The Eurasian Economic Union (EEU) that has dominated the political agenda of Vladimir Putin ever since he came back to power in 2012, is undergoing a critical phase of its development. Russia’s involvement in Ukraine that led to US and EU sanctions against Moscow and resulted in  an economic crisis is proving to be a major test for Vladimir Putin’s project of Eurasian integration.

The EEU, as we know it today, has gone through a short but dramatic transformation period, all in   the span of four years. In July 2010, Belarus, Kazakhstan and Russia created the Customs Union that is built upon the 2007 agreement creating a common customs territory. In January 2012, the three countries established the Single Economic Space which ensured the existence of a single market for goods and services as well as created coherent policies across a whole range of economic sectors. A treaty establishing the EEU was signed in May 2014, and came into force on January 1, 2015. The three founding members were joined by Armenia and Kyrgyzstan.

The EEU is based on WTO rules and its major institutions, the Eurasian Commission, is largely modeled after the EU’s European Commission. The objective of the Union is to boost economic growth in each of the member-states by up to 20% in the next 10 years. By 2025 the EEU is expected to build a comprehensive economic space with unified regulations of the energy and financial markets.

Each member state had its own interest in joining the EEU. Kazakhstan’s major goal is to remove the negative trade balance with Russia through the removal of administrative barriers. Belarus, on the other hand, would like to secure an inflow of discounted oil and gas from Russia, which may be short-lived as the case of Ukraine proved. The economy of Belarus is deeply strained by European sanctions which hinder their trade relations. That is why the EEU may alleviate some of these restrictions by providing easier access to Central Asian markets to Minsk.

Russia, however, is the only party whose goal is more political than economic. Some European experts argue that by creating the Eurasian Economic Union, Moscow is attempting to revive the Soviet Union. But in reality Moscow simply wants to cement its influence in the post-Soviet Union sphere feeling threatened by EU’s advance from the West and China’s advance in Central Asia.

First: European and Eurasian Unions

Even though the EEU is loosely based on the principles of the European Union, the logic behind the Eurasian integration is very different. Prospective EU members need to be well-functioning democracies with free markets, which is not required of the EEU members. Market protectionism is still strong in Armenia, Belarus, Kazakhstan and Russia, while the accession to the EEU does not require broad political and economic reforms.

Regardless of EEU’s shortfalls the project is arguably the most modern and comprehensive attempt to unite post-USSR economies into one single market. The EU however failed to recognize this and use it for its own interests in a timely manner. The crisis in Ukraine began partially because of a tussle over whether the country should join EU’s Eastern Partnership or the Russia-led Eurasian Economic Union. The inability of the two groupings to see opportunity in cooperation with each other is likely to become one of the major trends in years to come.

As of now, it is hard to predict whether the Eurasian Economic Union can become an alternative center of economic influence in Europe and Asia. Although the EEU surpasses the EU in terms of area it covers (20mln sq km and 4mln sq km respectively), the European Union far outstrips the Eurasian Union in economic terms (PPP GDP of $18.3tn and $4tn respectively). The limits of EEU’s economy means that it risks becoming a second-tier alliance that will not be able to compete with the EU.

Russia accounts for nearly 86% of the economic potential of the EEU and even if all former USSR states join the Union, its economy will still be weaker than that of the European Union, China or the USA. Vladimir Putin is perfectly aware of this, which is why in 2010 he proposed the creation of “a harmonious economic community stretching from Lisbon to Vladivostok.”[i] This is a remote prospect but the EEU is certainly taking a step in that direction, especially if one considers China’s ambitious Silk Road project that aims to facilitate trade in Eurasia through the creation of infrastructure on the continent.

Second: Challenges ahead

1- Single currency

One of the main tasks for the EEU in the next 10 years is to add momentum to the integration process, which concerns both how deep the integration can penetrate their economies and how many new partners the EEU can draw to its ranks. A perfect example of a failed economic integration is the Union State of Belarus and Russia that aimed at achieving total political and economic integration between the two countries after the fall of the USSR. The Union State whose existence to this day remains unknown to many people failed to create a supranational entity due to its inability to introduce a common currency.

At a recent EEU summit in Astana in March 2015 Vladimir Putin put forward a proposal to introduce a single currency for the Union. Many experts interpreted this move in context of current economic and geopolitical issues that Russia is going through. A union based on a joint currency would mean the deepest form of integration in the Former Soviet Union space since the collapse of the USSR. This type of integration is much deeper than a free trade zone and customs union, and would be a logical step in the development of the EEU.

