The union’s member states account for about 15% of the world’s land mass, covering over 20 million square kilometers. Source: Wikipedia

Last Thursday TASS news agency reported that India will start negotiating a comprehensive free trade agreement with the Customs Union of Russia, Belarus and Kazakhstan within the next six months. India started working on the project last year when in November supported a proposal to establish a workshop to sign the agreement with the EEU.

The Russia-led Eurasian Economic Union has huge potential to expand and is open to cooperation with partners in the East and West, President Vladimir Putin said at the EEU summit in Moscow in December 2014.

“The increase in the number of members is beneficial to the union itself. It boosts its market capacity and contributes to the strengthening of trade and economic ties, and to the launching of new investment projects,” Putin noted. [Eurasian Economic Union Is Open For New Partners, Putin Says]

“Vladimir Putin and the Russian government clearly are keen on expanding their influence throughout the former Soviet space. It is fair to say that the EEU was part of a larger and more comprehensive effort to return Moscow to a privileged position of regional leadership,” BNE reported in January 2015. [The Rise And Fall Of The Eurasian Economic Union – OpEd]

The EEU is a part of a wider new global financial architecture which also includes the formation of BRICS and Shanghai Cooperation Organization (SCO).  Apart from the current EEU members which are Russia, Kazakhstan, Belarus and Armenia, the next candidate in the list on the accession is Kyrgyzstan. Later, the desire to join the EEU expressed Vietnam, Turkey and Syria.

China has also said it is willing to join a free trade zone with Eurasian Economic Union. “At first the Chinese were cautious about the Eurasian Trade Union; they just needed to make sure that it works. Now they are increasingly showing interest in participation with the union, not just with Kazakhstan, Belarus, Russia, Armenia, and Kyrgyzstan on an individual basis, but with the union per se,” the Russian Ambassador to China Andrey Denisov told RIA in an interview.

Moldova, Ukraine and Georgia have been offered by both the European Union and the Eurasian Economic Union to join their integration unions. All three countries opted for the European Union by signing association agreements on March 21, 2014. However break-away regions of Moldova (Transnistria), Ukraine (Republic of Donetsk) and Georgia (South Ossetia and Abkhazia) have expressed a desire to join the Eurasian Customs Union and integrate into the Eurasian Economic Union. [BRICS, Eurasian Economic Union (EEU), Shanghai Cooperation Organization (SCO): Towards A New Global Financial Architecture?]

What would be the significance of India, a BRIC member and the biggest democracy in the world, joining the EEU? In the following interview by Rajya Sabha TV published in January 2015, guests: Ajai Malhotra (former diplomat) ; Kanwal Sibal (former foreign secretary) ; Prof. Manoj Pant (subject expert) discus the issue in details.

*) What is the EEU?

“The Eurasian Economic Union (EAEU or EEU) is an economic union of states located primarily in northern Eurasia. A treaty aiming for the establishment of the EEU was signed on 29 May 2014 by the leaders of Belarus, Kazakhstan and Russia, and came into force on 1 January 2015. Treaties aiming for Armenia’s and Kyrgyzstan’s accession to the Eurasian Economic Union were signed on 9 October 2014 and 23 December, respectively. Armenia’s accession treaty came into force on 2 January 2015. Although Kyrgyzstan’s accession treaty will not come into force until May 2015, provided it has been ratified,^[15] it will participate in the EEU from the day of its establishment as an acceding state.

In 1994, President of Kazakhstan Nursultan Nazarbayev first suggested the idea of creating a regional trading bloc during a speech at Moscow State University. Numerous treaties were subsequently signed to establish the trading bloc gradually. Many politicians, philosophers and political scientists have since called for further integration towards a political, military and cultural union. However, modern-day Kazakhstan has insisted the union stay purely economic as it seeks to keep its independence and sovereignty intact.

