Ukraine Can Help Belarus with Exemptions in the Eurasian Economic Union

The presidents of Belarus, Kazakhstan and Russia plan to sign the founding treaty of the Eurasian Economic Union in May 2014.

With the signing less than two months ahead, the parties cannot reach a compromise on a number of contested issues, such as trade exemptions.

Belarus seeks to abolish oil exemptions. This will mean an additional $3-4 billion for the country’s revenues at the expense of the Russian budget.

The crisis in Ukraine can impact the negotiation process in unpredictable ways. On the one hand, Belarus may have extra leverage over the Kremlin as Moscow, more than ever, needs good news from its Eurasian front. On the other hand, Russia’s Crimea campaign undermines its economy and ability to finance its integration project.

Hasty Negotiations

Eurasian integration resembles a race where each participant tries to demonstrate its ability to run at a faster pace than everyone else. The summits of the Eurasian troika (Belarus, Kazakhstan and Russia) usually witness calls by the leaders of the states to accelerate their integration. As a result, the integration agenda has in less than five years come a long way from the Customs Union to the Common Economic Space to the Eurasian Economic Union (EaEU). The latter may become fully functional as of 1 January 2015.

For that to happen, the three countries need to prepare and sign the founding treaty of the EaEU. They have set the deadline for May. However, more and more evidence suggests that they will fail to settle all of the outstanding issues in the time remaining before the deadline.

In 2013, against the backdrop of a rush towards integration, the Belarusian and Kazakhstani leaders started to voice serious concerns about the depth and strength of the integration project. At the summit in Minsk last October, they both emphasised several fundamental problems in the economic and political realms.

Economically, Eurasian integration fails to fulfil even the criteria of a customs union, not to mention a common economic area. According to the President of the Eurasian Economic Commission Viktor Khristenko, the Customs Union still has about 600 exemptions that restrict the free movement of goods, services, capital and labour force inside the union. Thus, the previous integration stages remain incomplete, yet the Kremlin already wants to move on the next step.

Politically, Russia tries to subdue the supranational institutions of the Eurasian integration and bring it under its full control. In the words of Kazakhstan’s President Nursultan Nazarbayev, the officials of the Eurasian Economic Commission should work independently from the national governments they represent but the Kremlin demands full loyalty from the Russian nationals there. What's more, Russia negotiates with prospective new members of the integration (e.g. Armenia) without proper consultations with either Belarus or Kazakhstan.

Back in October 2013, the leaders of the troika agreed that their governments would work to resolve these issues before signing the documents on establishing the EaEU. But a summit on 5 March in Moscow showed that such an agreement did not materialise.

The draft treaty establishing the EaEU consists of two parts: an institutional and a functional element. The latter raises particular concerns. According to Aliaksandr Lukashenka, only about 70-80% of the draft is ready to be signed. The rest includes the most sensitive economic issues, which remains unsettled.

Belarus’ oil interest

The central controversy relates to the exemptions from the ‘four economic freedoms regime’. Kazakhstan has a strong interest in abolishing restrictions on its access to Russian transportation networks, primarily to the pipeline system used to export hydrocarbons to Europe. And Belarus wants to get rid of the standing exemptions in oil trading.

According to a bilateral agreement, Belarus has to transfer all export duties on oil products produced from Russian oil and sold to a third country to Russia’s state budget. The price tag of this issue for Belarus amounts to $3-4 billion. In 2013, Belarus transferred $3.3 billion worth of export duties to Russia’s account. This year it might well reach $3.5-4 billion.

If this money stayed in Belarus it would essentially improve the nation's current balance. Last year, Aliaksandr Lukashenka even promised that he would turn the country into another Emirate if he had the duties on oil products at his disposal. The upcoming 2015 presidential campaign and the poor economic outlook only reinforce this desire.

Thus, the Belarusian authorities are doing their best to negotiate the abolition of the exemption while drafting the EaEU’s founding treaty. Officials in Minsk are resorting to both behind-the-scenes diplomacy and public statements to convince the Kremlin. For example, a couple weeks ago the Head of the External Economic Policy Department of the Ministry of Economy Raman Brodau called Russia’s approach to calculate its losses from the Eurasian integration “fundamentally wrong".

Russia's position in Light of Crimea

The Russian government does not, of course, volunteer to give into its partners’ demands. On 26 March the First Deputy Prime Minister of Russia Igor Shuvalov stated that the exemptions problem goes beyond gas and oil. According to him, Russia’s economy also suffers from certain exemptions introduced by Kazakhstan and Belarus. In particular, he named such goods as medicine, tobacco, alcohol and seafood.

Shuvalov opined that the three states are “so remote from finding mutual understanding and a common denominator regarding these goods that, perhaps, they will have to put them aside and negotiate after May, after the treaty is signed."

At the moment, this looks like the most likely option. The leaders of Belarus and Kazakhstan seem ready to undersign the EaEU’s founding treaty in May and to continue negotiations afterwards. But only if the Kremlin promises concessions. And here the Ukrainian factor may come into play.

Considering Russia's growing international isolation, Putin desperately needs good news on the Eurasian integration front. Under such circumstances, Belarus and Kazakhstan gain additional leverage in their negotiations with Moscow. The more intense the isolation the Kremlin faces, the more it has to pay its integration partners for loyalty.

At the same time, the annexation of Crimea will be quite costly for Russia. Preliminary estimates state that the new subject of the Russian Federation will roughly require $4-5 billion in annual subsidies. Moreover, Russia’s economy will suffer substantial losses as a result of capital outflow and a lack of foreign investment after its Crimean campaign. The former already claimed $75 billion in the first quarter of 2014. Under this kind of pressure, Russia might simply become unable to finance its Eurasian integration dream.

With all that is happening, politics within the Eurasian integration has become a particularly exciting development to watch. Post-soviet politics is getting as unpredictable as ever.

Yauheni Preiherman is Policy Director of the Discussion and Analytical Society Liberal Club in Minsk.

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