5. Scope and Priorities of Integration
The Astana Treaty codifies the framework for integration related to the Customs Union and the SES, up to and including creating a common market without internal barriers. This agenda entails the removal of non-tariff barriers, the setting up of common markets in energy and electricity, as well as the harmonization of various policies, such as transport, public procurement and financial services. In this, the EAEU has sought to emulate the EU and its approach to eliminating internal barriers has included extensive regulatory harmonization, including common technical standards and sanitary and phytosanitary standards (SPS).50
This ambitious agenda stems from the recognition that the real benefits of preferential trade agreements arise from deep integration and not merely from changing tariff rates. This is especially so as the region’s trade in goods had already been largely liberalized within the context of the multilateral and bilateral trade agreements concluded within the Commonwealth of Independent States (CIS).
Such an objective requires effective, strong domestic institutions and a high level of cooperation and commitment. Yet, in practice the priorities and progress of integration are critically affected by bargaining among the member states, all of which value flexibility. The degree of flexibility they enjoy within the EAEU depends on their relationship with Russia. This power-driven dynamic is evident both with regard to the internal and external functioning of the EAEU.
Internal market
While deep integration is an explicit objective for the EAEU, its scope is not easy to ascertain – it requires delving into the technical details, embedded in the union’s founding treaty, its extensive appendices and subsequent agreements.
The Astana Treaty proclaims that member states can trade freely with each other without the application of tariffs, non-tariff barriers, other protective measures and internal customs controls (articles 25 and 28). Free trade within the EAEU relies on the pre-existing bilateral and multilateral free trade agreements between member states and, as a result, has been the easiest to achieve. Tariff removal was accompanied by the elimination of customs controls between the countries in 2011. Complications arise when the agenda moves beyond simple tariff-free trade into the domain of border trade facilitation and particularly, the elimination of domestic regulatory and other non-tariff barriers to trade.
One of the early successes of integration was the provision of common border regulation through the adoption of a common customs code when the Customs Union was established in 2010. That code brought about modernization as it incorporated current international customs practices. Yet, it resulted in complex customs regulations, due to its numerous references to national legislation, and was extensively criticized by businesses. The drafting of a new code began as early as 2011 and progressed slowly to its planned but problematic adoption in December 2016. The code as well as related trade facilitation activities took a back seat during the drafting of the Astana Treaty. Reflecting Russia’s priorities, the final stage of integration – the economic union – took precedence over the key foundation steps – the Customs Union. Further delays were caused by diverging priorities and last-minute bargaining. Ultimately, the signing of the new code in December 2016 became another opportunity for Kyrgyzstan and Belarus to secure better economic hand-outs from Russia. Even when the code enters into force, most likely in 2017, this kind of bargaining is likely to plague its implementation within the EAEU.
The progress in removing regulatory barriers has exhibited similar dynamics, where investment in technical aspects of integration has suffered from the institutional deficiencies of integration. It is widely recognized that non-tariff barriers – such as technical standards, SPS, competition and public procurement issues – hinder free trade and pose the biggest challenge for any integration project. Removing such barriers requires consensus amongst the member states for the commission to decide on the process stipulating which barriers and when should be tackled.
Non-tariff barriers form a strong impediment to free trade in the EAEU. The ad valorem equivalents of such barriers range from 10–30 per cent of some countries’ export value.51
Non-tariff barriers were not an EAEU agenda priority, instead attention was focused on the new treaty negotiations and further enlargement of the union. Since 2015, the EAEU commission has sought to identify, list and classify existing barriers as a first step towards their elimination, which will be followed by a road map with specific measures and timetables.52
The progress, however, will be particularly difficult, given that the bulk of such barriers result from gaps in the union regime or exemptions granted under the Astana Treaty. The highest proportion of extant barriers are the result of ‘under integration’ (nedointegratsiya), according to Commissioner for the Internal Market Karine Minasian.53 In a range of policy areas pertaining to the internal market, member states agreed only to a loose, fragmented framework for cooperation, in defiance of the proclaimed intentions of integration. Notably, references to ‘unified’ policies were eliminated from the Astana Treaty, in favour of vaguely described forms of ‘coordination’ and ‘harmonization’. In addition, even where the removal of existing barriers is a treaty obligation, their removal has been hampered by a lack of domestic compliance and complex bilateral negotiations.54 Clearly, much needs to be done in order to make deep integration a realistic proposition if the EAEU is to achieve its aims.
