Research and Policy Consulting, Kiev, Ukraine


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Prof. Igor Burakovsky, Co-director of the Institute for Economic

Research and Policy Consulting, Kiev, Ukraine




Regional economic integration as an element of economic security

(Key points) 1

I. After the collapse of the USSR former Soviet republics faced the challenge to secure their independence by establishing proper international institutional arrangements of political (security) and economic character. In fact, they had to solve very difficult problem of integration into international political and economic structures. In order to solve this problem they needed quite clear understanding of the national economic and political interests in the long-term perspective.
II. Even rather general analysis of different regional and regional arrangements on post-Soviet space leads to a conclusion that former Soviet republics have been rather active in searching for allies inside and outside post-Soviet space. At the same time the practical gains of virtually all regional arrangements are rather modest. Thus today one can only analyze intentions of one and another participating state and possible scenarios of further developments.
1. It is clear that any successful regional arrangement (other things being equal) critically depends upon the proper selection of allies. In my view, there are three key players on post-Soviet space whose behavior influences economic and political developments in the region: Russia, Ukraine and Kazakhstan.2 Russia remained so far important economic partner for CIS states and important security partner for some of them. In terms of European part of the region, Ukraine’s economic and security standing cannot be underestimated. And, in geostrategic sense the most important country in the Central Asia region is Kazakhstan.

2. In principle, the present condition of the economic cooperation on post-Soviet space has quite distinct pattern:



Firstly, due to historical reasons Russia remains an important economic and political partner of virtually all CIS countries. This fact can be attributed mostly to the heritage from old centralized Soviet system.

Secondly, rather limited development of “horizontal” economic links, that is trade among CIS states excluding Russia. This characteristic also refers to the trade relations within subregional groupings and trade relations among neighboring countries. Former Soviet republics (except Russia) are net-FDI importers.

Thirdly, third countries importance as trade and economic partners has been steadily growing (the effect of trade diversion has been already started).

3. Economic links among CIS states in all configurations are limited primarily to trade relations. The amount of financial flows is rather insignificant.

4. Energy sector and transportation of oil and gas have become already and will be in the future important factors shaping relations in the post-Soviet space. For many countries the further economic development will depend upon successful construction of pipelines and transportation networks.

5. In principle, the process of integration includes key components:



Trade component. By trade component we mean in fact trade regime or in practice elimination of trade barriers. Ukraine as well as other former Soviet republics views it as a preferential trade arrangement.

Regulatory component. This component has two dimensions – shallow and deep. By shallow dimension we mean that partners are solving issues related to trade, while deep integration means in fact that cooperation on regulatory issues goes beyond pure trade issues. So far Ukraine’ has been advocating the necessity to implement free trade regime, while Russia’s approach has been to set up the tasks of coordination of national economic policies.

Political component. At the moment this component is one of the most important one. In fact this aspect refers to the problem of striking delicate balance between liberalization at the national level and reaching certain level of supranationality in terms of managing different integration schemes.

6. A lot of economic arrangements in the post-Soviet space have distinct political content: politicians view them as a proper and rather efficient instrument of signaling political closeness and solidarity. At the same time new political elites try to use these arrangements as a tool for internal consolidation of their power.

7. So far these attempts to integrate have brought no significant results. The main obstacle to integration is inadequate economic reforms pursued in the CIS countries.

8. The cooperation on the CIS space will be influenced by the EU enlargement.

9. The WTO accession has become very important issue of regional economic cooperation.
III. After the collapse of the USSR former Soviet republics have clearly demonstrated two principal ways of so to say political and economic self-determination both in international and regional coordinates.3
The first one can be tentatively named “Baltic way”. This strategy in practical terms means joining existing political and economic organizations like NATO, Council of Europe and EU. And now we can say that this strategy was successfully implemented by Estonia, Latvia, and Lithuania. This strategy has a clear distinctive feature – avoidance of any strong institutionalized ties with the former Soviet republics.

Three Baltic republics have declared EU membership as the national priority and have been constantly rejecting the very idea of participating in any regional arrangements with the participation of the former Soviet republics only (regional and sub-regional). These countries have positioned themselves politically beyond the bounds of economic and political groupings emerged on the post-Soviet space.



