The Eurasian Economic Union in the Context of Geopolitical Changes in Europe and Asia
Before Russia launched its special military operation against Ukraine, the economic integration process of the Eurasian Economic Union (EAEU), driven by Russia, was generally proceeding smoothly despite internal disagreements. However, the Russia-Ukraine conflict and the subsequent extreme sanctions imposed by the West have seriously deteriorated the EAEUs external environment. Russia, as the engine of the integration process, has encountered unprecedented difficulties and lost its driving role and leadership capacity to other EAEU members, even becoming a ‘negative asset” for their economic development. Discussions in Kazakhstan about withdrawing from the EAEU have surged. The EAEU has made a series of adjustments to alleviate pressure from member states, but it remains to be seen whether they will be effective.
Key Achievements of the EAEU
Since the establishment of the EAEU in 2015, considerable progress has been made in the integration of markets and technologies. The highlighted integration of energy, transport and financial markets has also progressed in an orderly manner. The most notable result is the free movement of labor, which is much welcomed by the people. As it becomes richer in content, the “EAEU+” model has become even more important for external cooperation.
Major progress in market integration
To facilitate the conditions for a common market, the EAEU has removed 80% of internal barriers and exemptions. Currently, 12 barriers, 11 exemptions and 35 restrictive measures remain within the EAEU which are announced through internal communications.
The establishment of common markets for energy, financial, and transport services is at a critical stage. In the context of the escalating Ukraine crisis, whether breakthroughs can be made in these areas is significant for the development of the EAEU.
In terms of a common energy market, the integration of electricity markets has made the most significant progress with the least difficulty; In 2019, the EAEU Heads of State signed the Protocol on Common Electricity Market and approved an action plan to accelerate the formation of such a market. Technical tests are expected to be carried out between 2024 and 2025, with full operation starting in 2025. Existing national electricity markets will remain in place and electricity will be traded in the border regions of member states.
The integration of oil and gas markets has been the most contentious and has progressed particularly slowly; In May 2016, the Supreme Eurasian Economic Council, the EAEUs highest decision-making body, approved a vision for the creation of a common market for gas, oil, and refined petroleum products. In December 2018, the plans for a common natural gas market and for a common oil and petroleum products market were adopted, covering issues such as oil and gas trade rules, uniform tariff standards for transportation, and access to transportation systems. Three separate working groups on oil and gas market integration were set up within the organization. In August 2021, the Armenian Prime Minister Nikol Pashinyan indicated that the member states had reached a basic consensus on the formation of a common market for oil and petroleum products, and that an international treaty on the establishment of such a common market would be approved by 2024 and enter into force at the beginning of 2025. In the field of natural gas, the draft agreement on a common natural gas market prepared by Russia was submitted for review in April 2021. The agreement covers the principles for the operation and management of the common market, the pricing mechanism, pipeline transportation fees, procedures for cooperation in trade with third countries, and principles for member states’ access to natural gas pipelines. The signing of the treaty on establishing such a common gas market was originally scheduled for 2021, but was postponed, while the date of entry into force of the agreement remains 2025. If negotiations proceed smoothly, an EAEU common energy market could be launched in 2025.
In terms of financial integration, in 2019 the EAEU approved the vision for establishing a common financial market, proposing the coordination of financial market legislation as soon as possible, the conclusion of standard license agreements, the monitoring and analysis of local currency settlement, and the eventual creation of a single payment area. In November 2020, an action plan for harmonizing financial market legislation in the member states was adopted- In March 2021, the Financial Markets Advisory Committee of the Eurasian Economic Commission reviewed and approved the draft plan for establishing a supranational body for the supervision and development of the common financial market and the draft regulation on the issuance of standard licenses for the banking and insurance industries by the central banks of the member states, A supranational supervisory body and a Unionwide rating agency are to be established by 2025 . In addition, the Eurasian Development Bank, the Eurasian Stability and Development Fund and the Astana International Financial Center are considered to be the three pillars of the EAEUs future financial infrastructure.
Although a common financial market has yet to take shape, there have been notable outcomes in local currency settlements. In 2013, the share of local currency settlements between Russia, Belarus, Kazakhstan, Kyrgyzstan, and Armenia was 63%, and in 2021 it reached 73.5%. Of these, ruble settlements accounted for 713%. Over the same period, the share of US dollar payments fell from 30% to 19.2%. According to the Eurasian Economic Commission, more than 85% of inter-Union trade is projected to be settled in local currencies by the end of 2022.
The EAEU is implementing the integration of services in 53 sectors, covering hotel and catering, agriculture, forestry; wholesale and retail trade, warehousing, construction, and logistics. It plans to increase this number to 63 sectors by 2025. Among these, the integration of transportation services is the most far-reaching and influential In December 2016, the Supreme Eurasian Economic Council adopted a resolution on the main directions and implementation stages for coordinating the transport policies of the member states, proposing to lift restrictions on all modes of transport within the Union by 2025 and establish a common market for transport and logistics services. To achieve this goal, the EAEU has drawn up specific roadmaps in the four sectors of road transport, aviation, waterways, and railways, and agreed on a list of cooperation projects in rail, road and multimodal transport services. However, many disputes remain in this area and progress is far behind schedule.
Integration of market supervision and technical standards
In addition to market integration, the EAEU has also made considerable progress in harmonizing regulations and standards. In 2016, the EAEU began implementing electronic labeling of fur products. Fur products without electronic labels are banned from sale, and the scope of mandatory electronic labeling is being continuously expanded to include certain food products, bottled water, tobacco, alcohol, and bicycles. In 2019, the EAEU members signed the Agreement on the Establishment of a Traceability Mechanism for Imported Goods to effectively monitor the flow of imported goods, crack down on illegal imports and combat tax evasion. A farm-to-fbrk traceability system for animals and animal products within the Union was also introduced to improve food safety At the end of 2021, the EAEU adopted the Agreement on the Use of Electronic Seals to track goods transiting through two or more member states, increase transparency of international transport, combat false imports and re-exports, and reduce disputes between member states.
In the area of harmonizing technical standards, the EAEU has adopted 48 technical regulations, 44 of which are already in force and can regulate 85% of goods and services on the market.