The Eurasian Economic Union has an integrated single market of 176 million people and a gross domestic product of over 4 trillion U.S. dollars (PPP). The EEU introduces the free movement of goods, capital, services and people and provides for common transport, agriculture and energy policies, with provisions for a single currency and greater integration in the future. The union operates through supranational and intergovernmental institutions. The supranational institutions are the Eurasian Commission (the executive body), the Court of the EEU (the judicial body) and the Eurasian Development Bank. National governments are usually represented by the Eurasian Commission’s Council. In addition, all member states participate in the Collective Security Treaty Organization, an intergovernmental mutual defense alliance,” Wikipedia says.

Courtesy of Tom Stiglich/Creators Syndicate

As the value of Russia’s ruble tumbles amid low oil global prices and Western sanctions, it is taking the currencies of many former Soviet republics down with it.

Just ask Gagik Ghazaryan, an exporter in Armenia. He used to be able to sell soft drinks and canned food profitably to Russia before the ruble tumbled 60 percent against the dollar over the course of this year.

Today, the ruble is so weak that his Russian customers can no longer afford his products, which are priced in dollars.

“It is about two months now that we have suspended our exports,” he says. “We had an order worth $1.5 million from Russia, but we cannot supply the product because the ruble has depreciated by approximately 60 to 70 percent.”

“Our situation is very bad,” he adds. “And we don’t know how to get out of it.”

He is hardly alone. As Armenian exports suddenly lose their price competitiveness in the Russian market, the entire Armenian economy is reeling. Less foreign earnings are coming in and Armenia’s own currency, the dram, has fallen 12 percent against the dollar since January.

The same thing is happening next door in Georgia. Moscow may not be Tbilisi’s major trading partner, as it is Yerevan’s, but Russia is the single biggest source of remittances from Georgians working abroad. Now, however, the rubles they send home inject far less money into the economy than before. That has helped bring the Georgian lari down 9 percent against the dollar since January.

The drop in the Armenian and Georgian currencies create an array of problems for both countries. It means each has to pay more for badly needed imports from the West and pay more to service their foreign debt. At the same time, they must spend some of their scarce foreign currency reserves to slow the rate at which their currencies lose value if the public is to maintain faith in the nation’s money.

And the two Caucasian countries are hardly the only ones to feel the effects of the weakening Russian ruble.

Hurting Across The Board

Kazakhstan, which is both a major trading partner with Russia and an oil producer in its own right, has been badly hit by both the fall of the ruble and the shrinking price of oil. Rather than try to protect the value of the Kazakh currency, the tenge, the government decided to devalue it by 19 percent in February this year. Yet even that may not be enough to keep the currency from devaluing further next year.

“If oil stays around $70 to $75 a barrel, we will be looking for growth in Russia to be, well, no growth. We would be looking for [Russian] GDP [gross domestic product] to shrink 2 to 3 percent next year,” notes Charles Robertson, global chief economist at Renaissance Capital in London.

“That is going to have a negative effect on [Russia’s] neighbors and all you can try and do is compensate for that by depreciating your currency.”

And there is another challenge: The slipping ruble is not only making it hard for Russians to afford Kazakh goods, it also means Kazakhstan must protect its own industrial and agricultural sectors from low-cost Russian imports flooding the market.

“It’s about trying to maintain the competitiveness of their non-oil sector,” Robertson says.

“You don’t want to see Kazakhs just buying Russian imports because the ruble has got so cheap, you want them to continue to buy Kazakh products, maybe Kazakh steel, Kazakh minerals rather than Russian minerals. So [they] are playing a role to try to protect [their] own industry when the Kazakhs let the currency move.”

In different, but equally uncomfortable, circumstances is Belarus. Its currency, the ruble, has slipped some 13 percent against the dollar since the start of the year. One reason is that the slump in the Russian ruble’s value has reduced revenues from Belarus’s two large refineries which convert Russian crude oil into gasoline and other products for the Russian market.

