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The Customs Union: Crisis Developments

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These findings are based on the official statistics of the CU (Eurasian Economic Commission), analysis of statements and comments made by the representatives of government, diplomatic and business circles of the Republic of Belarus, Republic of Kazakhstan and the Russian Federation on the situation in the national economies and the social sphere in the framework of the Customs Union.

The results of the analysis showed that the problems and risks identified by us in March 2013, not only deepened by September, but also formed persistent negative trends.
Countries of the Customs Union demonstrate reductions in the mutual trade. Thus, according to the data for the first five months of this year, the mutual trade within the Customs Union and the Eurasian Economic Commission was down 9.9 per cent from the same period last year. The decrease compared to the same period last year happens each month, which is confirmed by the official statistics (see Annex 1). The largest drop in trade performance is observed in Kazakhstan and Russia. In May 2013 the trade performance of Kazakhstan tumbled 15.8 per cent compared to the same period last year, and the trade performance of Russia tumbled 15.1 per cent. This trend indicates a steady reduction of internal trade volume in the CU.
The poor dynamics in the mutual trade between the member countries is caused by the facts that the exports are mainly raw materials and the competitiveness of non-oil commodities is low. The main problem of the turnover between the members of the CU is still a small amount of goods that the participants are willing to offer each other, excluding energy sources. In addition, the increased competition as a result of lower prices for imported goods hits some industry markets. This creates the conditions for crowding out of some domestic producers from the market and for hostile takeovers.
Representatives of Kazakhstan believe that, despite the growth of trade within the Customs Union since 2010, its establishment had little effect on the positions of Kazakhstani goods in the markets of Russia and Belarus, but rather strongly affected the country’s structure of imports, where the share of Russian products has increased. At the same time the commodity structure of exports and imports, as well as the proportion of the volume of these products, have not changed much after the establishment of the CU.
Russia has resorted to external and internal trade wars, as a way of protecting the domestic Russian market.
Low growth rates of the trade within the CU, as well as the crisis developments in the Russian economy, contribute to waging trade wars against internal and external partners on specific product lines. This supports our predictions made in March of this year.
To date, Russia is going through a difficult situation in the economy and in the public sector. The Ministry of Economic Development of the Russian Federation believes that the Russian economy is in a state of stagnation. At the same time, Moscow fears the beginning of a slump, which will lead to a rise in unemployment. The plans of the Russian government to adopt a balanced budget for the fiscal 2015 are obviously impractical. According to the estimates of the Ministry of Finance of the Russian Federation, the budget deficit in 2014 will be at 0.6 per cent of the GDP, which is 0.4 per cent higher than the figure in its earlier forecast. However, such an index will not be achieved, because the reduction of 650 billion roubles in oil and gas and other revenues is expected in 2014, while maintaining the level of expenditure. The proposal of the Ministry of Finance of the Russian Federation to the Ministry of Defence of the Russian Federation to postpone some of the costs of the state armaments program for several years in order to ensure stability of the Russian budget is indicative of problems in the public sector.
According to the Federal State Statistics Service, the GDP growth in the second quarter of 2013 was only 1.2 per cent, well below the forecast of the Ministry of Economic Development. For comparison, the economic growth in the second quarter of 2012 was 4.3 per cent over the same period of 2011. The GDP growth declined to 1.6 per cent in the first quarter of 2013. Thus, 2013 may turn out to be the worst year in terms of economic growth for the entire presidency of Mr. Putin.