Strong commitment of member states to joint production
Despite a variety of resolutions of intent among member states on joint production, substantial achievements have yet to be made in this regard. In 2018, the Eurasian Economic Commission established a working group on industrial integration and import substitution. In 2019, the Industrial Policy Committee was established to coordinate the adoption of coherent industrial policies among member states and formulate strategies and policies for the EAEUs industrial development. In July 2020, it published the industrialization roadmap of the EAEU, proposing the establishment of industrial joint ventures involving all member states, the modernization of existing member state enterprises, and the creation of new innovative industrial enterprises. In April 2019, the EAEU launched a Eurasian network for industrial cooperation, subcontracting and technology transfer projects, aiming to connect large enterprises with small and medium-sized enterprises (SMEs) by establishing an information and data sharing platform, so that SMEs in the member states can participate in the production chain of larger enterprises. In late 2020, the Eurasian Economic Commission and the Eurasian Development Bank met to discuss support for the Unions industrial development and proposed financial support for 177 industrial projects with a total value of US$195 billion and 100 agricultural and industrial complex projects with a total value of about US$10 billion. In April 2021, the Eurasian Intergovernmental Council approved the Basic Directions for Industrial Cooperation in the EAEU until 2025, proposing to deepen strategic cooperation on industrial integration, improve the commodity labeling system and the traceability system for industrial products, utilize the Unions market potential, and jointly explore the export market. Despite the member states’ strong intentions and ambitious plans for cooperation in the above-mentioned areas, it remains to be seen whether they can be implemented.
Effective projects for people’s well-being
The free movement of labor is the most welcomed factor in the EAEU, which has laid a solid social foundation for the Unions development. Article 98 and Annex 30 of the EAEU Treaty stipulate the right to employment, the continuous accumulation of pension insurance, and the right to medical care and the protection of migrant workers and their family members. In December 2019, the Supreme Eurasian Economic Council adopted the Agreement on Retirement Protection for Workers of the EAEU, which took effect in 2021 to provide better protection for migrant workers within the Union. According to the agreement, member states should not restrict the employment of citizens of other member states on their territory; and employment in other states of the Union does not require any special permit, or any language, legal and history tests in the country of employment. Children of migrant workers are entitled to receive pre-school, primary and secondary school education in the country of employment. People who work in a member state for more than one year, pay their social security contributions regularly and meet the age requirements are entitled to receive state pensions. The agreement also allows workers to transfer their pensions from their country of nationality to their country of residence. All these measures are very much in line with the demands of migrant workers, particularly those from Kyrgyzstan and Armenia. In July 2021, the EAEU launched the aWbrk Without Borders” employment information system to help citizens of member states find jobs within the Union. With the highest wage levels and the largest job market,
Russia is currently the preferred destination for migrant workers. According to statistics from the Eurasian Economic Commission, average monthly wages in 2021 were US$768 in Russia, $584 in Kazakhstan, $565 in Belarus, $405 in Armenia, and $239 in Kyrgyzstan.
The “EAEU+” model enlarges the space of the Union
The geographical space of the EAEUs member states lies in the Eurasian region. With Ukraine, Moldova and Georgia becoming increasingly pro-Western, and Azerbaijan pursuing an independent policy and maintaining hostile relations with Armenia, there is little chance that these countries would join the EAEU. Turkmenistan follows a neutral policy and has no intention of joining any integration mechanism. Tajikistan has been distancing itself from the EAEU for years and is weighing the pros and cons of joining the organization. Uzbekistan joined as an observer and has no intention of going any further. The EAEU is running out of room for expansion. In this context, “EAEU+” has become the main lever for expanding the Unions influence.
First, the EAEU is developing observer states where appropriate. In May 2018, the Supreme Eurasian Economic Council adopted the regulation on EAEU observer status, making Moldova its first observer state. In 2020, Uzbekistan and Cuba were granted observer status. Cubas accession means that the EAEU has gone beyond the Eurasian space and made its presence felt in Latin America. In the future, the EAEU is expected to admit Venezuela and other Latin American and African countries as observer states.
Second, free trade area agreements were signed. In May 2015, the EAEU signed a free trade agreement (FTA) with Vietnam, which came into force in October 2016. This was the first FTA signed between the EAEU and a nonmember state. In October 2019, the EAEU signed free trade agreements with Serbia and Singapore respectively; The former took effect in July 2021, while the latter has yet to come into force, which may be shelved indefinitely as Singapore imposed sanctions on Russia over its special military operation against Ukraine and is considered by Moscow to be an unfriendly country; In May 2018, the EAEU and Iran signed an interim free trade agreement, which came into effect in July 2019 for a period of three years. In addition, the EAEU has started free trade negotiations with India, Egypt, Israel, and Indonesia, and is conducting feasibility studies on one with Mongolia.
Third, the EAEU has been promoting synergy with China as an entirely new plan for trade and economic cooperation. In May 2018, the two sides signed an agreement on trade and economic cooperation, which took effect in October 2019. The agreement and the EAEU-Vietnam FTA are similar, with two major differences: the former does not involve tariff reduction; and the speed of customs clearance is slightly slower than the latter. The EAEU and China have also set up a joint committee to implement their agreement, exchange views and solve problems arising from their cooperation in a timely manner, and create a better environment for regional economic integration.
Jointly fighting the pandemic
The EAEU has shown a strong presence in the face of the COVID-19 pandemic. The title of the EAEU 2020 Annual Report was “The EAEU Fighting against the Pandemic — Stronger Tbgether.. In April 2020, the Supreme Eurasian Economic Council held a special meeting and issued a joint statement on the fight against the pandemic, calling for solidarity and cooperation to eliminate the negative impact of COVID-19 and ensure the free flow of essential food, medical equipment, and medicines, as well as personal protective equipment. During the peak time of the pandemic, the EAEU introduced a series of policy measures to ensure supplies, including banning the export of medical supplies and food to outside the Union, and reducing import tariffs on critical anti-pandemic commodities. In March 2021, the EAEU decided to establish a working group on the emergency supply of agricultural products to ensure a timely response to shortages in the food markets of member states. In July 2021, the Eurasian Intergovernmental Council adopted the Comprehensive Action Plan on Health Care and Prevention of Transmission of COVID-19 in the EAEU, calling for joint research and production to secure access to safe and effective vaccines of reliable quality; To some extent, the joint response to the pandemic has strengthened the EAEUs unity, ensured the orderly flow of food, energy, and medical supplies within the Union, and brought a sense of security to the people of the member states.