And now the pressure is rising further as Minsk and Moscow engage in a trade war over charges that Belarus is acting as a backdoor for smuggling banned EU milk and meat products into Russia.

Ironically, that trade war comes as the current Customs Union between Belarus, Russia, and Kazakhstan prepares to expand into a new Eurasian Economic Union (EEU), which will include Armenia and Kyrgyzstan and begin operations January 1.

Whether Minsk and Moscow can solve their differences ahead of time remains to be seen, as does whether Moscow will help its weaker EEU partners cope with the downturn in their economies.

“In recent years, Belarus has been very dependent upon Russian financial aid and Minsk must be a little concerned that, given Russia’s own problems, Moscow would be less willing to provide future financing for Belarus,” says Timothy Ash, an expert on emerging European states at Standard Bank in London.  “But I don’t think that is necessarily the case. For both Belarus and Armenia, Russia will be very eager, I think, to prop up those countries within the Eurasian Union because it wants to send a message that the Eurasian Union is a successful entity and that members help each other.”

Diminishing Remittances

Several other countries on Russia’s fringes are suffering from the ruble’s collapse, mainly because they have large numbers of citizens working in Russia. Moldova, Tajikistan, Kyrgyzstan, and Uzbekistan have all seen the value of remittances those migrant workers send home diminish.

The Moldovan National Bank announced on December 11 that the country’s currency, the leu, lost 17 percent of its value against the dollar this year due to the devaluation of the Russian currency as well as that of Ukraine, another important economic partner.

Tajikistan’s somon has dropped 5.5 percent, Kyrgyzstan’s som has dropped 15 percent, and Uzbekistan’s som has dropped 9 percent. The three Central Asian states, which have many citizens working as migrant laborers in Kazakhstan, have also been hit by the economic downturn in that country.

Turkmenistan, a major gas exporter, has fared better. With pipelines to Russia and Europe, to China, and to Iran, it does not depend solely on the Russian market and it has sufficient foreign currency savings to keep its manat within a narrow band against the dollar.  At the same time, few Turkmen go to Russia as migrant workers, so remittances are not an issue.

Oil-rich Azerbaijan looks still more impervious to the tough new economic realities in the region. It, too, is being battered by low oil prices but has a large stabilization fund to keep its currency, the manat, within its usual band against the dollar. At the same time, most of its trade is with Turkey, not Russia.

“It is less tied in to the Russian economy, more diversified in terms of its trade and export routes, and quite closely tied to Turkey,” says Ash. “It gets quite a lot of trade and benefits from investment from the Turkish economy and Turkey is obviously doing very well.”

The biggest loser in the region is Ukraine. Its currency, the hryvnia, has lost 86 percent of its value against the dollar since the start of the year as the country battles pro-Russian separatists and the country’s economy is in crisis.

Courtesy of Radio Free Europe/Radio Liberty (RFE/RL)

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Radio Free Europe/Radio Liberty (RFE/RL) is a broadcasting organization that provides news, information, and analysis in 21 countries where free press is banned by the government or not fully established.  

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Copyright (c) 2014. RFE/RL, Inc. Reprinted with the permission of Radio Free Europe/Radio Liberty, 1201 Connecticut Ave NW, Ste 400, Washington DC 20036.

The executive body of the Eurasian Economic Union (EEU) and a Kazakh business lobby have dismissed the possibility of switching to national currencies in trade within the Russia-led trade bloc when it comes into being on January 1, instead of the current system of using dollars and euros in some transactions.

The slap down is another sign of division between the three members of the precursor body to the EEU, the Customs Union, whose leading member Russia wants the trade bloc to act as a instrument in its current fight against the EU and the US, while Kazakhstan and Belarus are less keen to disrupt ties and trade with the West.

The statement came in reaction to an article in Russian newspaper Izvestia, in which the chairman of the board of directors of Russia’s National Payment Council, Alexander Murychev, suggested that the dollar and euro should be banned in trade between the member states of the EEU, with Russia, Kazakhstan and Belarus switching to national currencies in mutual payments by 2025-2030.