At the same time these countries has been trying to preserve economic links with the former Soviet republics on bilateral basis (free trade agreements, for example).
The second strategy can be named as a “mixed” one in the sense that in this case former Soviet republics have been trying to combine accession to existing political and economic organizations (like NATO, WTO, closer relations with EU, etc.) with searches for different interstate institutional arrangements on the post-Soviet space (both political and economic ones).4
In fact we can say that this strategy consists of two elements:

pro-regional component (that is establishing different structures on the post-Soviet space) and

external component (joining different arrangements outside CIS area).
IV. This region (that is fifteen newly independent states) has attracted attention of powerful international economic and political players who have their own so to speak agendas and their impact upon economic and political affairs has been constantly increasing.
V. As far as former Soviet republics integration into existing international economic structures is concerned, practically all former Soviet republics (except Turkmenistan) have applied for WTO membership or joined this Organization already (see Table 1).
Table 1. CIS countries accession to WTO.


Country

Current Status

Armenia

Protocol of Accession signed 10 December 2002. The Protocol of Accession is now subject to the ratification by Armenian Parliament

Azerbaijan

Working party established on 16 July 1997

Belarus

Working party established on 27 October 1993

Georgia

Member since 14 June 2000

Kazakhstan

Working party established on 6 February 1996

Kyrgyzstan

Member since 20 December 1998

Moldova

Member since 26 July 2001

Russia

Working party established on 16 June 1993

Tajikistan

Working party established on 18 July 2001

Turkmenistan

No application for accession

Ukraine

Working party established on 17 December 1993

Uzbekistan

Working party established on 21 December 1994

Now, except 3 Baltic state (Estonia, Latvia and Lithuania) four CIS countries have already accessed to WTO while Turkmenistan did not apply for accession at all. WTO accession is an important factor shaping CIS state foreign economic regime in general and their mutual economic cooperation in particular.


VI. All CIS states except Belarus, Tajikistan and Turkmenistan have some contractual relations with EU (see Table 2). At the same time the goals of their European policies varies from official declaration to join EU (Ukraine) to establishing some loose forms of cooperation like common European economic space as in case of Russia.
Table 2. Agreements between EU and CIS countries.


Country

Agreement, entered in force

Armenia

Partnership and Cooperation Agreement, 1 July 1999

Azerbaijan

Partnership and Cooperation Agreement, 1 July 1999

Belarus

Partnership and Cooperation Agreement, signed in March 1995 but is not yet in force. The Interim agreement is also not in force

Georgia

Partnership and Cooperation Agreement, 1 July 1999

Kazakhstan

Partnership and Cooperation Agreement, 1 July 1999

Kyrgyzstan

Partnership and Cooperation Agreement, 1 July 1999

Moldova

Partnership and Cooperation Agreement, 1 July 1999

Russia

Partnership and Cooperation Agreement, 1 December 1997

Tajikistan

No Partnership and Cooperation Agreement proposed

Turkmenistan

Partnership and Cooperation Agreement signed in May 1998 but is not yet in force. The interim agreement is not yet in force

Ukraine

Partnership and Cooperation Agreement, 1 March 1998

Uzbekistan

Partnership and Cooperation Agreement, 1 July 1999

 
VII. As far as export destination is concerned CIS countries may be divided in two rather broad groups:

1) CIS-oriented states: this category comprises Belarus, Georgia, Moldova and Tajikistan. For theses countries CIS market plays decisive role in terms of export destination (though its share varies from country to country).

2) Third countries-oriented states. These countries have already reoriented their export from CIS to third countries markets. And again in this case the level of reorientation (or trade diversion), that is the share of third countries market, varies from country to country (90% for Azerbaijan and Russia, more than 50% for Armenia, Kazakhstan, and Uzbekistan, 71% for Ukraine). At the same time it is worth mentioning that there the commodity structure of export virtually has not changed. On contrary, in some cases the share of traditional export commodities has even increased.
The same approach can be used to analyze geographic distribution of import. And again we can talk about two groups of states:

1) CIS-oriented states – Belarus, Kazakhstan, Kyrgyzstan, Tajikistan, and Ukraine.

