Scenarios for Eurasian Integration

None of the countries in the world can survive without being economically linked with the other. The economy of any individual country exists as a part of the global economy.

The globalization is being facilitated by highspeed transportation, telecommunication, other communication means and media, higher level of education. The globalization process is primarily triggered by the human desire to improve constantly their living standards. The development of the global economy is fast and spontaneous despite the state borders and other barriers. In this respect, it is very much alike the process of natural evolution.

It is important to bear in mind, that not everybody is supporting a natural way of economic evolution; the likelihood of military conflicts is

currently very high as there is a possibility of global economic development being managed by a single world power or a global government. This is in the direct contradiction with the principle of evolution that stipulated for the balance of powers. Thus, multipolarity, being the vital condition for a fairer world order, is the main feature of the contemporary situation.

The factors above impact the integration processes that are being unfolded in the contemporary world. States have the two options; they may adjust to the inevitable globalization trying to use the process for their good or chose the policy of isolation, which is a counterproductive course of action.

Given the accelerated globalization, a vast number of states have chosen to enter various regional alliances and agreements. The bulk of these engagements are economic by nature.

Many of them, namely the WTO, ASEAN, APEC, EU, and BRIC are aimed at increase of export, removal of barriers and cooperation amidst intensified global competition. Therefore, the countries of the world tend to unite within regional economic blocks in order to pursue their common interests.

There are no any “new emerging markets” left on the planet. This is a genuine challenge for the global hi-tech business. The competition is likely to intensify even further on the markets of America, Europe, and Asia.

During the recent years, the CIS countries have become the major markets for the food manufacturers from the EU. Yet the post-Soviet markets are no longer adequate to the economic growth of Germany, Italy and Japan. New technologies are either transferred or invented in the Eurasian space. The international sanctions prevent the access to Russia (Kovalev, 2014).

The natural resources of the planet Earth are being exhausted. The competition for these resources motivates the states to unite in order to ensure the access to them. Regionalization is becoming a means to boost the competitive capacity of the national economies concerned via inclusion of the national economies and companies into the relations of global competition as being united they would become more capable to do so.

The trend of integration is manifested in the establishment of the engagements of political and economic character in the format of regional integrated groups or blocks usually uniting the neighboring states for the purpose of pursuing the common interests in economic, political and even military fields. The other option is regional and inter-regional trade agreements concluded by states and economic unions in order to establish a preferential regime for the participants in terms of the access to the markets of the fellow members.

Given the multipolarity of the world order and the competition for the markets of both consumer goods and raw materials, Kazakhstan faces a number of challenges. Kazakhstan is not to claim a status of a great power, the nation‘s ambition is to be among those states that have found their niche in the global distribution of the hi-tech production. This is how Kazakhstan is going to use globalization for its own good. This is the only way the country may survive today amidst intensified global competition.

From the one hand, Kazakhstan’s chances to occupy its place in the club of the hi-tech economies are being diminished as the technologies are constantly changing, those outdated are replaced with the most cutting-edge ones. The Nokia’s retreat from the markets because of the advancement of the Apple and Samsung or Kodak’s virtual disappearance from the international market are very illustrative examples.

From the other hand, the speed and extend the new technologies are able to win the markets when they are of a genuine demand by the consumer increase the chances of any country. Kazakhstan shall introduce new technologies everywhere from production to retailing, from basic services to education.

If Kazakhstan is serious about its ambition to be among the most technologically advanced nations, it will have “to cut the wall through to have the window to Europe”[11]. Kazakhstan is a landlocked country, rather remote form all transportation routs and its transit potential is still underdeveloped. Therefore, the Eurasian Economic Union may become such a “window to Europe” for Kazakhstan. The pragmatic policies within the Eurasian Union are essential for Kazakhstan. The nation shall not be diverted from its track following the examples of Singapore and Malaysia in terms of economic breakthrough, from its ambition to become a next [Euro]Asian tiger.

The strategic goal of Kazakhstan is to improve the living standards making them closer to those in the most developed countries. There have been numerious programs and other strategic documents adopted in Kazakhstan in order to achieve this goal. Consequently, within the two decades after gaining its independence, Kazakhstan has been able to position itself as a nation that is stable, economically dynamic and constantly reforming in all spheres of life.