Financial statements of large-scale enterprises in the Russian Federation indicate that the fall in investment since April is more than 5 per cent. This is indirect evidence and a leading indicator of pitching into recession.
It is expected that the Russian government will have to cut down on its budget. Thus, the amount of federal revenues in the first half of 2013 was 48.6 per cent of the projected amount approved by the Federal Law on the Federal Budget for 2013 and for the Planning Period of 2014 and 2015. At the same time, Moscow will try to avoid a budget sequester, which will create new political tensions in Russia.
This means that the Kremlin is interested in establishing a maximum level of protectionism and import substitution for goods from third countries and for goods originating in the countries of the Customs Union with the aim of maximum load of Russian companies, growth of budget revenues and GDP.
A similar situation can be observed in Belarus. Thus, the GDP of Belarus in January to July 2013 in current prices was 340.1 trillion roubles and increased compared to the same period last year, in comparable prices, by 1.4 per cent. The forecast for 2013, in accordance with the Decree of the President of the Republic of Belarus of 25 September 2012 No. 418, anticipates its growth by 8.5 per cent that, given the current momentum, is not possible.
Establishing of the CU has led to increase in prices of particular commodity groups. On one side this is happening due to increase in customs tariffs leading to increase in prices for commodities imported from third countries, and, from another side, due to equation of prices within the CU. As a result, Kazakhstan has to resort almost to fixing of prices for socially important commodities and introduction of state regulation of prices. There is a significant increase in primary commodities observed at the market against decrease in purchasing capacity. Thus, in the RB there is constant high inflation rate which has been 36.1 per cent according to the results of 2012.
Protectionism is able to provide a temporary boost to industrial growth within the CU. However, such measures may cause industrial upgrading of the member countries to inhibit.
So far, the protective barriers affect trade. Thus, sources in diplomatic circles in Kazakhstan linked the reduced trade performance of the country in 2012 with protective barriers set by other participants. This is particularly true for food products, in some cases, these barriers are of technical nature. Discrimination against Astana is happening in the market of alcoholic beverages, confectionery (Russian legislation allows to import only a part of the product range) and in import VAT matters. For example, the Russian-made juice relating to child nutrition falls under the rate of 10 per cent, whereas the same juice made in Kazakhstan is taxed at 18 per cent.
We would like to draw your attention to the fact that the food production sector is equally developed in Kazakhstan, Belarus and Russia. This explains the fact that Russia is creating trade conflicts primarily in these sectors.
Despite the fact that the factor of rapprochement between Ukraine and the EU is indeed present in the motives of behaviour of the Federal Service for Supervision of Consumer Rights Protection and Human Well-Being, the underlying economic causes of introduction of protective barriers by Russia are precisely the crisis of development and trade inside the CU. This is confirmed by the fact that Russia has recently banned imports of not only Ukrainian goods, but those of other countries (including EU members), as well.
Thus, on August 12, 2013, the Federal Service for Veterinary and Phytosanitary Surveillance reported on the inspection of 6 enterprises producing food of animal origin in Turkey: three of them were specializing in dairy products and other three — in fish products and seafood. On the same day the Federal Service for Veterinary and Phytosanitary Surveillance restricted imports of Fonterra (a New Zealand-based company) products because of the causative agent of botulism. On August 15, 2013, 133 Germany-based companies were excluded from the list of food suppliers “because of the numerous detections of violations of the requirements of Russia and the Customs Union during the laboratory safety monitoring and systemic deficiencies recorded during inspections of German enterprises”.
In recent weeks, Russian officials have made claims to the quality of Polish food products and to the Polish suppliers. It started with Polish pork and continued 4 days later with Polish vegetables and fruits in connection with the alleged presence of nitrates and pesticides in the imported fruit and vegetable products. At the same time, Moscow does not confirm its accusations with specific facts. It must be emphasized that the intensification of the Russian-Polish trade claims is against the background of growth of exports from Poland to Russia by 12.8 per cent (EUR 3.9 billion) in the first half of 2013, while imports of Russian goods to Poland fell by 12.4 per cent (EUR 9.5 billion). The drop was primarily due to the decline in world prices for oil and gas that Warsaw buys mainly from the Russians.
This confirms our findings that Moscow is imposing trade sanctions against its economic partners to hide and balance the negative and crisis developments in its own economy and the one of the CU, and to create the illusion of effectiveness of the Customs Union.
We would like to note that not only the Kremlin uses this tactic, but also the official Minsk.
This is clearly shown by the situation where the leadership of Belarus attempts to regain control over the export of potash without the participation of Russian business by unprecedented action against Uralkali. We would like to note also that this tactic does not add to the stability of the Custom Union, but leads to political conflicts that may ultimately affect the functioning of the Union.