“The creation of a single payment space of the EEU will lead to the acute need to adopt a system of multi-currency operations or to a speedy switch to a payment system of a single currency. Simultaneously, it is necessary to raise the issue of excluding the dollar and euro from interstate payments before the national banks of member states,” Murychev told Izvestia.

At present around half of trade within the members of the EEU is conducted in the dollar and euro, increasing their dependence on foreign currencies, according to Murychev.

However, the Kazakh National Chamber of Entrepreneurs responded by pointing out that the agreement establishing the EEU does not include provisions providing for a ban of certain currencies in mutual trade. The document instead speaks only about how EEU states should strive to increase the role of national currencies. The Chamber has no information about any ongoing work on the mentioned ban of foreign currencies, it said.

Following the Kazakh business group’s negative reaction to the Russian suggestion, the Eurasian Economic Commission, the executive body, intervened to clarify that a plan of action proposed by Russia’s National Payment Council did not mean that it would be adopted because the council was a public organisation. At the same time, the Commission said that the member states of the Customs Union (the precursor to the EEU) were currently revising the provisions of the treaty on the establishment of the EEU.

The Commission, however, pointed out that a switch to transactions in national currencies has the advantage that it will reduce costs and risks. “The Eurasian Economic Commission has just started to discuss this issue, but there is no talk at the moment of a switch by EEU member states to transactions in exclusively national currencies,” Tengrinewsquoted the Commission’s press service as saying.

The Commission said that there were no real grounds for banning foreign currencies in mutual trade. “The EEU treaty does not have such provision.” It noted that member states aim to coordinate currency policy to expand economic integration, ensure free movement of goods, services and capital, and boost the role of national currencies in trade and investment, as well as ensure the mutual convertibility of national currencies.

Friction

This is another row between Kazakhstan and Russia regarding the functioning of the EEU. In recent weeks the parties have traded accusations over restrictions on the transit of meat from third countries via the Russian territory to Kazakhstan. In a separate move, Astana also banned the sale of certain types of alcohol products made in Russia.

The suggestion of banning reserve currencies in mutual trade clearly shows that Russia is eager to pursue its own interests in the EEU, disregarding Kazakh and Belarusian positions. Russia is keen to use economic integration in its backyard as a tool in pursuing its global policy objectives and is seeking to bring as many former Soviet countries as possible back into its orbit. This explains the haste with which Moscow is fast-tracking Armenian and Kyrgyz membership of the EEU. In October, Armenia signed the treaty to join the EEU in 2015, while Kyrgyzstan is expected to follow suit some time next year.

Within hours of the signing of the treaty on the establishment of the EEU in Astana in late May, Kazakh and Russian representatives clashed over Moscow’s vision of the free-trade bloc, which Astana is selling to its domestic audience as purely an economic, not political union.

When Kazakh President Nursultan Nazarbayev suggested ahead of the signing that an EEU financial regulator should be set up in Kazakhstan’s financial capital, Almaty, by 2025, Russia’s main negotiator, First Deputy Prime Minister Igor Shuvalov, took Nazarbayev’s words to suggest that the EEU would in future envisage a financial and currency union between the member states. “At some point we will need to seriously study the issue of a financial union or perhaps even currency [union]. But this… issue is not on the agenda yet,” Shuvalov told a news conference.

Shuvalov’s revelation of Russia’s designs for the EEU horrified Kazakh negotiators, whose president and government, as well as state-owned media, have been tirelessly promoting the EEU as a purely economic entity. Kazakh Deputy Prime Minister Bakytzhan Sagintayev immediately dismissed Shuvalov’s statement with irritation. “[Shuvalov] has talked about a financial and currency union. Not a single time have we discussed this issue, neither at our level nor at the level of heads of state,” he said. “Today, President Nursultan Nazarbayev spoke about positioning Almaty as a financial centre as part of the creation of a supranational financial regulator. There is no talk of any currency and financial union.”