Kazakhstan managed to go through economic crises relatively intact, to stabilize the rate of its currency and increase its gold reserves, even to diversify its economy to a certain extend and build some infrastructure. Importantly, while conducting the reforms and implementing its development projects, the nation is self-sufficient in the most of the cases. Its government has been rather reluctant in terms of borrowing financial and other resources from the foreign states or intergovernmental organizations. This enhances Kazakhstan’s capacities to pursue a more independent policy in accordance with the national interests.

It is in the national interests of Kazakhstan to expand the markets for Kazakhstan’s exports, to remove the trade barriers and other obstacles for better business, to boost exchange of technologies. Thus, President Nazarbayev of Kazakhstan was the first to articulate the idea of a custom union

back in 1994. Unfortunately, it was responded rather unenthusiastically due to the lack of the economic interest of the other states, first of all

Russia; very few believed then in economic feasibility of the project, the main purpose of which was to mitigate the negative consequences of the dissolution of the USSR.

The initial idea, however, gained its continuation in 2000 in Astana when the EurAsEC was officially started. Since the end of 1991 there had been several projects within the former Soviet space: the CIS, CU, EurAsEC, CES, CSTO, ECE, and GUAM. None of the former alliance addressed the issues of integration and, therefore, those of the national sovereignty.

For the last three years, the integration processes of the Eurasian continent have been notably accelerating. The Eurasian Economic Union extends its influence on almost all aspects of life

in Kazakhstan. Understandably, integration is a rather complex and controversial process. The project may be regarded as the first attempt of

the states concerned to voluntarily share their sovereignty and to create an integration structure similar to that of the European Union.

Stages of Economic Integration

The European Union is the model of a stricture with the maximum degree of integration. Noskova (1996) identifies the four stages the EU has under gone: the free trade area, the customs union, the common market, and the economic union. Each degree of integration corresponded to a certain set of conditions that were codified in a number of intergovernmental agreements. Here the similar analytical framework is applied to discuss the integration processes in the Eurasian continent.

Stage one is the free trade area stipulates for the agreement between the states concerned about abolition or diminishing of the customs and other quantitative restrictions of international trade in goods and services.

Stage two is the customs union established on the basis of agreements of the member states on complete abolition of the customs duties on goods and services and establishment of a unified external customs tariff on its perimeter. The union obliges the member states to eliminate the customs restrictions and requires pursuing a common trade policy.

Stage three is the single market as a more advanced form of economic integration. Apart from above mentioned aspects of integration, it provides for the unification of technical standards, common environmental requirements, as well as common legal frameworks for businesses and other economic activities.

Stage four is that of establishment of the economic union, which is the highest form of integration. The union presupposes the existence of single economic, legal, military and information spaces. The structures of deeper integration usually mean establishment of supranational bodies of some kind. In the case of the European Union these are the European Parliament, the Council of Ministers, the European Commission, the European Court (Noskova, 1996).

We argue here that currently, Kazakhstan, Russia and Belarus* are on the second “customs union” stage of integration. Nevermind the official names of the structure, be it the Common

Economic Space or the Eurasian Economic Union, it has been functioning as a customs union so far. By 2015, the member states have been unable to establish a common market, which is the stage when harmonization of technical standards and common environmental requirements is being achieved. A single legal framework for intra-entrepreneurship is also on the agenda.

Moreover, the share of mutual trade between the three countries is quite low. For example, the volume of mutual trade in goods, services as well as mutual investment within the EU is 60%, whereas in the EEU in 2014 the share of mutual trade amounted to 11.7%. Therefore, one may conclude that the extent of the economic cooperation between the member states is insufficient.

From the EEU and Beyond: Scenarios of Integration

The fact that the countries differ considerably one from another in terms of their power and interests may explain the difference in the outcomes they have out of the economic relations they are involved in. For example, the openness of some states for import may cause difficulties for the local manufacturers due to the intensified com petition on the domestic market. This may even cause numerous bankruptcies of local businesses.

International economic integration is the most beneficial for the most developed, richest and politically sustainable states. There are a number of reasons for that. Firstly, their economies are those to produce the most competitive, hi-tech goods of the greatest international demand and, therefore, being the most profitable. Secondly, the export of capital tends to be the most profit able business internationally.

Those states that have not been involved into economic alliances before, decide to join out of their very particular interests. They do not expect very high profits, yet count on their economic engagements as on the vehicles that shall enble them to catch up with their more economically developed counterparts. These were the courses chosen by Japan, Australia, South Korea and more recently Singapor, Taiwan and Malaysia.

