The Eurasian Economic Union Single Market

Introduction

The Eurasian Economic Union (“the EAEU” or “the Union”) is an international organization tasked with spearheading economic integration in the Eurasian region. This paper will evaluate the Union’s progress in creating and regulating a single market. It consists of two sections: the first section analyzes the legal basis of common market regulation and the regulatory policy cycle process. The second section evaluates the extent of the single market integration in goods and argues that while the EAEU has basic institutional architecture of supranational governance body, lack of genuine political commitment coupled with weak design features of the Eurasian Economic Commission (“the Commission” or “the EEC”) are the main obstacles to deep integration.

Section 1

The Law of the Union

According to Article 4 of the EAEU treaty, the principal objective of the Union is establishment of common market for four freedoms: goods, services, labor and capital. Not only does the Treaty empower the EAEU to regulate the Customs Union within the region but Article 7 also gives it legal personality in international arena and authority to negotiate free trade agreements with third parties. The Article 28 prohibits imposition of tariffs, non-tariff duties, safeguard, anti-dumping and countervailing measures within the Union.

Binding customs tariffs and non-tariff regulations as well as technical regulations are exclusive competences of the Commission that are “directly applicable on the territories of the Member States” (EAEU Treaty). In other words, decisions of the Commission do in principle have direct legal effect in the jurisdictions of its member states. This pooling of policy responsibilities in trade and customs union according to the principle of direct applicability is one of the major innovations in the Eurasian region.

The policy cycle process

Formally, the main agenda setter of the EAEU’s single market policies is its permanent executive body - the Commission. EEC bodies have equal representation of all member states, which was intended to reduce Russia’s influence in the decision-making process. Modeled on the European Commission, the treaty empowers the Commission “to develop proposals in the sphere of economic integration within the Union” (EAEU Treaty). However, an important difference between them is the split of the EEC into two bodies: The Council of the EEC and the EEC Board. The Council’s membership of Deputy Heads of Governments and its unanimous decision-making compromises supranational feature of the EEC. Therefore, while the European Commission is “the pivotal actor in policy formation”, the EEC’s role in agenda-setting is secondary vis-à-vis the member-states (Young, 2015).

Since the heads of governments are the key initiators of policies and the supranational powers of the EEC are circumscribed, there is not much access for non-state actors in the policy formulation stage, including the business interests, societal actors and bureaucratic policy-entrepreneurs. While European Commission is obliged by treaty to consult all relevant interest groups, there is no such requirement for EAEU Commission. However, the EEC introduces some transparency measures in its policy process. The EEC website states that it publishes draft decisions at least 30 days prior to the planned adoption date in order to receive feedback from interested persons, although it is difficult to find them. Moreover, the website claims that the policies pertaining to the businesses will be adopted “based on the results of regulatory impact assessments”, suggesting that the EEC moves towards evidence-based policymaking (“FAQ”, 2020).

The decision-making in the EEC is twofold: decisions in the Council of the Commission are adopted by consensus and in the Board of the Commission by qualified majority. There is also a list of sensitive issues compiled by the Supreme Council, where the Board decisions are adopted by unanimity. Any decision made by the EEC Board can be challenged at a higher level and member states can initiate the challenge (Karluik, 2015). Therefore, while “the EU combines pluralism with executive dominance”, the EAEU mimics the hierarchical, top-down decision-making of the domestic politics of its member states (Young, 2015).

The implementation is arguably one of the weakest links in the EAEU’s single market policy cycle process. Due to the weakness of the EAEU Court and lack of infringement proceeding initiation by the Commission, there is no functioning enforcement mechanism. This also undermines the policy feedback stage because the legislation aspect of the policy cycle process is separated from the implementation phase, “stretching the feedback loop” (Young, 2015).

Policy Output

Public policy scholars differentiate between three types of economic policy: regulatory, expenditure and macroeconomic policies (Hix and Hoyland, 2011). EAEU’s policy output in these three policies varies considerably. As of yet, the expenditure policy in the EAEU is nonexistent and the macroeconomic coordination is very minimal. The most significant policy output has been in regulatory policies. However, to what extent can we call EAEU as “a regulatory state”? In the next section, I will evaluate the extent of the regulation and the main obstacles in the Customs Code and the liberalization of goods market.