Even more important, progress in eliminating existing barriers is undermined, by the explosion of new obstacles to free trade within the EAEU. Most visible have been the ‘trade wars’ such as the ‘milk and meat wars’ between Russia and Belarus or the ‘potato wars’ between Kazakhstan and Kyrgyzstan, where exemptions to free trade on the basis of alleged violations of food safety standards have been invoked. The effect of these ‘trade wars’ by the back door is not easy to quantify, not only do they signal a continuous lack of predictability in intra-union trade relations but also result in the unravelling of previous achievements. For example, Belarus retaliated against Russia’s bans of its products by the re-introduction of internal customs border controls in December 2014. The standing disputes have been aggravated by the wider dynamics of relations between Russia and Belarus in relation to gas prices and border controls,55 resulting in the unilateral re-introduction of a stronger border protection regime on the Belarusian–Russian border by Russia in February 2017.
Finally, the objectives of the EAEU include the harmonizing of a range of state policies, such as competition, taxation, public procurement and financial market regulation. An important part of this agenda has been the establishment of a common market for pharmaceuticals and energy (electricity, gas and oil). Yet, the Astana Treaty delivers only a general road map for future developments, with few specific and immediate obligations. The common market is to be created in several steps, starting with defining common principles, followed by an action plan with a timetable for implementation of the agreed measures. Meeting these intermediary deadlines requires inter-state consensus and will ultimately need members’ commitment and additional international agreements to implement the action plans. It is indicative that some of the earlier deadlines, for example, the timetable for the pharmaceuticals industries, have been delayed – the commission could not surmount the political and technical difficulties.56 Clearly, any progress will continue to depend on the underlying power dynamics in what are highly sensitive areas of cooperation.
The lack of progress on non-tariff barriers reflects the mismatch between the grand narrative and the limited powers of EAEU institutions when confronted with resistance from member states to pursue deep integration. Solutions for these issues are available. For example, Tarr suggests that the EAEU could abandon its ambition to create common technical regulations and, instead, move towards a system of voluntary standards and mutual recognition agreements.57 Indeed, this would be easier to achieve, but is premised on Russia’s interest in seeking such pragmatic solutions. Russia would have to take the lead and there is little evidence that Russian authorities are keen to spearhead such a modernization of the regulatory framework within the EAEU. Ultimately, progress is hampered by backsliding and departures from the core principles of the union, something that is also seen in the external dimension of integration.
External dimension – the unravelling of the Customs Union’s tariffs
Understanding the external relations of the EAEU requires delving into technical detail. However, analysis shows that at its core the union is weak and its member states put a premium on flexibility. As a result, there is little unity in the EAEU’s external relations.
In terms of the fundamentals of a common external policy, the EAEU added little to the Customs Union launched in 2010, which adopted a common external tariff and empowered the commission to develop a common customs policy, such as the imposition of anti-dumping measures. The 2010 regime did not set up a fully-fledged customs union. The establishment and expansion of the EAEU in fact led to the contraction and fragmentation of the Customs Union – to the point of undermining the viability of earlier achievements of integration. This is best illustrated by exploring the departures from the common external tariff of the union and the unilateral introduction of various external trade protection measures and their impact on the integration process.
The launch of the Customs Union demonstrated Russia’s ability to impose its own terms within the Eurasian project, owing to its economic might. In 2010, Russia’s high, protectionist import tariffs were embedded in the Customs Union common external tariff.58 This continued after Russia’s accession to the WTO: the Customs Union as a whole committed to implementing Russia’s tariff reduction and other WTO obligations.59
Russian preferences have affected the trading relations of other member states with the rest of the world after they joined the Customs Union. Kazakhstan, for example, which had had more open trade with the rest of the world than Russia, was required to significantly increase its tariff levels. Even after the progressive reduction of Russia’s tariffs in line with its WTO commitments, the Customs Union tariffs were higher than Kazakh tariffs had been prior to joining the Customs Union. The problem was temporarily eased by granting Kazakhstan a large number of exemptions, which were gradually phased out, but tensions remain.60
The issue reappeared during Kazakhstan’s own accession to the WTO in 2015. In its long process of accession, Kazakhstan negotiated a schedule of WTO commitments that was more liberal than that of Russia. For agricultural products it agreed an average final tariff rate of 7.6 per cent versus 10.8 per cent that Russia agreed, and for industrial products – 6 per cent versus 7.3 per cent respectively.61 Owing to the WTO accession, Kazakhstan ended up with different tariffs than the Customs Union as a whole. The discrepancy was addressed by introducing a schedule of exemptions from the EAEU external tariff on imports. The proportion of products covered by these exemptions is massive: 3,500 tariff lines accounting for 49 per cent of Kazakhstan’s imports from non-EAEU partners.62 As such, in the short to medium term, Kazakhstan’s import duties will be lower than those of other EAEU members. Kazakhstan committed itself to start negotiations on tariff increases to match the EAEU level in three and a half years after the end of all transitional periods, which would mean talks commencing in approximately 2024. These negotiations are not expected to be quick and easy. Of more immediate and vocal concern, however, has been the potential re-export of those goods to the rest of the EAEU. As a result, the union came up with a list of ‘risky goods’ most liable to be re-exported and introduced a customs monitoring scheme. This effectively reintroduced barriers within the internal market.