With the Russian ruble plummeting amid falling oil prices and an economy collapsing under the weight of Western sanctions over its support for the insurgency in eastern Ukraine, the establishment of any currency union with an increasingly isolationist Russia would not look attractive to many Kazakhs, despite the continuing worries about the state of their economy and value of their own national currency, the tenge.

Courtesy of BNE

This material is reproduced with the prior written consent of Business New Europe (BNE). 

Business New Europe is a media company covering business, economic finance and politics in the 30 countries of the former Soviet Union, Central Europe, Balkans, Caucasus, Central Asia, and Turkey.

For more information on Business New Europe (BNE), please visit http://www.bne.eu/

“Weaker growth in the Caucasus And Central Asia (CCA) region stems from the economic slowdown and increased geopolitical risks in Russia, coupled with weaker domestic demand in a number of countries due to fiscal tightening and flat oil production in some countries” Juha Kähkönen, Deputy Director of the IMF’s Middle East and Central Asia Department, told reporters in Almaty, Kazakhstan.

Russia’s economy significantly affects the growth of the CCA region. The big neighbor’s impact has been materializing via different factors like: trade, remittances and investments. Slower growth in Europe or China, could also have a negative impact on the region’s economic development.

Courtesy of IMF

The CCA’s oil exporters — Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan—are expected to see growth slowing to 5.6% this year from 6.8% in 2013. These countries managed to build up solid fiscal cushions due to the relatively high oil prices during the recent years and diversified export markets.

On the other hand, non-oil growth in the oil-exporting countries is forecast to decline by about 1 percentage point. The factors to blame are: slower consumer lending, increased investor caution, and higher geopolitical risk related to the conflict between Russian and Ukraine.

Unfortunately, the recent decline in oil prices complicates the outlook. The local oil exporters are very sensitive to a prolonged period of low oil prices and that may contribute to further growth slowdown as oil revenues decrease.

Weaker demand from Russia, is adding extra pressure on the current account balances, with the surpluses of the CCA oil exporters shrinking. Fiscal surpluses are also under a downward pressure, with an expected drop to 2.1% of GDP this year and 1.4% in 2015, down from 3.4% in 2013.

Inflation is expected to rise in the region. Oil exporters will see an increase in inflation to 6.5% this year, up from 6.3% in 2013, mainly due to recent currency depreciation.

Growth in the CCA’s oil importers — Armenia, Georgia, Kyrgyz Republic, and Tajikistan—is forecast to slow by 1 percentage point this year, to 4.6% of GDP. That’s predominantly due to the fact these countries have close trade and remittance linkages with Russia. Unfortunately, they will see a greater impact from Russia’s slowdown than the CCA’s oil – exporting countries according to IMF.

Courtesy of IMF

The IMF report suggests the CCA regions needs a new economic model. Despite the past 20 years of solid economic growth the problem is  inequality.  Also high youth unemployment and emigration are not good signs for the future.

The IMF report recommends that the local governments should give priority to the following:

• Carrying out bold structural reforms to develop worker talent, increase competitiveness, and create an environment conducive to private sector-led growth;

• Promoting inclusive growth through better access to finance for small and medium-sized enterprises and a deeper, more stable financial system;

• Creating a diverse and dynamic non-oil tradable sector to diversify the region’s economies and reduce their dependence on oil and gas; and

• Pursuing broad-based, balanced trade integration at both the regional and multilateral levels.

Courtesy of IMF

The full IMF report can be accessed under the following link:
Regional Economic Outlook: Middle East and Central Asia, October 2014

Source: IMF

]]> /2014/11/12/growth-in-the-cca-expected-to-decline-by-one-percentage-point-due-to-the-slowdown-in-russia-international-monetary-fund/feed/ 0 CCA etfalpha CCA CCA Growth CCA CCA Reforms