Section 2

Literature Review

The literature on the single market regulation within the EAEU is divided into two broad research areas: one provides an overview of the institutional design and legal order of the Union (Karluik, 2015; Dragneva and Wolczuk, 2017) and the other provides historical overview and descriptive analysis of the Eurasian integration progress (Knobel, 2019; Tarr, 2016; Vinokurov, 2017; Kirkham, 2016). The Eurasian integration project can be viewed as a 4-stage process that started 20 years ago. The first stage was establishment of the free trade zone. The countries already removed tariffs in bilateral and multilateral treaties, including Customs Union Treaty in 1995 and EurAsEC in 2000 (Vinokurov, 2017). In 2011, they created a Customs Union to set common external tariffs. The signing of Treaty of EAEU in 2015 marks the third stage of Eurasian integration – creation of single economic space. The final possible stage of integration is creation of economic and monetary union, which is not currently under consideration but have somewhat loose legal foundations.

Customs Union

Although Belarus, Kazakhstan, Kyrgyzstan and Russia have been operating under a customs union under EurAsEC as early as 1996 and customs posts have been removed in 2011, it wasn’t functioning well for two reasons. First, setting up common external tariff in EurAsEC meant adopting Russian tariff regime, which was higher than in Kazakhstan, Kyrgyzstan, Tajikistan. High tariff lines created trade diversion and income transfers to Russian manufacturers at the expense of foreign producers and consumers in Central Asian countries (Tarr, 2016). As a result, Central Asian countries imposed lower tariffs only in goods where trade diversion was the lowest, limiting the effectiveness of the common external tariff. Second, countries continued to engage in trade disputes such as the “milk and meat wars” between Russia and Belarus or the “potato wars” between Kazakhstan and Kyrgyzstan (Dragneva, Wolczuk, 2017). Countries unilaterally slapped tariffs onto each other’s’ goods on the grounds of sanitary and food safety violations.

To address these issues, new EAEU customs code was adopted in 2018. The average MFN tariffs decreased to 6.6% and the trade weighted average tariffs decreased to 5.6% (Kofner, 2020). Still, a number of exemptions exist for Armenia, Kyrgyzstan and Kazakhstan. For example, certain categories of goods can be imported only to Kazakhstan under lower tariffs due to its WTO commitments.

More significant problem for the EAEU customs code in the future is Russia’s countersanctions to Western countries’ imports. Since other members of the Union refused to join the countersanctions, it created a discord in the Union’s common trade policy. Russia accused Belarusian producers for reexporting embargoed food products to Russia. It reintroduced stronger border controls with Belarus and Russia, undermining the long efforts to remove physical borders. Russian authorities started to inspect all food products from Belarus and banned their transit to Kazakhstan via Russia (Gulunov, 2015). Belarus retaliated by introducing similar custom controls. Moreover, Russia banned the movement of Ukrainian products through its borders to Kazakhstan and Kyrgyzstan, raising discontent from Nursultan and Bishkek. It agreed to ease the ban to certain industrial goods, but the issue still remains largely unresolved (Kofner, 2020). Therefore, despite the elimination of custom borders and reduction of common external tariffs, exemptions and unilateral countersanctions by Russia continue to compromise the effectiveness of the EAEU customs code.

Non-tariff barriers

Removal of tariffs and custom controls is necessary but not sufficient condition for economic integration. In an era of relatively low tariff rates, the real benefits of trade liberalization come from removal of non-tariff barriers to trade. The empirical study by Eurasian Development Bank quantify for the first time the negative impact of non-tariff barriers in the EAEU bilateral trade flows. Based on a survey of large number of exporters in Kazakhstan, Belarus and Russia, authors find that the most harmful NTBs are “sanitary and phytosanitary measures, technical barriers, price control measures and measures affecting competition” and to a lesser extent state subsidies (EDB, 2015). Authors find that the cumulative cost of NTBs for Belarusian and Russian exporters is 15% and 25% of the value of exports, respectively. Kazakh exporters face the highest cost, ranging from 16.3% to 78.9% of the value of exports (EDB, 2015).

Similarly, Vakulchuk and Knobel empirically estimate the effect of non-tariff barriers on internal imports (Vakulchuk and Knobel, 2018). They find that 1% reduction in NTBs increase trade volume on average by 1.7%, ceteris paribus. It means that total eliminations of NTBs can potentially increase internal trade by 25%. Trade in agriculture and food industry will benefit the most from full elimination of NTBs, by almost 100%.

The EEC ministry responsible for liberalizing non-tariff barriers is Technical Regulation, which consists of Technical Regulation and Accreditation Department and Sanitary, Phytosanitary and Veterinary Measures Department. According to Viktor Nazarenko, EEC Minister in charge of Technical Regulation, “removal of technical barriers to trade, establishing uniform mandatory requirements for products as well as uniform procedures for their admission to this market and competitiveness of EAEU manufacturers” is three main objectives of the Union (EEC, 2020). The ministry adopts the general list of EAEU items subject to quarantine, veterinary and sanitary control and technical regulations that are binding on member-states. It also approves uniform EAEU veterinary certificates, uniform compliance certificate and compliance declaration based on scientifically justified and risk-assessment principles. Harmonizing technical and SPS measures are example of positive integration, in which member-states replace national regulations with common Eurasian ones. This is done in order to protect human, animal and plant life and liberalize trade at the same time.

