|Author: Olga Homolova|
ECONOMIC INTEGRATION OF THE CIS – FROM IMMATURE DREAMS TO HARSH REALITY
Dreams and ideas of economic integration have shadowed the Commonwealth of Independent States ever since it was established. No small number of plans for unification of the post-Soviet economic area (excluding the Baltic states, which are not CIS members) have been hatched over the last ten years. The creation of an integrated economic area under the CIS is legally framed in a document from 1993 on Economic Union. This treaty enshrines numerous important principles that characterise economic union, such as free movement of goods, services, capital and labour or co-ordination of the legislation, currency, tax and budgetary policies of the states involved1. However, true reality is harsh. CIS is now perhaps further away from the goal it set itself than when the treaty was signed.
First attempt: The opportunities of the rouble
The most grandiose projects involving CIS economic integration were perhaps thought up just after its inception. Behind the hopes that were placed in a new form of closer integration, the most compelling justification was obvious: the economic ties that already existed among the newly formed republics and existence of a single common currency - the rouble. According to 1991 figures, the proportion of mutual trade among CIS countries came to around 60%2. A fact of equal importance was that the economic policies of the newly established independent republics (if any) did not have very clear outlines yet. The endeavour to maintain an integrated rouble zone was thus a first and logical attempt to reintegrate the post-Soviet area (or at least to prevent its further disintegration).
The decision to retain the rouble as the single accounting and payment unit throughout the CIS was declared by CIS representatives as early as the Minsk Summit in late 1991. The subsequent agreement on the rouble zone was signed in February 1992. The CIS countries agreed in a convention signed October of the same year on the co-ordination of their credit and currency policies3.
Nevertheless, it soon became apparent that the mechanism set in place for clearing interstate payments with a single issuing centre was not viable. Russian and the other central banks established a system of official correspondent accounts through which payments were to be channelled. Cash roubles were only issued by the Russian Central Bank and other CIS states could expand the aggregate money supply only by creating credits in roubles. This led to the emergence of so-called "non-cash” roubles in different countries with different exchange rates between them and the Russian rouble. 4. Moreover, rising inflation and the great economic slump forced the other CIS countries to borrow increasingly large amounts from the Russian Central Bank. These loans rose to staggering levels. Some statistics indicate that as early as May 1992 they had reached 8.4% of Russian GDP at the time, so that Moscow's accommodating policy in 1992-1994 cost it 5.6 billion dollars overall5.
At the same time, it was only through the corresponding accounts of the CIS central banks that internal CIS trade was allowed to pass. Insufficient monetary co-ordination among these banks caused that governments were not interested in exporting to the CIS countries. All they gained for the exports were rouble credits in their banking system 6. As for Russia itself, by providing more and more loans from its Central Bank it subsidised its own exports.
Nor did the co-ordination among the central banks of the individual countries function properly, so that a surplus in foreign trade with one CIS country could not, for example, be credited against a deficit in trade with another CIS country. The Russian foreign trade surplus began to rise hazardously and this was exacerbated by late payments, instability and worsening inflation, to which the aforementioned loans to the CIS central banks contributed in their turn.
Hence, in July 1992, Russia set limits on further loans provided by its Central Bank, which led in practice to tighter controls on foreign trade by Moscow. (F.e., if this limit was exceeded, a Russian exporter did not need to be paid even though the other party had the financial resources.) Thus trade within the CIS gradually lost its attraction for the majority of member states - it was no longer subsidised by Russia and, what is more, it was still bound to the relatively unstable rouble.
The final blow to the entire project was dealt by a Russian Central Bank decision in July 1993 to withdraw old Soviet banknotes from circulation and to issue new roubles. This presented the other CIS countries with the dilemma of either introducing their own currencies or remaining in the currency union with Russia (which would mean continuing control of foreign trade by Moscow without any further benefits). Russia also set increasingly difficult conditions on using of the rouble, requiring, for example, high gold and hard currency reserves from the other central banks. Thus the majority of CIS countries decided to introduce their own national currencies in 19937 (Ukraine had already started using the hrivna for some operations in 1992; Tadjikistan did not introduce its own currency until 1995 because of its civil war).