Impact of the Ukraine Crisis on the EAEU
The Ukraine crisis has had a profound impact on the development of the Union, both at the geopolitical and economic levels. After the escalation of the Ukraine crisis in February 2022, the economy of the Union encountered unprecedented difficulties, with economic decline and high inflation, causing the discussion of withdrawal from the Union and the EAEU Treaty to increase sharply in Kazakhstan and other countries. However, external complications are also expected to bring Union members closer together in some areas.
Consequences for internal relations of the EAEU
The Ukraine crisis in 2014 coincided with the establishment of the EAEU. At that time, the fundamental cause of the crisis was the pressure on Ukraine to make a diplomatic choice: either to pursue a policy of balancing between the East and the West, or to turn completely towards the West. This situation was triggered by the Association Agreement between Ukraine and the European Union. The crisis at that time did not stop the creation and evolution of the EAEU, but the escalation of the Ukraine crisis in 2022 has had a significant impact on the EAEUs internal dynamics.
First, the extreme pressure exerted, by Western countries on Russia and Belarus has strengthened Russian-Belarusian relations. Throughout the EAEUs development, Belarusian President Alexander Lukashenko has repeatedly criticized the Union for being slow to remove barriers, while new ones keep emerging. When Belarus held presidential elections in 2020, people who were dissatisfied with the election results and Lukashenkos long rule took to the streets in mass protests that lasted several months. The US and Europe made no secret of their intention to overthrow the Lukashenko regime. It was then that Russia came to Lukashenkos defense, providing economic aid and security assistance. In 2021, the emergency landing of a Ryanair flight and the refugee crisis on the border between Belarus and Poland strained relations between Belarus and the EU, and the EU escalated sanctions against Belarus. During this period, Russia once again came to Belaruss rescue. All these events accelerated the process of alliance building between Russia and Belarus, which had been stalled for years. In November 2021, the two countries signed the Main Directions for Implementing the Treaty Establishing the Union State for 2021-2023, which set out the roadmap for deepening cooperation in 28 economic fields and agreed on the military doctrine of the Union State.
The series of events in Belarus, which have a similar nature to the crisis in Ukraine, are actually the byproduct of the rivalry between Russia and the West. The difference is that, with Russias help, Lukashenko stabilized his administration and Belarus was not turned into a battlefield. When Russia carried out the special military operation against Ukraine, the territory of Belarus became a transit and recovery zone for Russia, For this reason, the West and Ukraine regarded Belarus as Russias accomplice and introduced unprecedented sanctions against Belarus. Belarus had no choice but to tie itself closely to Russia, and its capacity for diplomatic maneuver was significantly reduced.
On issues related to the EAEU, President Lukashenko changed his previously critical stance to one of active support for the Unions integration process. Belarus stood firmly with Russia in both the vote in March 2022 in the UN General Assembly to censure Russia and the vote in April 2022 to suspend Russia from the UN Human Rights Council. Regime crises and regional conflicts have drawn Russia and Belarus closer together and aligned them more strongly in the EAEUs development.
Second, subtle changes have been taking place in Russia-Kazakhstan relations. In contrast to the closer relations between Russia and Belarus, Kazakhstan is more concerned about Russia, and many Kazakh elites regard Russia as the biggest threat to their sovereignty and territorial security; Russia has been very dissatisfied with Kazakhstans de-Russification and de-Sovietization efforts, and the Ukraine crisis in 2022 posed a serious challenge to Russia-Kazakhstan relations and had a profound influence on the direction of the EAEUs development.
Although Kazakh President Kassym-Jomart Tbkayev, backed by the Russian-led Collective Security Treaty Organization (CSTO), swiftly pacified domestic unrest in January 2022, the deteriorating relations between Russia and Kazakhstan relations have failed to turn around. The decline in bilateral relations has been evident for years. Russia was very upset when then Kazakh President Nursultan Nazarbayev visited the United States, and signed a new strategic partnership agreement that allowed the US military to use the Caspian Sea ports of Kuryk and Aktau to transport non-military supplies. At the end of 2020, Russia and Kazakhstan had another territorial dispute. Vyacheslav Nikonov, Chairman of the Russian State Dumas Committee on Education and Science, claimed in an interview that Kazakhstan had never existed before as a state and that it had not been inhabited prior to the arrival of the Russian Empire; the territory of modem Kazakhstan was a gift donated by Russia and the Soviet Union.9 Although the controversy soon subsided, it left its mark on Kazakhstan-Russia relations and caused great concern in Kazakhstan.
Russia is also worried about de-Russification in Kazakhstan, as Russian scholars believe that Kazakhstan is accelerating the pace of de-Russification.
For example, some streets and municipalities were renamed in Kazakh, Soviet imprints were erased, and seminars were held with Ukraine on the co untry s great famine in the Soviet era to promote the dark side of the Soviet history; They also accused Kazakh nationalists of carrying out “language patrols/5 attacking Russian-speaking residents and making Russophobic statements. An article entitled aKazakhstan prepares to rewrite history and a break with Russia is inevitable” published by the Russian newspaper Pravda in December 2021 argued that ‘”Kazakhstan is moving towards an anti-Russian position on historical issues at the national level, which makes it difficult for Russia and Kazakhstan to coexist in the CSTO and the EAEU.
For the third year in a row, Kazakhstan has canceled Victory Day celebrations on May 9. Mukhtar Taizhan, a member of Kazakhstans National Council of Public Trust, an organization that directly reports to the Kazakh president, has repeatedly called for the Victory Day of the Great Patriotic War to be renamed a day of mourning, saying that it is not a Kazakh war, but a war between Russia and other empires. Askar Umarov, who was appointed Minister of Information and Social Development after the January 2022 riots, has also spoken out against the celebration of Victory Day, which according to Russian scholars is “the last common memory of the united post-Soviet spaced After Russia launched its special military operation against Ukraine, public opinion in Kazakhstan was sharply divided and anti-Russian rallies were held in many places. However, Kazakhstans senior leaders were cool-headed and chose not to take sides, abstaining from UN votes on Russia, In a telephone conversation with German President Frank-Valter Steinmeier in March 2022, Tbkayev said that all countries must strictly abide by the purposes and principles of the UN Charter, but that the origins of the Ukraine crisis were rather complicated and that new diplomatic approaches should be sought for a peaceful solution. If Tbkayevs position is relatively neutral, trying not to offend either side, the statement by Kazakhstan’s Deputy Foreign Minister Roman A^ssilenko better reflects the countrys stance. In an interview with the German newspaper Die Welt in March 2022, he said that “‘Kazakhstan does not wish to be behind any new Iron Curtain that Russia may seek to erect and advised companies that have pulled out of Russia because of sanctions to relocate their production lines to Kazakhstan.
