Customs Union: Economically Sound, Politically Harmful?

Russian business daily Vedomosti reported today that the Customs Union negotiated between Moscow, Minsk, and Astana may come into effect without Belarus. The paper quoted BNP Paribas official as saying that Kiev would make a more desirable union partner for Russia than Minsk.

The Customs Union between Belarus, Kazakhstan, and Russia is missing a second deadline this year. However, when it does come to fruition, the Union will lead not only to the adoption of a common external tariff, but also to eventually creating a free trade agreement and single economic space like the European Union by 2012.

Today, the main bone of contention is Minsk’s insistence on the abolition of duties on Russian oil and petroleum that are exported to Belarus. Although it already owes $192 million to Russia for its gas for the year 2010, Minsk claims to be gradually acquiring energy independence from Russia. It does not seem to realize that without export duties its energy dependence on Moscow would only grow.

Ironically, it is the currently obdurate Belarusian leadership who has been the most enthusiastic advocate of the Customs Union between the three post-Soviet states. The Belarusian government claimed the Union would help the national economy by mitigating the difficulties related to the adaptation to the new energy prices. Russia’s refusal to provide this benefit by lowering energy prices and abolishing export duties in the new union made President Alyaksandr Lukashenka say in his April State of the Nation Address that Russia was putting Belarus “on the verge of survival.”

Because a formal customs union between Russia and Belarus already exists, it is unclear what effect the failure to agree to union conditions with Russia and Kazakhstan would have on Belarus’ economy. However, were such a union to materialize, it would hardly alleviate the country’s economic troubles.

Theoretically, customs unions are created with an economic and political benefits in mind. While the short-term economic benefits are easy to see, political and economic benefits in the long term are typically unclear and vary with time. More often than not, creating a big common market within a customs union allows to depoliticize economic cooperation between the participating countries. However, entering into a customs union with a big and powerful former empire like Russia often results in a much more politicized market than that typical for a Western free trade zone.

Even if participation in the Customs Union brings some short-term economic benefits for Minsk, it will undermine Belarus’ economy in the long run and draw Belarus dangerously close into the Russian orbit. Just like the Soviet experience created problems for the economy of the independent Belarus, the Customs Union with two large energy-rich countries is likely limit the country’s indigenous industrial capacity and skew its development. Russia already controls more than half the Belarusian economy and is buying shares in its oil processing industry, and the Customs Union will make Minsk even more dependent on Russian resources, especially if the oil export duties were abolished upon the Belarusian leader’s request.

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