In 2017 the EEC produced “The White Paper” that listed 60 barriers in the domestic markets and instruments to eliminate them (EEC, 2017). As of yet, the EEC Commission published 113 legislative acts (decisions, dispositions and recommendations) pertaining to technical regulation and 86 legislative acts pertaining to SPS measures regulation in their official website. In total, 42 uniform technical regulations that “regulate 85% of the products circulating in the Union’s market” were adopted and entered into force (EEC, 2020). In fact, 40% of the EEC decisions in 2019 were related to technical regulation, reflecting the priority of NTBs in current integration agenda of the EAEU. The Strategic Directions for Developing the Eurasian Economic Integration contains 12 measures and 30 mechanisms that will establish uniform mandatory requirements for products by 2025 (EEC, 2020).

Intra-EAEU trade

To what extent elimination of tariffs, customs borders and non-tariff barriers to trade were effective in promoting intra-Union trade? Evaluating EAEU’s progress by macroeconomic performances of the member-states can be misleading because its operation coincides with the external economic and political shocks and currency volatility in the region (Kofner, 2020). International sanctions to Russia after annexation of Crimea in 2014 and fall of the oil prices significantly impacted member-states’ economies. Nevertheless, descriptive trade statistics reveal EAEU’s preliminary performance and illuminate some of the persisting integration challenges.

After 2015-2016 recession due to currency devaluations, mutual trade between member-states started to recover. According to UN Comtrade and EEC Commission statistics, the total volume of internal mutual trade in goods, measured as the sum total of intra-EAEU exports, increased by 23% in 2017 and 6% in 2018 (Figure 1). In other words, intra-Union trade is increasing but not significantly and still didn’t recover to the 2014 level.

Between 2015-2019 intra-EAEU exports showed mixed results. Annual growth in export to EAEU countries was significantly higher for Kazakhstan, Kyrgyzstan and Armenia compared to the rest of the world. Russia’s export growth was somewhat similar as to the rest of the world. Belarus’s exports growth with the Union’s countries was, on average, lower than to the rest of the world (see Table 1 in Appendix). Moreover, EAEU’s share in each other’s exports in 2019 remained low for Russian Federation (8%) and Kazakhstan (11%), moderate for Kyrgyzstan (32%) and Armenia (28%) and high for Belarus (62%) (Figure 2). In other words, only Belarus exports more to the EAEU countries than to other trading partners. Overall, EAEU’s trade turnover (exports and imports) structure remains highly asymmetric (Figure 3). Internal trade accounted for only 13% of the total trade in 2018. This is significantly lower than in other regional economic unions. For example, mutual trade accounts for 47% of EU’s total trade and 27% of NAFTA’s total trade in 2016 (Vakulchuk, Knobel, 2018).

In terms of geographical structure of intra-EAEU exports, Figure 4 and Figure 5 indicate that Russia still accounts for the majority (64%) of the Union’s export voumes and predominant share (87%) of the EAEU’s GDP. According to Kirkham, the disparity in the size of the economies is significant flaw of the EAEU since it exposes smaller countries to negative spill-over effects from Russia and results in unequal distribution of gains from integration among the member states (Kirkham, 2016).

To sum up, while the mutual trade increased in 2017 and 2018, the progress has not been as promising as was envisioned in the Union’s prospects. There is no evidence of significant trade creation and the structural economic asymmetries persist.

Lack of enforcement mechanism and political commitment

Despite the introduction of improved EAEU Customs Code and the nominal reduction in non-tariff barriers, there are still disputes in common trade policy and lack of trade facilitation. Even though nominally the regulatory policymaking authority is transferred to a supranational entity, it is national member states who ultimately enforce the regulations. The two main reasons for the lack of integration progress is lack of enforcement mechanism of the Commission and political commitment of member-states.

The transposition of the Commission’s decisions is crucial for successful operation of the single market. However, unlike the European Commission, the EEC Commission cannot initiate infringement proceeding against the non-compliant member state. Moreover, the EAEU Court’s role of “guardian of the EAEU legal order” is minimal due to its weak institutional design (Karluik, 2015). Absence of preliminary ruling compromises its goal of the uniform application of the Union’s law. According to Hancock and Libman, poor institutional design and ‘opting out’ system characteristic of Eurasian regionalism make commitments unreliable and therefore explain poor integration in the region (Hancock and Libman, 2013).

