The EAEU by 2025: Priorities and Expectations of Russia

_ Elena Alekseenkova, Ph.D. in Political Sciences, Manager for Analitic Projects at Russian International Affairs Council, Research Fellow at the Centre for Global Problems Studies of MGIMO University under the Ministry of Foreign Affairs of the Russian Federation. Moscow, 2017. *

The main goal of the creation of the EAEU was envisioned by the member states as the provision of the conditions for developing their respective economies and improving their competitiveness within the global and regional economic system. The expectation was that the participation of the member states in integration processes would be carried out, among other things, with the aim of making their products competitive on the global markets and improving the business climate at home to make it more attractive to investors.1 For the purposes of integration, we are talking about four freedoms – the free movement of goods, services, labour resources and capital.

In 2015, the Supreme Eurasian Economic Council determined the main areas of the EAEU’s economic development up until 2030, which included the following:

1. Ensuring macroeconomic sustainability. This means achieving stability in terms of macroeconomic indicators, predictability of current economic policy, raising the technological level of the member countries, diversifying production and export, maintaining a sustainable balance of payments and reducing the external debts of the individual member states.

2. Creating conditions for increased business activity and investment attractiveness, which is necessary in light of the continued strengthening of international competition and the restriction of access to markets.

3. Raising the scientific and technical potential inside the member states, developing knowledge-intensive industries innovative development and modernization, and increasing the share of hi-tech exports, all of which are necessary in order to achieve innovative development and the modernization of the economy.

4. Ensuring the availability of financial resources and the formation of an effective financial market for the EAEU. Major problems in this area that are to be addressed include: harmonizing national legislation and its practical application; improving regulation of the securities markets; integrating stock exchanges; resolving issues related to credit provision for the real sector of the economy; and reducing the level of state participation.

These harmonization processes must be completed by 2025, and a supranational regulatory organ for the financial markets must be set up. On the whole, financial integration is expected to help make the markets more resilient to manifestations of crisis phenomena.

5. Recognizing that infrastructural development and achieving transit potential are critical to the successful functioning of the common market and for guaranteeing the four freedoms. It emphasizes the need to harmonize transport legislation, become integrated into the global transport system, increase participation in major international transport projects and create a common market for transport services.

6. Developing human resource potential, which is caused by the need to transition to an innovative economy and the development of hi-tech sectors in the face of shortages of highly skilled labour resources. The plan is to create a system for monitoring the movement of labour and develop cooperation on issues relating to the effective functioning of the labour market.

7. Cooperating in the cost-effective use of resources and increasing energy efficiency, which is associated with stricter requirements in terms of the quality of goods produced and the need for competitive access to the domestic market and to the markets of third countries, as well as in terms of the goal to reduce the burden on the environment.

8. Developing the regions (inter-regional and cross-border cooperation). A shift from bilateral cross-border cooperation to multi-lateral regional cooperation has been proposed, which will facilitate the exchange of experience, stimulate growth in terms of the mutual significance of EAEU member states markets, the establishment of production ties and the creation of jobs in small and medium-sized enterprises.

9. Achieving foreign trade potential, which is dictated by the need to diversify trade flows in the face of growing competition, reduce transaction costs and minimize the influence of the foreign political environment on the economic development of countries. This area of cooperation will be expanded through the signing of preferential and non-preferential trade agreements, as well as through dialogue interaction.

A number of common markets and trade areas are set to be developed within the framework of the EAEU by 2025:

  • the creation of common energy markets, specifically a common gas market and a common oil and oil-product market, as well as the formation of a common EAEU electricity market;2
  • a common transport space;3
  • a coordinated agro-industrial policy;4
  • the elimination of existing barriers to the movement of goods and labour;
  • the formation of a single EAEU financial market.5

The existence of a single EAEU document that lays out development plans until the year 2030 is a clear indication that the EAEU member states all share a common vision of the prospects for the Union’s development at the current stage. It is highly desirable for all EAEU member states to resolve each of the abovementioned tasks (improving competitiveness, coordinating macroeconomic regulation, attracting investments and developing human resource potential) if they are interested in developing their own economies.

