Russia Leads Effort to Negotiate New Relationship with European Union: The Arrival of the Eurasian Economic Union


2015-01-03 As a new member of the Euro, Lithuania becomes the third Baltic state to join the pact.

Clearly, this is about politics as well as economics, and joining is seen as a buffer to the Russians. 

As noted in a Reuters piece published on December 31, 2014:

Lithuania joined the euro zone at the stroke of midnight on Thursday, hoping to anchor itself in Europe as its former master Russia flexes its military muscle in the region.

The first Soviet republic to declare independence, in 1990, Lithuania is the last of the three Baltic states to join the currency union and will be the last country to do so for the foreseeable future, with remaining European Union members at least two years, and probably much more, away.

“Myself, and I think, many of you feel sad that (Lithuania’s currency) the litas, which has served us well for more than two decades, becomes history, but we have to move forward,” Lithuania’s Finance Minister Rimantas Sadzius told the euro launch ceremony.

The common currency remains a divisive issue, with polls showing half the population of 3 million still not convinced dumping the litas is a good idea.

Lithuania’s Prime Minister Algirdas Butkevicius, who became the first person in the country to withdraw a 10 euro banknote from a cash machine, said the euro would “become a guarantor of both economic and political security.”

At the same time, Russia has launched a new economic organization bringing together several states of the former Soviet Union. 

Eurasian Union leaders in Astana (Photo:
Eurasian Union leaders in Astana (Photo: 

The newly formed Eurasian Economic Union (EEA) has been launched as an alternative to the European Union.

As The Moscow Times wrote on January 2, 2015 about the new EEA:

Armenia officially joined the Eurasian Economic Union (EEU) on Friday, banding together with Russia, Kazakhstan and Belarus in a Moscow-led project meant to counterbalance the European Union. 

As part of a deal signed last October, Armenia will have limited representation in the organization until the end of 2015. Three Armenian members will share one vote in the union’s governing body, the Eurasian Economic Commission, TASS news agency reported Friday.

Kyrgyzstan is also set to join the union on May 1.

Armenia’s entry into the EEU means it will have to gradually transition to a unified tariff system with the union’s other members, with 2022 set as the deadline for the full transition, TASS reported.

The country will have to negotiate with the World Trade Organization, of which it is a member, on its changing obligations in light of its new membership with the economic bloc of former Soviet republics.

The Armenian government had been set to clinch a free-trade deal with the EU until, following talks with Russian President Vladimir Putin, Armenian President Serzh Sargsyan in 2013 abruptly decided to switch to the Russian-led Customs Union, a precursor to the EEU.

Trade economist Alexander Knobel told The Moscow Times previously that Armenia turned away from European integration after Russia offered it the budget price of $170 to $180 per 1,000 cubic meters on its all-important natural gas imports.

The Armenian economy is heavily dependent on Russia, the country’s largest foreign investor and trade partner as well as the source of vital remittances sent home to Armenia by migrant workers.

Armenia has also cultivated a close political relationship with Russia in order to secure itself against neighbors Turkey and Azerbaijan. Armenia and Azerbaijan have been entangled in a territorial dispute over the Nagorno-Karabakh region and surrounding districts for decades, with both Turkey and Azerbaijan erecting economic blockades against Armenia in response to its occupation of the area.

Credit: Heritage Foundation
Credit: Heritage Foundation 

And with the new EEA a reality, Russia has started its diplomatic efforts with the European Union, to shape a new phase in Russian-European relationships.

With the Euro expanding Eastward, and the invasion of Ukraine placing pressures on Europe to sort out what to do with Ukraine and Russia, Putin has launched yet another offensive, this time in the political-economic domain.

As Andrew Rettman of the EU Observer wrote on January 2, 2015:

Russia’s EU ambassador has urged Brussels to launch talks with the newly born Eurasian Economic Union (EAEU) despite the Ukraine crisis.

Vladimir Chizhov told EUobserver: “Our idea is to start official contacts between the EU and the EAEU as soon as possible. [German] chancellor Angela Merkel talked about this not long ago. The EU sanctions [on Russia] are not a hinder”.

“I think that common sense advises us to explore the possibility of establishing a common economic space in the Eurasian region, including the focus countries of the Eastern Partnership [an EU policy on closer ties with Armenia, Azerbaijan, Belarus, Georgia, Moldova, and Ukraine]”.

“We might think of a free trade zone encompassing all of the interested parties in Eurasia”.

He described the new Russia-led bloc as a better partner for the EU than the US, with a dig at health standards in the US food industry.