Regarding the sanctions against Russia, Kazakhstan has made it clear that it will neither join nor help Russia to circumvent the sanctions. ”Kazakhstan will not help Russia circumvent sanctions imposed by the United States and the European Union,” said Timur Suleimenov, the presidents First Deputy Chief of Staffs during his visit to Europe. “Although Kazakhstan is a member of the EAEU, it is a completely independent country and will follow the restrictions imposed on Russia and Belarus Suleimenov, who had worked at the Eurasian Economic Commission for five years, made such a favorable gesture to the West in part to avoid secondary sanctions against his own country, but it reflects growing divisions in Russian-Kazakh relations.
In addition, Kazakhstan is likely to ask for a renegotiation of its share of import tariffs. Currently, the share of EAEU import tariffs allocated to each member state is 85.065% for Russia, 6.955% for Kazakhstan, 4.86% for Belarus, 1.9% for Kyrgyzstan, and 1.22% for Armenia, Since the escalation of the Ukraine crisis in 2022, the extreme Western sanctions on Russia have severely restricted the countrys imports from Western countries, which has inevitably led to a reduction in Russias import tariffs. As a result, Kuantyrov Alibek, Kazakhstan’s Minister of National Economy, has proposed a modification in the distribution of import tariffs if necessary.
Since Russia launched the special military operation against Ukraine, the debate in Kazakhstan about whether to withdraw from the EAEU has suddenly intensified. Some experts suggest that it is dangerous for Kazakhstan to be in the same boat with a belligerent state under current conditions. Although the Kazakh government has publicly stated that it will not withdraw from the EAEU, and mainstream expert opinion does not agree with the withdrawal, the reason given by experts was that the EAEU is not only an economic integration organization, but also a geopolitical body, which is easier to join but harder to leave. Some Kazakh political analysts fear that Kazakhstan will fall as a victim to a new geopolitical realignment. Ruling out the possibility of an outright exit, but uneasy about the status quo, Kazakhstan has shifted from being the initiator and promoter of the EAEU to its biggest sceptic, and is now grappling with the difficulty of getting along with the organization.
Third, Ifyrgyzstan and Armenia have remained detached amid the volatile situation. Both Kyrgyzstan and Armenia abstained from the UN General Assembly vote in March 2022 calling on Russia to immediately end its military operations. In April, Kyrgyzstan voted against Russias suspension from the UN Human Rights Council, while Armenias representative was absent. Kyrgyz President Sadyr Zhaparov initially expressed understanding for Russias special military operation, but later changed his position. On April 25, 2022, Zhaparov stated that Kyrgyzstan would follow the principle of neutrality, explaining that “Ryrgyzstan is a small country with no influence and whoever we support will not win any time soon：” The Ukraine crisis has triggered a division of opinion in Kyrgyzstan, with both pro-Russian and anti-war rallies taking place. To avoid criticism from the West, the Kyrgyz National Security Council banned the use of the “Z” symbol on Victory Day costumes after US Under Secretary of State Uzra Zeya visited Central Asia.
Armenia, which has a feud with Turkey and a territorial dispute with Azerbaijan, sees Russia as its biggest security backer. However, conflicts resurfaced in Nagorno-Karabakh during Russias special military operation against Ukraine, with Azerbaijan demanding the withdrawal of peacekeepers from the disputed territory. There have been protests in Armenia since the Nagorno-Karabakh conflict in 2020. If Armenia loses again to Azerbaijan because of Russias insufficient focus, the Armenian people will have more doubts about Russias ability to protect them. Since January 2022, Armenia and Turkey have been negotiating the normalization of their relations. By the end of June 2022, four rounds of negotiations had been held and the two sides had agreed on a number of issues, which may herald a new path for Armenian diplomacy.
Impact on the economies of EAEU countries
First, the crisis has taken its toll on the macro-economy and development model of EAEU countries. Under the Western-imposed extreme sanctions, the Russian economy was forced to enter a wartime mode, abandoning market principle in some cases to ensure national security; Since then, the share of the state-owned economy and government intervention in the economy have increased, and the logic of prioritizing security over economic development has become more consolidated in Russian diplomacy. To cope with the effects of sanctions, Kazakhstan and Belarus have also carried out economic mobilization. The state has played a more prominent role in economic life, and administrative interference in running the economy has expanded. Both countries have issued export bans on gasoline, diesel, and some food products to ensure the stability of domestic supplies» Regulating the prices of some commodities is ultimately contrary to the law of the market. Although people will benefit for a certain period of time, production and investment will be unprofitable, resulting in fewer job opportunities and affecting long-term development.
As the Ukraine crisis has dragged on, import substitution has gradually become a national development strategy instead of merely a temporary measure to tackle the crisis. Russian President Vladimir Putin said at the 2022 St. Petersburg International Economic Forum that in the 2020s Russia will strengthen its economic sovereignty, and the country will speed up the development of its infrastructure, technology, and financial system. At present, Russia has more than 20 industries promoting import substitution and more than 1,000 import substitution projects. In his State of the Nation address in January 2022, Belarusian President Alexander Lukashenko proposed a systematic and orderly transition away from external dependence. The import substitution program is the basis for the survival of most industries in Belarus and a priority for the country in the next five years. For Kazakhstan, localized production has long been its strategic orientation, and in recent years it has proposed a “program for the economy of simple things” to finance import substitution projects. At the beginning of 2020, Kazakhstan had identified 900 such projects, and the figure was raised to 2,600 by the end of 2020. However, due to the homogeneity of the EAEU countries5 industrial structure, import substitution tends to replace products within the Union, rather than products imported from outside the Union. This policy will intensify competition within the Union. In February 2021, Kazakhstans Vice Minister of Trade and Integration, Zhanel Kushukova, stated that the EAEU member states regard each other as competitors rather than equal partners, and that the Union is an integration organization with the lowest share of mutual trade.