As for the members of the Eurasian Economic Union, the major trend is that each of them pursues its own economic interests and has its own expectations of their membership in the alliance. Given that, various scenarios of developments are possible. Given the complexity and complicatedness of the integration process on the post-Soviet space it is virtually impossible to make accurate predictions about the trends and directions of its future development.

One thing is clear: it is probably not the best idea for a nation to unite with any other unless it has the aspiration to leave the bottom in the world economic ranking i.e. such socio-economic indicators, as human development and standard of living.

The analysis of the foreign trade of the EEU, the structure of the exports and imports suggests that the raw materials remain the major component of the economies of its members. Thus, in 2014, mineral products amounted to 73.3% in the commodity structure of the export of the EEU members to the third countries. The machines, equipment and vehicles were 45.5% in the total imports. The figure for the chemical products was 16.4% and for the foods as well as agricultural raw materials was 13.5% respectively.

Let us consider the possible long-term scenarios of economic integration provided the features of the current state of the Eurasian Economic Union remain. The following scenarios are based on the assumption that none of the Union member states will have any conflict relation ship with each other, neither will they have the trade barriers.

In the long term perspective, at least three scenarios are the most likely to occur within the Eurasian integration.

The first scenario is about state non-interference. The governments of the member states in the Union are jointly taking all measures necessary to provide a comprehensive common legal space for the economic activities to create favorable conditions for business and maintain maximum transparency. The legislature is being constantly improved and its enforcement is aimed at maintenance of human security, preservation of private property, elimination of corruption. The results are being achieved though (among the other measures) the number of supranational legal institutions. The member states are committed to the principle of the rule of law. The reformation of the law-enforcement system is being conducted. This scenario presupposes the creation of a space for fair competition, minimum state interference, laissez-faire policies, removal of the borders and barriers for trade and business between the member states.

The second scenario is about specialization of the member states within the Union. This scenario presupposes the establishment of a supranational body entitled to assign the quotas on production of a certain nomenclature of goods and services for the each member state. This is a commonly agreed policy to encourage specialization of each member state so that they world not have to compete with each other within the Union.

Each member state is developing a particular industry and occupies a niche in the structure of the export within the Union and beyond. For example Belarus is to become a major producer of dairy products whereas Kazakhstan is focused on the meet, Kyrgyzstan’s major industry is textile while furniture is mostly produced in Russia. The Union conducts the policy of comprehensive state interference.

The most competitive businesses and industries are directly supported to realize to the maximum their export potential and ensure that their production meets the highest international standards of quality. The strict compliance withinternational quality standards and export orientation is the requirement imposed by a specially established institution.

The similar practice exists in Europe via a rather strict quota system for each EU member in terms of their industrial production and export. These quotas are allocated among individual companies that, in turn, determine the volume of production. For example, according to such quotas the leading producers of milk within the EU in 2013 were the following countries: Germany produced 31.3 million tones, 24.4 million tones were produced in France, the figure

for the United Kingdom was 13.9 million tons and for Poland it was 12.7 million whereas the Netherlands produced 12.4 million and Italy 11.3 million tons of milk respectively. Moreover, the bulk of milk was exported.

The third scenario is about establishment of a series of holding companies in each sector. The Europeans had such an experience during the European Coal and Steel Community. The international organization brought together coal and metallurgical industries of France, Germany, Italy, Belgium, Netherlands and Luxembourg. By 1975 the ECSC had controlled about 90% of the steel production, almost 100% of the coal and 50% of the iron ore production in Western Europe. The ECSC may be considered the first instance in international history when the states concerned delegated parts their sovereignty to a supranational institution.

The most perspective, under the conditions of the EEU, may be the establishment of a number of holdings in agriculture, mining, petroleum, and other industries. Provided the industry is highly potent in terms of export, the holdings in each sector within the Union may help to harmonize the interests of the producers.

Similar practice started back in 2012 by Kazakhstan and Russia, when the Memorandum on Cooperation was signed between the Kazakhstan Association of Mining and Metallurgical Enterprises (comprising 65 companies), and the Russian Association of Mining and Metallurgical Complex (uniting 10 holdings). First Vice Premier of Belarus Semashko promotes the Rosbelavto holding project of the Belarusian MAZ and Russian KamAZ (REGNUM, 2015b). The president of the Kazakhstan Association of Sugar Producers proposes the holding between the companies of Russia, Kazakhstan and Belarus.