MAY 29: Belarussian President Alexander Lukashenko, Kazakh President Nursultan Nazarbayev and Russian President Vladimir Putin (L-R) attend a signing ceremony during the Summit of Supreme Eurasian Economic Council, on May 29, 2014 in Astana, Kazakhstan. Russia, Belarus, and Kazakhstan have agreed the creation of the Eurasian Economic Union, a common market that will be made up of more than 170 million people. (Photo by Sasha Mordovets/Getty Images)
MAY 29: Belarussian President Alexander Lukashenko, Kazakh President Nursultan Nazarbayev and Russian President Vladimir Putin (L-R) attend a signing ceremony during the Summit of Supreme Eurasian Economic Council, on May 29, 2014 in Astana, Kazakhstan. Russia, Belarus, and Kazakhstan have agreed the creation of the Eurasian Economic Union, a common market that will be made up of more than 170 million people. (Photo by Sasha Mordovets/Getty Images) 

And in the best quote of the day:

“Do you believe it is wise to spend so much political energy on a free trade zone with the USA while you have more natural partners at your side, closer to home?

We don’t even chlorinate our chickens,” the ambassador said.

Rettman provided additional context to the launch of the Eurasian Economic Union (EEA):

Modelled on the EU, it has a Moscow-based executive body, the Eurasian Economic Commission, and a political body, the Supreme Eurasian Economic Council, where member states’ leaders take decisions by unanimity.

It has free movement of workers and a single market for construction, retail, and tourism.

Over the next 10 years, it aims to create a court in Minsk, a financial regulator in Astana and, possibly, to open Eurasian Economic Commission offices in Astana, Bishkek, Minsk, and Yerevan.

It also aims to launch free movement of capital, goods, and services, and to extend its single market to 40 other sectors, with pharmaceuticals next in line in 2016.

Ukraine was originally to join, but a popular revolt last year overthrew its Russia-friendly president and its new government signed a free trade treaty with the EU instead.

The developments prompted Russia to invade Ukraine and the EU and US to impose sanctions on Russia.

They also prompted the EU and US to accelerate talks on their own free trade treaty to strengthen Western ties.

Russia’s Chizhov said neither the sanctions nor the slump in oil prices and the resulting crash in the value of the rouble will harm the Eurasian project.

“Russia has been wise enough to build substantial reserves to withstand the external pressure”, he noted.

“The situation with the ruble will be remedied. And we have to see the future of financial and energy markets in the long term. They are of no doubt in favour of Russia and Kazakhstan particularly”.

The political and diplomatic advantages for Moscow of the EEA seem obvious, but what about the economic prospects?

If the goal is to reinforce economic ties among states close to Moscow, the EEA may make economic sense, notably if bartner rather than global currency is the goal.  But otherwise, there is real reason to be skeptical.

Business Insider is skeptical of the success of the EEA.

As Mike Bird wrote on December 31, 2014:

Russia’s economic woes barely need repeating. With oil prices falling, the ruble dropped to record lows dozens of times in recent months, falling to 80 against the dollar in one spectacularly turbulent day. It’s down by more than 40% this year.

Things were actually looking pretty ugly even before a large part of the ruble’s collapse. Western sanctions have hit Moscow and the country’s own finance minister expects a 4% drop in GDP in 2015.

Can the other nations in the EEA help out? The short answer is no. 

Kazakhstan isn’t immune to Russia’s crisis. Its currency is now 50% more expensive in rubles than in the first half of the year. That makes it more difficult for Kazakh firms to export to Russia, though the Moscow Times suggests it may get a bit of a boost from investors who are concerned about Russian sanctions, but still want a presence in the region.

The Kazakh economy is doing well in a lot of ways. That might be why long-term autocrat Nursultan Nazarbayev doesn’t want to tie himself too closely to Moscow. He actually invented the contemporary idea of a Eurasian union, and even he doesn’t seem convinced any more, insisting that the country could leave if it wanted, according to the FT.

What’s more, according to Foreign Policy magazine, studies actually suggest that membership of the Eurasian Customs Union has so far weakened Kazakhstan’s economy. It’s too late to back out now, but it’s no surprise that Astana isn’t rushing into anything more serious.

The economy of Belarus isn’t looking so hot. On 21 December Alexander Lukashenko, who like Nazarbayev has ruled the country for decades, sacked the prime minister and central bank chief. Belarus is extremely dependent on Moscow and exposed perhaps more than any other nation to the collapse of the ruble. As in Russia, there have been queues to exchange currency, and massive interest rate hikes.

Aside from the immediate crisis, it doesn’t look like Lukashenko will be presiding over a dynamic economic any time soon. An apparent obsession with farming led to a plan for the country to return to a sort of serfdom earlier this year.

So of the five countries joining the union in 2015, by far the largest is likely to have a shrinking economy.