Second, the escalating sanctions have once again impeded the development of Union states. The economies of the EAEU countries were experiencing a modest recovery prior to Russias special military operation against Ukraine, but they lost momentum immediately after the operation began. According to forecasts by the World Bank, in 2022 the economies of Russia, Belarus, and Kyrgyzstan would shrink by 11.2%, 6.5%, and 5% respectively; Kazakhstan and Armenia would continue to grow, but the growth would slow down from 3.7% to 1.8% in Kazakhstan and from 6.25% to 1.5% in Armenia.8 Belarusian scholar Katerina Bornukova believes that “the current crisis is unprecedented for sovereign Belarus in terms of the scale of problems.
Since its establishment, the economic growth rate of the EAEU has been lower than the world average, and the gap between the Union and emerging economies is even wider. Economic difficulties caused by regional conflicts and Western sanctions will further diminish the EAEUs position in the world economy;
Russias lack of power as the engine of the EAEU has weakened the Unions appeal. Since the Unions establishment, Russias economic development has remained sluggish, with an average annual growth rate of less than 2%. As the Russian economy accounts for about 85% of the EAEU, the economic vitality and development potential of Russia directly affect the Unions internal and external cooperation. The Ukraine crisis has substantially undermined the Russian economy, and Russia is no longer able to provide suffîcient impetus for the Unions development. With the economic and technological decoupling between Russia and the West, Russias economic development potential has also been severely weakened.
Inflation remains high and is spreading rapidly throughout the Union. Based on the statistics of the Union states, the inflation rates in Russia, Kazakhstan, Kyrgyzstan, and Belarus were 17.83%, 13.2%, 14.5%, and 15.9%, respectively, compared to the previous year, and the Central Bank of Armenia forecast the figure to be 7% for the country in 2022. Faced with high inflation and depreciation pressure, Union countries have been forced to raise benchmark interest rates. Russia raised its benchmark interest rate from 9.5% to 20% in response to Western sanctions, which was then gradually lowered back to 9.5% as the exchange rate gradually stabilized. Kazakhstans central bank raised its benchmark interest rate from 10.25% to 13.5% and then to 14% on the day of Russias special military operation against Ukraine. Armenia increased its rate from 8% to 9.25%, and Belarus did the same from 9.25% to 12%. High interest rates have increased the financing costs of enterprises and reduced the willingness to invest.
Russias efforts to curb inflation have also displeased other member countries. To ensure domestic supplies, Russia announced an export ban on more than 200 commodities in early March 2022, On March 14, Russian Prime Minister Mikhail Mishustin signed a provisional decree banning the export of wheat, rye, barley, and corn to other EAEU states until June 30, and the export of white sugar and cane sugar was suspended until August 31. Russias inflation and export ban spilled over to other member countries, causing panic buying of sugar in Kazakhstan and Kyrgyzstan. Russias practice has aroused the dissatisfaction of other countries. Kazakh economist Aidar Alibayev criticized that “the biggest problem of the Union is that Russia does not treat other members of the Union as equal partners and declares a ban on the export of grain and sugar without consulting other members.
In the short term, Russias economic recession has damaged the Unions supply and industrial chains, which now require a reset. In the longer term, if Russias special military operation continues, it will lead to a further decline in investor confidence. International investors will deliberately avoid EAEU countries to avert risks. There is little hope that multinational companies evacuated from Russia will move their production to other Union states. In the current critical period of scientific and technological transformation and rapid development of green energy, the Ukraine crisis will greatly delay the investment of Union states in science and technology as well as in the green economy and will affect the sustainable development of regional countries. On May 17, 2022, Deputy Chairman of the Russian State Duma, Pyotr Tolstoy, said that the Duma was planning to discuss the possibility of withdrawing from the World Trade Organization and the World Health Organization. The discussion of withdrawal from the Paris Agreement has been widely reported. Leaving international organizations and returning to isolationism may miss the new round of scientific and technological revolution and affect the scientific and technological competitiveness of the entire Union. Kirill Tremasov, director of the monetary policy department of Russias central bank, is right to worry that the most difficult time for the Russian economy is not now, but in the future. With the departure of Western technology companies, the Russian economy will become more self-contained, and the years of Russian integration into the process of globalization will be reversed. aWe will become less technologically advanced” and “the economy will look more and more like the era of the early 1990s.
Third, labor migration in the EAEU has been severely impacted by the crisis. The EAEUs most successful project for peoples well-being now faces huge challenges. Since the Ukraine crisis in 2014, Russias economic performance has been far from ideal, and the number of migrant workers from other Union states in Russia has not returned to 2015 levels. The escalation of the Ukraine crisis in 2022 dealt another blow to labor migration. Russias plummeting economy resulted in a significant decline in job opportunities. The Moscow city government estimated that more than 15,000 jobs were lost in the Russian capital as a result of the departure of foreign businesses. Besides, the exchange rate witnessed volatile fluctuations. The rubles value plunged at the onset of the sanctions, but later stabilized as Russia required payment for gas in the currency; However, it is doubtful whether the ruble can remain strong for a long time, as the basis of exchange rate stability is sustainable economic development. If the Russian economy is in a long-term downturn, the pressure of ruble depreciation will exist for a long time. Kyrgyzstan, home to the largest number of migrant workers in Russia, is now working with Turkey and South Korea to ease visa restrictions for migrant workers due to concerns that a sharp drop in immigrant remittances could affect the countrys economic and social stability;
Fourth, transportation and agriculture are among the hardest hit industries. Western sanctions against Russias transport and logistics involve sea, land, and air transport, in an attempt to physically cut off Russia from the international market. Since Russia is the core of the EAEU, sanctions against Russia have indirectly increased the difficulty and cost of imports and exports of all Union states. Well-known international logistics companies, such as the Swiss Mediterranean Shipping Company, the Danish Maersk, and the French CMA CGM, suspended their services to Russia, which partially excluded Russia from the global container transportation system. In addition, trucks from Russia and Belarus were banned from entering Europe, Russian ships were not allowed to dock at European ports, and 36 European and American countries have closed their territorial airspace to Russia, Heavy truck producers, including Mercedes and Volvo, have stopped providing services to Russia, resulting in a shortage of auto parts and increasing transportation safety risks. Moreover, the International Association of Classification Societies revoked Russias membership on March 11, 2022. Ships that had joined the Russian register are facing difficulties with the delivery of new ships and the inspection of operational ships. According to regulations, ships must have a valid class certificate for insurance, legal cargo delivery and access to ports around the world. Lastly, Western financial insurance companies have stopped insuring transit business in Russia,
The sanctions against Russia have also caused collateral damage to other Union states, especially Kazakhstan and Belarus. While Belarus was sanctioned by Western countries along with Russia, Kazakhstan has suffered truly undeserved consequences. First, road transportation has become more difficult. As Europe restricts the entry of Russian trucks, Kazakh trucks are also blocked at ports. The transportation potential of the Western Europe-
Western China (WE-WC) Highway built by Kazakhstan cannot be realized. The Kazakh government had to set up a special taskforce to solve the problem of westward logistics. Second, energy export has also encountered more difficulties. Kazakhstans crude oil export to Europe mainly depends on the Caspian Sea pipeline, which has an annual capacity of 67 million tons. Kazakh crude oil accounts for about 80% of the pipelines delivery, and the rest is Russian crude oil delivered through the Russian port of Novorossiysk, Kazakhstan has exported a total of 750 million tons through this pipeline since 2001. Since Russia carried out the special military operation against Ukraine, the operation of the pipeline has been unstable, and was temporarily suspended in March 2022 due to a storm. In early July, it was again suspended for 30 days by a Russian district court for environmental reasons. Meanwhile, Kazakhstans oil exports to Europe have been hampered by the lack of a new mechanism to determine the cargoes country of origin. For fear of secondary sanctions, traders and banks have stayed away from trading oil that comes from the Caspian pipeline. Given this, Kazakhstan has proposed building another pipeline across the Caspian Sea, with KazMunayGas in charge of formulating a specific plan.
