Russia for a close knit economic alliance

Russian President Dmitry Medvedev, left, Belarusian President Alexander Lukashenko, center, and Kazakh President Nursultan Nazarbayev, right, take part in a meeting of heads of states of the Supreme Eurasian Economic Council, in the Moscow Kremlin, Moscow, Russia, Monday, Dec. 19, 2011. The meeting is a part of a summit of the Eurasian Economic Council, an economic grouping that includes six Soviet former states. (AP Photo/RIA-Novosti, Mikhail Klimentyev, Presidential Press Service, Pool)   | Photo Credit: Mikhail Klimentyev

Twenty years after the breakup of the Soviet Union, Russia has moved decisively to reintegrate former Soviet states in a closely knit economic alliance.

On January 1, a Common Economic Space (CES) comprising Russia, Kazakhstan and Belarus came into force. For the first time in post-Soviet history, three ex-Soviet states created a supranational economic entity to which they agreed to delegate a part of their sovereignty. It is the second stage in Moscow's ambitious project of rebuilding a single economic system that existed in the erstwhile Soviet Union. In the first phase, Russia, Kazakhstan and Belarus set up a Customs Union, under which the three states removed customs controls on their borders last summer.

The CES takes the integration process a big step forward. It provides for free movement of goods, services, capital and labour in the three-cornered union. The real breakthrough is the establishment of the Eurasian Economic Commission (EEC) which will monitor the compliance of the member-states with the rules of the CES, and the CES Court for resolving business disputes. Day-to-day work of the EEC with a staff of 800 will be handled by the Board chaired in rotation by representatives of the member-states. The Commission will also have an upper tier, the EEC Council, consisting of three Deputy Prime Ministers delegated by the member-states, and the apex body, the Supreme Eurasian Economic Council, which will consist of the heads of state and government.

Open to other countries

By 2015, the Common Economic Space is to be upgraded to the Eurasian Union, a full-fledged economic bloc, modelled on the European Union, with a common currency, harmonised legislation, and closely coordinated economic and monetary policies. The Eurasian Union will be open to other countries, both inside and outside the former Soviet Union. Kyrgyzstan and Tajikistan have already applied, and Russia is actively courting Ukraine. In October, Russia set up a free trade zone in the former Soviet space, designed to serve as a “prep school” for other ex-Soviet states that may be willing to join the Eurasia Union. So far, seven out of 11 members of the Commonwealth of Independent States (CIS) have signed the free trade pact — Ukraine, Belarus, Kazakhstan, Armenia, Kyrgyzstan, Moldova and Tajikistan.

‘Civilised divorce'

The loose CIS, set up immediately after the disintegration of the Soviet Union, served its purpose as an instrument of “civilised divorce” but was useless as a mechanism of economic integration. The past two decades saw several attempts to set up economic alliances but they all failed. This happened partly because Moscow sought to draw in as many newly independent states as possible, including those which feared falling back in Russia's orbit, and partly because Russia, being by far the largest economy, insisted on having a dominant say in a would-be alliance. (Russia's Gross Domestic Product is seven times that of Ukraine, the second biggest economy in the former Soviet Union). It was not until Moscow agreed to give its partners equal rights in the new union and to bear the main costs of integration that it could set the ball rolling.

Russia, Kazakhstan and Belarus will have one vote each in the governing bodies of the Eurasian Economic Commission and all decisions will be taken by consensus. At the same time, contributions to the EEC budget will be proportionate to the relative size of the members' economies, with Russia footing more than four-fifths of the bill. Under the Customs Union agreement, Russia cancelled export duties for crude oil and reduced gas prices for Belarus. This will cost Russia four to five billion dollars a year.

However, benefits may far outweigh the costs. The CES union has created a common market of 170 million people with a $2.55-trillion economy, $900-billion trade and 90 billion barrels of oil reserves. It is the world's largest union in terms of territory and the sixth biggest in terms of GDP. Experts have estimated that membership in the CES will generate additional 15 to 17 per cent growth rates in each of the member-states over the next 10 years. Trade within the Customs Union grew by nearly $20 billion, or more than 43 per cent in the 10 months of 2011.