2) Third countries-oriented states – Azerbaijan, Armenia, Georgia, Moldova, Russia, Uzbekistan.
VIII. There is also a group of countries with asymmetric connections with CIS market. The countries like Georgia and Moldova whose export is dominated by CIS while import originates outside CIS region. The second “asymmetric” group comprises Kazakhstan, Kyrgyzstan, and Ukraine. These countries rather heavily rely upon supplies from CIS while their products are sold outside CIS region.

Russia is a specific case, because among CIS countries Russia occupies special place due to its economic potential. Being itself less integrated in intra CIS trade this country is, at least, rather important trading partner of all CIS states.


IX. Changing significance of intra CIS state trade influences the development of CIS as economic grouping as well as attempts to create different sub-regional arrangements. Generally speaking, currently there are three principal tendencies (and, at the same time, lines of thinking regarding integration) on the post-Soviet space. Every tendency has been shaped by the desire “to restore the broken ties and disintegration trend towards strengthening the national sovereignty”.5
X. The first one can be tentatively called “broad” integration embracing all former Soviet republics (except Baltic ones which declared their intention to follow their own way and join Europe). This “broad integration” concept resulted in establishing Commonwealth of Independent States. Later a number of agreements paving road to the closer integration were signed, for example, Interstate Eurasian Association of Coal and Metal (24 September, 1993), Free Trade Zone Agreement (15 April 1995). One of the steps towards a FTZ and custom union in CIS was the signing on 6 March 1998 of the Agreement on the Single Agricultural Market.

In fact formation of CIS economic component started form signing bilateral agreements on economic issues of two types: free trade agreements (for example, Ukraine has signed bilateral free trade agreements with all former Soviet republics) and agreements on production cooperation.

Of course, these bilateral agreements differ from each other in terms of coverage of goods, etc. Ukraine, as well as other CIS countries also concluded bilateral free trade agreements with the Baltic states (Estonia, Latvia and Lithuania). But all the former Soviet republics in general and Ukraine in particular viewed these arrangements as a tool of preserving cooperative links established under USSR (preserving so to say common economic space) and in this capacity as a measure counteracting economic recession followed USSR dissolution. This approach has had some logic behind: after the disintegration of the USSR the newly independent states inherited only fragments of industrial chains and thus have been trying to re-establish production relations in a new economic environment.

At the same time “broad” integration has had from the very beginning rather strong political component (security cooperation, for example), which has been favored only by certain CIS countries and directly or indirectly opposed by others.

Russia has been constantly trying to transform CIS into a full-fledged military and political grouping under Russian leadership, while Ukraine has opted for rather limited participation in CIS activities and development approach toward cooperation within the Commonwealth of Independent States and has stressed more than once the necessity to concentrate efforts on economic side of cooperation. But at the same time Ukraine did not become member of the Customs and Payments Union actively promoted by Russia.
XI. The second tendency can be named sub-regional (or plurilateral) integration that is formation of different sub-regional (if we use term region for the territory of the former USSR excluding Baltic states). Appearance of different sub-regional projects generated term multi-speed integration (or different speed integration).
These groupings in fact has been appearing in two primary ways:

first, as pure political projects based on considerations of political cooperation, and later declared their intention to develop integration-type economic cooperation (GUUAM, for example);

second, as economic projects from the very beginning.6
Among these sub-regional groups Russia-Belarus Union State represents a specific case. Originally these countries formed customs union in 1995, later in 1997 it was transformed into the Union of Belarus and Russia, and finally in December 1999 the Union State of Belarus and Russia appeared. This integration project is the most ambitious one on the Post-Soviet space because its ultimate goal is establishing Union state.
As it was mentioned earlier GUUAM (Georgia, Ukraine, Uzbekistan, Azerbaijan and Moldova) was formed as a regional organization to facilitate political cooperation as well as promote cooperation in the field of transporting Caspian oil and development of a road network linking Middle East and Europe. In 2002 the presidents of Georgia, Ukraine, Azerbaijan and Moldova signed agreement on establishing of free trade area. This step signaled attempt to boost economic integration.

Ukraine has demonstrated special interest to GUUAM and has already rather developed contractual framework of bilateral cooperation with all members. Ukraine has bilateral free trade agreements with all GUUAM members.