Thanks to its natural endowment, the EAEU has been the most successful in agricultural import substitution, achieving self-sufRciency in key agricultural products. Russia and Kazakhstan are among the worlds largest exporters of agricultural products. However, the EAEU relies heavily on imports of sugar beet, canola (rapeseed), sunflower and corn seeds. Due to Western sanctions, seeds that had been ordered could not arrive in time. Agricultural machinery is also heavily dependent on imports: more than half of the combine harvesters and beet harvesters are imported from outside the Union. These problems cannot be solved in the short term.
Fifth, the sanctions have to some extent promoted intra-Union cooperation. Kazakhstan could become a buffer zone for the transfer of labor and resources. Russian companies are trying to relocate to Kazakhstan to facilitate foreign cooperation. In the first five months of 2022, the number of Russian companies registered in Kazakhstan surged by 1,566. Under the pressure of sanctions, the local branches of Russian banks were also sold to Kazakhstan, including the purchase of Alfa-Bank Kazakhstan, previously a subsidiary of the Alfa Bank in Russia. The bank is preparing to re-register and operate under a new brand. This is Kazakhstans first acquisition under international sanctions. Sberbank Kazakhstan, a subsidiary of Russias Sberbank, is to be sold to the Kazakh state-controlled Baiterek Holding. The two subsidiaries account for about 12% of Kazakhstans banking assets.3 Western financial sanctions against Russia and Belarus have forced the EAEU to speed up the construction of payment system within the Union and accelerate the share of local currency settlement, which helps the EAEU to build a unified financial market. Moreover, multiple routes bypassing Russia have been developed and are receiving more international attention, including the Kazakhstan-Caspian Sea-Caucasus corridor, the Kazakhstan-Turkmenistan-Iran corridor, and several other routes from Central Asia south to the Indian Ocean. In the past, countries mainly relied on Russias transit channel, while in the future, Russia will also have to rely on other countries5 southward channels. This is conducive to the construction of an interdependent transportation integration space, and Kazakhstans status as an international transit hub will be consolidated and enhanced. Finally, the demands for intra-Union trade have been growing. The significant decrease in Russias trade with ‘unfriendly countries” is beneficial for trade within the EAEU. Given that the proportion of trade in goods within the Union has been hovering around 8% since the EAEUs establishment, there is considerable room for the expansion of intra-Union trade.
Influence on the EAEU’s external cooperation
While the EAEUs development is entering a difficult period due to the Ukraine crisis, other regional integration organizations are making rapid progress. For example, the Regional Comprehensive Economic Partnership Agreement (RCEP) has entered into force and has greatly enhanced the trade liberalization and facilitation among Asia-Pacific countries. The informal meetings of Central Asian heads of state have become more institutionalized, and regional countries are now more willing to cooperate. The establishment of several “5+1” mechanisms by Central Asian states with countries outside the region has weakened their dependence on the EAEU to a certain extent. According to Kazakh economist Kassymkhan Kapparov, the United States will not impose sanctions on Kazakhstan, but will use the opportunity to ingratiate itself with Kazakhstan and influence the countrys development path. “The US is going to throw some tempting proposals at Kazakhstan, as it did in 2013 during the Ukraine crisis, saying that it will support Kazakhstan to join the European Union,” Kapparov estimates. In this context, the Union states are facing more competition from internal and external cooperation mechanisms, which negatively impacts the cohesiveness of the Union.
While the EAEU faces difficulties in developing economic and trade relations with the West, the status of the Asia-Pacific region in the Union is on the rise. Since the Ukraine crisis in 2014, Russia has accelerated the shift of its policy priority toward the East, attaching more importance to cooperation between the Union and the Asia-Pacific region. The new intensity of the Ukraine crisis since 2022 greatly accelerates this process.
Although the European Union is still the largest trading partner of the EAEU, the share of trade with the EU has continued to decline, while the trade status of the Asia-Pacific region in the Union keeps rising. The share of trade with other members of the Commonwealth of Independent States (CIS) has remained steady around 5%, and the room for expansion is limited. According to Sergei Glazyev, Minister in charge of Integration and Macroeconomics of the Eurasian Economic Commission, the worlds economic center of gravity is shifting to the Asia-Pacific region, and the EAEU needs to cooperate with it and secure its position. After the new round of the Ukraine crisis in 2022, Russia sees the Asia-Pacific as a key market. In the case of energy, its crude oil exports to China increased by 55% in May 2022 against a backdrop of overall declining exports» Indias imports of Russian crude oil surged from 3 million barrels in March to around 25 million in May, significantly increasing its share of Russian oil exports from 0.2% to 10%.
