Eurasian economic integration between Minsk and Vilnius: Problems, prospects, and UNDP’s role

by Ben Slay

 

A worker mixes cement at a factory in Kazakhstan.
A worker mixes cement at a factory in Kazakhstan. Photo: Kubat Sydykov/World Bank


The politics around the Eurasian Economic Community’s (EEC) 23 October summit in Minsk attracted a flurry of media attention.

 

This was driven primarily by surprise announcements about India’s, Turkey’s, and Syria’s possible accession to (or association with) the EEC Customs Union, as well as by perceptions of the on-going competition between the EEC Customs Union and the European Union’s Eastern Partnership initiative for influence in the Caucasus and Western Commonwealth of Independent States (CIS).

 

The likelihood that the governments of Georgia, Moldova, and possibly Ukraine will sign European Union (EU) association agreements at the upcoming Eastern Partnership summit in Vilnius (28-29 November)—and thereby begin the implementation of deep and comprehensive free trade agreements with the EU—combined with the realization that the Custom Union’s further expansion to Kyrgyzstan (not to mention Armenia and Tajikistan) is years away at best, led many pundits to focus on the weaknesses of the Eurasian integration project.

 

  1. 1. In response, this piece argues that—as is so often the case when pundits apply a political lens to questions with important economic and development dimensions—‘east versus west’ horse race discourses are wide of the mark.

  2. 2. It also argues that Eurasian economic integration is today no less (or more) viable than it was before Minsk, or than it will be after Vilnius.

  3. 3. And it suggests that—from a development perspective—the most important challenges and opportunities of the Customs Union may lie not in the Western parts of the former Soviet Union, but rather in Central Asia.

 

Geography matters

Discussions about Eurasian economic integration—understood as regional cooperation schemes that involve inter alia the reconnection of former Soviet republics—often generate more heat than light. This dissonance reflects in part widely differing interpretations of Soviet history. For some, the 1917-1991 period was an historical aberration characterized by the systematic denial of human rights and national self-determination, as well as economic mis-development.

 

Proponents of such arguments—who tend to be more numerous in the Western parts of the former Soviet Union, as well as in new EU member states—generally don’t find much to like in post-Soviet re-integration schemes.

 

For others, however, the Soviet period was an era of successful modernization, the costs of which were less than the benefits. Such views are more common in the Central Asian republics, which—in contrast to the Baltic states, Ukraine, Moldova, and Georgia—did not witness significant independence movements prior to 1992.

 

The declines in living standards that followed the collapse of what had been the integrated Soviet republican economies (and of the Soviet bloc in general) in the 1990s have also exacerbated these differences in perceptions.

 

The countries that joined the EU in 2004 and 2007 were relatively successful in replacing ruptured Soviet-era economic linkages with new commercial ties, many of which resulted from deep integration into European (and global) value chains.

 

However, the development opportunities afforded by geographic proximity to Estonia and Latvia could not then, and can not today, be extended to Kyrgyzstan and Tajikistan. The post-1991 rupturing of the commercial ties that bound the Central Asian republics together—in energy, water, transport—cannot be restored or replaced by European integration.

 

Development in the region’s poorest countries must therefore be supported by other regional cooperation schemes. Seen from this perspective, if Eurasian economic integration can reduce poverty, raise living standards, and buttress socio-political stability in the Central Asian countries bordering Afghanistan, it should be supported even by NATO countries. It should certainly deserve the support of the EU—whose member states and European Commission together comprise the world’s largest donor.

 

A blue facade of a building showing six windowsAn dilapidated apartment building in Russia: Many EU member states don't favour post-Soviet re-integration schemes. Photo: Yuri Kozyrev / World Bank

 

As an integration project, the Customs Union has its blemishes—which is to be expected, as it is only a few years old. (The EU of today has moved light years beyond what began with the Treaty of Rome in 1957.) Despite this, the Customs Union has managed to attract member states that account for most of the former Soviet Union’s area, gross domestic product (GDP), and population (i.e., the Russian Federation, Kazakhstan, and Belarus).

 

Kyrgyzstan, Tajikistan, and Armenia have declared their interest in joining the Customs Union; Kyrgyzstan’s road map for accession was approved in Minsk last month.

 

Russia seems unable to interest other CIS countries in joining the Customs Union. Nor does Moscow seem able to dissuade Ukraine, Moldova, and Georgia from signing association agreements with the EU in Vilnius later this month.

 

This does not mean, however, that these countries are en route to joining the EU. In contrast to the Balkans, EU membership is not, at present, an option for the Eastern Partnership countries. Moreover, as long as governments in Chisinau and Tbilisi do not fully control their borders, and as long as the Black Sea fleet remains based in Ukraine, it is difficult to imagine these countries ever joining the EU and NATO.

 

Likewise, the potential benefits of their prospective deeper European integration are weakened by the EU’s current loss of dynamism.

 

As long as the EU manages its relationships with its eastern neighbours via ‘more for more’ (and ‘less for less’) conditionalities, concerns about these countries’ observance of ‘European governance standards’ (on human rights, competitive electoral processes, gender equality, anti-corruption, etc.) may slow the pace of EU integration.

 

As recent European research points out, for the EU’s eastern neighbours, tensions between European ideals on the one hand versus the political, economic, and institutional challenges posed by deeper EU integration on the other need not necessarily be resolved in favour of deeper, and rapid, integration.

 

So while the governments of Georgia, Moldova, and Ukraine may sign EU association agreements in Vilnius later this month, signatures on paper may not easily produce the transformative modernizations experienced by many of their Western neighbours during their run-up to EU accession.

