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Russia's Growing Economic Influence in Europe and Beyond

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In an effort to recapture the glory days of the Soviet Union, and to enhance its standing among its neighbors, Russia is leading an economic regional reintegration plan at such a rapid pace, it may make the Europeans envious. Covering an area more than five times that of the European Union (EU), if Russia has its way, the 'Eurasian Union' (EAU) will serve as a de facto bond between the nations of the former Soviet Union, and could come to rival Europe in terms of economic importance.

Eurasian reintegration became a priority in Russian economic and foreign policy in 2008, coinciding with the onset of the Great Recession, following the EU announcement of its Eastern Partnership program. The Partnership program was initiated to improve political and economic relations between the EU and six "strategic" post-Soviet states -- Armenia, Azerbaijan, Belarus, Georgia, Moldova and Ukraine -- in the core areas of democracy, the rule of law, human rights, the promotion of a market economy, and sustainable development. Since then, Russia has in essence been competing with the EU to gain influence in these countries.

But while EU's eastward expansion stalled at the borders of Ukraine -- considered by Russians as its backyard -- the Russian-led program is rapidly moving forward. Earlier this year, Russia launched a single economic space with Belarus and Kazakhstan, establishing a unified market for goods, investment and labor. The EAU, which fully reintegrates member countries, is expected to begin functioning by 2015. If the EU continues on its rocky economic path, the EAU may have little difficulty in establishing a firm operational foundation.

The EAU is not oriented toward the past in terms of Russian domination; rather, it is a market-oriented reintegration based on the EU's rule-based governance system. Although its institutional framework is modeled after the EU, the EAU seeks to avoid unnecessary bureaucratic superstructures. Its 'supranational' institutions are minimal, consisting of a commission that sets binding legal agreements, and a court -- the first major regional civilian institution of its kind in the post-Soviet era. Moreover, the EAU is in line with both EU and World Trade Organization (WTO) norms and regulations on most economic and many political issues. A common currency (the 'Yevraz'), similar to the euro, may also be introduced to hedge against volatility in global financial markets, and to insulate member countries from global economic crises.

Some analysts have raised doubts about the viability of the EAU, and whether it can successfully compete with the EU. They argue that given the weak rule of law in post-Soviet countries, it would be hard to imagine how supranational institutions could monitor that member states are in compliance with provisions of the various international treaties. Moreover, the three member states cannot agree about the use of a single currency. While Belarusians believe that the Russian ruble could be used as the common currency, the Kazakhs seek a new currency. The Russians have not expressed a formal opinion on the matter, but it is hard to imagine that Moscow would drop its ruble and agree to a supranational currency. More likely, the question of a common currency will result in a deadlock -- at least for now -- as it has happened several times between Russia and Belarus, with the latter maintaining its own currency.

The creation of the EAU is beneficial to Russia not so much for its implied economic impact as for its political connotation. Many economists are concerned that the Union in fact would benefit other members economically more than it would benefit Russia; in fact Russia would be losing out economically. The Russian economy would inevitably play a central role in the new Union, perhaps even more so than Germany's role in the EU. Belarusian and Kazakh businesses enjoy access to the larger Russian markets, while the two countries' political and economic orientation tends to limit reciprocal penetration of Russian business into their markets. In the case of other Central Asian applicants -- such as Kyrgyzstan and Tajikistan -- Russian business would need to invest heavily into their economies, as these countries are both poor.

Since it was initiated, the Customs Union of Belarus, Kazakhstan, and Russia encountered several problems when economic harmonization resulted in disputes, particularly between Russia and Belarus. Moscow banned import of Belarusian dairy products, claiming that they did not meet Russian packaging standards, a non-tariff measure allowed under the common customs code. The disagreement, which became known as the 'Milk Wars', cost Belarus approximately $1 billion. The real problem was that Belarusian farmers were heavily subsidized, meaning that the cost of milk production in Belarus was substantially lower than that in Russia. As a result, Russian dairy producers were on the verge of bankruptcy and looked to their government for support. In response to Russian action, Belarus introduced a ban on the purchase of Russian agricultural machinery, accusing Russia of not providing leasing for Belarusian tractors (a major source of income for Belarus).

Moreover the EAU could capitalize on EU weaknesses. The ongoing financial crisis has enhanced what had already been foreseen as the EU's 'enlargement fatigue'. Economic stakeholders that used to be in favor of the EU's enlargement are now becoming more cautious, noting the disadvantages of enlargement. From the perspective of post-Soviet non-member 'partners', incentives for participating in the EU program are high, given that the program has no official tie to the EU enlargement program. Future accessions to the EU therefore depend on when the fatigue passes and the EU is realistically in a position to enlarge its membership. This makes some to think that this is in fact an unequal partnership.

These issues raise questions about the viability of the EU's strategy vis-à-vis the post-Soviet republics. The anticipated membership of Kyrgyzstan and Tajikistan to the EAU may not be worrisome to the EU, but the accession of Ukraine -- the second largest country in Europe and a strategic former Soviet republic -- could well become a tipping point. With Ukraine having just adopted Russian as an official language, it seems that membership in the EAU is next logical step.

The growing strength of the Customs Union and its evolution into the EAU would help reaffirm Russia's role as the regional superpower. But it remains to be seen whether the EAU would ultimately seriously challenge the bureaucratically rigid and culturally diverse EU in economic or political terms. The EAU is certainly Russia's most ambitious political and economic reintegration program since the fall of Soviet Union, and meshes nicely with its membership in the WTO. Russia is certainly now in a position to flex its muscles regionally and globally, and there is every reason to believe it will do so in the near term.

Kambiz Behi is a consultant in foreign affairs at EnterInvest in Minsk. He holds a PhD in Social Anthropology and Masters in Regional Studies from Harvard University, and a Master of Laws (LL.M.) from University of Pennsylvania Law School.

Daniel Wagner is CEO of Country Risk Solutions, a cross-border risk management consultancy based in Connecticut (USA), and author of the new book Managing Country Risk (www.managingcountryrisk.com).