Following the fall of the rouble zone, an agreement was reached in October 1994 on the creation of a payment union within the CIS in which foreign trade was to be accounted in mutually convertible national currencies. An Interstate Currency Commission was even convened two years later and bilateral agreements were reached on the convertibility of currencies. Declarations on the creation of a payment union resound repeatedly at CIS summits (the Kazakh President Nazarbajev is its great supporter). There was no lack of such declarations in the annual CIS Meeting report in autumn of the previous year, which provided an analysis of the organization's prospects.
However, this dream is still very far from reality. The creation of a payment union requires inter alia the creation of a functioning and firmly established clearing system among the central and commercial banks (which the rouble zone did not manage to establish), strong banking sector, interconnection of the financial infrastructure of individual countries and stability of their currencies. The CIS countries do not currently meet any of these requirements. What is more, the slump in foreign trade within the CIS and its lack of equilibrium (see below) raises the question of whether the payment union might be significant for all member states.
Second attempt: "Jointly and severally"
The unsuccessful maintenance of a common currency within the CIS was soon replaced by new but no less ambitious ideas on various forms of economic integration. September 1993 saw the signing of a treaty on the creation of an Economic Union. In April 1994, an agreement was reached on the creation of a free-trade zone, followed by an agreement on a customs union in October 1994 and the aforementioned payment union agreement.
Nevertheless, when it was time to start implementing these specific agreements, it became evident that most CIS countries were either not ready for integration or were simply not willing to accede to it. The pace was again set by Russia itself, the country with by far the largest economic potential in the entire post-Soviet area. It was in Moscow where voices started to be heard, in the mid-1990s, saying that it was more advantageous for Russia to focus on specific bilateral agreements than on developing an integrated economic area.
Hence at CIS summits the word “integration” gradually came to be supplemented by the adjective "multi-speed". Subsequently, the idea of closer unification "jointly and severally" was gradually abandoned in favour of bilateral agreements and regional groupings.
The problems confronting the CIS countries in their attempts to implement the economic union agreements were numerous right from the start. The first and most substantial (which was already evident in the rouble zone) was Moscow's domination of the entire region, which creates an enormous imbalance within the Commonwealth. Out of all the countries in the CIS, it is Russia which has by far the greatest economic resources. It is thus "morally entitled" to dictate terms or bring discussions to a halt. Thus, in practice, Russia's unhealthy preordained predominance does not allow for the CIS to be transformed in future into a union similar to the EU (which supporters of unification theories sometimes invoke).
At the same time, modern-day Russia is not yet economically powerful enough to be the "engine" of post-Soviet integration. For example, such a strong and dominating country like Russia should be a significant foreign investor in the other member countries. However, its current investment share in the CIS does not even amount to 1%8. Given the current state of the Russian economy (in spite of development over the last two years), Moscow still cannot afford the required “generosity” to meet the requirements and expectations of the other CIS countries.
The overall economic weakness of Russia and the entire post-Soviet area is another significant obstacle to any closer form of economic integration 9. The economic growth that some CIS countries have shown recently is to be seen more as an indication that the entire CIS is "on the rebound from rock bottom". None of the Commonwealth member state economies has yet reached its 1991 level. For example, GDP in the CIS countries declined from 1992 to 2000 by 38%, industrial production by 45% and agricultural production by 36%10. The inadequate overall regional stability and the other special problems continue to put off foreign investors who might otherwise bolster the positive growth trends.
Subsequently, six times more people now live below the poverty line in the CIS (with income less than 4 USD per day) than in the early 1990s11. The standard of living varies considerably for the citizens of the individual CIS countries. This unfortunate situation makes CIS countries govern their macroeconomic decisions on short-term objectives, promising maximum profit within the foreseeable future (instead of considering their strategic interests over the longer term). The most persuasive proof of this assertion is again provided by Russia itself, which has openly shown since the mid-1990s that for purely pragmatic reasons it prefers individual bilateral agreements to the uncertain vision of future union.
In any case, what is very telling about the true extent to which the individual CIS states are interested in collaboration is the sharp decline in trade within the region, which is now approximately one third of its 1991 level12.