This experience can be applied to the agroprocessing sector in general. The practice is widely known internationally[12]. Large holdings can become the major vehicles for modernization, transition to more innovative production technologies; they are more capable to launch specific projects in the energy, transportation, high technology, social development.

Each of the scenarios above has its drawbacks. The first scenario of state non-interference has a number of risks. Indeed, there is no economy in the world today that operated purely on the basis of free market. This kind of scenario is even more unlikely on the post-Soviet space. The state own the bulk of the economy of Belarus. The state ownership is less common in Russia. As for Kazakhstan, there is no public ownership in the proper sense there. The state interference is aimed at mitigating the drastic consequences of markets and providing some social justice. The first scenario, if implemented, risk to disturb the balance.

The second scenario of holdings in each industrial sector is rather promising but unlikely unless the initiative is grasped by the entrepreneurs themselves. To that end, the business, being economically motivated, shall become the major initiators of holding creation. Otherwise, the integration will remain formal.

For example, the first attempts to unite Europe by institutions such as the Organization for European Economic Cooperation, the Council of Europe, the European Defence Community were rather unconvincing, their decision were not binding and their scenarios of integration were repeatedly rejected by the national Parliaments.

$95.3 billion.

The economic motivation for integration, however, proved more successful. The common market was established by the governments due to the pressure maintained by the producers of coal, iron ore, scrap iron, steel, cast iron. The treaty abolished the customs duties on the coal and steel industry products and quantitative restrictions in trade in these products. It introduced the uniform freight rates for the coal and ore, scrap and iron as well as steel industry products. In 1951, the European Coal and Steel Community, was the first example of a well functioning

supranational structure with the executive body controlled by the Council of Ministers, the Assembly and the Court. By 1955, the coal production in the members states had raised to 250 million tons and the steel production had grown to 60 million tons per year.

The economic alliances, therefore, are primarily motivated by pragmatic considerations of the states concerned in accordance with their national interests. In our case, certain economic interest shall be expressed by the businesses of Belarus, Kazakhstan, Kyrgyzstan, and Russia. In the meantime, they compete with each other. Moreover, there is no enough information about the possible benefits of the Eurasian integration.

The idea of Rosbelavto auto holding of the Russian KAMAZ (JSC) and the Belarusian MAZ (state-owned) has been discussed for five years. The lack of any concrete decision damages the reputation of the authorities of Belarus and Russia. The main reason why the holding has not been established so far is the lack of obvious advantages for Minsk. Belarus fears that the Russian capital will gain control over Belarusian enterprises (REGNUM, 2015a).

However, the four more projects are being promoted to merge the Russian and the Belarusian industrial sectors: the first one concerns the

JSC Integral and JSC Russian Electronica as well as state-owned Rostekhnologii; the second is about the JSC Minsk Wheel Tractor Plant and the Rostekhnologii; the next one is about the JSC Peleng and the Roscosmos Federal Space Agency.

There is also a plan ot merge the JSC Grodno Azot with the JSC Mineral and Chemical Company EuroChem or with the Gazprom Investment.

In the meantime, despite the sanctions, KAMAZ, Mercedes-Benz and Mitsubishi are to unite their management assets in 2015 to establish a joint venture in Naberezhnye Chelny. The transaction to merge Mercedes-Benz Trucks Vostok (MBTV) and Fuso Kamaz Trucks Rus (FKTR) was approved by the European Commission (ExpertOnline, 2015).

To sum up, the holding scenario means that the smaller economies are absorbed by the larger ones. Whether this scenario is implemented depends on the decision taken by the businesses themselves.

The scenario of country’s specialization is rather difficult to implement. This variant of integration presupposes division of the market between the member states so that they would be able to avoid unfair competition. Whether the EEU members will be able to agree about the quotas as the EU members do is an open question.

These kinds of issues are not resolved without problems even there. The meet and vine wars are the examples of rather intensive competition among such EU members as France, Spain, Italy and Germany.

Smaller EU countries face a number of difficulties as well: the sugar and milk production quotas allocated to the Baltic States are so small that these economies will have to leave one- third of the land uncultivated. The Baltic States express their frustration about that fact that subsidies for their producers are considerably lower. The interests of smaller economies within the EU are far from being a priority.