In addition to trade, the priority of EAEU transportation, logistics and financial cooperation will also shift to the Asia-Pacific region. In June 2022, Russian Foreign Minister Sergei Lavrov said at the 7th China-Russia High-Level Think Tank Forum that while the United States and the European Union are turning their currencies into weapons to blackmail other countries, Russia and China are ready to develop an independent financial infrastructure and significantly increase the use of local currencies between the two countries, which currently account for 1/4 of total settlements.
Belarus, whose traditional markets were the CIS and the EU, has also accelerated its pivot to the Asia-Pacific region in recent years due to its fractious relations with the West. According to Belarusian Prime Minister Roman Golovchenko in May 2022, Western sanctions have blocked almost all of Belaruss exports to the EU and North America, amounting to about $16-18 billion per year, and Belarus urgently needs to redirect its exports to Asian, African and Middle Eastern markets. However, given its geographical proximity to the EU, it is more difficult for Belarus to shift to the Asia-Pacific region. In 2021, Belaruss foreign trade in goods reached §81.7 billion and its exports to Europe surged by 74.4%, accounting for 25% of the co un try s total exports of $39.89 billion. In the same yeag Belaruss top five export destinations were Russia ($16.4 billion), Ukraine ($5.4 billion), the Netherlands ($2.2 billion), Poland ($2.07 billion), and Germany ($1.66 billion)
Countermeasures by the EAEU and Its Prospects
In response to Western sanctions, the EAEU countries have shown solidarity and cooperation to address the difficulties, and the Union has taken measures to ease the pressure, but their effectiveness remains to be seen. The upper limit of the EAEU depends on Russias development potential, while the level of the Unions integration depends on Russia-Kazakhstan relations.
EAEU measures in response to sanctions
First, ensuring stable internal supplies, especially of goods related to people’s livelihood, lb alleviate the supply shortages caused by Western sanctions, the EAEU adopted a list of imports subject to preferential tari压 in March 2022. The list sets lower tariff rates for more than 450 items, including baby food, pharmaceutical raw materials, metallurgical and electronic products used in production, and some agricultural and food products. In April, the scope of provisional preferential tariffs was expanded twice and the implementation of some anti-dumping measures was postponed. The Union also increased the threshold for tax-free individual parcels from €200 to €1,000 and simplified the confirmation process of certificates of origin for free trade partners and underdeveloped countries. Some import companies will also be eligible for a six-month delay in paying customs duties. Russia has further introduced a parallel import list involving more than 200 brands, including Apple, Samsung, and Tesla, to address the shortage of supplies of important goods. Russia wants the policy to become common to the EAEU but has yet to win public support from others.
Second, accelerating import substitution. In April 2022, the Eurasian Economic Commission issued an assessment report on import substitution, which stated that about $70 billion, or 27% of the Unions total industrial imports have import substitution potential, including $55.7 billion from Russia, $7.3 billion from Kazakhstan and $4.3 billion from Belarus. According to the report, the industries with the highest import substitution potential in the EAEU are mechanical equipment, automobiles, computers, electronics and optics, and chemical products. The report also presents a list of the most effective import substitutions, covering 149 products with a total value of about $29.1 billion. The report recommends the formation of a common EAEU list of products imported from third countries as soon as possible, a mechanism to incentivize import substitution, and the use of tarife and technical barriers to restrict imports. Kyrgyz President Zhaparov also called for “the earliest possible start of localized production and the implementation of cooperative projects in the Union to reduce dependence on imported products. Since localization of production has become the national strategy of each EAEU country, it is expected that a Unionwide import substitution policy will be launched. In response to Western sanctions against Russian aviation, Russian, Belarusian and Kazakhstani companies signed the Agreement on the Establishment of a Civil Aviation Manufacturing Technology Platform in July 2022.
Third, actively expanding non-Western markets and opening new international corridors. Under Western sanctions, the expansion and deepening of economic cooperation with third parties is essential for the development of the EAEU. The EAEU will continue to advance the “EAEU+” model and expand its circle of friends. In May 2022, the Supreme Eurasian Economic Council decided to launch negotiations on a free trade agreement with Indonesia and speed up free trade negotiations with Iran which were scheduled to be concluded by September 2022, upgrading the interim free trade deal with Iran to a normal agreement and achieving zero tariffs on about 80% of goods. Meanwhile, the EAEU is ready to set up a working group with the United Arab Emirates to study the feasibility of a free trade area and plans to work with Mongolia on a roadmap for cooperation until 2025.
During the Eurasian Economic Forum in May 2022, all parties proposed deepening cooperation with China in the economic, trade and logistics spheres. President Putin stressed the need to ‘consider further steps to develop a system of trade and investment agreements, including with the participation of the SCO, ASEAN and BRICS member states. He also spoke about the prospects and relevance of the Greater Eurasian Partnership in activating the regional integration process and promoting the synergy between the EAEU and Chinas Belt and Road Initiative (BRI). Noting the huge potential for trade and economic cooperation with China, President Lukashenko said that the two sides should expand industrial cooperation, especially in the field of innovation, to attract investment and further explore the potential of transit transportation. Earlier, a meeting between the transport departments of EAEU countries and the Energy and Infrastructure Council of the Eurasian Economic Commission in late April proposed a plan to improve the infrastructure of Union states, so that they can more closely align with the BRI and better integrate into the east-west and north-south international transport corridors. In this context, Lukashenko called for urgent restructuring of the logistics system to ensure more efficient transportation of agricultural products and promoted the Eurasian Agricultural Express project at the Eurasian Economic Forum. ”Partnership with China in the field of digital transport corridors is also of particular importance,” he said, “It is necessary to work on the speedy implementation of the roadmap with the Chinese side and facilitate the digitalized transition in rail transportation between the Union states and China.