The table below with the latest information from 2001 indicates that with the exception of Belarus and Moldavia, most exports from all CIS countries go to states outside the Commonwealth. The import situation is a little more optimistic - more than one half of CIS imports are for Ukraine, Kazakhstan, Kyrgyzstan and Tadjikistan. However, these results are significantly affected by the fact that with the exception of Kazakhstan, these are countries with insufficient fuel and power resources, which thus make up a significant proportion of their imports.
|State||Exports to CIS countries||Imports from CIS countries|
|millions USD||total % of exports||Millions USD||total % of imports|
|Armenia||65.6||27. IV||145.4||23. V|
|Russia||10 704.7||14.0||8507.2||28. IX|
Note: statistics for Turkmenistan and Uzbekistan not yet published
The fact that Commonwealth members include both countries with sufficient fuel and power resources (Russia, Kazakhstan and Azerbaijan) and states that are not self-sufficient in this respect and depend on imports (Georgia, Armenia, Moldavia, Belarus and Ukraine) does not sound promising for closer integration either. On the one hand, the CIS includes states with budgets which are markedly dependent upon revenue from the export of raw materials. On the other hand, the other CIS members are countries which do not have these raw materials and have to concentrate on "processing" industries or agriculture.
Over the last ten years, "production" of raw materials in the CIS has risen from 16.5% to almost double amount. Some authors use the expression "primitivization of the economy” for this considerable reduction in productive range of CIS countries in last ten years 13. The CIS is thus increasingly perceived to be exclusively a raw materials base for the rest of the world.
The CIS member states have also rather diverse economies. Although they all declare their resolve to become market-oriented economies, they find themselves at various stages of its development. The differences are truly enormous: a relatively "market-oriented" Russia has not much in common with rigid Belarus (where state ownership is still predominant), not to mention the situation in the Central Asian republics.
The statistics in Table 1 also indicate that the Russian Federation has the least interest in trading with CIS partner states. Exports are a particularly notable case; Russia increasingly sends them to the EU (30% of its exports are accounted for in this way). A glance at volume indicators suggests that Moscow's enormous economic resources play a considerable role in this result. The question remains whether Russia might be able to primarily increase exports of raw materials to CIS countries without the risk of thereby merely increasing its foreign debt.
In spite of decreasing foreign trade among the CIS countries, the idea of creating a free-trade zone (i.e. a zone in which customs duties and export and import quotas would gradually be phased out) was resurrected some two years ago. However, Russia has not yet ratified the relevant 1994 agreement, and has instead engaged in bilateral negotiations on exemptions to free-trade procedures. At the end of last year it announced that of all the CIS countries, it "only" remained to conclude an agreement with Belarus, Ukraine and Tadjikistan14 .
What's more, Moscow has adopted a similar attitude towards the idea of a uniform procedure for collecting indirect taxes on imports and exports. In WTO states, indirect taxes are paid in the country of destination and not in the country of origin. Although most CIS countries have declared their intention of adhering to the same principle, in practice a mixed system is in effect15. Russia itself bided its time until July 2001 before it adopted the "destination country" principle. However, it did retain an exception: oil, oil products and condensed gas, i.e. those items which prevail in Russian export16.
The planned creation of a free-trade zone and subsequently a customs union with uniform customs tariffs for third countries is complicated by the diversity of production referred to above and thus the foreign trade structure of individual countries. Oil and gas exporters have difficulty in finding a common language on customs matters with the other CIS countries. What's more, some CIS countries (such as Kyrgyzstan, Georgia and Moldavia) have already been accepted in the WTO. The terms which they have undertaken to meet within this organisation (e.g. an average customs duty and charge rate levied of up to 10% of the price of goods) do not always match the interests of their CIS partners.
It is also worth mentioning that the CIS does not yet have a precisely defined and adequately protected frontier (e.g. see Tadjikistan). Moreover, the economy of each member state is considerably bound up in the "black" economy. This phenomenon may well not be recorded in official statistics, but it has no small impact on the workings of free market principles and free trade. Published estimates of the share of the black economy in GDP for Russia alone strike a warning note and range from 25% to 50% 17.
Trends towards integration within the CIS countries at the economic level are thus frequently influenced by political factors, not to mention the fact that the newly established states have to deal with their own inexperience and immaturity.
Third attempt: If it doesn't work jointly, it might work separately ?