The quotas issue concerns not only the Baltic farmers but their counterparts from elsewhere in the Union. Since the beginning of 2015, there have been a number of farmers’ protests throughout the EU: the major concern is that since April 1, 2015 the milk production quotas were abolished (DairyNews, 2015). The milk quotas removal has been the issue on the EU agenda for the last ten years. The EU farmers insist on keeping the quotas. It would seem paradoxical, because without the quotas they may not fear the penalties for their exceeding*, but in fact, the free market with fierce competition frightens them more. As demand grows in China, Korea and other countries, the EU policy is changing towards a more free-market orientation; the abolition of quotas is to increase export. Brussels has been considering the question of quotas removing for a while, but it could not foresee the sanctions against Russia and increase of domestic milk production in China.

The similar practice was implemented beyond Europe as well. The US Congress adopted the Jones-Costigan Act in the framework of the Roosevelt’s New Deal stipulating for the annual quotas for the sugar to be sold on the domestic market. It also fixed the prices so that they would be reasonable for the consumers and fair for the producers and importers. The Act allocated the quotas for the domestically made and imported sugar and imposed other measures.

The example below is worth special consideration. The European Emissions Trading Scheme (EU, 2003) under the Kyoto Protocol assigned the mandatory quotas for greenhouse gas emissions to more than two dozen larger enterprises registered in the EU including heat and energy plants, oil refineries, iron and steel production as well as pulp, paper and mills. Together, they account for 45% of CO2 emissions. Smaller producers (those that do not meet the 20 MW thresholds) are released from the quota regime. The EU trades the emission quotas that defer from country to country (EU, 2003).

The EEU does not address such issues although there is apparent necessity to do so. The sugar and milk wars between Russia and Ukraine for markets of the CIS countries only prove that. The economy of Kazakhstan should not slip down under stronger competition. The quotas regime would be very useful in this context (Arbuzova, 2011). The government shall support Kazakhstan milk producers, it might insist on the quotas for them to enter the Russian market. So far, it is apparent that Belarus benefits most

from its EEU membership. For example, after the introduction the embargo on Russia, the export from Belarus to Russia increased. The dairy manufacturers have been working in their full capacities recently, now Belarus, experiencing considerable milk shortages, has become a major milk importer of the EU, which it has never been before.

Meanwhile, the companies of Kazakhstan do not express any concerns. Kazakhstan entrepreneurs generally see no threat from the EEU and regard positively the integration process. At the same time, being involved into the global economic relations, the countries defend their own national interests and intensify the competition. This international competition is now conducted simultaneously at two levels: between the member states within economic unions and between those economic unions or other integrated structures. These are the factors Kazakhstan must be constantly aware of.

An economically developed country has not choice but to produce the goods and services of global demand. Moreover, it must be economically self-sufficient in such vital strategic sectors

of water, heat, gas, electricity. This is the matter of national security. Apart from that, the government must create the favorable conditions and support large successful companies in promoting their exports. Every state is aware of that, it tries to support the domestic businesses, to develop national economy, to protect and provide for its nationals and, to ensure the very existence of the state in its integrity.

There is another challenge Kazakhstan is facing within the Eurasian Economic Union. This is the competition for quality human capital. Given the free movement of labor within the EEU, the most highly qualified professionals may decide to leave

for Belarus or Russia. After joining the WTO the problem of hand/brain drain may even aggravate.

Kazakhstan has invested a lot in educating its labor force through professional training and scholarship abroad. There shall be the mechanism found to retain our professionals at home so that they would contribute into the development of their country.

* In 2014, Irish dairy producers have paid 75 million Euros for exceeding the quotas, which is considerable given that Ireland exports 85% of its dairy products.

Conclusion

The member states in the Eurasian Economic Union are facing a number of vital issues such as diversification and modernization of their economies and advancement in the industries that may become the most profitable. Such spheres as R&D and innovation are crucially important. The EEU member states shall take huge efforts to catch up with the fifth and sixth technological revolutions. All these will boost the competitiveness of the countries of the EEU and ensure their sustainable future. Any of the scenarios above may be implemented. Kazakhstan shall find its place within each of them so that it would serve its national economic interests the best.

 

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Year: 2015
City: Almaty