To overcome the logistical blockade caused by Western sanctions, the Union states are looking for alternative routes. Kazakhstan is actively promoting the Trans-Caspian Transport Corridor from China to Baku and the Caucasus via Kazakhstan’s Aktau port. In May 2022, Kazakhstans Prime Minister Alikhan Smailov asked the Ministry of Industry and Infrastructure Development to work with the State Railway Company to explore a route for goods export through the Trans-Caspian Corridor, In June 2022, the first trial operation of container transport was launched along the North-South Transport Corridor from Russias Astrakhan to Irans Anzali port and India across the Caspian Sea, which took about 24 days. In addition, the construction of China-Kyrgyzstan-Uzbekistan Railway is expected to begin. ICyrgyzstans President Zhaparov revealed in an interview that he had discussed the project with his Russian counterpart Putin for half an hour, explaining that “the importance of the railway to Kyrgyzstan is like breathing air； and finally won Putins understanding.0 As a result of Kyrgyzstans efforts, the railway has been included in the EAEUs list of priority transportation projects. Uzbekistan is also promoting the railway from its city of Shahrisabz via Kabul in Afghanistan to Peshawar in Pakistan, which will enable it to reach the sea by the shortest route.
Fourth, establishing the EAEU Working Group on Macroeconomic Stability. Proposed by Kazakhstans President Tbkayev, the EAEU decided to set up a special working group in March 2022 to ensure the macroeconomic stability of Union states under external pressure. Led by Russias Economic Development Minister Maxim Reshetnikov, the working group includes central bank governors, ministers of economy and finance, the chairman of the board of directors of the Eurasian Development Bank, and some members of the Eurasian Economic Commission. In May 2022, the Supreme Eurasian Economic Council approved the Main Directions of Macroeconomic Policies for the period 2022-2023, stating that the Union will work to ensure macroeconomic stability, create better conditions for investment in the real economy, develop scientific and technological cooperation, explore the industrial capacity of the Union, and expand economic, trade and investment cooperation with third parties to effectively address external challenges.
Development prospects of the EAEU
Although the EAEU faces greater external pressure, it remains an important lever for Russia to expand its influence. Since its inception, the EAEU has had a strong geopolitical nature, with politics being more important than economics. All countries have a clear understanding of this and would not dare to engage in any political adventure to withdraw from the Union. Although there are strong voices in Kazakhstan to leave the Union, Tbkayev said at the Eurasian Economic Forum in May 2022 that every organization will have problems of some kind, but in a complex international situation, unity and focus on developing trade and economic cooperation is the assurance of “collective immunity from global challenges.,31 This indicated that withdrawing from the Union is unlikely to become Kazakhstans national policy, and the EAEU will endure and grow.
Given the lack of competitiveness of products from Belarus, Armenia and Kyrgyzstan on the world market, Russia is an important export market for them. This situation is not expected to change in the short to medium term. Trade with Russia accounts for about 50% of Belaruss foreign trade, 34% of Armenias and 40% of Kyrgyzstans. Exports to Russia account for more than 40%, 28%, and 32% of the three countries5 total exports respectively; Among the commodities they import from Russia, the share of energy and raw materials is large and difficult to replace. With the exception of Kazakhstan, all countries have been relying on Russia for their energy supplies and are enjoying “friendship prices” granted by Russia, In the gas supply agreements that Armenia and Belarus successively concluded with Russia at the end of 2021, the price was set at $165 per thousand cubic meters, much lower than the price of Russian gas supplied to Europe in the same period. Thanks to the low gas price, many private cars in Armenia are powered by natural gas.
In essence, the upper limit of the EAEUs development depends on Russia, For the other members, the EAEU is for common development: they expect Russia to facilitate their economic development but are reluctant to share Western pressure with Russia. Therefore, the level of Russias economic development and its ability to support other members are key to the Unions cohesion. The escalation of the Ukraine crisis has sharply worsened Russias external development environment: its overseas assets are at risk of being plundered by the West, its scientific and technological exchanges with the West have been interrupted, and its economy is moving toward internal circulation. The decarbonization of world energy and the de-Russification of European energy will weaken Russias influence in the global energy market. Russias economic potential is declining, and the Unions prospects are dimmed by Russias lack of momentum.
The depth and breadth of EAEU integration depends on the political mutual trust between Russia and Kazakhstan. Kazakhstans first president, Nursultan Nazarbayev, was the initiator and an ardent supporter of the EAEU. But currently, Kazakhstan is the least dependent on the Union in terms of trade. In 2021, the trade volume between Kazakhstan and Russia was $25.39 billion, accounting for 25.2% of Kazakhstan’s foreign trade; and Kazakhstans exports to Russia stood at $6.92 billion, only 11.6% of its total goods exports. In fact, it is Kazakhstans strategic orientation to seek political, economic, and cultural independence, which requires de-Russification and de-Sovietization. The escalation of the Ukraine crisis has dealt a heavy blow to Russia-Kazakhstan relations, particularly psychologically. Kazakhstan is now more sensitive to the transfer of sovereignty to the EAEU. Although cooperation in health care, education and science is included in the EAEUs cooperation agenda until 2025, Kazakhstan firmly opposes handing over the management of these areas to 11 the Eurasian Economic Commission, which, according to President Tbkayev, would change the Unions economic nature and go against its original purpose. If political mutual trust between Russia and Kazakhstan continues to decline, it will be difficult to further elevate the level of integration. In the worst-case scenario, the EAEU will continue to exist, but in name only and will no longer serve as a platform to unite the post-Soviet space but only play a symbolic role under certain conditions, like the CIS.
For now, the main challenge for the EAEU is the regime stability in the member states, and the situation in Belarus would have the greatest impact on the Union. Since 2020, “the West has been trying to replicate the Ukrainian-style Euromaidan Revolution in Belarus,” but “they broke their horns and teeth — it did not work.＞，35 In 2022, the escalation of the Ukraine crisis caught the attention of the Belarusian public, and domestic problems were put on hold. Given that the attempts by external forces to overthrow the Belarusian regime have not abated, and the constitutional amendment in the country has not fundamentally solved the problems of development and national governance, there are still hidden concerns about regime stability. Belarus is geographically linked to Europe, and any Western intervention to push it westward would be fatal for the EAEU.
The EAEU cannot be a tool for Russia to diversify economic risks and ease its mounting pressure from sanctions. Although member states of the Union are important geopolitical partners of Russia, they are not the main economic and trade partners of Russia, let alone its major export markets. In terms of logistics, these landlocked countries can hardly help Russian products bypass Western containment and enter the international market. Instead, a viable way out for Russias economic isolation would be to cooperate with non-Western countries through the EAEU and the EAEU becoming more diplomatically active in the future.