(From left to right) Kazakhstan’s president Nursultan Nazabayev, Russia’s then-president Dmitry Medvedev and Belarus’s president Alexander Lukashenko enter a December 2011 economic summit, in which they discussed plans to create closer economic ties between the three countries

(From left to right) Kazakhstan’s president Nursultan Nazabayev, Russia’s then-president Dmitry Medvedev and Belarus’s president Alexander Lukashenko enter a December 2011 economic summit, in which they discussed plans to create closer economic ties between the three countries

Closer economic integration of countries in the Commonwealth of Independent States has been discussed for many years without practical progress. The launch of a single economic space between Russia, Kazakhstan and Belarus may be about to change that.

Plans to build closer economic relations between the former states of the Soviet Union have been afoot almost since the day the organisation itself was disbanded on December 8, 1991. Remarkably, that was the same day that EU leaders signed the Maastricht Treaty to create the European single market. For 20 years, however, the leaders of states that had once been a single political unit seemed unable to emulate their colleagues to the west, with an attempted customs union in 1995 and putative Eurasian Economic Community in 2000 both falling flat.

But since the creation of a narrower customs union between Russia, Belarus and Kazakhstan in 2010 that harmonised tariffs between the three countries, things have moved so quickly that there is still some uncertainty about how to translate the name of the organisation that will come into force in July 2012 – a common or single economic space.

Tatiana Valovaya settles for single economic space (SES), and she is in a good position to make the decision. She has been appointed the commissioner for integration and macroeconomics at the Eurasian Economic Commission, the newly created body modelled on the European Commission, which will administer the SES.

Speaking at the annual meeting of the European Bank for Reconstruction and Development (EBRD) in London in late May 2012, Ms Valovaya said the experiences of both the EU and previous failed attempts at Eurasian convergence had been useful, and encouraged the adoption of a gradual programme rather than a jump to full supranational status.

“There is no equivalent to the Treaty of Rome, instead we have 17 treaties and many acts in each member state to implement them, and there will be constant constitutional repairs and upgrades just as there are in the EU. The Eurasian Economic Commission will set joint tariffs and be responsible for anti-dumping regulation and investigations into non-tariff barriers,” she said.

Different this time

At the point of creation, only the existing customs union and new rules ensuring equal treatment in government procurement are in force. This leaves the formulation of rules to enable the free movement of goods, services, labour and capital, mutual recognition and other guarantees of non-discrimination, “an empty book”, as Anton Kudasov, Belarus deputy minister for the economy, told delegates at the EBRD meeting in May 2012.

He urged the three countries to keep moving towards a situation where investors can choose any one of the three jurisdictions as a base for doing business in all three. This would clearly help to drive competition between the three members to improve their business environments. Despite the lack of detail behind the SES so far, investors are becoming more confident that this will not be another false start, and that there will be movement towards a Eurasian economic union, even if the target date of 2015 is ambitious.

“We have not seen a detailed timeline yet, and normally people have dismissed Russian-led attempts at coordination. But there is the commission in Moscow and signs that the three governments will begin coordinating economic, agricultural and industrial policies,” says Marcus Svedberg, chief economist of East Capital, which is one of the largest investment funds focused on the region.

Senior figures in the Russian government appear to be throwing their weight behind the programme. Deputy finance minister Sergei Storchak told EBRD delegates that Russia’s intra-SES trade was up 35% in 2011, even while global trade was stagnating. And in June 2012, recently re-elected Russian president Vladimir Putin apparently suggested at a bilateral Russia-EU meeting that future trade negotiations should be conducted with the Eurasian Economic Commission, rather than with Russia individually.

Graph - Russia, Kazakhstan and Belarus open economic borders

Financing integration

Mr Svedberg says it makes clear strategic sense for the three countries to position themselves as a bridge between Asia and Europe. He does not give credence to the view that the SES is merely an attempt to restore some sort of Soviet-style Moscow hegemony, although he notes that Russia may be keen to maintain influence in central Asia in the face of growing Chinese investment there.

A further indication of the seriousness of intent is the willingness to deploy financial resources to strengthen ties between the SES members. Igor Finogenov, chief executive of the multilateral Eurasian Development Bank (EDB), which has six members including the three SES states, says he expects the bank’s role and lending to increase in several areas that are vital to making a success of the project. His focus on transport links suggests that policy-makers are indeed pursuing the concept of the SES as a geostrategic trading route.