Putin's vision

Moscow has made clear that it looks beyond the current tripartite configuration of the Eurasian Union and its purely economic agenda. Prime Minister Vladimir Putin set out his vision of the Eurasian Union in a keynote article published in October, days after he announced his bid to reclaim presidency in the March 2012 elections.

“We are proposing a new, powerful, supranational union capable of becoming one of the poles in the modern world, and playing the role of an effective bridge between Europe and the dynamic Asia-Pacific region,” Mr. Putin wrote in the article titled “A new integration project for Eurasia: The future in the making.”

To live up to Mr. Putin's vision, the Eurasian Union must expand. It must include at least one more ex-Soviet state — Ukraine — which is the most coveted prize in Mr. Putin's game plan. The U.S. master geo-strategist, Zbigniew Brzezinski, aptly described Ukraine as a “geopolitical pivot” that can make or break Russia's bid to re-emerge as a global power.

“Without Ukraine, Russia ceases to be a Eurasian empire,” he wrote in his book The Grand Chessboard. “…However, if Moscow regains control over Ukraine, with its 52 million people and major resources as well as its access to the Black Sea, Russia automatically again regains the wherewithal to become a powerful imperial state, spanning Europe and Asia.”

The failure of the Orange Revolution in Ukraine with its euphoria for a fast-track accession to the Euro-Atlantic community has given Moscow a new chance to draw its largest Slav neighbour into its orbit. Kyiv still insists that integration with Europe is its top foreign policy priority, but the European Union in December put off the signing of a free-trade and association agreement with Ukraine over the imprisonment in Ukraine of the former “orange” Prime Minister, Yulia Timoshenko, while the Euro crisis has killed Ukraine's hopes of gaining EU membership in the foreseeable future.

Meanwhile, Moscow has stepped up a carrot-and-stick policy towards Ukraine. The free trade agreement Ukraine signed with the CIS in October will facilitate exports of its metals, confectionery and machines to Russia, but oil and gas will be exempt from the pact. Russia has refused to lower the price of natural gas for Ukraine and moved to reduce its dependence on Ukrainian pipelines for gas transit to Europe. With the launch in November of the Nord Stream gas pipeline across the Baltic Sea to Germany, and the planned construction of the South Stream gas pipeline across the Black Sea to Europe by 2015, Ukraine will lose its only bargaining chip in gas price talks with Russia. Moscow has graphically demonstrated to Kyiv the benefits of joining the Eurasian Union by slashing gas prices for Belarus for 2012 by almost half. In 2012, Belarus will pay $165.6 per 1000 cubic metres of gas compared with a crippling $416 Ukraine paid in the last quarter of 2011. Mr. Putin estimated that Ukraine would stand to gain $9 billion a year from membership in the Customs Union, but if it refuses to join, the member-states may close their borders to Ukrainian exports.

The main risks for the Eurasian Union are political. Mass protests in Russia against fraudulent elections to Parliament last month may undermine Mr. Putin's hold on power; Kazakhstan may be entering a period of instability following deadly riots in an oil-rich region in December; Belarus President Alexander Lukashenka faces growing opposition to his 17-year-old authoritarian rule.

Reality by 2015

However, if the risks do not materialise in the next few years, the Eurasian Union may well become a reality by 2015. Russia's allies are demonstrating growing willingness to act in unison, and not only in economic matters. Last month, the Collective Security Treaty Organisation (CSTO), the defence bloc which, apart from the three Eurasian Union members, includes Armenia, Kyrgyzstan, Tajikistan and Uzbekistan, took the historic decision that foreign military bases can be deployed on their territory only with the consent of all member-states. The decision gives Moscow effective veto power over the U.S. and NATO military infrastructure in Central Asia.

Russia has good reason to be in a hurry to set up the Eurasian Union by 2015. The planned withdrawal of the U.S. and NATO forces from Afghanistan by 2014 may well lead to the comeback of the Taliban and a spill-over of terrorism to Central Asia, Russia's soft underbelly. Russia also needs to consolidate its grip on Central Asia to parry challenges from the U.S. “new silk road” plan and China's economic push in the region.

The Eurasian Union looks set to become the overarching theme of Mr. Putin's new six-year presidential term.

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