Due to the various features of their economic development, the EAEU member states each have their own scale of priorities and relevant objectives within the framework of Eurasian economic integration.

At the same time, due to the various features of their economic development, the EAEU member states each have their own scale of priorities and relevant objectives within the framework of Eurasian economic integration. Taking the abovementioned areas of EAEU integration development up to the year 2030 into account, and on the basis of an analysis of official and expert discourse within the EAEU countries themselves, it is possible to identify integration development priorities for each of the member states within the framework of the EAEU and pinpoint the factors that will influence their perception of integration processes in the medium term.

The Russian Federation

Official and expert discourse in the Russian Federation views Eurasian integration primarily as a resource for economic development and a way to stimulate development in neighbouring countries.

The Concept of the Long-Term Socioeconomic Development of the Russian Federation for the Period Until 2020 identifies strengthening Russia’s leadership in integration processes in the Eurasian space and turning thе country into a centre of world economic relations, including a global financial centre, as its target goals.49 In accordance with the Concept, the transition from an export- and raw materials-oriented model of economic growth to an innovative model of economic growth, which is to be achieved by 2020, is being carried out, among other things, through the expansion and strengthening of Russia’s foreign economic positions, as well as through increasing the effectiveness of Russia’s participation in the global division of labour. Specific tasks in this direction include “the gradual formation of an integrated Eurasian economic space for joint development.”

The updated Foreign Policy Concept of the Russian Federation (2016) noted Russia’s intention to “make active use of the opportunities offered by regional economic and financial organizations to develop the national economy, while paying special attention to organizations and structures that reinforce Eurasian integration processes” (Paragraph 40 of the Concept).50

Deepening and expanding integration within the framework of the EAEU is seen in this document as a means of achieving stable development, completely overhauling the technological infrastructure, stimulating cooperation, increasing the competitiveness of the EAEU member states and improving living standards for the general population. Another task of the EAEU as set out in the Concept is to take a leading role in harmonizing integration processes within Europe and Eurasia and establishing “a common economic and humanitarian space from the Atlantic to the Pacific by harmonizing and aligning interests of European and Eurasian integration processes, which is expected to prevent the emergence of dividing lines on the European continent” (Paragraph 63).

The economic concept of Eurasian integration is at the forefront of Russian academic and expert discourse. Integration is a “way of developing economic processes that can be used by countries as an opportunity to develop.” It is a “common market and a coordinated economy” and “trade and investment openness.”51 That is, integration is first and foremost an open economy and a common market.52 It is a chance for development.53

The EAEU is seen as one of the possible mechanisms for overcoming the economic crisis and attracting new resources and mechanisms for ensuring economic development. In the opinion of Russian experts, Russia’s neighbours are its natural partners. And it would be short-sighted to ignore the possibility to expand sales of Russian goods in conditions where they are not particularly high.

In this regard, medium-term assessments of the effectiveness of Eurasian integration processes in Russia will be influenced by the following factors:

  1. expanding markets for domestically produced goods and diversifying trade and economic relations;
  2. establishing a common financial market and turning Russia into a global financial centre.
  3. expanding opportunities for foreign economic activity;
  4. the degree to which the country’s transport potential has been realized and the development level of the transport and logistics infrastructure;
  5. increasing access to the labour force of EAEU member states and developing human resource potential;
  6. creating a common electrical power market.

Let us look at each of these factors in greater detail.

1. The Ability of the EAEU to Facilitate the Expansion of the Markets for Domestically Produced Goods and the Diversification Trade and Economic Relations

2016 turned out to be one of the least successful in recent years for Russian foreign trade. In value terms, imports and exports fell to their lowest level for five years. This was caused by the unfavourable foreign economic situation (falling oil prices, the devaluation of the rouble, the contraction of foreign markets as a result of the sanctions and counter-sanctions, etc.) and the shortcomings of the Russian economy, which made it difficult to respond quickly to the changes in the external environment (poor diversification, the economy’s dependence on resources, etc.).