GUUAM united countries opposing so to say Russia-led integration attempts. At the same time GUUAM is an example of regional project whose destiny depends predominantly upon economic and political agenda of third parties (USA, EU, Russia, etc.) having special interests in the region concerning transportation of Caspian energy resources to the world markets. In this relation one can assume that closer cooperation between Ukraine and EU could potentially contribute to the revitalization of GUUAM. So far this grouping has not demonstrated any significant economic success because the member-states have not enough financial resources to implement far-reaching and ambitious goals.
EvraAzES presents another example of sub-regional grouping where Russia plays leading role. The history of this grouping began in 1995 when Russia, Belarus and Kazakhstan formed customs Union, which was transformed into the Eurasian Economic Community in October 2000. This grouping (consisting now of Russia, Belarus, Kazakhstan, Kyrgyzstan (since 1996), and Tajikistan (since 1998), Ukraine and Moldova were granted observer status in 2002) has set up rather ambitious goals including establishing customs union by 2005.

In fact, EvraAzES is an interesting example in a number of aspects.



First, this grouping has been dominated politically and economically by Russia. In fact one may assume that EvraAzES is viewed at least by Russia as a certain alternative to GUUAM and CIS, and in strategic perspective this grouping may become the nucleus of bigger regional arrangement.

Second, reportedly the members of the grouping have already started negotiations on unifying import tariffs. The information about the level of tariffs unification is incomplete but it is often reported that Russia and Belarus have already harmonized 95% percent of tariffs, Russia and Kazakhstan - 5%, Russia and Kyrgyz Republic - 14%, Russia and Tajikistan - 60%.7

Third, this grouping has encountered with quite a specific problem – contradiction between obligations of Kyrgyzstan as a member of WTO and attempts of the grouping to agree upon common external tariff. In order to raise its import tariffs to the level of EvraAzES common external tariff (which is currently under discussion) Kyrgyzstan has to agree with WTO changes to the terms of WTO accession. (In principle, this problem can be solved if Kyrgyzstan will opt for free trade agreement with EvraAzES, but in this case the very idea of new regional arrangement is lost).
Russia’s opinion on this problem is rather critical. In November 2001, the Government of Russia discussed the problems and perspectives of Russia’s cooperation with CIS countries and officially declared Russia’s wish to coordinate efforts aimed at WTO accession with other CIS countries. In Russia’s view non-coordinated activities of CIS states aimed at WTO accession will result in substantial losses for Russia. The logic behind this argument is, that being WTO members, these countries may demand opening Russia’s markets as Kyrgyzstan (EvrAzES member-state as well as Russia) already did. Such a situation may harm not only Russia but EvrAzES states as well.8

Later on 13 May 2002, this idea was realized in a form of agreement of Presidents of EvrAzES agreed upon mutual consultations and coordination of efforts in terms of WTO accession. According to mass media it was agreed that EvrAzES states would base their WTO accession negotiations on Russian terms of WTO accession. Besides, such common position must take into account elaboration of EvrAzES common external tariff.


Republics of Central Asia have also attempted to establish regional economic grouping. Originally Kazakhstan, Kyrgyzstan and Uzbekistan formed economic union in September 1993 and later this year in February agreed to create common economic space. In July 1994 the agreement was transformed into a new regional organization – Central Asian Union, and in July 1998 new name was agreed upon – Central Asian Economic Community.9 Georgia and Turkey hold observer status.

The group of countries comprising Central Asian republics, Azerbaijan all face challenging geograghic and economic circumstances, including the relatively small size of their economies; remoteness from world markets; long-term isolation from global technology and capital flows; heavily dependency on primary production of energy, minerals, and other commodities; continuing vulnerability to external shocks arising from volatility in international oil and commodity prices; dependence on Russian economy (which is still the largest market for their exports); and industrial structure from the Soviet era that is hardly compatible with an open economy.10


That’s why this organization has been seen by the founding states as tool to create subregional market, which will facilitate overcoming their relative isolation from world markets, rapid industrialization and in the end contribute to sustained economic growth. This organization as many other arrangements on the post-Soviet space is in fact intention to intensify economic cooperation while the actual level of internal economic links trade is rather small.
One more recent initiative is worth mentioning. On February 24, 2004 Belarus, Kazakhstan, Russia and Ukraine declared their intention to establish common economic space and later the Agreement was signed. The ultimate goal of the project is establishing the so-called Organization of regional integration. This Agreement envisages:

  1. establishing common economic space;

  2. coordinated economic policy in a number of fields;

  3. harmonization of respective legislation;

  4. establishing “single regulatory interstate independent commission on trade and tariffs”;

  5. coordination of WTO accession efforts.


