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Economic Integration and Security on the Post-Soviet Space

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Economic Integration and Security on the Post-Soviet Space Powered By Docstoc
					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.


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.

                                                                                               1
       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




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.

                                                                                     2
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
                    Protocol of Accession signed 10 December 2002.
Armenia             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


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”.

                                                                                         3
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
                 Partnership and Cooperation Agreement, signed in March 1995 but is
 Belarus
                 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

                 Partnership and Cooperation Agreement signed in May 1998 but is not
 Turkmenistan
                 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


                                                                                       4
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.

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.


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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.

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.

                                                                                         6
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

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.



                                                                                       7
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

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

                                                                                          8
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.


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.

                                                                                         9
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.




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

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