Is the Customs Union Good for Belarus?

On 4 November Alyaksandr Lukashenka declared that Belarus and Russia were close to reaching a new agreement on natural gas supplies for 2012. He also expressed confidence about the probability of coming to an agreement with Russia on equal prices for oil and gas within the Customs Union of Belarus, Russia and Kazakhstan. However, Lukashenka also made it clear that if the suitable price agreements were not reached by the end of November Belarus may not to participate in the Single Economic Space which the Russian leadership is keen to launch in January 2012.

In the past the Belarusian ruler made significant political concessions to Russia. He led Belarus into Russia's projects on the creation of the Customs Union, the Single Economic Space and the Eurasian Union. Did these projects actually benefit Belarus economically?

Benefits in exchange for promises?

The gas supply agreement mentioned by Lukashenka was negotiated on 31 October during a meeting between Gazprom CEO Alexey Miller and Belarusian vice-premier Siargei Rumas. Though all details of the negotiations are still unknown, it is obvious that the future agreement will allow Russia's Gazprom to increase its share in JSC Beltransgaz from 50% to 100% and thus obtain full control over the Belarusian gas transportation system. 

In return, Gazprom promised not to reduce gas supplies which go through Belarus even after the official opening of Nord Stream, which the German chancellor Angela Merkel and the Russian President Dmitry Medvedev opened earlier this week. Belarusian policymakers hope to benefit from equal gas prices with Russian consumers, but the Russian prime-minister Vladimir Putin insists on including of a special “integration reducing" coefficient for Belarus starting from 2012. Russia plans to equalize gas prices for its internal market and for export only in 2013.

Therefore, for the first time Lukashenka may become a victim in the traditional post-Soviet game “benefits in exchange for promises” which he and the former Ukrainian president Leonid Kuchma invented. Russia may continue to feed Lukashenka with promises to ensure equal hydrocarbons prices in the future and push Belarus further along the path of the Eurasian integration until there will be no way back. This development is particularly important as the Customs Union Commission will be abolished and a new supranational Eurasian Economic Commission modeled like the European Commission will start its work in July of 2012. The new commission will increase the number of staff from 150 to 1200 people.

Is the Customs Union good for Belarus?

Belarus' membership in the Customs Union has other benefits, but many of them are questionable. A new single Customs Code has been in force for Belarus, Kazakhstan and Russia since 6 July 2010. Transports and customs control has already moved from national borders to the Customs Union borders. According to official reports, Kazakhstan’s export to Russia increased by 38% and its export to Belarus more than doubled, Russian export to Kazakhstan raised by 25% and foreign trade turnover between Belarus and Russia increased by 50% at the end of 2010.

On the other hand, Belarus had to impose a high import duty on cars at the request of Russia, Belarus produces no cars while Russia was eager to support its car own industry. That led to a significant rise in car prices for ordinary Belarusians whose need for cheap used cars from Lithuania and Germany resulted in a large outflow of foreign currency estimated at 1 billion dollars in April-June of 2011.

In the heat of the summer economic crises Belarus was unable to impose prohibitive duties in order to prevent mass removal of goods and food to Russia. As a result, Belarusian consumers had to deal with deficit of meat, sugar and other basic products.

Moreover, by the end of 2011 Belarus should abolish the regulation on the obligatory sale of foreign currency by companies to the state as one of the commitments which fulfillment will allow Belarus to join the Single Economic Space.  This abolition can provoke a new wave of foreign currency crisis.

The WTO factor

Despite Lukashenka’s hopes to gain different benefits from cooperation with Russia, it seems that Russian prime minister Vladimir Putin, who supervises the creation of the Eurasian Union and other integration projects, just seeks to maximize the economic benefits for his own country. All integration in the post-Soviet space is beneficial for Russia as it is the most developed and competitive CIS economy and has quite a lot of free financial and economic resources at its disposal to gain control over the majority of post-Soviet markets and gain political advantages as well.

In this context it is important that on 18 October leaders of all CIS countries except for Azerbaijan, Uzbekistan and Turkmenistan signed a new free trade treaty that had been discussed for more than 16 years. As expected, the list of preferential goods does not contain hydrocarbons and metals – the core of Russian exports. That means that all countries will not get an automatic discount on Russia's minerals but will have to negotiate with Russia separately in the future.

On 10 November Russia signed in Geneva an agreement with Georgia on the establishment of the international monitoring group on the Russian-Georgian border thereby removing the last obstacle in its way to the WTO membership.

Russia will support the accession of Belarus and Kazakhstan into the WTO, which would allow Russia to redistribute in its favour the amount of agricultural subsidies allowed by WTO regulations for the Single Economic Space as Belarusian agricultural subsidies may decrease more than threefold in the near future.

On 8 November the upper chamber of the Belarusian Parliament approved the so-called Treaty on Functioning of the Customs Union in the Framework of the Multilateral Trade System. In accordance with the treaty, following Russia's accession to the WTO its trade relations with Belarus and Kazakhstan will be regulated mostly by WTO norms that will have a higher legal force than the Customs Union norms. Moreover, Belarus will have to conduct separate negotiations with Russia on its WTO accession and Russia may lay put forward very tough conditions as Georgia did during Russia's accession process.

A sober balance of the Eurasian integration

To sum up, Belarus so far failed to achieve the main goal that could  justify its participation in the Eurasian integration – equal oil and gas prices with Russian consumers and equal business conditions. No one can say for sure whether these goals will be achieved after the creation of the Single Economic Space. It appears that on balance Belarus currently loses more than gains from its participation in the Customs Union. Its economy is unreformed and not ready for competition in accordance with the WTO rules. That hinders Belarus ability to take advantage of the 170-million single market of the Customs Union. On the contrary, the Eurasian integration projects may seriously threaten its macroeconomic stability.

George Plaschinsky

George Plaschinsky is an associate analyst at the Centre for European Transformation in Minsk. He is a graduate of the Moscow State Institute of International Relations (MGIMO University). 

George Plaschinsky is a graduate of the London School of Economics where he studied under the OESS scholarship by European Comission.

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