Greater Eurasia by 2040: Futures of the EU – EAEU Cooperation

_ Marina Steiniger (Ifo Institute, Munich); Rufina Gafeeva (University of Cologne); Audrey Au Yong (LMU, Munich); Nargiza Kasymova (Financial University, Moscow/Bishkek); Svetlana Kiriliuk (Diplomatic Academy of Vienna); Oleg Nevzorov (Samara State Technological Universiity); Alexey Rybalka (HSE, Moscow); Marc Wallach (University of Cologne); Natalya Askerova (HSE, Moscow); Valerii Zavgorodnii (Samara State University); Liubov Kravchenko (Diplomatic Academy, Moscow/Rostov-on-Don); Olga Lashko (RGGU, Moscow/Kiev);  Maria Shilina (HSE, Moscow). Under supervision by Jurij Kofner (IIASA, Vienna). 

This arcticle is the result of a foresight working group of the above mentionend young researchers. The working group convened as part of the international youth forum “Future of Eurasian and European Integration: Foresight – 2040”, that took place 4 – 8 December 2018 at Laxenburg, Austria and was co-organized by INES, IIASA and the Gorchakov Fund.

Global Economic Trends for the EAEU and the EU

Free trade between Europe and the Eurasian Economic Union (EAEU) and beyond might lead to substantial economic advantages since the economic setup of both regions is complementary to each other. The European imports from the EAEU are concentrated on natural resources, such as gas, oil and metals. More than eighty percent of the EAEU’s exports to the EU consist of natural resources. The EAEU’s imports from the EU are dominated by machinery and chemical products, whereas service trade is still underdeveloped on both export and the import. This already shows that there is still room for an increase of the extensive and intensive margin of trade.Both quantity of goods traded can be increased (the extensive margin), as well as the range of traded goods (the intensive margin). Further, the next figure shows that trade between the EAEU and EU was already increasing significantly until the great recession of 2008-2009 hit countries across the globe. Then trade volumes increased again, but there is a clear trend that the overall trade did not recover. It even stagnated and had a slightldecreasing tendency – even before the Ukrainian crisis.

Figure 1: European trade volume with EAEU, in mn USD, 1994 -2014.

Source: IMF DoTS and own visualization.

The trade barriers between the former Soviet Union countries and the European Union are still relatively high in many sectors. The average tariffs in the agricultural sectors are consistently above ten percent. The manufacturing industry is confronted with average tariffs of five percent. The tariff heights can be retrieved from the next figure.

Figure 2: Tariffs, weighted average in %, 2014.

Source: WITS-TRAINS and own visualization. Data for Georgia from 2013. No data for Turkmenistan.

The non-tariff barriers are still quite substantial as well, which can be traced back to the large number of international disputes; especially in regard to technical trade barriers and in the sanitary and phytosanitary areas.  However, the EAEU is autonomously adopting many European standards and that of the international standards organizations (ISO, IEC, ITU), which work very closely in partnership with the European standards organizations (CEN, CENELEC, ETSI), such that international and European standards are to a large degree identical. This means that the legal and technical infrastructure for non-tariff barriers of the EAEU and EU is already converging very substantially.  

The potential for additional trade in goods and services between the EAEU and the EU is substantial. Various reasons have prevented a successful economic and political integration between the EU, the EAEU, and their neighbors. These global trends bring us to the initial motivation of this article.

Vision 2040

It was already in 1989, when Gorbachev and Kohl spoke about the aspiration of a “Common European House”, which should build on closer economic cooperation. This was almost 28 years ago and we are not yet there. When we, the young people, think of 2040, we want this vision of a common space from Lisbon from Vladivostok (and beyond) to be accomplished.

Benefits of a “C3 strategy”

To achieve this, social, political, and economic challenges have to be addressed. In this regard, we suggest striving for a “C3 strategy”: Compatibility, Cooperation and Competition.

Competition: We need an economic environment that allows fair competition. Only then, the economy can prosper.

Compatibilty: We suggest concentrating on compatibility of regional integration projects, their aims and strategies.

Cooperation: We suggest concentrating on the implementation of bottom-up projects, such as improving connectivity via developing hard, soft and digital infrastructure to become the basis for integration.

We want to think positive. We appreciate differences, but want to live together in our common house called Greater Eurasia. We want Greater Eurasia to be peaceful and prosperous.