Similar dynamics were demonstrated when Armenia and Kyrgyzstan joined the EAEU, despite their longstanding membership of the WTO. In joining the EAEU they undertook to match Russia’s higher tariff schedule and launch compensatory negotiations within the WTO.63 As with Kazakhstan, some relief to those countries was provided by envisaging a schedule of transitional exemptions, which in the case of Armenia was much larger than Kyrgyzstan (see Table 2). Unlike Kazakhstan, however, exemptions will be removed and a progressive move to the EAEU tariff effected in a shorter period of time, by 2022 in the case of Armenia and even sooner, 2020, in the case of Kyrgyzstan. In the meantime, Armenia and Kyrgyzstan have agreed to refrain from re-exporting goods imported at lower tariffs to the rest of the EAEU during the transition periods. As with Kazakhstan, a special mechanism was put in place to monitor the intra-EAEU movement of such goods and the repayment of duties to the union, in cases when entry into the common EAEU market has been established.
Table 2: Members’ exemptions to EAEU tariffs related to WTO membership
|
Armenia |
Kyrgyzstan |
Kazakhstan |
|
|---|---|---|---|
|
WTO entry |
5 Feb 2003 |
20 Dec 1998 |
30 Nov 2015 |
|
Volume of exemptions |
800 tariff lines: 40 per cent of non-EAEU imports |
200 tariff lines: 14 per cent of non-EAEU imports |
3,500 tariff lines: 49 per cent of non-EAEU imports (starting at 21%) |
|
Transition periods until |
2022 |
2020 |
2024 |
|
Position after end of transition period |
Move to Customs Union schedule |
Move to Customs Union schedule |
Start of negotiations within the EAEU |
Source: Movchan, V. (2017, forthcoming), ‘The Eurasian Economic Union: diverging trends in common trade policy’, Kyiv, Institute for Economic Research and Policy Consulting, Kyiv.
If these developments were not problematic enough for the union, the fragmentation of the common customs regime has been compounded by Russia’s own exemptions. Most spectacularly, Russia acted unilaterally in order to punish Ukraine for proceeding with its Association Agreement with the EU. It threatened Ukraine that it would withdraw from the free trade deal granted through the 2011 Free Trade CIS Agreement and instead impose ‘most favoured nation’ (MFN) duties on Ukraine exports to Russia.64 Russia sought consent from Belarus and Kazakhstan to introduce MFN tariffs through the entire Customs Union in June 2014. However, Belarus and Kazakhstan declined. Despite this refusal, Russia unilaterally imposed a range of trade restrictions on Ukraine, including MFN tariffs, in January 2016. It also imposed transit restrictions on Ukrainian goods through Russian territory. This means that to import goods from Ukraine, Kazakhstan or Kyrgyzstan need to obtain Russia’s permission, something that further increases Russia’s leverage over their trade, which further undermines the very ethos of the union. In a similar vein, when member states refused to impose retaliatory measures in response to EU economic sanctions against Russia for its actions in Ukraine, once again Russia proceeded to impose its own sanctions on goods from the West. Quite simply, when Russia’s interests are at stake, it ignores the constraints that a common regime would normally impose.
Russia has been unable to resist sacrificing the Customs Union in order to maintain freedom of action in its foreign policy. While Russia’s partners have not followed suit, they have not challenged Moscow’s hegemonic impulses or the Kremlin’s disregard for the common regime. In fact, Moscow’s unilateral trade restrictions and tariff changes were formally authorized by the EAEU’s highest council, implying a nominal compliance with formal processes. However, to its cost, the Customs Union has been devalued and the hollowness of EAEU solidarity has been exposed.
At the same time, Moscow’s actions legitimized its partners’ subsequent efforts to evade and profit from the sanctions regime. Famously, Belarus started exporting bananas and seafood to Russia. This, in part, triggered the ‘trade wars’ already mentioned. At the same time, Russia’s partners have been complaining about exclusion from Moscow’s generous import substitution programmes introduced to protect its industries from the effect of sanctions.65
These developments have prompted renewed efforts to reduce dependence on Russia through developing partnerships with other strategic players. Having been prevented from concluding an Association Agreement in 2013, Armenia completed negotiations on a new agreement with the EU in 2017. Kazakhstan has also concluded a new agreement with the EU, whereas Belarus made a number of overtures to improve relations with the EU. Both countries have also shown keen interest in developing relations with China, particularly in the context of its Belt and Road Initiative. So far Russia has refrained from responding directly to these overtures.66 However, many of the sectors covered by the Belt and Road Initiative relate to cooperation on transport, logistics and infrastructure matters, something that Russia seeks to influence. Within the EAEU, cooperation in those policy areas tends to be loose, rarely amounting to more than a coordination of efforts. In formal legal terms, individual member states retain much of their discretion regarding China. However, Russia has been keen to spearhead a collective approach and coordinate cooperation initiatives with China, seeking to retain its ability to direct these initiatives and thereby act as a ‘gatekeeper’ in the external relations of the EAEU.
