July 8, 2013

Is "the Custom Union's King" Dieing? Long Live "the Custom Union's King!"

The closer the summit of "Eastern Partnership" of the EU (in Vilnius, in November this year), the more active becomes counter-action to the process of European integration of Ukraine and other CIS countries of democratic choice. While the decision of European countries in principle to sign an Association Agreement between the European Union and Ukraine, even causes a hysterical reaction of the Russian Federation as it believes that this perspective negates all attempts to establish Russian control over Ukraine. This explains the transition of the Russian from information campaign to pressure on Kyiv (including evidence of "inappropriate Ukraine's rapprochement with the EU") to direct threats against our country to start an economic war and, in particular, to deport Ukrainian citizens from Russia. Of course, if Ukraine signs an agreement with the European Union.

But how consistent is Russia in its demands? What really is it after in its relations with the West? After all, is its “anti-Western rhetoric” confirmed by any relevant political and economic steps?

Answers to these questions can be found in the immediate relations of Russia with the EU. After all, the latter still remains one of the main external partners in the political and economic spheres, despite all the conclusions of Russian experts on "economic and institutional crisis in the European Union" and " Eurasian integration being more attractive” for the former Soviet Union.

Russia-the EU: trade cooperation
Russia-the EU: trade cooperation

Russia cooperation with the EU today is based on the Partnership and Cooperation Agreement, signed in 1993, and the Program "Partnership for Modernization", which was initiated in 2009 by the former Russian President Dmitriy Medvedev. The Program provides for deepening interaction between the parties in four major spheres: political, economic, security and cultural. The Russian side hoped that, having adjusted constructive relations with the EU, it will have an access to modern European technologies, and will be receiving loans and investments. Current President V.Putin also agrees with these plans.

As part of the economic block of the Program to date have been signed more than 20 bilateral agreements on modernization, which serve as a platform for realization of joint business interests of Russia and the EU. Thus, despite the negative impact of the global financial crisis, in 2012 trade between Russia and the European Union had increased by 4.1% and reached a record level — 410.3 billion US dollars. This is half the foreign trade turnover of Russia.

The European Union is the biggest investor in the Russian economy. For example, at the beginning of 2013 the total European investment in Russia was 276.8 billion US dollars. And 60% of foreign investments of Russia are in European countries. As for the gold reserves of the Russian Federation, 40% of them are denominated in Euros.

As part of the further deepening of the strategic partnership between Russia and the EU, there is being prepared a new bilateral agreement, which, inter alia, provides simplification of visa regime for Russian citizens visiting EU countries. Russia also insists on including into this Agreement of provisions for the establishment of direct links between the European Commission (it actually is the EU government) and the Eurasian Economic Commission (intergovernmental governing body of the Customs Union).

Despite a number of problems in relations between Russia and the European Union, in particular, concerning the provisions of the "Third Energy Package of the EU" (which prevents Russia from an access to the European pipeline system), some tax and customs barriers in trade, the EU ‘s unreadiness to fully open its borders for Russian citizens , the interpretation of the situation in Syria, and questions of democracy in Russia, the mentioned agreement should be signed very soon.

The positive nature of relations between Russia and the European Union was confirmed on 31st EU-Russia summit on the 3-4th of June in Yekaterinburg, which was attended,in particular, by the Russian President Vladimir Putin, Head of the European Coommission J.Barroso and President of the European Council H. Van Rompuy.

Following the discussion of the prospects for deepening cooperation between Russia and the EU, the sides agreed on the need to accelerate work on a new basic agreement between Russia and the European Union; to ensure the implementation of the "road map" interaction between the parties in the energy sector by 2050 (signed in March this year );to solve issues of trade and economic relations, including the removal of customs barriers for promoting products and services, coordination of trade regulations and standards, and to fulfill obligations to international organizations in the spheres of finance and trade.

Russia and the EU agreed to deepen cooperation in matters of air transport links, struggle against terrorism and extremism, as well as to oppose the unauthorized distribution of drugs.

However, despite the tough policy of Russia regarding the NATO, cooperation between them is getting activated. In particular, the partnership nature of cooperation between Russia and NATO was discussed during a teleconference "Pyatigorsk— Brussels" on June 7 this year. According to the Deputy Assistant of Secretary General of NATO for Political and Security Issues J. Appaturaya, Russia and the NATO have been successfully cooperating on security in Afghanistan and Iraq, fighting drug trafficking and anti-terrorism and maritime piracy.

Today, Russia is a major partner of the USA and NATO in terms of the logistics of international ISAF Forces in Afghanistan and their withdrawal from Afghan territory through the so-called "Northern Dividing Network". At the core of this network is the railway and aviation infrastructure of the Russian Federation and Central Asia countries, which is being used for transportation of goods from Europe to Afghanistan. The relevant agreements have been concluded by Russia with the USA, Germany, France, Great Britain, the Netherlands and other NATO countries.