According to Federal Customs Service data, Russia’s foreign trade turnover for 2016 fell 11.2 per cent from the previous year. Meanwhile, exports dropped by 17 per cent in value terms during the same period, although they actually rose in real terms.54 The Russian Federation’s export flows are gradually being reoriented under the influence of the foreign economic situation and the conflict with western states, with the European Union’s share dropping from 44.8 per cent to 42.8 per cent. The main beneficiaries of this shift are APEC countries, and China in particular, which have seen their share rise from 28.1 per cent to 30 per cent.

The share of CIS countries in the overall volume of Russian exports has remained relatively stable (contracting by 0.5 per cent in 2016).55 Belarus is Russia’s largest trading partner within the EAEU, totalling $26.3 billion in 2016, down 5 per cent year-on-year. Trade turnover with Kazakhstan fell by 16.3 per cent in 2016 due to the decrease in the supply of oil products, automobiles and ferrous metals, as well as to the active import substitution policy and reduced purchases. The only country to improve its foreign trade indicators was Armenia, which increased supplies to Russia by 6 per cent to $1.34 billion. Armenia is increasing exports of fish, fruits and vegetables, alcohol, textiles and footwear to the Russian and EAEU markets. Russian experts note that insufficient progress has been made in eliminating and unifying non-tariff barriers, further overcoming non-tariff

restrictions and removing exemptions. At present, national protectionist measures remain with respect to a number of categories of goods and industries. Insufficient progress has also been made in the legalization of “grey” imports and shadow trade mechanisms.56

Thus, Russia is very interested in expanding its exports to the unified EAEU market, ensuring the unimpeded penetration of domestically produced goods to the final consumer in the member states, increasing the share of non-resource exports and eliminating the remaining trade barriers and restrictions. Russia’s assessment of the EAEU’s effectiveness will to a great degree depend on whether or not the common EAEU market will have realized its potential for expanding Russian exports by 2025.

2. Establishing a Common Financial Market and Turning Russia into a Global Financial Centre and the Leading Financial Hub in the Eurasian Space

The Concept of the Long-Term Socioeconomic Development of the Russian Federation for the Period 2008–2020 identifies the task of making Russia an international financial centre, turning the rouble into the region’s main reserve currency, expanding use of the rouble in foreign trade and achieving leading positions on the Eurasian financial markets.

Even before the Treaty on the Eurasian Economic Union formally entered into force in March 2015, Vladimir Putin had put forward an initiative to form a monetary union between Russia, Belarus and Kazakhstan. The plan was also mentioned in the Draft Declaration on Eurasian Economic Integration with the remark “the Kazakhstani side opposes the proposal put forward by the Russian side.”57 According to the EEC, the issue of a common EAEU currency cannot be raised before the common financial market is established in 2025. It sees expanding the use of national currencies in mutual trade a more important issue.58 The desire for Russia to become the financial centre in the Eurasian space continues to be relevant, however.

3. Expanding Opportunities for Foreign Economic Activity

Russia is interested in the formation of free trade areas with neighbouring countries in the Eurasian space, as well as with countries further afield. Creating free trade areas not only expands opportunities for Russian exporters, but it also allows for the diversification of goods entering the Russian market, which is important during this period of economic sanctions and food import embargoes.

Russia believes that the formation of the EAEU and the deepening of Eurasian integration can help create a region that is attractive to other economic players. An agreement on a free trade area has already been signed with Vietnam (2015), for example. Negotiations are under way on the possibility of setting up a free trade area with Egypt; mutual trade between Russia and Egypt is growing and close partnership relations are being developed in terms of investments and the construction of large infrastructure facilities. Talks are also ongoing with Iran, Singapore, India and Serbia.59 Russia hopes that Eurasian economic integration will help restore relations with the European Union.

