The Eurasian Union’s Troubled First Year

2015 was meant to be the year that the Eurasian regional integration project took off. The launch of the Eurasian Economic Union (EEU) on January 1 marked a qualitative change in the scope and ambition of post-Soviet economic integration. The EEU treaty, signed amid much fanfare in May 2014, went significantly beyond a free trade zone. It bound the signatory states into an ambitious institutional framework and established a complex system of interactions between national and supranational governance structures. Crucially, the treaty also added a clear geopolitical dimension to the integration project, by establishing the EEU as an international organization and an object of international law. As a result, whether or not all the signatories admitted it, the organization could never simply be solely about economic cooperation.

The EEU’s proponents must have hoped that the first year would provide an opportunity for acclimatization to the new institutional architecture and consolidation of its governance framework. Instead, events of the past year have not only underscored pre-existing contradictions, but also exposed the Eurasian Economic Union to new pressures.

In the Teeth of a Crisis

The launch of the EEU has come at an inauspicious time, with the region experiencing its worst economic crisis, according to President Nursultan Nazarbayev of Kazakhstan, since the Russian default of 1998. Low oil prices have led to a collapse in export revenues for the region’s energy producers. Russia’s recession and the depreciation of the ruble has led to a sharp fall in remittances, a key source of income for the non-commodity based economies of the region. Across Eurasia, currencies have depreciated rapidly, inflation has accelerated, and household incomes have declined precipitously.

As a result, trade within the EEU has plummeted in dollar terms. According to the organization’s own statistics, in January-October trade turnover between EEU members was down by 26.5 percent year on year; trade in machinery and equipment – the kind of high-value manufactured goods Eurasian integration is meant to foster – contracted by 38.2 percent.

The decline in trade, of course, has no direct link to the launch of the EEU (although EEU leaders had in the past touted Eurasian integration as a means to shield the region from external economic shocks). But it nevertheless raised further questions about the economic rationale for the integration project and underlined the risks posed by the high level of regional economic dependence on Russia. As various studies have shown, Russia already played an oversized role in the economies of the member states even before the launch of the EEU. This raised questions over the economic rationale of further integration, which have been thrown into sharp relief by the downturn in Russia’s economy. In the case of Armenia, Belarus, and Kyrgyzstan, a more diversified economic profile (such as through stronger links to the EU) might have mitigated some of the impact of Russia’s recession.

The trading relationships within the EEU are also highly uneven – in all cases Russia accounts for a significant share of the other members’ exports, but with the exception of Kyrgyzstan and Kazakhstan, trade between the other members is negligible. Given this asymmetry, EEU members should be concerned about the long-term outlook for the Russian economy. Even when commodity prices were high in 2012-2014, Russia’s economy was showing signs of stalling as a result of serious structural constraints linked to low investment, the tight labor market, and declining productivity gains. Despite an estimated 4 percent contraction in real GDP in 2015, the Kremlin, unlike the Kazakh government, has also given no indication that it plans to use the crisis as a spur to enact reforms. The leaders of the other EEU states could be forgiven for worrying that they have hitched their economies to the Russian locomotive just as the wheels have started to fall off.

Deepening Contradictions

From the inception of the Eurasian integration project, there have been doubts about the potential for the highly personalized, non-democratic post-Soviet states to craft an effective rules-bound structure and submit to supranational governance. The EEU is riddled with exemptions, discrepancies, and inconsistencies. Armenia, for example, secured tariff exemptions on over 700 import items for a transition period of five years in its EEU accession agreement. The first year of the EEU’s existence has provided further grounds for skepticism that a uniform and effective institutional framework could be built.

In the first half of 2015, for example, Kazakh companies found themselves at risk of being undercut by Russian rivals as a result of the weak ruble. The Kazakh central bank, unlike its Russian counterpart, sought to keep the tenge pegged to the dollar. The Kazakh authorities responded by using a number of administrative measures to restrict Russian imports, prompting talk of a trade war in the Russian and Kazakh press. The rapid depreciation of the tenge since August 2015, when the Kazakh central bank abandoned its attempts to peg to the dollar, has eliminated the exchange rate mismatch. Nevertheless, the protectionist response of the Kazakh authorities was telling.