The centre for transportation from and to Afghanistan in Ulyanovsk
The centre for transportation from and to Afghanistan in Ulyanovsk

At this, for transportation from / to Afghanistan, Russia offers the USA and NATO to create a special Transit Center at the airfield of the RF Air Force strategic bombers in Ulyanovsk. In fact, at the expense of this, Russia is trying to take over transit services on behalf of ISAF, which are being provided by countries of Central Asia, in particular through Kyrh’zstan's airbase "Manas" ( under the pressure from Russia , on the 26th of June this year, Kyrgyzstan’s leadership refused to let the USA use this airbase from July 2014 on).

Russia is also actively involved in training Afghan troops and Iraqi security forces, providing them with weapons and equipment. This is confirmed by a contract between Russia and the USA on the supplies of Russian attack helicopters for the Afghan army.

Russia actively interacts with individual NATO member countries, including the USA. For example, in 2013 are planned more than 70 measures of military cooperation between the Russian Federation and the United States (by 30% more than last year), including joint military trainings focusing mainly on counter-terrorism and AD.

Besidea,have become regular joint military trainings of the Navy of Russia and those of countries of the North Atlantic Alliance. One of these events are the annual joint military trainings of Navies of the USA, Great Britain, France and Russia, codenamed "Frokus", taking place in June and July — in the waters of the Atlantic.

More large-scale nature has military-technical cooperation between Russia and the EU and NATO. Thus, now are being implemented a number of joint projects with participation of Russia, France, Italy and Germany, for the development andproduction of armor, aviation and naval equipment and manufacturing small arms. The largest of these projects is co-production by Russia and France of two (pre-planned four) amphibious helicopter carriers of "Mistral" type totaling 1.2 billion Euros.

And against the background of such an active cooperation between Russia and the Western countries, international organizations have recently been noticing stagnation of economic relations within the Customs Union (CU) of Russia, Belarus and Kazakhstan.

The share of the interbloc trade in the foreign trade turnoverof the CU member countries
The share of the interbloc trade in the foreign trade turnover of the CU member countries, 2011, %.
Data: IMF, World Bank, Russian Federal State Statistics Service. By the level of trade integration the CU is signifficantly lagging behind other economic and trade unions.

In the first quarter of this year, bilateral trade turnover of the Customs Union fell by 15%. At this, the trade between Russia and Belarus decreased by 14.4%, and trade- economic relations between Belarus and Kazakhstan are actually at the stage of liquidation. In particular, during the first three months of this year, the Belarusian exports to Kazakhstan decreased by 17% and imports —by 34%.

This trend was observed as early as 2012, when the rate of growth of trade within the CU fell nearly three times— from 30% to 9%. At this, the surplus of Russia’s foreign trade with its partners in the Customs Union decreased by 13%, from 62.5 billion US dollars in the first quarter of 2012 to 54 billion US dollars. during the same period this year.

The reason for this is both, the economic situation in the member states of the Customs Union getting more complicated and a number of unresolved fundamental problems in the activity of the organization. At this, the CU directly depends on the economy of the Russian Federation, the condition of which has deteriorated. Thus, in 2012 the growth rate of the economy declined to 3.4% (in 2011 it accounted for 4.3%), the index of industrial production fell to 2.6% (from 4.7%), the index of agricultural production — 4.7% (in 2011 it increased by 23%), the national debt has increased by 22% (10.5% of GDP), as for the budget deficit, its rate is 0.06% of GDP (in 2011the surplus amounted to 0.8% of GDP).

The dynamics of the GDP of the CU member-countries
Complication of the economic situation in the CU member-countries. The dynamics of the GDP of the CU member-countries * - Forecasted indexes for 2013

The situation has not improved this year. Instead, it is getting worse. According to experts of the International Monetary Fund, by the results of 2013 is expected further reduction of the rate of growth of GDP to a level less than 3%; inflation will be 6.9%, the unemployment rate — 5.5%.

But independent Russian experts in their forecasts on the economy are even more pessimistic.The economic recession in the country, in their view, could start in autumn this year. This is confirmed by statistical agencies of the government, according to which during the first half of 2013 external debt increased by 10.4% and as of July 1, amounted to 704 billion US dollars, that is nearly by 200 billion US dollars more than the gold reserves of Russia.

The same economic problems are in Belarus and Kazakhstan. Belarus, for example, is actually in a state of permanent crisis, besides, it is very closely linked with the economy of Russia.