4. Expanding Opportunities to Realize the Country’s Transport Potential and Develop its Transport and Logistics Infrastructure

The idea of realizing Russia’s transport potential was discussed by government officials and the expert community before the announcement on connecting the Silk Road Economic Belt and the Eurasian Economic Union was even made. Specifically, it was back on October 13, 2014 that the Ministry of Transport of the Russian Federation, Russian Railways, the National Development and Reform Commission of the People’s Republic of China and China Railway signed a Memorandum of Cooperation on high-speed transport for the creation of the High-Speed Eurasian Transport Corridor between Moscow and Beijing. Russia was hoping to modernize and increase passenger flow on the Trans-Siberian Railway and reinvigorate the transport and logistics possibilities of the Far East region. The Trans-Siberian Railway was indeed later incorporated into the Chinese Silk Road Economic Belt initiative, and functioning (Grodekovo–Suifenhe, Zabaykalsk–Manzhouli) and potential (Nizhneleninskoye–Tongjiang, Blagoveshchensk–Heihe) border crossings were brought up.60 Russia was

hoping that the use of this route would have a positive effect on the socioeconomic situation in the Far East region of the country and that the development of the transport infrastructure would be followed by the development of the logistics infrastructure. Moreover, Russia hoped that the Free Port of Vladivostok would give new impetus to the development of relations with China and other Southeast Asian countries, that new points of growth would be created and that Russian businesses would be able to increase exports and trade with the countries in the region.

However, at present China is interested in three routes within the framework of the Silk Road Economic Belt, none of which involve the Russian Far East:

  • The Northern Route (China – Central Asia – Russia – European Union);
  • The Central Route (China – Central Asia – the Persian Gulf and the Mediterranean):
  • The Southern Route (China – Southeast Asia – South Asia – Indian Ocean).

Right now, Russia’s involvement in Silk Road Economic Belt projects is limited to the construction of the Moscow–Kazan High-Speed Railway. According to experts, official discourse in China regarding the creation of a land bridge between China and Europe is dominated by the idea of developing Central Asian transport routes. In other words, Russia’s transit potential is seen exclusively in terms of the exploitation of its central regions (Ürümqi – Almaty – Orenburg – Kazan – Moscow – St. Petersburg – Europe), or in term of the construction of a potential transport corridor connecting China, Mongolia and Russia.61 As it stands, Russia is modernizing the Trans-Siberian and East Siberian railways by itself. According to Russian Railways, investments into the development of the East Siberian Railway infrastructure totalled 34 billion roubles in 2016. Of this sum, 29.9 billion roubles was spent on developing the Baikal–Amur Mainline and the Trans-Siberian. A total of 42.3 billion roubles have been earmarked for the development of infrastructure in 2017, with around 35.6 billion going to the modernization and development of the Baikal–Amur Mainline and the Trans-Siberian.62

In March 2017, the Eurasian Economic Commission announced that it had compiled a list of priority projects to be implemented by the EAEU countries and which would support the formation of the Silk Road Economic Belt. Some 39 of these concern the construction of new (or the modernization of existing) roads, the creation of transport and logistics centres and the development of key transport hubs.63 Specifically, the Moscow–Kazan High-Speed Railway (with speeds of up to 400km/h and a journey time of 3.5 hours) is set for completion. Mechanisms are currently being worked out to attract Chinese investments into the project. Other potential projects include the construction of the China – Kyrgyz Republic – Uzbekistan railway and the development of the Armenia–Iran line, which will give Armenia rail access via Iran to Kazakhstan, China and beyond.

In addition to developing its own territories and realizing its transit potential, Russia is interested in making sure that EAEU–Silk Road Economic Belt alignment projects are also carried out in other EAEU member states and that these projects become an additional tool for the countries grow and improve the level of their socioeconomic development. The hope is that implementing this initiative will help form the necessary level of transport and logistics connectivity in the region – the kind of coherence that is absolutely essential for the future development of the common EAEU market. Russia thus holds high expectations for the project to align the EAEU and the Silk Road Economic Belt by 2025.

