Russia Rethinks The Eurasian Economic Union

Vietnam, India and Indonesia Eyed As Asian Regional Hubs For EAEU Multilateral Trade As EAEU Gains New Significance In Moscow   

Russia has begun its 2023 Chairmanship of the Eurasian Economic Union (EAEU) as the trade bloc faces increasing potential for expansion and development, in addition to challenges posed by Western sanctions upon its largest member – Russia itself.

Overall, the EAEU comprises Armenia, Belarus, Kazakhstan, Kyrgyzstan and Russia and fills the northern geographic landmass between East Europe (Estonia, Lithuania, and Poland) and Western China. The EAEU has Free Trade Agreements itself with Serbia, Iran and Vietnam, while at least twenty other countries, including major nations such as India, Indonesia, Thailand, Egypt and the UAE are currently negotiating the same. China has a loose FTA with the EAEU, classified as ‘non-preferential’ where tariffs are lowered on specific goods and products on an ‘as need’ basis rather than set in stone as is the case for most FTA. This allows the EAEU nations some protection against China’s massive export market while allowing ‘cherry-picking’ by both sides.

Over 80% of EAEU internal trade involves Russia, which means that its 2023 chairmanship in the EAEU’s integrated association is important in articulating its priorities, and adjusting plans for the implementation of initiatives to suit its own needs. However, Russia, has been engaged with economic warfare with the West just over a year now, and is consequently setting larger and more ambitious goals from within the EAEU as a result. These range from creating a Eurasian rating agency (along the lines of Fitch or Standard & Poors) to achieving genuine independence and self-sufficiency in the technological sphere. These targets go well beyond 2023 and, by definition, cannot be achieved in a calendar year. For these reasons, the priorities of Russia’s Presidency of the EAEU, outlined by President Putin back in December 2022, are best viewed in a broader strategic context.

Previously, despite the abundance of official statements and documents, the EAEU played a peripheral role in Russian foreign policy, and the practical value of the Union for Moscow raised larger questions as to its actual use, necessity, and viability. This has changed. Now, for Russia, the EAEU is turning into an important tool to increase resistance to the West’s sanctions regime, reduce technological and financial dependence on the West and develop foreign trade relations with friendly countries.

The significant dependence of Russia on machine-building imports, components and intermediate consumption goods from Western countries requires the formation of long-term import substitution programs and ensuring technological sovereignty for those products where it is rational according to the criteria of long-term intersectoral efficiency and economic security. Among the mandatory requirements for such programs are clearly defined time frames and performance criteria, as well as reaching the world level in terms of the competitiveness of the created products in the medium and long term and its export orientation, which will follow after saturation of the Russian domestic market as Russian, EAEU and other players, notably China, moving into the market spaces vacated by Western businesses exiting Russia.

Avoiding Over-Legislation

In the context of restricting the import of industrial products and technologies from unfriendly countries, Russia needs to establish alternative import supplies from partner states, as well as organize channels for parallel imports, more systematically using the transit capabilities of partners in the EAEU, especially given the fact that national import substitution programs have not yet been fully launched. During this Russian Presidential year in the EAEU, and in subsequent years, it is fundamentally important for Russia to avoid legalizing the mechanism of parallel imports at the EAEU level. Otherwise, this will lead to even greater politicization of all processes within the association and will meet the natural resistance of other member countries.

Promoting Parallel Imports

To promote parallel imports, it seems possible to work out measures in two main areas:

1) Building diversified logistics channels to ensure uninterrupted supplies. This implies the creation of foreign trading houses in the EAEU countries, which can serve as a safety net, as well as the extension of the economic chain of new intermediaries from third countries that have refused to impose sanctions.

2) The creation of direct and tangible benefits for EAEU partners that can outweigh the potential risks for them.

It is important to understand that the more actively other EAEU countries help Russia bypass Western restrictions, the greater their vulnerability to US and EU sanctions will be. In the future, the range of these risks will only increase, requiring Russia to take a more scrupulous approach to maintaining a balance of interests in the dialogue with partners in the association. Thus, Russia, in the context of the current global energy and food-inflationary crisis, as well as an increase in world interest rates, can instead offer EAEU member countries raw materials, food, and debt refinancing on better and more competitive terms.