There are, however, still many obstacles to the introduction of a single currency in the Union. The volume of trade between its member-states is continuously decreasing, and in 2013 did not exceed 9% meaning that the level of harmonization of the macroeconomic policy is still unacceptably low. Before introducing an EEU currency, member-states will need to stabilize their national currencies and minimize their dependence on global oil prices. Judging by the structure of the Russian and Kazakh economies, this is going to be a long-term goal. The current EEU Treaty has no provision allowing for the creation of a common currency union or introduction of a single supranational currency. Moreover, Kazakh officials have recently spoken against such a development, which became the first public rejection of Vladimir Putin’s March proposal.

2- Russian economic crisis

Despite all the fruits the EEU may bear it is widely considered to be off to a bad start with Russia facing a grave economic crisis. The Union has not yet led to truly integrated economies and has not resulted in a single currency across the markets, yet its members as well as other post-Soviet Union states were hit hard by the economic downturn in Russia. This highlights the issue of Russia’s dominance in the EEU, where states with less geopolitical weight and smaller economies have to abide by decisions of the dominant power.

This conflict of interest within the EEU was vividly demonstrated by the Ukraine crisis. Russia, whose economy is closely intertwined with those of Belarus and Kazakhstan, came under fire after the annexation of Crimea and its alleged involvement in Eastern Ukraine. Western sanctions were a huge blow to Russia’s economy and provoked counter-sanctions. Moscow’s aggressive political decisions and its counter-sanctions hit not only Russia, but Belarus and Kazakhstan as well.

Kazakh economic growth rate dropped from 6% in 2013 to 4.3% in 2014 and is expected to go further down to 1.5% this year. A looming economic crisis in the country is accompanied by fears of the Tenge devaluation, similar to what occurred in 2009 when the Central Bank of Kazakhstan devalued the currency against the US Dollar by 25%.[ii] The Belarus economy contracted by 0.6% in 2014[iii] due to its reliance on exports to Russia, and its currency fell around 20% against the US Dollar in 2014 that was largely provoked by the collapse of the Russian ruble in December.[iv]

Despite the fact that Kremlin has put the project of Eurasian integration as a top priority, 2014 has proved that Russia’s political ambitions are being continuously put above the economic interests of its partners whose economies are almost entirely dependent on Russia. It highlights the inequality that still underpins the Eurasian Economic Union, which was based on the principle of equal access to the market. Successful integration will only be achieved if member-states agree to give up on some of their political ambitions for the sake of balanced economic policies.

3- Reaching out to regional markets

The EEU may prove to be an effective economic grouping if it manages to go beyond immediate geographical borders of its member-states and sign free trade agreements with rapidly developing  economies around the globe. The Union with a combined GDP of $4tn is preparing such agreements with Egypt, India, Iran, Israel, Turkey and Vietnam.

China, a potential rival to the EEU, was unfazed by its creation. Beijing stands to lose little from the Union’s establishment but on the contrary may even win. China’s initial concern was that customs barriers for Chinese exports would eventually increase. But it turned out that even during the economic crisis in Russia the demand for Chinese goods was not affected.

Conclusion

The Eurasian Economic Union is a logical development for the post-Soviet Union world which took too long to bring to life. Yet unlike the USSR EEU members are united by their economic interests rather than one ideology. The Union is a few months old, which is why it is too soon to be talking about the prospects of its development. Although the Ukrainian crisis has outlined some of the issues the EEU will need to deal with to sustainably evolve into a EU-type grouping, Moscow was continuously acting out of its geopolitical calculations in Ukraine, ignoring the domino effect of economic repercussions for the economies of its EEU partners. The anti-Russia sanctions and Moscow’s inability to cushion the blow for the Union have raised doubts in Belarus and Kazakhstan about the future of the EEU.

Some ex-Soviet states, particularly Moldova, Georgia and Kazakhstan, fear that Moscow’s tough response to the events in Ukraine could set a precedent in Russia’s relations with its neighbors. This could certainly pose a threat to the whole idea of Eurasian integration. On the other hand, these states may want to quickly resolve any outstanding issues with Moscow and foster the integration process as a confidence-building measure. With Russia trying to position itself as a new pole of economic influence through the project of the Eurasian Economic Union, it needs to be cautious with its overly assertive foreign policy. While the pros of joining the EEU outweigh the cons for some post-Soviet Union states, the situation may change. Moldova, Ukraine and Georgia have chosen a European path by signing EU’s Eastern Partnership (EaP) while Armenia, Azerbaijan and Belarus still have not rejected dialogue with Brussels through the same platform.