5. Removing Barriers to the Movement of Labour and Developing Human Resource Potential.

The loss of national labour resources brought about by the rapidly ageing population threatens to put a brake on the Russian economy’s development. In this regard, the migration resource has taken on a role that it has never had before. Russia is interested in the influx of labour from neighbouring countries – countries with which it has a long history of coexistence within the framework of a unified state and with which it has formed a kind of social and cultural commonality. At the same time, the need to reindustrialize the country and develop an innovative economy put special requirements to the quality of human capital crossing the border. The task of developing human resource potential is, therefore, just as important as that of attracting foreign labour to the country.

The creation of a single EAEU labour market came about as the result of the overall realization of the role that labour migration plays in the region’s countries. The unified EAEU labour market opens up a number of opportunities:

  1. the opportunity to distribute the available cumulative labour resources more rationally according to the needs of the economies of the member states;
  2. great employment and social mobility opportunities for EAEU citizens, which, in turn, will improve the social wellbeing of the families of migrant’s in their home countries;
  3. the opportunity for labour migrants to have access to the social security system in the host country;
  4. the existence of preconditions for reducing illegal migration and unregistered employment;
  5. the opportunity for migrants to realize their professional potential (the mutual recognition of academic qualifications);
  6. reducing corruption by cutting down the number of documents required in order to work in the EAEU member states;
  7. eliminating discrimination against migrants in the recruitment process in the host countries.

As a following step, a thorough and detailed study of the labour markets in the EAEU space is urgently needed in order to form a programme for the development of human resource potential that corresponds to the needs of the common market. And this is a task facing all the countries in the region that supply foreign labour, not just Russia as the main destination of foreign migrant workers, since the quality of the declining labour pool and the returning human capital, and the qualifications and competencies they acquire directly determine the economic development potential of the donor countries.

6. Creating a Common Electrical Power Market

Russia currently has a net surplus of electrical energy and is interested in selling its excess electricity to other EAEU member states, as well as to the external markets.64 However, the demand for Russian electricity inside the EAEU is quite low. There is a slight shortage of electrical energy in Belarus, Kazakhstan meets its own requirements almost completely.

The situation in Armenia and the Kyrgyz Republic is different. The Kyrgyz Republic is a generator of electrical power; however, the conflict with Uzbekistan over access to water means that it has been forced in recent years to reduce the amount of water used for electricity generation. A direct consequence of this is that the once export-oriented Kyrgyz Republic has now become an importing country and has been forced to purchase electricity from Kazakhstan for the past two years.

Armenia produces a surplus of electrical energy (taking into account the nuclear power plant, which produces around 40 per cent of the country’s electricity). However, the plant’s operational lifetime is rapidly coming to a close, and the issue of whether to continue operations there or build a new power plant is currently being addressed. Armenia is not in a position to finance the construction of a new nuclear power plant by itself and is counting on investments from Russia. As it currently has a net surplus in its energy production, Armenia could theoretically export these surpluses to Iran, although Iran’s needs are far greater than could be provided through the unified energy system alone.

Thus, Russia and the other EAEU member states are all interested in creating a common electrical power market that would allow all the countries involved to export electricity surpluses to third counties while at the same time meeting their own needs. Russia produces 10–30 times the amount of electricity as the other EAEU member states. Domestically, the country needs only 5 of the 12 gigawatts it produces. This is why Russia calls for the creation of a common electrical power market, the hope being that it will be an additional tool for GDP growth in all EAEU countries in the medium term.

Source: EAEU Development Prospects up to 2025. Working Paper. Special Issue / 2017 / [E.S. Alekseenkova, I.S. Glotova, A.V. Devyatkov, et al]; [I.S. Ivanov, Editor-in-Chief]; Russian International Affairs Council (RIAC). – Moscow: NPMP RIAC, 2017. – 96 pages.

Leave a Reply

Your email address will not be published. Required fields are marked *