Russia: Customs Union instead of WTO?

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV.COM Ltd.

Russia, Kazakhstan and Belarus may be on the brink of creating a supranational body modelled on European integration, but this could be a difficult task given the problems that their customs union has faced so far, writes George Bovt, a journalist and political observer, in a March publication for the EU-Russia Centre.

''Russia, Kazakhstan and Belarus could be at the point of creating a supranational body, which would acquire some of the same prerogatives as the three national governments. This body, according to Kazakh Prime Minister Karim Masimov, would be modelled after the European design of integration, developed during the initial steps of the EU's formation. Mr Masimov said that such a move could happen as early as 2012. Would that be really possible, given that the customs union, made up of the three states, is far from being a smooth- working body so far?

According to Mr Masimov, a supranational authority of the customs union would be responsible for regulating natural monopolies, tariffs, unified competitive rules and energy policy. This is quite a challenging goal, assuming that the current conditions of cooperation between the member states continue. As Masimov put it, while it took more than 20 years for the EU member states to cope with the same problems (reaching agreed terms of regulation), the three member states of the customs union have to manage these problems in two years.

The customs union started working on 1 January this year, but it appears that not all of the problems facing it were effectively solved prior to its launch. The unified Code of the Union is still not in effect; it was supposed to start working from 1 July. The beginnings of the Union's operation were spoiled by the quarrel between Moscow and Minsk over Russian oil and gas imports and transit. To put it plainly, Belarus insisted on its right to discounted prices for Russian oil and gas, with a presumed right to subsequent resale to the West at market prices.

Another area of disagreement has been the allocation of import duties between Russia, Belarus and Kazakhstan. Initially, Russia insisted on receipt of 93% of all duties gathered by the other three nations. In the end, the three countries reached a compromise, with 87.97% going to Russia, 4.7% to Belarus and 7.3% to Kazakhstan.

Also, Russia has managed to persuade Minsk to agree not to use the Odessa-Brody pipeline for Russian oil resale in exchange for privileged prices (Russia agreed to supply Belarus with 6.3 million litres of duty free oil this year). Discounted prices for Russian gas for Belarus have been retained and Minsk pays $168 per 1,000 cubic metres of gas, compared to $305 paid by the neighbouring Ukraine.

Russia and Belarus have a long history of uneasy relations. The two countries have been in a customs union since 1995 and in a union state for over ten years. During that time, Minsk has imposed 24 trade restrictions on Russian goods and Moscow has imposed 15 on Belarusian goods. These numbers demonstrate that the two governments do not, in reality, have a free trade area.

Last year Belarus-Russia relations were set alight by trade disagreements over dairy products, gas, meat and tractors. As a result, trade between the two countries dropped 40%. The New Year started in similar fashion with a row over oil, in which Moscow demanded that Minsk pay full export duty on the discounted oil that it was buying from Russia and re-exporting to the West at a profit. The issue was only finally (or temporarily) solved after the visit of Russian Prime Minister Vladimir Putin to Minsk at the end of March.

The other issue under discussion in the negotiation of the trilateral customs union is the possibility of Ukraine joining in the foreseeable future. For now, Russia is very pleased with the victory of Viktor Yanukovich in Ukrainian presidential elections. Moscow was also pleased to see Mykola Azarov appointed prime minister of Ukraine. He is believed to be the most 'pro-Russian' member of the new Ukrainian government.

Yanukovich's accession to power after the collapse of the 'yellow revolution' generated some bright hopes in Russia that the neighbouring Slavic country could be returned into the sphere of Russian-dominated influence. But friendly rhetoric doesn't seem to be enough for the restoration of Russian-Ukrainian relations.

'Both of the parties agree that the existing relations have to be changed,' admitted President Yanukovich after his Moscow visit at the beginning of March, 'in the context of the energy security problems that generate concern in Ukraine, Russia and the European Union. Our economies are tied to each other so closely today that the creation of a common economic space has become an issue of the nearest future'.

'Join our customs union,' was Putin's response to Yanukovich in the course of their meeting on 5 March; but no immediate response followed from Ukraine. And there will be none in the foreseeable future.

For Ukraine, which is a member of WTO already (unlike Russia, which apparently postponed the idea of joining the WTO in favour of the customs union with its two neighbours), the most important objective is to receive a substantial reduction in gas prices from Russia. The country suffers from a huge budget deficit, while Ukraine's gas transportation system could become President Yanukovich's trump card in negotiating such a reduction. In turn, Russia may react positively to the Ukrainian proposal of establishing an international consortium with its own participation to jointly manage the system.

While economically viable, the idea of a venture with Russian Gazprom still has to be approved in Ukraine, (about 80% of Gazprom's exports to Europe cross Ukraine). Apparently, this deal would be hard to sell to the public while the current opposition leader Yulia Timoshenko (who remains popular) is strongly against it. Opposition parties in Kiev promised a tough fight over the gas consortium plan, describing it as harmful to national security. Ukrainian opposition lawmakers said there would be riots if the government handed some of the authority over the country's pipelines to Gazprom.

If an international consortium to include the European Union, Russia and Ukraine is established, sweeping modernisation of the Ukrainian gas transportation system will logically follow, and eventually the transit of Russian gas deliveries to Europe free from interruptions would be ensured. If that happens, construction of the South Stream pipeline, energetically pushed for by Russia at a skyrocketing price, would lose its economic viability, since the security of gas transportation would be jointly ensured by the EU, Russia and Ukraine.

As for Ukraine's joining the customs union, it would be erroneous to expect such a move even from Yanukovich. Most of the Ukrainian elite retain their European orientation, and there is no sign of its reorientation towards the trilateral customs union. As for the union itself, it is extremely important for Russia to demonstrate its viability in order to reconfirm its previous questionable decision not to pursue membership of the WTO. The question is how much Moscow would be ready to pay for such a politicised decision, assuming that Belarus would play a more independent role in its own bilateral relations with the EU.''

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