Managing Intra-EAEU Forex Flows

The introduction of tough financial sanctions upon Russia, including the disconnection of numerous Russian banks from the SWIFT system, lead to significant losses for Russia’s global financial jurisdiction. This was further underlined because of the fears of companies in the real estate, banking and financial organizations from EAEU members and other friendly countries to fall themselves under secondary sanctions, coupled with the deliberately technical complexity of financial transactions in trading with Russia, including the ability to conclude commercial transactions in US Dollars and Euro with sanctioned banks, Russian businesses and individuals.

These risks are critical in solving Russia’s problems in restructuring import and export flows, since they can actually block cooperation within the EAEU. In this regard, there is a growing demand for the formation of a financial anti-sanction infrastructure with the involvement of regional development institutions and national regulators of the member states of the EAEU for cooperation with Russia with less risk.

For example, the formation of a Eurasian payment system as a SWIFT alternative, a more active connection of the Central Banks of friendly countries to the Russian Central Banks financial message transmission system (SPFS); and the development of a network of mutual correspondent accounts between Russian and foreign banks in their respective currencies.

This issue has also affected international policy bank institutions of which Russia is a primary member. In early March 2022, the China-led Asian Infrastructure Investment Bank (AIIB) and the BRICS New Development Bank (NDB) announced the suspension of transactions to Russia and Belarus. The decision of these financial institutions in particular to freeze lending to both countries indicates growing pressure on global financial institutions, which may adversely affect Russia’s intended participation of Russia in the implementation of various infrastructure projects.

Increasing the Eurasian Development Bank Remit  

Under these conditions, it is critically important to provide alternative mechanisms for investing in infrastructure projects and replacing the falling investments of international institutions. This is possible primarily through strengthening cooperation within the framework of the Eurasian Development Bank (EDB) by strengthening the pool of national foreign exchange reserves both within the institution and in partnership with third countries such as China, India, and the ASEAN states.

The Bank’s own research activities have made it a reputable think tank.  EDB current shareholders include (in descending equity order) Russia, Kazakhstan, Belarus, Tajikistan, Kyrgyzstan, and Armenia, while it has initiated very recent studies into infrastructure projects such the International North–South Transport Corridor: Promoting Eurasia’s Intra- and Transcontinental Connectivity; EDB Monitoring of Mutual Investments for the twelve CIS countries and Georgia; Investment in the Water and Energy Complex of Central Asia; and Uzbekistan and the EAEU: Prospects and Potential Impact of Economic Integration amongst others.

The Bank’s charter capital totals US$7 billion, including US$1.5 billion of paid-in capital and US$5.5 billion of callable capital. The current investment portfolio as of 1 March 2022 totalled US$3.902 billion and the cumulative investment portfolio (including completed projects) US $10.448 billion. A total of 84 projects are being financed. It would not be a surprise to see a recapitalisation of the EDB and an expansion of its shareholding especially from China and India as both have vested regional interests and would benefit from inclusion.

EAEU Trade & Economic Relations

The priorities of Russia’s presidency in the EAEU in 2023 and, in a broader sense, the Russian vision of the Union’s development for the next 5-10 years require updating the EAEU’s trade and economic relations strategy with friendly foreign partners. It is no coincidence that in his January address to the heads of the EAEU member states, President Putin specifically outlined the importance of expanding the geography of the EAEU’s international contacts and concluding new preferential agreements. The logical continuation and fixation of the ideas of the presiding party was the approval in February 2023 of the EEC (the EAEU’s governing body) action plan for the implementation of Russia’s priorities. Among them is building a systematic dialogue with major partners, for example, the Shanghai Cooperation Organisation, the Commonwealth of Independent States, ASEAN, and the Latin America trade bloc MERCOSUR, while updating guidelines for the global and regional positioning of the EAEU.

Taking into account the potential success in the development of EAEU integration, strengthening the external position and status of the Union requires recognition and creation of a clear success story with major regional players the countries of Southeast Asia, Latin America, the African continent, the Middle East.