The 3 C’s (Cooperation, Compatibility and Competition) could form the basis of optimal economic integration within the EU – EAEU – China space. Firstly, economic cooperation cannot be achieved alone, without socio-cultural understanding among member states. Close economic cooperation therefore fosters better cultural relations through enhanced mutual understanding of neighboring countries’ economic dynamics and systems. The compatibility of economic laws and regulations is equally important in ensuring that trade ideologies for instance, are consistent between nations. This will ultimately prove to be the key to successful economic integration within the EU – EAEU and the Asian space. Lastly, competition is required for fair competition and efficient markets, in addition to exploiting the benefits of comparative advantage. Economic literature abound, the advantages of competition far outweigh the associated costs, which will yield welfare benefits for participating nations and long-term economic growth.

Scenarios

As our vision suggests, we strive for the C-Cubic channels to increase the overall welfare. A broad framework for a successful economic integration is depicted in three potential scenarios.

Graphic 1. Scenarios of future potential economic integration in the Greater Eurasian space

Source: By the authors.

Notwithstanding, economic integration via trade agreements constitutes one of the main channels for deepened cooperation. The C3 strategy suggests that it is crucial to not only concentrate on the economic parameters, such as a reduction of tariffs, but also consider other aspects that are of (potential even greater) importantce to the negotiating partners: facilitating foreign direct investment, technological transfer, digitalization, services, intellectual property, transport and, of course, non-tarriff barriers. These features are deeply embedded into the respective side’s economic interests and will unambiguously influence the effectiveness of economic integration.

The free trade agreement scenario can be divided into different subcategories. Firstly, there can be a deep and comprehensive free trade agreement, which includes countries from Lisbon to Vladivostok and Shanghai. This would be the most deeply integrated scenario. Secondly, one can implement a differential (asymetrical) FTA between China, the EAEU and the European Union. In this case, the tariffs and non-tariff barriers will be reduced sector by sector depending on the need of each of the sectors. Other, more sensitive sectors, such as manufacturing sectors, or high-tech sectors can still sort out the remaining incompatibilities until a common solution is achieved.

Another scenario is to solely concentrate on non-tariff barriers, such as technical regulations. There are actually already substantial similarities between the European and EAEU standards (Kofner, 2018). This broad scenario is therefore a more flexible way without th need to agree upon a thorough agreement. The respective regions can concentrate on different sectors step by step.

The third scenario is the worst case scenario, which suggests no change in EU-EAEU relations at all. In this case, local projects can still be implemented.

Trends and Risks

These three broad scenarios could build the framework and set the stage for implementation of economic integration strategies. Now we would like focus on different economic integration measures and tackle various instruments, such as the transportation and infrastructure sector, the energy sector, and the technological sector. We suggest distinct strategies on how to successfully implement the economic integration goals.

Transport corridors

To improve the current development between the EAEU and the European Union in terms of economic cooperation, it is fundamental to adjust and develop the system of transportation and corridors. Currently, high-speed railways between those areas exist, which reduce time and related costs. Also numerous new flight paths are established, as it is the more efficient to transport goods within a short period of time. Furthermore, the exchange of resources could be enhanced by providing a new pipeline network.

Accordingly, not only physical insecurity is a main aspect of the expansion of transportation infrastucture, the risk of non-profitable investments and a lack of investors also has to be considered really well. Thus, corruption needs to be prevented by establishing a joint authority. Another big issue which could lead to disagreements between the European Union and the Eurasian Economy Union is the topic of ecological sustainability. The EU keeps enacting laws, which should protect the environment. On the other hand the Eurasian Economic Commission is missing these kinds of competencies. Also force majeure has to be considered, especially as it comes to geological challenging terrain. 

Recommendations:

  • Standardization of requirements for railway gauges, containers;
  • Standartization of legal documents for automobile transportation, declarations, etc.;
  • Reduction of bureaucratic barriers for the carriage of goods through the territories of states-transit;
  • Procedural harmonization;
  • Development of the Cross-border logistic points;
  • Implementation of “single-window”;
  • Formation of an inter-continental discussion platform between EU, EAEU, BRI (China).

Digital finance: blockchain innovation

The finance sector is an important part of the process of world economic integration. International finance covers foreign exchange, credit, stock exhange, investments, etc.

Blockchain is becoming ever more feasable and popular as a new instrument for financial interactios. Its capabilities will make it possible to radically change the world of financial relations and institutions. This technology allows to exclude the mechanism of trust, which is a serious breakthrough. Its use cancels the control system and does not require the use of intermediaries’ assistance in concluding transactions. Thus, in the near future, a cluster of “smart contracts” can be formed, which will reduce the market of lobbying services in businesses.