 

The significance of the Vilnius summit may instead lie in whether or not the signing of EU association agreements will be quickly followed by the deep liberalization of the EU visa regime for citizens of Georgia, Moldova, and (possibly) Ukraine.

 


In Central Asia, Eurasian economic integration is happening

By contrast, Eurasian economic integration is happening in Central Asia. Every year, labour markets in Tajikistan and Kyrgyzstan become more deeply integrated with the Russian labour market; ratios of remittance inflows (90 percent of which come from Russia) to GDP are now nearly 50 percent for Tajikistan, and above 30 percent for Kyrgyzstan.

 

Gazprom has purchased Kyrgyzstan’s domestic gas infrastructure, while the Russian Government is financing the construction of hydropower stations along the Naryn Cascade.
These developments could significantly improve national and household energy security. More generally, Russia as a donor is stepping up its bilateral support for both Tajikistan and Kyrgyzstan.

 

At the same time, being outside the Customs Union imposes costs on these countries—especially for Kyrgyzstan, which shares a long northern border with Kazakhstan.

 

While the uprising of April 2010 that unseated former President Bakiyev had many causes, one was the hardening of this border, precipitated by the deepening of the Custom Union.

 

Small traders in northern Kyrgyzstan who lived off cross-border trade with Kazakhstan’s Almaty region lost their livelihoods as a result. Official statistics indicate that Kyrgyzstan’s exports to CIS countries (mostly Russia and Kazakhstan) are down this year, and its current account deficit is exploding. The Customs Union’s higher tariffs and tougher borders may account for some of this.

 

In any case, the $360 million in exports Kyrgyzstan sold in CIS countries during the first half of 2013 pales in contrast to the nearly $1 billion in remittance inflows reported by the National Bank of the Kyrgyz Republic during this time—virtually all of which came from Russia and Kazakhstan.

 

The socio-economic significance of its migrants in (and the remittances they generate from) the Russian Federation is therefore difficult to exaggerate.

 

In addition to leading to better treatment for its migrants, Kyrgyzstan’s prospective Customs Union entry could help labour-intensive production and exports (e.g., textiles, foodstuffs) supplant the migrant labour flows that, while lucrative for the national economy, impose hardships on Kyrgyzstan’s social fabric.

 

For Kyrgyzstan and Tajikistan, integration within the framework of the EEC may be the only game in town, for the foreseeable future. While many other global and regional heavyweights—China, the US, the EU, India, Turkey, Iran—are present in Central Asia, most are either too far away, have too many other problems, are too narrowly engaged, or are not economically strong enough to challenge Russia’s and Kazakhstan’s joint position.

 

This could change for China, which has become the leading trading partner for a number of Central Asian economies, and which is investing in large infrastructure projects in the region.

 

However, Chinese economic diplomacy in Central Asia continues to focus on procuring energy and raw materials, selling consumer goods, and ensuring that Central Asia does not become a haven for Uighur separatists.

 

By most accounts, Beijing sees its medium- and longer-term challenges and opportunities to its east and south, not to its west. And while Chinese trade and investments are certainly promoting economic development in Central Asia, many of these benefits have yet to trickle down to local communities.

 

As a result, cooperation with China does not (yet) offer energy-poor Tajikistan and Kyrgyzstan the sorts of benefits that EEC integration is already providing—particularly for low-income households, and for regions and sectors that could benefit from the growth in labour-intensive production and exports (e.g., textiles, foodstuffs) that could result from Customs Union membership.

 

Implications for UNDP

Because of our poverty reduction mandate, our focus on Central Asia, and our emerging partnership with the Russian Federation, the Eurasian integration project matters for UNDP—and seems likely to continue to do so.

 

For the low-income Central Asian countries where we are working, EU integration is not an option; there are no viable competing regional integration projects. It is therefore not surprising that the governments of Kyrgyzstan and Tajikistan are looking to UNDP for support on Customs Union accession.

 

On the other hand, it is now clear that Kyrgyzstan’s (and then Tajikistan’s) Customs Union accession will be difficult processes, requiring the investment of hundreds of millions (maybe billions) of dollars and years of institutional development—in the public, private, and third sectors.

 

aA small hydropower facility in rural Tajikistan

 

This is not necessarily a bad thing: the EU accession experience shows that the institutional development needed for supra-national integration can produce significant improvements in the quality of governance.

 

Moreover, given the deep integration (with Russia) of Kyrgyzstan’s labour market and increasingly its energy sector, Kyrgyzstan is already capturing some benefits of integration. At issue is whether Bishkek can manage these integration processes strategically—as opposed to being at the mercy of spontaneous integration dynamics.

 

It is unfortunate that, at present, Eurasian and EU integration processes are at cross-purposes with one another in the Caucasus and Western CIS.

 

In light of the weakening momentum for World Trade Organization (WTO) -led global economic integration, as well as ‘east-west’ political dynamics, the appearance of competing regional integration projects in the Caucasus and Western CIS is not a surprise.

 

However, the current loggerheads need not be permanent. In fact, advocates of Eurasian integration have articulated open, pragmatic visions of the EEC’s further evolution that are consistent with both multilateral and pan-European development perspectives.

 

UNDP, and other United Nations agencies working in the region, should work to build on such visions.

 

If Eurasian economic integration can reduce poverty, raise living standards, and buttress socio-political stability in the Central Asian countries bordering Afghanistan, sooner or later it will come to be supported by the EU—whose member states and European Commission together comprise the world’s largest donor.

 

UNDP—with its long history of close cooperation with the EU in Central Asia—should be prepared for this as well.

 

 

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