17.11.22 Review

Offshorization of Integration: war and sanctions are leading to a fundamental change in the Eurasian Economic Union's nature

Western sanctions against Russia have raised the question of the expediency and forms of the Eurasian Economic Union's further existence. The Union was providing significant benefits to the small economies of the post-Soviet republics, primarily by offering free access to the Russian market. The imposition of large-scale sanctions against Russia has opened significant new opportunities for these countries, but it has dramatically changed the nature of economic relations within the Union and created considerable parallel risks.
The Eurasian Economic Union (EEU) has become another structure whose fate has been called into question by the Russian invasion of Ukraine (we wrote earlier about the Collective Security Treaty Organization crisis). Before the invasion, the EEU, which is a zone of free movement of goods, services, capital, and labor ("four freedoms"), looked like an example of the partial success of integration initiatives of Russia and President Putin personally. On the one hand, it was an example of successful integration: mutual trade within the union reached $76 billion in 2021. On the other hand, apart from Russia, the EEU included only four post-Soviet countries — Belarus, Armenia, Kyrgyzstan, and Kazakhstan. Uzbekistan and Moldova retain their observer status, while the rest of the post-Soviet countries have declined to participate. In Ukraine's case, unsuccessful attempts to lure it into the EEU first led to Russia's interference in the 2004 Ukrainian presidential election and then to the Ukrainian crisis of 2012-2013 that ended with the Euromaidan and the following first Russian invasion of Ukraine.

Attempts to increase the level of integration of the EEU and to develop a coordinated economic policy were also unsuccessful. Because of its huge imbalance — Russia accounted for 86% of the EEU's total GDP — it had no chance of becoming anything like the EU, and any further integration would inevitably lead to limiting the sovereignty of its members in favor of Russia.

The introduction of large-scale sanctions against Russia by a coalition of developed countries puts the EEU's long-term prospects into question, even though it creates some short-term competitive advantages for its members, say the authors of a report published by the Swiss Center for Security Studies (CSS).

For Moscow and Vladimir Putin personally, it was an integration project aimed at increasing Russia's economic and political role in the post-Soviet space, but Kazakhstan and Armenia considered it solely from an economic perspective, CSS experts write. Kazakhstan and Armenia benefited the most from this integration not only by facilitating access to their goods and services to the Russian market but also by increasing their investment attractiveness. Yerevan has explicitly urged Western companies to invest in the Armenian economy to facilitate work with Russia. For Kazakhstan, which has no access to the oceans, the EEU was extremely important because it allowed using Russian territory for transporting export goods to seaports at a minimal cost.

With the imposition of tougher sanctions against Russia, these advantages have become a source of significant associated risks, and duty-free access to the Russian market has ceased to be an argument for Western investors. Kazakhstan has become uncertain about its ability to use Russian railroads and oil pipelines: the main channel for Kazakh oil exports, the Caspian Trunk Pipeline, has become a factor in Kazakhstan's political dependence on Russia, and sanctions have made its maintenance difficult (besides, there are risks of sanctions against the pipeline itself if Russia uses it to circumvent the sanctions restrictions).

According to the experts, the sanctions have undermined the possibility of the EEU's further integration into the global economy. A couple of years ago, there were negotiations between the EEU and South Korea, as well as several other countries, on the expanded free trade zone establishment. Under the new conditions, such negotiations are no longer possible with the majority of countries. Moreover, the risk of secondary sanctions from the West threatens free trade within the EEU itself. For example, Astana has to hold regular consultations with the EU and the United States to avoid secondary sanctions, and in the future, it may have to impose trade restrictions on its relations with Russia. At the same time, there are risks of Russia using economic leverage to put pressure on its partners and politicize the union. For these reasons, Kazakhstan tends to pursue a multi-vector strategy in its foreign policy. However, the main alternative to Russia for Astana would be China: its transport infrastructure can replace the Russian one for Kazakh exports (although this kind of cooperation with Beijing carries its own risks for Kazakhstan).

However, in the meantime, this situation opens up new opportunities for several EEU countries (Kazakhstan, Kyrgyzstan, and Armenia). They are becoming important transport and logistics corridors for Russian trade, which is reorienting to Asian markets, as well as for the supply of Western goods to Russia. Other opportunities for these countries are provided by the influx of labor and human capital due to the mass emigration of the educated class from Russia and the relocation of businesses focused on cooperation with Western economies. According to Armenian Prime Minister Nikol Pashinyan, because of the current events, the republic is experiencing a real economic boom, and the Central Bank of Armenia has announced that this year's economic growth will amount to 13% instead of 1.6% as it was expected before the war. The growth of Kazakhstan's economy is estimated at 3%, but the country is witnessing a boom in foreign trade: exports grew by 1.5 times in January-August, while imports rose by 13%. However, the role of Kazakhstan as a transport corridor serving Russia looks much more vulnerable than the role of Silicon Valley for the relocated Russian IT, which Armenia is taking on.

One way or another, the nature of economic interaction between EEU member countries and Russia is dramatically changing: from partners in the economic union, they are increasingly turning into a system of offshore facilities for the sanctioned Russian economy.