26 August 2013

The Customs Union: Initial Results

The Customs Union created by Russia, Kazakhstan, and Belarus was launched in practice in July 2011, when the three countries eliminated their internal trade borders and relocated customs posts. After two years of operation, the trade impact on the member countries includes both positive and negative effects, but overall can be viewed as beneficial to the bloc as a whole. Discussions are underway to enlarge the Customs Union with new members in the near future (e.g., Kyrgyzstan).
The Customs Union: Initial Results
Background
 
In a move to foster regional economic integration, Russia, Kazakhstan, and Belarus announced the creation a “Customs Union” in January 2010, more than two years before Russia joined the WTO.  Initially designed as a free-trade area, the Customs Union is progressing toward a full-fledged economic union, perhaps as soon as 2015.  
 
The goals of the Customs Union include increasing trade among member countries, creating a broader Eurasian alliance among former Soviet states, and creating a powerful economic bloc that could partially counter-balance the strength of the European Union, China, and the United States.
 
Pluses and Minuses
 
According to the Eurasian Economic Commission, in 2012 mutual trade among the CU members totaled $68.6 billion, an 8.7% increase over 2011. Also in 2012, the Customs Union’s foreign trade with third countries increased by 3.2% compared to 2011 (totaling $939.3 billion, with exports accounting for $600 billion and imports representing some $339 billion. The CU also posted a slightly larger trade surplus of $260.9 billion over 2011 figures.
 
On a negative note, according to the Russian Central Bank, in 2012, fake import contracts with entities from Kazakhstan and Belarus may have accounted for 40% of Russia’s net capital outflow, representing a total of $25 billion over the last three years.  Of that $25 billion, roughly $10 billion flowed through Kazakhstan, while the remaining $15 billion was funneled through Belarus.
 
Country Impact: Belarus
 
Overall, Belarus has largely benefitted from joining the Customs Union due to Russia’s increased financial subsidies, which play a vital role in the Belarusian economy.  These Russian subsidies include inexpensive gas prices, re-exports of refined oil products from Russian crude oil and the preferential placement of Belarusian goods in the Russian market.  For example, in 2012, oil and gas subsidies totaled 15.9% of Belarus’s GDP. Belarus has also benefitted from increased access to Kazakhstan’s oil through the Customs Union.
 
Additionally, in 2012 imports decreased by 6.9% while exports from Belarus increased by 10.2% over 2011 statistics.  Trade between Russia and Belarus also totaled $43.9 billion, representing a 9.6% increase and accounting for 64% of the total trade turnover among the members of the Customs Union.
 
In terms of drawbacks, Customs Union membership means that Belarus can no longer manipulate its own tariffs in order to protect certain domestic industries.  Also, there are concerns that participating in the CU will encourage Belarus to become increasingly dependent on Russia and that Russian industries will seek to dominate the Belarusian economy.
 
Country Impact: Kazakhstan
 
Kazakhstan has seen numerous benefits from its Customs Union membership, including increased market share for Kazakhstani goods, increased FDI opportunities, especially in Kazakhstan’s developing manufacturing sector, and lower transportation costs across the Custom Union’s borders.  For example, in 2012, Kazakhstan’s exports to the Customs Union increased by 30% compared to 2011.  Also, joining the Customs Union has helped Kazakhstani businesses become more familiar with WTO regulations in light of Russia’s recent membership, which may help to expedite Kazakhstan’s WTO negotiations and facilitate accession by the end of 2013.
 
In 2012, trade between Kazakhstan and Belarus increased by 15.1% (to $900 million); trade between Kazakhstan and Russia totaled $23.8 billion, representing a 6.8% increase over 2011 (and approximately 35% of trade within the Customs Union).
 
While the gains outweigh the losses for Kazakhstan overall, consumers do feel one negative impact directly.  Since Kazakhstan does not produce most of the goods that it consumes, the establishment of the Customs Union’s Common External Tariff (CET) makes foreign goods more expensive for Kazakhstani consumers. 
 
Country Impact: Russia
 
Due to the implementation of the CET in each of the member countries, Russian goods will become relatively cheaper in Kazakhstan and Belarus, thereby increasing Russia’s exports.  Also, as the member country with the greatest political and economic clout, Russia is able to influence policy and regulation in favor of Russian interests within the Customs Union.  Finally, by further expanding the membership of the Customs Union, Russia may be able to offset China’s growing influence in Central Asia.
 
While these positive effects are practical and measurable, the negative implications stem more from risks to Russia’s standing in the international community.  For example, officials from nearby Lithuania and as far away as the United States have expressed concern over the expansion of the Customs Union. Also, Russia’s overtures to Ukraine regarding joining the Customs Union have created some tension in the EU-Ukraine negotiations regarding Ukraine’s Association Agreement.
 
Ukraine’s Balancing Act
 
Ukraine has attempted to strike a delicate balance between cooperation with the Customs Union, which it has pursued over the past two years, on the one hand, and its EU integration agenda, on the other.  Ukraine has attempted to resolve these competing tensions by affiliating with the Customs Union insofar as it does not disrupt its negotiations with the EU.   
 
Thus in May 2013, Ukraine signed a memorandum of cooperation with the Eurasian Economic Commission (EEC) that granted it “observer status” in the Customs Union.  This affiliation includes a permanent Ukrainian representative to the Customs Union, greater access to information, and the right to submit proposals to the EEC.
 
Nevertheless, tensions have run high between Ukraine and Russia during recent trade disputes. In July, Russia implemented additional checks of Ukrainian goods at the border and banned a popular Ukrainian candy outright. And in August, the Russian Federal Customs Service (FCS) labeled all Ukrainian exports as “high risk”. Although the FCS has since reversed course, Ukrainian officials have spoken out against the measures as coercive attempts to force Ukraine into joining the Customs Union.
 
The root of this trade tension lies in Russia’s concern over the possibility that Ukraine might sign an agreement with the EU in November. Both Russian President Putin and his advisor Sergei Glazyev have noted that “protective measures” may be taken by the Customs Union if Ukraine signs an agreement with the EU. Specifically, Russia may use WTO “safeguards” in order to more closely monitor, and restrict, certain agricultural and steel imports.
 
Thus this fall’s Ukraine-EU negotiation will impact the current 3+1 format in the Customs Union.
 
Conclusion
 
In its first two years of operation, the Customs Union has largely achieved its initial objectives of fostering economic growth and facilitating trade relationships and cooperation among its three member countries.  
 
Going forward, the issue of Russia’s economic influence, the domination of Russian companies in certain industries, and Russia’s primacy on international trade policies will determine the bloc’s future success and its possibilities for expanding to incorporate new members.