Increasing pragmatism and awareness of the difficulties involved in integration measures led the CIS countries in the mid-1990s to attempt political and economic rapprochement on a smaller scale: in regional groupings. This trend was started by the Central Asian republics (Kazakhstan, Uzbekistan, Kyrgyzstan) when in January 1994 they established the "Central Asian Union". This organisation set itself the aim of creating a common economic space. In July 1994, the Central Asian Development Bank was established. Tadjikistan joined four years later and the union was renamed the Central Asian Economic Community (Centralno-azijatskoje ekonomitcheskoje soobshestvo). The last transformation to date of this grouping took place in December 2001 when "Central Asian Co-operation" (Centralno-asijatskoje sotrudnichestvo) came into being. Its latest resolution set again its initial aims as the integration of transport and energy systems, a joint customs policy and the broadening of collaboration among financial institutions and business organisations. Despite the considerable difficulty in gaining access to information from this region, this association probably has not made too much progress towards declared economic integration.
Another regional union within the CIS might be partly responsible for this failure. Its establishment was initiated by Russia in January 1995 when it signed a customs union agreement with Belarus. They were soon joined by Kazakhstan, Kyrgyzstan (1996) and Tadjikistan (1998). This five-state customs union agreement was transformed in October 2000 into the "Eurasian Economic Community" (Evrazijskoje ekonomitcheskoje soobshestvo, EVRAZES). The greatest hopes of a future economic union within the CIS are now placed in this association and in the Union of Russia and Belarus (see below).
An alternative to this customs union and a "counter-union" to Russian domination in the region was established in 1997. The grouping called GUUAM includes five CIS states: Georgia, Ukraine, Uzbekistan, Azerbaijan and Moldavia. Although the countries make continual appeals for economic collaboration, there were significant political factors which played a great role in GUUAM establishment. Thus unsurprisingly, no visible progress in economic integration has been forthcoming, in spite of the repeated declarations on harmonisation of economic policy or attempts to deal collectively f.e. with the issues surrounding the integration of transport and energy systems.
As stated above, the greatest hopes for the economic integration of the CIS have been placed in the Eurasian Economic Community, even though its results to date have not been particularly remarkable. Doubts have been cast in the press18 on the declaration made by leading EVRAZES representatives to the effect that there are no longer any trade barriers within the Community19. Whatever the truth of the matter is, it is indisputable that in the six years of its existence, the Community has not managed to create a single customs tariff for other countries and create a true customs union. Harmonisation of external customs duties has been managed in the case of 60%-80% of products, according to various sources20 . There are also problems with the varying standards of technical and IT resources available to the customs offices.
One of the declared aims of the "Five" upon its establishment was to enter WTO jointly. However, by 1998 only Kyrgyzstan had become a WTO member. Its separate policy again only complicated the situation, as commitments to WTO customs policy sometimes do not coincide with the interests of all EVRAZES states.
The Russian Federation has dominant status in EVRAZES as it does in CIS. The other member states are very much oriented towards Russia, both politically and economically, so it is no surprise that Moldavia is displaying considerable interest in joining the Community (even though it does not have a common frontier with the member states). A noteworthy point is also the membership of unstable Tadjikistan which, as in the case of the entire CIS, casts doubt on the existence of the entire union's integrated and properly controlled frontier.
A new decision-making mechanism was implemented when EVRAZES was established in an attempt to reduce the overall dominance of Russia within the Eurasian grouping. In the Integration Committee, the Russian vote counts for 40%, the votes of Kazakhstan and Belarus 20% and the other two countries 10%. The member states contribute to the Community budget proportionately. Neverth eless, the information on what takes place within the EVRAZES Integration Committee is limited and that is why it is not possible to evaluate to what extent the new mechanism reins in Moscow's ambitions.
The Eurasian Economic Community brings together both the “richest” and “poorest” CIS countries. Therefore, the same objections can be levelled against its chances of working properly as against the entire CIS free-trade zone: economic weakness of the coutries, dependence on the will and 'willingness to unify' of dominant Russia, disparate import and export structures and thus the varying interests of the member states, “black” economy, differences on the macroeconomic and microeconomic level and so forth.
A different type of economic and especially political integration within the CIS framework is represented by the Union of Russia and Belarus, established under a treaty signed by the representatives of the two states in December 1999 (the first "union" agreement was concluded in April 1996). There is now practically free movement of goods between the two countries.
