of trade integration, particularly by lowering non-tariff trade barriers. Potentially the union can bring further benefits such as improved cross-border infrastructure and strengthened institutions."

"The Customs Union created a common external tariff and eliminated a plethora of non-tariff barriers between the countries of the troika, but the parallel Single Economic Space agreements (17 signed and 55 more to come) also covered a wide range of issues, including the coordination of macroeconomic policy, unrestricted access to different types of infrastructure, common acquisition rules and antitrust regulations, common policy on migrant labour, and so on," says Eugeniy Vinokurov, head of the Centre for Integration Studies at the Eurasian Development Bank (EDB), which has been responsible for financing many of the cross-border infrastructure projects.

In parallel, the Customs Union Commission has actually become the first institution in the post-Soviet area with truly supranational powers.

Since it was set up, the Customs Union has already led to a doubling in trade between the member countries. This was partly fuelled by the low base effect as the countries recovered from the 2008 crash, but the EBRD economists say that the single-tariff policy has made a real contribution to the increase in trade volumes.

The EDB estimates that the Customs Union will add about 3% to the collective GDP of the troika of countries, says Vinokurov, with Belarus getting the biggest relative boost (an additional 15% to its GDP) and Russia enjoying the largest absolute gains. "However, the most significant benefits won't be the increases in trade volumes, but the longer-term technological convergence between the three countries," says Vinokurov.

More importantly, the change in the structure of the trade means that member countries are getting ready to use the Customs Union as a springboard to launch exports to the rest of the world. "Higher-value-added goods first exported within the regional bloc are likely to later be exported to other destinations," says the EBRD.

Trade between members and China has been the most affected by the advent of the Customs Union, declining by 2-3% in the last two years. In particular, Kazakhstan has been swapping the import of increasingly expensive Chinese goods for their Russian equivalents, thanks to the lower tariffs.

The growth of the Customs Union is happening in parallel to Russia's integration with the World Trade Organization (WTO) to which it acceded this summer that is also likely to bring additional gains - both in terms of increased trade volumes, but also from more technology transfers and the goad of heightened competition. "Regional integration should also be linked to global integration processes. While Kyrgyzstan, Ukraine and Georgia are members of the WTO, Kazakhstan and Belarus are not," says Vinokurov. "Russia has already adopted a huge number of laws enabling it to conform to WTO requirements... These cumulative changes will move the Russian economy towards a more transparent trade and investment model of economic development and away from an import-substitution-industrialization economic model."

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