Since the launch of the EAEU, Russia’s participation in the bloc has been strengthened by the development of an external loop of interaction based on Russia’s existing and long-standing diplomatic relations, an example of which is the signing of an EAEU Free Trade Agreement with Vietnam in 2015, and a series of other transactions in subsequent years. However, in the first five-year plan, the goal-setting mechanism of such agreements had structural issues largely due to the youth and lack of experience of the EAEU itself. The number of proposed agreements often overshadowed the quality. On the part of both Russia and other EAEU members there was often an artificial pursuit of beautiful figures for trade turnover within the framework of proposed FTA.

The EAEU has learned that FTA agreement in themselves are not necessarily a guarantee of a significant trade increase, as evidenced by the agreement between the EAEU and Vietnam. Although it led to the expected jump in mutual trade with Russia, it did not help to achieve the stated plans of US$10 billion EAEU-Vietnam trade by 2020. This was largely due to a misunderstanding of weak logistics and transport links between the EAEU and Vietnam, although this has subsequently been adjusted by both expanding the terms of the agreement and improving logistics routes.

In general, so far, the positive economic effects for Russia from the concluded agreements are minimal or absent to other EAEU members due to the framework nature of the transactions, as is the case with the trade and economic agreement between the EAEU and China, although this is being addressed – the Belarussian Presidents recent visit to Beijing to discuss trade and logistics with China’s President Xi Jinping being another example of the EAEU being given greater priority.

It is also important to understand that the corridor of opportunities for concluding trade agreements between the EAEU and third countries has narrowed. This primarily applies to countries that have joined the anti-Russian sanctions. For example, Singapore, which in 2019 signed a preferential agreement on goods with the EAEU with a view to further concluding an FTA on services and investments with each member country of the Union separately suspended the agreement following sanctions upon Russia. A similar scenario is expected in relations with South Korea, which at various stages showed interest in concluding an FTA with the EAEU and with which Russia began negotiations on services and investments in 2019.

Under the current conditions, the mechanism of setting of trade goals in agreements for Russia, in particular an FTA within the framework of the EAEU, must change and can be aimed at performing three main functions as follows:

1) The creation of privileged conditions for the import of critical products into Russia, for example, electronics, semiconductors, and equipment. Already, some EAEU partners can replace imports of goods that have fallen in volumes due to sanctions in certain categories. For example, Vietnam is able to replace Taiwan as one of the largest suppliers of electronic integrated circuits to Russia. This may become an argument for Moscow to lobby for the revision and updating of the existing agreement with Hanoi within the framework of the EAEU.

2) The expansion of export channels to redirect Russian products that are no longer in demand in Europe. The main product categories include oil, gas, coal, steel, as well as fertilizers and agricultural products. The latter is especially relevant for most regions of the world in terms of ensuring food security in the face of global shocks.

3) The formation of new regional entry points and/or hubs as part of any FTA network, each of which is capable of performing a specific function depending on regional specifics. In the Middle East, the UAE can become a financial and technological hub in the new conditions, India can play the role of an economic hub in South Asia, and Mongolia can play the role of a transport, logistics and infrastructure hub in Northeast Asia.

Previously, Singapore served as a similar entry point, through which Russia sought to integrate more tightly into key economic and technological processes in Southeast Asia and more widely in the Asia-Pacific region. After the imposition of sanctions, this role is likely to be assigned to Indonesia, with which the EAEU is negotiating an FTA, with ratification expected by 2025. There is some pressure on Moscow to seal this, as a solid result of its 2023 EAEU Chairmanship, for political, economic and reputational reasons, the Kremlin will want to speed up negotiations with Jakarta as much as possible in order to reach at least an advanced stage of negotiations between Indonesia and EAEU partners by the end of this year.

In the context of attempts by the West to turn Russia off from the world economy and trade, ensuring technological sovereignty, developing alternative financial mechanisms and external relations within the EAEU are becoming a more significant tool for Moscow to compensate for sanctions losses and to adapt to these external shocks. Guided by this logic, one can assume that in the foreseeable future Russia will be more enthusiastic and pragmatic in building ties with its partners in the EAEU.

There should be no illusions: for Russia, the EAEU is one of the tools, the skilful use of which will only partially help to solve a number of the most sensitive problems. Changes to and accelerations to its development towards Asia can be expected.

Source: Alexander Korolev for the Russian International Affairs Council with additional commentary by Chris Devonshire-Ellis

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