Kazakhstan’s accession to the World Trade Organization in December 2015 has further underlined the shallowness of the economic union. Kazakhstan’s accession does not in itself contradict its membership in the EEU, which has been explicitly designed to be compatible with WTO provisions. Indeed, Russia had initially envisioned that the three founding members of the Eurasian Customs Union, as it then was, would join the WTO as a bloc. In practice, however, Kazakhstan’s entry to the WTO will create further administrative problems for the EEU as Kazakhstan’s average import tariff will fall over a transition period to 6.1 percent, significantly below the 7.9 percent average for Russia. According to Zhanar Aitzhanova, Kazakhstan’s minister for economic integration, Kazakhstan’s accession will lead to lower import tariffs for over 3,500 items compared with other EEU states. Russia has responded to Kazakhstan’s WTO accession by calling for measures to prevent the re-export of goods to Russia at the lower tariff, which if carried through would appear to imply the reestablishment of customs controls, in contradiction with the principles of a customs union.

The most serious challenge to the implementation of the economic union has been posed by Russia’s sanctions war with the West. The EEU must be the first regional trade body whose lead member has from its inception been under wide-ranging international sanctions and loudly proclaimed the benefits of import substitution and protectionism. As a result, the coherence of the economic union has been in question from the very start. Whereas the EU imposed sanctions as a bloc against Russia in response to its annexation of Crimea and actions in eastern Ukraine, the other EEU members have no desire to cut off trade links with the United States and EU, and have refused to follow Russia in banning imports from the expanding list of countries with which Russia has come into conflict. Beyond the immediate problem of conflicting trade regimes within what is meant to be a single economic space, Russia’s protectionist turn has effectively led to a suspension of Russia’s WTO membership, and will make it much less likely that the EEU member states will succeed in institutionalizing a rules-based economic union.

Geopolitical Risks

Russia’s standoff with the West not only threatens the economic and institutional logic of the EEU, it has also recast the geopolitical context of the organization in a way which is likely to have made the other EEU members very uncomfortable. It is easy to forget that in its original conception, Russian President Vladimir Putin presented Eurasian integration as the basis for a common economic space “from Lisbon to Vladivostok,” bridging the post-Soviet region and the European Union. Instead, as a result of the conflict in Ukraine, the EEU has become for Russia one of the key normative structures through which it has pursued its geopolitical competition with the EU in the post-Soviet space. The Eurasian integration project has been transformed from a platform for the region’s integration into the global economy to an implicitly anti-Western geopolitical grouping.

Russia’s overt geopoliticization of the Eurasian Union is likely to limit the willingness of the other member states to intermediate their external and political relations through the institutions of the EEU.

Indeed, membership in the Eurasian Union has not prevented Armenia from relaunching negotiations on a substitute to the Association Agreement, which was abruptly abandoned in September 2013 after President Serzh Sargsyan unexpectedly announced the country would join the Russian-led bloc in preference to integration with the EU. Since restarting negotiations, the EU has described Armenia as an “easy country to negotiate with.” Gunnar Wiegand, a senior European Commission official has said that the two sides are aiming for a deal that would have a “very wide scope” and confirmed that it would include not only most of the political elements of the scrapped Association Agreement, but also some of its economic provisions.

Instrumental Considerations Likely to Dominate

The first year of the Eurasian Union’s operation has therefore raised serious questions about the organization’s economic rationale, institutional effectiveness, and geopolitical underpinnings. In such circumstances, the dominant logic of the EEU for several of the members currently appears to be an instrumental one: it serves as a means for the elite to manage relations and extract resources from the center. The Armenian government has done little to hide the fact it felt compelled to join the EEU to retain Russian security guarantees. Instrumental arguments also appear to have been dominant in Kyrgyzstan’s accession to the organization, which was completed in August 2015. While surveys appeared to suggest that public support for accession was high, the decision to join was driven by political and economic exigency, and the government made little attempt to pretend otherwise. As President Almazbek Atambayev told a meeting of the National Council for Sustainable Development in October 2014, “we are choosing the lesser of two evils. We have no other option.” Reporters noted that some officials appeared to have little understanding of what accession would entail, or the likely economic or social impact. Kyrgyzstan’s accession was sweetened by a package of economic incentives, including the establishment of a joint Russian-Kyrgyz Development Fund, a low-interest loan, and targeted aid to help the country meet the conditions of its membership.

2015 has not been an auspicious start for the EEU. Efforts to institutionalize an effective rules-based institution have been impeded by the economic crisis and Russia’s conflict with the West. The outlook for the organization remains uncertain. In the worst case scenario, the EEU could yet share the fate of the Russian-Belarusian Union State and become a virtual regional body used primarily as a framework for regime stability and to mediate resource diplomacy. However, the extent of the EEU’s institutional ambition and organizational structures makes this minimalist vision unlikely. Indeed, the significant funds allocated to Kyrgyzstan to build up its state capacity is a reminder that the EEU is not just an economic or political project, but also a significant bureaucratic machine, one that is likely to seek to further expand its areas of competence and authority in the coming years. This bureaucratic logic alone may ensure the EEU continues to shape the politics and economics of the region for some time to come.