Under these agreements, a truly close association should soon come about at the economic level: by 2005, for example, both countries are to go over to a common currency. However, the circumstances attending the attempts to realise this goal again indicate that it is more a question of pious hopes than sober perception of reality. The introduction of a common currency requires more than just the existence of an issuing bank and new banknotes. States that come together in this way should have the same type of economy and similar macroeconomic and currency policies. In the case of present-day Russia and Belarus, these countries do not have many points of contact in these regards. Belarus, in contrast to Russia, is almost untouched by privatisation. There is essentially no hard currency market and prices are often set by the authorities. Economic growth indicators for Belarussian production may be rising annually but the manufactured goods are often unsalable.
To improve the situation, Moscow has promised Minsk a loan of 100 million dollars. However, Belarus does not yet show sufficient willingness to effect any changes. While Minsk hurls reproaches at Moscow for not releasing the promised aid, Moscow responds with its suspicions that union money is being misused21 .
The latest proposal for the creation of a new regional grouping has been the plan put forward by Kazakhstan (supported by Azerbaijan) to set up a counterweight Oil Exporters Organization within the CIS. Under this plan, the members of this "Eurasian OPEC" would be Russia and Kazakhstan joined by Azerbaijan, Turkmenistan and Uzbekistan.
Moscow assumed a rather cool stance towards this proposal, doubtless because its share in CIS oil production is approximately 80% (so it does not have to co-ordinate its strategy with the partner states). Russian analysts also point out that the planned grouping would not be able to form a counterweight to OPEC. This organisation is involved in approximately one third of world oil production, while the CIS countries combined only produce about 11.5% of world oil annually22 .
Conclusion: Co-operation and integration are not the same
Economic integration within the CIS will only make headway with difficulty in the next few years. Relations within the CIS are substantially more geared towards pragmatism than to any attempt at integration. This very much stems from the fact that the present-day Eurasian post-Soviet area is economically weak, it suffers from a lack of foreign investment and it is going through a painful economic transformation (with the separate states at different stages of transformation).
Russia dominates the Commonwealth and that is why any integration plans stand or fall according to how Moscow views them. However, this country is at present nor able neither willing to be the "engine" of integration. Agreements on the creation of an integrated economic area within the CIS do exist but they are not going to be implemented within the foreseeable future.
The early achievement of the first steps on the road to integration, i.e. the creation of a free-trade zone and a customs union, are placed in doubt by the fact that by no means all the CIS countries gear their foreign-trade policy towards the other CIS states. The proportion of mutual trade within the CIS shows a downward trend over the long term. The individual states differ considerably even as regards the structure of their foreign trade: for some, the export of surplus raw materials is most important while others attempt to export a narrower range of agricultural or industrial products. The creation of a customs union is also complicated by the fact that three states (Kyrgyzstan, Georgia and Moldavia) have already become WTO members and their commitments to this organisation do not always match the interests of the CIS as a whole.
The idea of "multi-speed" integration took hold in the post-Soviet area in the mid-1990s when several regional groupings with ambitions to unify came into being. Nevertheless, all of these groupings (Central Asian Cooperation, the Eurasian Economic Community, GUUAM and the Union of Russia and Belarus) came up against the same problems as the CIS itself. The Eurasian Economic Community has made the greatest progress to date, and its official representatives assert that a free-trade zone has indeed been put in place there. The success of economic integration within the Union of Russia and Belarus basically depends on Minsk's willingness to launch economic reforms and not least on Moscow's subsequent political decisions.
Some defenders of integration plans have sufficient grounds for optimism in the fact that CIS countries are not closing up against each other and, indeed, they are interested in broadening collaboration. However, co-operation and integration are definitely not the same matter. Aiming at a higher level of real economic union demands much more than just good trading relations. Firstly, the states involved need to have strong economies. Then, they should be able to afford steps towards integration, as integration often requires concessions and compromises that are never “free of charge”. Integration measures can be considerably slowed down by the “black” economy, which is governed by its own rules. Higher level of union also requires close legislative co-ordination. Finally, integration should be naturally motivated by a high proportion of foreign trade among the states involved and by a certain degree of equilibrium among them. Government decisions should also precede a high level of collaboration at the microlevel, i.e. joint ventures and financial institutions, mutual investments and so forth.