Active introduction and the use of crypto currency will create healthy currency competition and increase the share of decentralized currencies. In capitalist economic systems, competition will actively develop, which will improve the quality of goods. Today, banks are bad at coping with lending to the real economy. Active use of crypto currency can give a powerful stimulus to the real economic sector.

But under the given conditions it is possible to also distinguisg the following risks: potentials for black/shadow markets; disappearance of most of the banks; decrease in usage of the Euro and other tradtional currencies.

Recommendations:

  • Work out international legislation, which will determine and consolidate the status of block-technology and crypto-currency;
  • Banks should work out clear mechanisms for implementing block technology and crypto currency in their activities, and also improve their digital protection;
  • The governments of countries should establish the necessary conditions for the circulation of crypto-currencies and free use of block-technology (e.g. as in Belarus);
  • Employees of the banking sector and the financial sector should undergo training in blockchaine technologies and crypto currency;
  • Education programms on crypto-currencies and block chain at universities.

Digital economy and technology transfer

One of the main directions of EU-EAEU cooperation could the creation of a common IT ecosystem for technology transfer and the comfortable co-development of new technologies. Nowadays this area is characterized by certain trends:

  • Lack of valdue-added production in the EAEU economies;
  • Low productivity and out-dated managment in EAEU countries;
  • “Physical presence” barriers for personal evaluation of goods and technologies of other companies / countries.

But today, technologies are developing and emerging that will lead to a fundamental change in the structure of the world economy and the transformation of the main international actors. These trends are:

  • «Big data» (new level of economic forecasts: volume of agricultural yield, more accurate search for new minerals, growth in trade);
  • Internet of things (reduction of production costs, franchising (technology transfer) in the EAEU countries);
  • “Open data” technology (for instance, Open API);
  • Virtual reality (“Virtual collaboration“ leads to removal of some trade barriers, improvement of professional skill of the staff, distance mobility of scientists, growth in trade);
  • “Superman” technology based on neurointerface and quantum computing;
  • Additive technology (for instance, 3D print, implants).

They have both positive and negative consequences. The positive side includes measures that enhance globalization and cooperation . Internet technologies (virtual reality, online education) will contribute to the development of remote work and reduce the outflow of highly skilled personnel. At the same time, the Internet will become the main platform for interaction of scientists. Such technologies as the system of sounding and monitoring of the earth will help locate resources. Internet of things can contribute to the development of franchising, standardization and automation of production.

But there are also risks, such as the development of new technologies, which can lead to increased confrontation on the continent and promote a technology race. A negative consequence can be the strengthening of socio-economic and physical inequalities, as not all will have availability of the new technologies.

Cooperation in the energy sector 

Both the European Union and the Eurasian Economic Union face serious challenges in energy sector development. Generally speaking, the energy sector is represented by three major segments – electricity, renewable and non-renewable energy sources. However, each actor has its own energy basket. The EU tries to mitigate climate change through the development renewable energy sources and also avoids dependence on traditional sources import by diversifying energy suppliers. By developing the production of renewables the EU succeeded in green technologies and equipment. Apart from that, the EU has developed a common electricity market, though, the electricity remains expensive because of the use of high technologies. At the same time, the energy basket of the EAEU is much different from that of the EU as the proportion of the fossil fuels segment is bigger. It leads to the negative ramifications for the environment and decreasing demand for the resources. Moreover, the electricity market of the EAEU is fuel-based and, hence, cheaper. The EAEU is planning to create a common electricity market by 2019 and a common energy market by 2025.

Higher dependence on the either segment of the energy basket can create imbalances in energy sector development. Cooperation and synergy could achieve a more balanced and sustainable energy market in the EU-EAEU space. However, there are a lot of risks that make its implementation complicated. Firstly, production of the renewables is highly costly and also season-dependent. Concentrating on the fossil fuels only will accelerate climate change, to say nothing about the costly extraction, and the risk of “Holland desease” of the EAEU. As for electricity, the electricity markets of the actors are developing at a different level, hence, creating technical-related issues. We can hardly deny the influence of high political risks on electricity.

Recommendations:

Here, is would be sensible to create joint projects based on technological and experience exchange between the Unions and to carry on negotiations in order to create insurance for political risks and to become reliable partners. As a result, the Unions will achieve a balanced energy sector with an average price on electro-energy, which is going to allow to gain leading position in the world energy market.

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