“We expect development in logistics for moving goods across the continent. Until now, a freight train travelling from the Chinese-Kazakh border to St Petersburg port has taken 10 or 12 days simply because of customs delays. That should now be accelerated, and we believe there can be a switch of some transportation away from the Suez canal, to go from Asia to Europe via Kazakhstan and Russia,” says Mr Finogenov.

He is anticipating a rise in cross-border projects, in particular associated with a very ambitious programme to move toward a unified grid system for Russia and Kazakhstan, including a large generation facility in northern Kazakhstan that will serve both Kazakh and Russian markets. Other transport-related projects already undertaken include financing of a combined Russian-Kazakh fleet to service the north Caspian oil fields from Astrakhan in Russia to Kazakhstan’s Atyrau. In Belarus, the EDB has financed the purchase of  BelAz industrial trucks by SUEK coal mines (Siberian Coal Energy Company), supplying  mining operations in the Russian regions of Kemerovo, Khakasia and Buryatia.

Graphs - Russia, Kazakhstan and Belarus open economic borders

Identifying the winners

The EDB also houses the Centre for Integration Studies, which has estimated the compounded benefits of the SES for all three countries at $900bn by 2030. This means adding 2.5% to the combined economic output of the three countries each year, and 15% to Belarus alone, which should benefit the most out of the three countries involved given its comparatively high trade dependence on the other two. The advantages to the largest companies are the most obvious.

“We have a chromium mine in Kazakhstan. Its output is processed in a ferro-nickel plant in the Russian Urals, and some is then transported to a storage facility in Belarus for sales into the EU. What the SES should help us to do is to optimise our financial and human resources management across all these businesses,” says Igor Zyuzin, chief executive of Russian mining company Mechel.

In addition to the heavy industries, Mr Finogenov believes agribusiness and technology sectors can seize opportunities. “What we also do is educate companies on the new possibilities to do business, for instance, through co-operation with chambers of commerce. We are sure it is not just the largest companies, but also the small specialist companies that can benefit,” he says.

There should also be opportunities in the services sector. Dmitry Andrianov, the chief executive of Russian software company Prognoz, is particularly focused on the SES provisions for equal treatment in government procurement, complaining that “until now governments have favoured domestic suppliers even when they are clearly inferior”.

Mr Andrianov also expects new business directly related to the implementation of the SES among both public and private sector operations, including new databases for managing joint registration for tax, customs and immigration purposes.

In the banking sector, the most obvious candidate for pan-SES integration is Russia’s largest bank Sberbank, which already owns a fast-growing subsidiary in Kazakhstan, and bought BPS Bank, the third largest in Belarus, in December 2009.

“We do believe the economic and geographic closeness of the ex-Soviet republics offers opportunities for cross-border banking. Bank penetration in Belarus especially is low, so our entry as a Russian market leader doing business to a high standard will give us a good chance to succeed,” says Anton Karamzin, Sberbank’s chief financial officer.

Facing the competition

The giant home market enjoyed by Russian companies raises an important question about how firms in the smaller Belarusian and Kazakh markets will compete once integration takes hold. That risk would also be acute for Kyrgyzstan, which has applied to join and would be by some distance the least developed member of the SES. The Belarusian government appears to be pushing for Ukraine to join the SES, as it is a major trading partner for Belarus – its inclusion would also reduce the economic dominance of Russia in the grouping somewhat.

“Belarus is not currently competitive with other countries because it has a relatively closed and managed economy. But its close official relationship with Russia should soften the impact – Russia has provided soft loans in the past in return for sales of attractive assets, and presumably integration would only proceed at a pace that was manageable for the Belarus economy,” says Mr Svedberg.

Ultimately, however, the keenest advocates of the SES believe that competition will force an improvement in the quality of the business and regulatory environment in all three countries. That trend should be further reinforced by the accession of Russia to the World Trade Organisation in 2012. Vladimir Dmitriev, head of Russian state development bank Vnesheconombank, pointed out at the EBRD meeting Russia’s woeful performance in the World Bank’s Ease of Doing Business survey, where it ranks 138 out of 146 countries for customs efficiency.

“There is a risk that not all countries are ready for competition. But this is outweighed by the potential reward: the establishment of competition at the level of administration and government agencies should create an environment where private companies from the three countries become better able to compete not just among themselves, but internationally,” he said.


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