50 As Tarr points out, regulatory harmonization has been preferred to the alternative and simpler route of concluding mutual recognition agreements, Tarr, D. (2016), ‘The Eurasian Economic Union among Russia, Belarus, Kazakhstan, Armenia and the Kyrgyz Republic: Can it Succeed where its Predecessor Failed?’, Eastern European Economics, 54:1, pp. 1–22, doi:10.1080/00128775.2015.1105672.
51 Vinokurov, E. et al. (2016), ‘Assessing the impact of non-tariff barriers in the EEU: Results of enterprise surveys’, EDB Centre for Integration Studies Report #30.
52 Various commission sources refer to between 200 and 450 barriers that have been identified and a special department to lead work in this matter was set up in 2016.
53 Eurasian Economic Commission (2017), ‘Interv’yu chlena Kollegii (ministra) po vnutrennim rynkam, informatizatsii, IKT YEEK Karine Minasyan Telegrafnomu agentstvu Belarusi «Belta»: «YEEK iskhodit iz printsipa o nedopustimosti bar’yerov v YEAES’ [Interview of member of the Board (Minister) on Internal Markets, Informatization, and ICT Karine Minasian with Belarusian news agency Belta: ‘EEC is based on the principle of impermissibility of barriers inside the EAEU’], 9 February 2017, http://www.eurasiancommission.org/ru/nae/news/Pages/09-02-2017-165921.aspx (accessed 21 Jan. 2017). Such legal barriers are estimated to be as high as 80 per cent, see International Centre for Trade and Sustainable Development (2016), ‘Yevraziyskaya ekonomicheskaya komissiya rabotayet nad ustraneniyem prepyatstviy na vnutrennem rynke YEAES’ [Eurasian Economic Commission works on removal of restrictions on the EAEU domestic market], ICTSD Bridges, 14 July 2016, http://www.ictsd.org/bridges-news/мосты/news/ евразийская-экономическая-комиссия-работает-над-устранением-препятствий-на.
54 For example, the commission’s decision No. 42 of 10 May 2016 refers to such non-compliance by Kazakhstan in relation to trade in recycled paper with Kyrgyzstan.
55 Klysinski, K. (2017), ‘The Risk of Escalating Tensions in Minsk-Moscow Relations’.
56 Vinokurov, E. et al. (2016), ‘Assessing the impact of non-tariff barriers in the EEU: Results of enterprise surveys’
57 Tarr, D. (2016), ‘The Eurasian Economic Union’, p. 23.
58 Export tariffs remained a matter of national discretion, to be harmonised at some point in the future.
59 Agreement on the Customs Union in the Multilateral Trading System of 19 May 2011, see Connolly, R. (2013), ‘Russia, the Eurasian customs Union and the WTO’, in Dragneva, R. and Wolczuk, K., (eds) (2013), Eurasian Economic Integration: Law, Policy and Politics, Edward Elgar, Cheltenham.
60 Kassenova, N. (2013), ‘Kazakhstan and Eurasian economic integration: quick start, mixed results and uncertain future’.
61 Tochitskaya, I. (2016), ‘Kazakhstan’s Accession to the WTO: Overview and Implications for the Eurasian Economic Union’, GET Belarus / IPM Research Center Policy Paper Series [PP/01/2016], http://eng.research.by/webroot/delivery/files/english/pp/pp2016e01.pdf (accessed 18 Jan. 2017).
62 However, given the five-year transition period for implementation of the changes in imports duties (until 2020), the initial schedule of exemptions applied in 2016 is much shorter, covering about 21 per cent of Kazakhstan’s imports from non-EAEU states.
63 Armenia notified the WTO in November 2014, Kyrgyzstan – in April 2015.
64 This option was available to the Customs Union members in the event of harm to an industry of the customs union member, resulting from tariff increases following the participation of a party in another regional agreement, pursuant to Annex 6 of the agreement. See Dragneva, R. and Wolczuk, K. (2015), Ukraine between the EU and Russia: The Integration Challenge.
65 For example, see Belta (2016), ‘Call for coordinating import substitution in Belarus, Russia’, 7 June 2016, http://eng.belta.by/economics/view/call-for-coordinating-import-substitution-in-belarus-russia-91937-2016 (accessed 20 Nov. 2016).
66 The introduction of border controls at the Russia–Belarus border in February 2017, however, is a clear response to the visa liberalization measures applied by Belarus to the West.