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Russia, Ukraine And The Disputed Crimean Peninsula

Dr. Matthew Crosston

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In this exclusive video for In Homeland Security, American Military University’s Dr. Matthew Crosston, Doctoral Programs, School of Security and Global Studies, discusses the tumultuous relationship between Russia and Ukraine since the 2014 ‘Maidan Revolution’ and how each nation, the United States, and NATO all view the disputed peninsula of Crimea. There is a transcript of the video below.

Transcript of Dr. Crosston’s Analysis:

If we’re looking at the Russian Ukrainian conflict, sort of en mass, going back to its beginning foundation, for Russia at least it starts with the Maidan Revolution – or even the precursors to what created the Maidan Revolution. And, that’s something that we get a little bit of a debate or a discussion in the West about. The Russians feel that the West sort of made some sneaky promises behind the scenes to Ukraine – the people who would ultimately lead this revolution and cause the sitting president to flee to Russia and have a new president come in and take his place who was much more EU-friendly much more-NATO friendly much less Russian friendly. The Russians always saw some subterfuge in that action. They never saw it as a natural organic revolution. They always saw it as an example of Western interference, and they – therefore – felt justified to say well if you can interfere, we’re going to interfere because if you’re just playing out your interests on the ground in Ukraine why can’t we play out our interests on the ground in Ukraine?

Besides, we also think Ukraine is a better partner to us and should be a bigger compatriot of our interest because we have religious, cultural, historical ties. No matter how you try to play it in the West, Ukraine and Russia should not be at odds against each other, Ukraine and Russia should not be enemies. They are the more natural allies. And in the end since you’re making false promises we’re going to find out how much you really mean it when you tell Ukraine secretly whisper-whisper behind our backs [saying] don’t listen to Russia don’t do anything about Russia. Come to us instead. Ukraine really believed in that the people who led the Maidan Revolution believe that would happen. So then what we call the annexation of Crimea (but yet in Russia they call the secession of Crimea into the Russian Federation because the people in Crimea held a referendum saying we want to be part of Russia) – we don’t want to be part of Ukraine anymore. We portray that as being Russia forced that on Crimea. The Russians say the Crimeans voiced their political will, and we back them up – which is what you guys in the West didn’t do for Ukraine when we did it.

The Kerch Strait

What’s above the Kerch Strait – which never gets played in Western media – is this massive eight-lane superhighway that actually the Russians built and had actually in place as a as an agreement and was already begun to be built before the Maidan Revolution and is now complete. What it does is it connects as a land bridge – it connects from Rostov in Russia and over into Crimea. So that you don’t have to go through Ukraine at all to get into Crimea. That’s where those naval vessels were;  that’s where the Russians they were getting near the bridge – without any knowledge or any announcement of anything preordained.

So, the Russians said ‘what are you doing here?’ Ukrainians don’t answer. And, the Russians start playing with it, and they said ‘well we’ll see how tough you really are … you really going to use these naval ships? Are you really going to do an action here? That’s why the Russians call it a provocation. And, in the West – we say the Russians are just making up the word ‘provocation’ because these vessels weren’t doing anything. But, we are ignoring how the perspective of the Russians – near this massive land bridge (that literally now connects Russia to Crimea), how would they interpret the presence of military vessels unannounced with no declared plan of action – just this sort of mysterious presence? They did what most countries probably would do, but what they did goes against our interests, so therefore we have a problem with Russia’s actions.

No World War 3 Imminent

Russia has seen – really, quite frankly – since the 90s (with Clinton) this sort of slow very gradual encroachment where more and more members of what they used to consider their sphere of influence or their regional neighborhood (the Russian regional neighborhood) more and more people become part of NATO. But the one part they’ve always laid out is like the parts that have always sort of been Russian, and you can’t underestimate what Ukraine means to Russians in their memory as far as their historical cultural and even religious memory – that area Ukraine and Russia has always been tied together. So that might be the red line (no pun intended) for the Russians drawn in the sand – Ukraine will not go to NATO – will stand up against that. And, I think maybe the possibility was that NATO thought ‘well let’s test that a little bit because maybe they’re saying it of course we understand why you say we need machismo on that, you need some bravado on that, but let’s see if you really mean it.’ And, as it turns out, the Russians said ‘yeah, we do really mean it. Now do you really mean it? Are you really going to come to bat for Ukraine if we step up?’ They stepped up, we stepped back. That sounds bad but it’s not World War 3, and won’t be World War 3 because it means the two big sides – the two big players (Russia and the United States) – are declaring: Ukraine is enough for us to get into [inconsequential] fights over, [but] it’s not enough for us to get into a real war with each other over. And, that’s the part that’s going unsaid in the West that we should emphasize more.