XIII. The third tendency can be named as mixed plurilateral integration that is joining existing or establishing new regional organizations with participation of third countries. Among them the following arrangements are to be mentioned.
In 1985 Iran, Pakistan and Turkey founded the Economic Cooperation Organization (ECO) to promote economic, technical and cultural cooperation. This institution succeeded organization for Regional Cooperation for Development (RCD), which functioned from 1964 to 1979. After the accession of Afghanistan, Azerbaijan, Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan and Uzbekistan (ratified in 1992) organization got a new impetus for further development. It is believed that membership of Central Asian republics in ECO will facilitate both trade among them and their southern neighbors. As many other regional arrangements ECO is considered as one having quite high potential, but to date it has not reached any significant accomplishments and its members have been predominantly interacting on bilateral basis.
Black Sea Economic Cooperation Organization (1992) is another example of regional arrangement with participation of former Soviet republics and third countries.11 And again this grouping (as others mentioned earlier) has not demonstrated any significant economic success except establishing Black Sea Trade and Development Bank on June 21, 1999, which is expected to form the financial pillar of the grouping. It is expected that Bank capital will total up to 1,5 bn dollars. Turkey, Greece and Russian Federation are the main shareholders with 16.5% shares respectively. Reportedly the Bank has already provided 102 million dollars to finance different projects in the region.
There is one more new arrangement involving former Soviet republics of Central Asia and Russia - Shanghai Cooperation Organization. It was set up in 1996 as a form of rather lose arrangement (originally called the Shanghai Group) between China, Russia, Uzbekistan, Tajikistan, Kazakhstan, and Kyrgyzstan.12 The primary goal was to settle border disputes between China and neighboring countries as well as to counteract danger posed by Islamic fundamentalists. Such an alliance may have serious economic implications because of China’s membership in the organization. Rapidly growing Chinese economy can stimulate economic development of Central Asian republics, which despite their rich natural resources endowment has been characterized by rather low level of economic development. At the same time China, though having considerable deposits of natural resources, demands increasing quantities of fossil fuels and imports sizeable portion of oil.


1 This text is partly based on the paper contributed to the book Swords and Sustenance.The Economics of Security in Belarus and Ukraine. Robert Legvold and Celeste A Wallander, Editors, 2004.


2 Of course, Belarus, with some reservations, can be also included in this list, but in fact this country has not conducted independent foreign policy and followed Russia’s course.

3 We shall discuss here only agreements meant for forming either economic or political groupings and omit numerous other agreements and treaties though these contractual arrangements are very important and form the basis of rather close cooperation in a number of fields.

4 In order to avoid misunderstandings the term post-Soviet space is used here to denote the region comprising 12 CIS states, and in this meaning it is equal to terms “CIS space” or “CIS region”.

5 G.N.Egorov. Economic Transformation, Industrial Potential and Current Status of the CIS Countries: The Role of Science and High-technology. UNIDO, Vienna, 2000, p. 29.


6 In fact, at the moment there is a huge gap between intentions of integration and their implementation, but for the sake of clarity the term grouping is used here despite the fact that a number of them are at the early stage of development.

7 Constantine Michalopoulos. The Integration of Low- Income CIS Members in the World Trading System. Paper prepared for the CIS-7 Conference. Draft as of December 2002.



8 This point was explicitly stated in the Report “On the Economic Relations Between Russian Federation and CIS Member-States and State and Ways of Their Further Development”.

9 Members: Kazakhstan, Kyrgyzstan, Tadjikistan (1998), Uzbekistan. Observers: Russia, Ukraine, Georgia, Turkey.

10 Asian Development

11 BSEC members are Armenia, Azerbaijan, Georgia, Moldova, Russia, and Ukraine Albania, Bulgaria, Greece, Romania, Turkey. The status of observer was granted to Poland and Business Council of Black Sea Economic Cooperation in 1992, Tunisia, Israel, Egypt, France, and Slovakia in 1993, Italy and Austria in 1995, France and Germany in 1999.

12 Organization changed it’s name to Shanghai Cooperation Organization in June 2001



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