None of this is sufficiently visible in the present-day CIS or its regional groupings. In spite of the bold plans and declarations, not even the Union of Russia and Belorus is coming close to the vision of a true union, even though this is only a federation of two states. Economic integration for the entire post-Soviet area will thus remain for a long time a dream.
1Strojev E.S., Bliakhman L.S., Krotov M.I.: Russia and Eurasia at the Crossroads, Berlin, New York, 1999
2Grinberg R., Vardomskij L.: Desjatiletije evoljucii i perspektivy strukturovanija postsovetskogo ekonomitcheskogo prostranstva, Rossijskij ekonomitcheskij zhurnal, 8/2001
3Litera B., Švec L., Wanner J., Zilynskyj B.: Vzájemné vztahy postsovìtských republik, Prague 1998
4Michalopoulos C.: Payments and Finance Problems in the CIS, World Bank, 1996
5Nezavisimaja gazeta, 7.10.1995
6Michalopoulos C.: Payments and Finance Problems in the CIS, World Bank, 1996
7Pomfred R.: The IMF and the rouble zone, Adelaide, 2001
8Verlin E.: Rossijskaja Ojkumena, Expert 45/2001 – see www.cis.minsk.by.
As part of its debt settlement with Moldavia and Armenia, Russia took on the shares of several local businesses. However, it will have to reassess this style of "investment" in view of its ambitions to join the WTO. See also Jarov J.: Globalizacija ekonomiki i rozvitije integracionnych processov v SNG, Rossijskij ekonomitcheskij zhurnal, 1/2001
9 In 1999, CIS states attained the following per-capita GDP rates (USD): Russia – 4,539, Belarus – 5,722, Ukraine – 2,348, Moldavia – 1,745, Kazakhstan – 2,482, Armenia – 2,842, Azerbaijan – 1,970, Georgia – 1,950, Uzbekistan – 2,612, Tadjikistan – 748, Turkmenistan – 2,891 and Kyrgyzstan – 2,211. Source: Grinberg R., Vardomskij L.: Desjatiletije evoljucii....
10 Grinberg R., Vardomskij L.: Desjatiletije evoljucii....
11 news agency www.gazetasng.ru, 20.12.2001. In 2000, real income in Russia came to 48% of 1991 income, in Belarus 92%, in Armenia, Azerbaijan and Ukraine approx. 30-39%, in Moldavia, Kyrgyzstan and Tadjikistan 13-17%. See Bljakhman L.S., Krotov M.I.: Rossija i sodruzhestvo nezavisimych gosudarstv:uroki pervogo desjatiletija, Rossijskij ekonomitcheskij zhurnal, 8/2001
12see speech of Russian premier minister Kasjanov 29.11.2001, also in Grinberg R., Vardomskij L.: Desjatiletije evoljucii....
13 Krotov M.I.: Ekonomitcheskaja integracija stran SNG: Problemy i perspektivy, Rossijskij ekonomitcheskij zhurnal, 1/2001, see also Strojev E.S., Bliakhman L.S., Krotov M.I.: Russia and Eurasia at the Crossroads, Berlin, New York, 1999
14 news agency www.strana.ru , 30.11.2001
15 news agency www.strana.ru 31.5.2001
16 Krotov M.I.: Ekonomitcheskaja integracija ....., see also news agency www.gazetasng.ru, 9.12.2001
17 F.e.in November 2000 the daily Kommersant published the following statistics compiled by Professor of Economics, Vadim Radajev: GDP from the black economy in Russia – 25%; number of people involved in the black economy – 30% of total; households with incomes from the black economy – 30% of total; black economy work – 25% of total. Thus at the end of last year, the State Secretary for the Union of Russia and Belarus, Pavel Borodin, stated that two thirds of foreign trade between these two countries was under the control of "black" capital (see news agency RIA.Novosti, 28.12.2001)
18 Grinberg R., Vardomskij L.: Desjatiletije evoljucii....
19 news agency www.strana.ru, see also Nezavisimaja gazeta, 16.5.2001 a 1.3.2001
20 Grinberg R., Vardomskij L.: Desjatiletije evoljucii...., see also Nezavisimaja gazeta 1.3.2001
21 news agency www.gazetasng.ru, 27.12.2001
22 Tchernyshov S.:Nash otvet OPEK, Vek, 7.12.2001