Author’s note: This video first appeared at Homeland Security

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The Death of the ‘Lisbon to Vladivostok’ Project?

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Russian relations with Europe are part of a complicated story rooted in military, economic and often ideological realms. Both entities have for centuries tried to find a modus vivendi, but have so far failed. One compromise suggested for Europe and Russia was an economic space stretching from Lisbon to Vladivostok – the space characterized by a unified economy, political understanding and even deep military cooperation.

Russia’s President Vladimir Putin for years advocated the idea, making speeches about the case. To be clear, Putin was not the first to propound it, but was merely reflecting on similar ideological arguments of the past. A transcontinental union spanning the Atlantic to the Pacific is a geopolitical concept that pops back up from time to time and is linked to neo-Eurasianism, before which the geopolitical space was made up by the triangle of Nazi Germany, Soviet Russia and Imperial Japan.

One space from Lisbon to Vladivostok, which one might also call “Greater Eurasia”, would make Russia pivot to the West. This was an attractive idea for the European and Russians. Indeed, even German Chancellor Angela Merkel once said that she hopes “Russia would increasingly develop ties with the European economic area, finally resulting in a common economic area from Lisbon to Vladivostok”.

How would such cooperation look? Perhaps it would imply at least a free trade agreement (FTA), whose core features might involve the cutting of tariffs and non-tariff barriers. Business interests in the EU as well as Russia are likely to be supportive of such a proposition. Putin stated that “in future, we could even consider a free trade zone or even more advanced forms of economic integration. The result would be a unified continental market with a capacity worth trillions of Euros”.

Surely when we talk about Russia in this context, we need to understand this space as including neighboring post-Soviet states. Russia launched its Eurasian Economic Union (EEU) project back in 2015.

One would think that for the EU, an FTA with the EAEU would be an advantageous proposition from an economic standpoint, since it would give preferential access to an important market. But one would expect the pre-conditions posed by the EU for the opening of negotiations to be many and quite stringent.

For Moscow, this positioning might be more economically advantageous, as the EEU could be a bridge for China’s Belt and Road Initiative (BRI) to connect with the European market. On the map, all appears logical and attractive, but in reality, China’s BRI, although not against being cooperative with other blocks, still aims at pulling major Eurasian resources towards itself. Russia’s EEU, weaker in dimension than the BRI, will inevitably be drawn to Beijing with growing grievances on the Russian side.

Back to the unified Russia-Europe economic space, there remains the fundamental question as to whether or not Russia would consider an FTA with the EU to be in its interests. Is the ‘Lisbon to Vladivostok’ idea serious? In Russia, many would fear that an FTA with the EU would be too imbalanced, or asymmetric in favor of the EU. Indeed, most Russian exports to the EU, such as oil and gas, are already being traded without tariffs. Also, the challenge for any petro-economy to sustain a substantial and competitive industrial sector would be a tough task to pull off.

So far, we have given a pretty rosy picture of the two stood regarding the project just several years ago, in the period before the Ukraine crisis.

When discussing Russian geopolitical moves, one needs to remember how important Ukraine is and how the latter has been a driving factor in Russia’s calculus. Ukraine has always been the main point of any of Russia’s grand projects of the past and present. The modern EEU, an ambitious project that goes well beyond the simple removal of borders between the five ex-Soviet countries (Armenia, Belarus, Kazakhstan, Kyrgyzstan and Russia), is weak economically and geographically without Ukraine. Many believe that even before the Ukraine crisis, Russia-Europe relations were strained and a crisis was inevitable, but it should not be forgotten that it is still Ukraine which made the differences insurmountable. It could even be argued that the Ukraine crisis put an end to any grand strategic view between Russia and Europe. The “Lisbon-Vladivostok” vision, it could be argued, is now dead.