Two lessons from EU can be applied to strengthen EAEU’s enforcement mechanism. The first is the principle of mutual recognition, which states that “any product that met the standards of one member state could be legally sold in another” (Hix and Hoyland, 2011). This approach limits the technical harmonization to minimum standards and instead mutually recognizes each other’s health and safety regulations. The second lesson is publicizing progress on implementation which incorporates elements of public shaming and peer pressure (Young, 2015). For example, the Commission can track the number of implemented acts on its official website to add visibility for non-compliance.

In addition to incomplete institutional design, lack of genuine commitment to deep economic integration by member-states can be an obstacle to genuine harmonization agenda. Some scholars argue that the political motivations, such as autocracy promotion (Hancock and Libman, 2013), Russian hegemonic expansion (Kirkham, 2016), security and military support (Dragneva and Wolczuk, 2017), Russia’s ‘normative rivalry’ with the EU (Dragneva and Wolczuk, 2012), led to the creation of the EAEU. Therefore, deep economic integration is not the most important priority for EAEU countries. Absence of the good governance is yet another issue that should be taken into consideration. Even if countries were willing to comply with the Union’s regulations, transposition of the EEC decisions by members of the block can be hindered by weak domestic capacity (Dragneva and Wolczuk, 2017).

Conclusion

The gap between the written obligations and practical enforcement of these obligations by member-states is at the heart of EAEU’s integration problem. At the same time, claims that EAEU is just another political project of Russia with no real power is distorted. The Union is working regional entity that achieved tangible successes in some policy areas, such as elimination of border controls and harmonization of technical standards. Moreover, this paper considered only integration of the goods market, which is only one aspect of the single market. Considering integration in services, capital and labor markets is beyond the scope of this paper. However, it is fair to say that we are already witnessing “the spillover effect” of the integration in goods market to other areas, particularly labor market. Nevertheless, the integration is very lengthy, perplex and arduous task. It took European Union 35 years to adopt the single market program. Therefore, it is still too early to judge the EAEU’s progress by the EU’s benchmark. Eurasian integration should be evaluated according to its own political and economic landscape.

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Appendix

Table 1: Annual export growth

Annual growth in export value between 2015-2019, %, p.a.

Share in country’s exports, %

2019

Origin country: Kazakhstan

Destination country

Armenia

131

Belarus

Kyrgyzstan

Russian Federation

EAEU

43.5

World

Origin country: Russian Federation

Destination country

Armenia

Belarus

Kyrgyzstan

Kazakhstan

EAEU

World

Origin country: Belarus

Destination country

Armenia

Kyrgyzstan

-4

Kazakhstan

Russian Federation

EAEU

8.5

World

Origin country: Kyrgyzstan

Destination country

Armenia

Belarus

Kazakhstan

-2

Russian Federation

EAEU

16.5

World

Origin country: Armenia

Destination country

Belarus

Kyrgyzstan

Kazakhstan

Russian Federation

EAEU

World

Table 2: EAEU exports, 2014-2018

2014

2015

2016

2017

2018

EAEU

23,571,461

16,338,234

15,729,729

19,381,882

20,557,175

including:

Armenia-Belarus

9,024

5,462

13,112

6,937

11,738

Armenia-Kazakhstan

6,868

4,858

5,267

4,916

9,778

Armenia-Kyrgyzstan

314

350

1,132

1,763

971

Armenia-Russia

304,605

225,871

372,987

540,514

641,864

Belarus-Kazakhstan

875,462

522,778

363,103

587,925

782,266

Belarus-Kyrgyzstan

88,824

55,381

47,838

123,450

120,320

Belarus-Russia

15,071,585

10,301,110

10,901,669

12,835,765

12,879,206

Kazakhstan-Kyrgyzstan

703,986

518,553

376,248

503,233

634,867

Kazakhstan-Russia

6,388,500

4,547,555

3,509,162

4,515,165

5,162,087

Kyrgyzstan-Russia

122,293

156,316

139,211

262,214

314,078

World

616,746,738

409,247,083

349,155,335

438,600,995

548,177,558

Kazakhstan

79,458,749

45,955,777

36,775,606

48,342,145

60,956,233

Kyrgyzstan

1,883,733

1,646,443

1,543,532

1,790,758

1,764,613

Russian Federation

497,833,529

333,501,801

285,491,052

357,083,135

449,347,157

Armenia

1,490,190

1,482,667

1,807,790

2,144,963

2,383,414

Belarus

36,080,537

26,660,395

23,537,355

29,239,994

33,726,141