The reason for this lies in the complicated economic situation in the member states of the Customs Union and in a number of unresolved fundamental problems in the organization. The main among such problems is preservation of customs barriers and other restrictions on the way of movement of goods and services within the Customs Union (despite the formal opening of the borders between participants of the CU). This is due to the desire of Russia, Belarus and Kazakhstan to protect their markets from foreign competition (Including representatives of the Customs Union) as well as continuation by Russia the practices of prohibiting importation of goods from other countries as a means of pressure on their leadership in political matters.

Sanctions relate to alcohol, meat, dairy, confectionery and other food products imported by Russia.

Besides, disagreements remain about the conditions of supplying Belarus and Kazakhstan with Russian oil, which is one of the main attractions in the trade balance of the sides.

In April this year, the government of Kazakhstan restricted imports of Russian oil products, diesel fuel and petrol included. Supplies of oil that were remitted to Russia for reprocessing, are being re-directed to China.

As for relations between Russia and its closest ally Belarus, you should only pay attention to how they implement some joint economic projects. For example, the creation of a Russian-Belarusian Automobile Holding "ROSBELAVTO" at the Belarusian Automobile Plant MAZ and Russian KAMAZ, or the inclusion of "Minsk Plant of Wheel Tractors" into the structure of the Russian military-industrial complex, as well as the acquisition by Russia of a controlling stake of Belarusian JSC "Grodno Nitrogen". Belarus, not seeing any advantage for itself, does not hasten the implementation of these projects and puts forward new demands, changing previous agreements.

Membership of Belarus and Kazakhstan in the Customs Union already has for them some negative effects. For example, rising domestic prices (from 30% to 200%) due to the increased level of the Russian Customs duties and tariffs on foreign products. In particular, this applies to both vehicles and essential commodities, food.

Belarusian and Kazakh Businesses have got strong competitors in the face of financial and economic structures of the Russian Federation, at their domestic markets included. Russian banks actually have taken over the control of the financial sector of Kazakhstan, which made the Kazakh leadership introduce additional restrictions on the activities of the Russian capital in the country.

Neither the leaderships of Kazakhstan and Belarus, nor the population of these countries like such membership in the Customs Union. Commenting on the situation in an interview with the media at the beginning of July, the President of Kazakhstan N.Nazarbayev criticized Russia's attempts to use the Organization as a means to achieve its foreign policy goals at the post-Soviet territories. According to him, Kazakhstan considers the CU solely as a mechanism of economic integration of the three countries. He laso reminded that Kazakhstan has the right to withdraw from any organization that constitutes a threat to its sovereignty.

The leadership of Belarus, emphasizing the priority in the development of relations with Russia within the framework of the CU, is trying to diversify its trade — economic relations, deepening ties with China, the Middle East, Africa and other regions, including the European Union.

Despite the political problems, actively is developing economic cooperation between Belarus and Baltic states, including Lithuania. Thus, contrary to previous statements by President of Belarus Lukashenko on plans for re-orientation of Belarusian exports from Lithuanian to Russian sea ports, the Belarusian state-owned company "Belaruskaliy" has invested 30 million US dollars into acquisition of 30% stake in one of the terminals of the port of Klaipeda. There are negotiations about acquiring shares of another Klaipeda shipping company. The Prime Minister of Belarus M.Myasnikovich notes that this will help twice increase the transit of Belarusian goods through Klaipeda.

By the way, participation in the Customs Union does harm to the economic interests of the Russian Federation itself . For example, the Central Bank of Russia states that two-thirds of the illegal export of capital from the country accounts for CU channels. In particular, due to the use of false schemes of exports, from Russia in 2012 were exported 35 billion US dollars, of which $ 10 billion US dollars— through Kazakhstan and 25 billion US dollars —through Belarus. Under the cover of the Customs Union massively are being used different fraudulent schemes for "laundering" funds, tax evasion,— due to which the budget of the RF suffers serious losses in the income part.

Within the framework of the Customs Union, there are other problems — from misalignment of the provisions of national legislation in the field of trade and economy to the use by a number of businesses of outright fraudulent trading and financing activities, which are covered in the media and do not need additional coverage.

The Russian "invitation" of Ukraine to the Customs Union has one and only goal- to exclude the European integration of our state
The Russian "invitation" of Ukraine to the Customs Union has one and only goal - to exclude the European integration of our state

In general, all these circumstances are quite eloquent and implicitly indicate extremely artificial nature of Russian integration initiatives within the CIS. They have no economic sense and pursue only one thing — to return the former Soviet republics under the control of the Russian federation. In this regard, the "retraction" of Ukraine into the Customs Union has a single goal — to prevent the European integration of our country, which at this stage involves blocking by Russia the signing of the Association Agreement between the EU and Ukraine.

Such a hypocritical and double character has Russia’s policy On the one hand it is actively developing its relations with the USA, EU and NATO — the leading centers of power in the military-political sphere, financial and technological donors Russia, on the other hand — it is trying at all costs not to give Ukraine the same opportunities.