Beyond the Ukrainian issue are also other important issues which are likely to stop any furtherance of the Greater Eurasia project. Europe and Russia are not just two competing economic blocs, but two blocs with opposing values and political systems. A compromise between the two has not been seen in the history of the past several centuries, except for short periods of time when Russian military power was needed in settling inter-European problems.

Moreover, put in the longer-term perspective, we see that the abandoning of the grand Lisbon-Vladivostok vision follows what is taking place across the entire Eurasian continent, where pragmatism and a reliance on real state interests and capabilities are back in fashion following the hopeful post-Cold War years.

Over the past several years, Russia has also leant towards the East. And while it is often put to question just how deep the Russian pivot to the East is, certain geopolitical tendencies lead us to support the idea as fact. Moscow portrays this policy as its own choosing, but the reality is that from three grand avenues (Eastern Europe, South Caucasus, and Central Asia) of projection of Russian geopolitical influence, it is only in Central Asia that Moscow does not meet important pushback from any Western power, while Chinese influence is only seen in economics. This simple vector of projection of Russian power is quite telling at a time when Moscow is more drawn to the East rather than the West, spelling a death note to once grand plans of an economic space from Lisbon to Vladivostok.

Author’s note: First published in Georgia Today

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Russia invites African leaders to Sochi Summit

Kester Kenn Klomegah

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Russia has finally announced that it would host African leaders and corporate business tycoons in a high-level October summit in Sochi, south coastal city, to roll out a comprehensive agenda and strategy aimed at raising the existing overall Russia’s economic profile in Africa, St Petersburg based Roscongress, the official organizer of the October summit, said on its website.

It is currently collaborating with the Russian Ministry of Industry and Trade, the Russian Ministry of Foreign Affairs, the Russian Export Center and the African Export-Import Bank in organizing the forthcoming business summit.

Roscongress is a non-profit foundation that has grown into a high-profile organization and gained recognition as an effective organizer of the most important business conventions and exhibitions, both in Russia and beyond.

Anton Kobyakov, an Advisor to the Russian President, said that the Russia-African summit primarily seeks to deepen understanding of the business climate, accelerate investment and partnership possibilities in Africa.

“The upcoming summit will be unique in the history of relations between Russia and African countries, and will plot the vector for the further development of bilateral and multilateral contacts for decades to come,” he said.

In his contribution, Professor Benedict Oramah, President and Chairman of the Board of Directors of the African Export-Import Bank (Afreximbank), explicitly noted that Russia had the necessary capabilities and, most importantly, the experience and professionalism of its people who could support in these efforts in consolidating the relations.

Russia, by holding various events regularly, would provide an additional impetus for the development of trade and investment opportunities for both countries.

Quite recently, Vyacheslav Volodin, the Chairman of the State Duma, told an instant meeting held with the Ambassadors of African countries in the Russian Federation, that Russia would take adequate steps to deliver on pledges and promises with Africa countries. “We propose to move from intentions to concrete steps,” he said.

Russian Foreign Affairs Ministry has expressed optimism and full-fledged support.

“It is evident that the significant potential of our economic cooperation is far from being exhausted and much remains to be done so that Russia and Africa know more about each other’s capacities and needs,” Foreign Affairs Minister Sergey Lavrov acknowledged in the current Russia’s relations with Africa.

He explained further that arranging an event of such a scale with the participation of over fifty heads of state and government required most careful preparation, including in terms of its substantive content and equally important was African businesspeople who have been looking to work on the Russian market.

“The economic component of the summit has a special significance as it would be of practical interest for all the parties. As such, specific Russian participants in bilateral or multilateral cooperation should be identified, which are not only committed to long-term cooperation but are also ready for large-scale investments in the African markets with account of possible risks and high competition,” Minister Lavrov noted in an interview.

For decades, Russia has been looking for effective ways to promote multifaceted ties and find new strategies of cooperation in energy, oil and gas, trade and industry, agriculture and other economic areas. Undoubtedly, holding a Russia-African summit would help deepen economic cooperation on the full range of spheres in Africa.

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