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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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Time for Diplomacy

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When I was hired by the Ministry of Foreign Affairs of the Soviet Union as an interpreter in the mid-1970s, the hardest thing about the job was translating for politicians who somehow “spoke” the language of their partners. They would often want to show off their skills, often interrupting the interpreter to say, “I got it. Go on.” This meant that important nuances, points of emphasis and details were lost in the process, which made it extremely difficult to ascertain the other side’s position with any degree of accuracy, let alone seal any specific agreements.

These days, pretty much everyone fancies themselves as a diplomat or a foreign policy expert at the very least. Without the slightest hint of hesitation, they are willing to voice their opinions on the most sensitive of international issues, brazenly tell us how we should be doing our jobs and share with us their sure-fire ways of quickly resolving long-standing problems, all the while ensuring and securing Russia’s interests. An inevitable consequence of this is that the global community is never quite sure what Russia’s official position actually is, which in turn leads to lopsided interpretations of Moscow’s foreign policy aspirations.

Given the unprecedented numbers of “armchair diplomats” we have today, it is hardly surprising then that politicians have absolutely no qualms about using real diplomats, and sometimes even entire diplomatic missions, as bargaining chips in the current global geopolitical confrontation. Depending on who you talk to, the “ambassadorial war” that is going on between Russia and the West has seen as many as 600 diplomats expelled from host countries. We have never seen anything like this in the history of diplomacy, and the sad truth is that the number of “casualties” will likely continue to grow.

The consequences of such a cavalier attitude towards the diplomatic service could be severe.

By all accounts, the world is already at war. Call it what you want: psychological warfare, information warfare, ideological warfare, hybrid warfare, or any other name you care to come up with. The label itself is not important, while the increasingly real risk of military confrontation is. Even if it does not come to that, the damage caused by the years of conflict is growing in all areas, whether politics, economy or social interactions for that matter.

Typically, there are only two ways a war can end—in a sweeping victory for one of the sides or in a compromise agreement that suits the interests of both sides. Today, there is no single country in the world that is capable of winning a regional confrontation, let alone a global war. This means that we need to look for agreements that would take us off our current path towards global destruction and open up opportunities for countries to work together in a productive manner.

One sure thing is that the parties will sooner or later have to sit down at the negotiating table. Those who’d held on to their best diplomats and experienced negotiators, having put together well thought-out and realistic bargaining positions, will clearly have the upper hand in such talks.

COVID-19 has shaken the global community to expose our vulnerability in the face of a deadly disease. Most experts concur that the mass vaccination programmes launched across the world will eventually lead to global herd immunity, signalling the end of the pandemic. Thankfully, the continued attempts to politicize the issue of vaccination are starting to recede into the background as the international community is becoming increasingly aware of our interconnectedness and the need to reach out and help one another in difficult times.

That said, we have to concede that such an awareness is sadly lacking among individual countries, regions and continents when it comes to issues of security. It would seem that the world’s leading politicians and experts—as well as the international community at large—are not yet ready to admit the obvious: today, any serious international crisis, even in a most isolated corner of the planet, could any time emerge as a global catastrophe, much in the same way that a dangerous infectious disease, no matter where it originated, can end up posing a real threat to human existence.

Most people would be surprised to hear that practically all the “safety” mechanisms set up over the course of decades to prevent isolated crises from escalating into direct military conflicts have in recent years been destroyed. The number of such mechanisms is shrinking, while the number of conflict situations is growing. You don’t have to be an imaginative author of post-apocalyptic dystopian novels to see where this could lead us.

There are no “easy outs” here. Even with all the political will in the world and the accumulated potential of professional diplomacy, no one will be able to effortlessly untangle the tangled knot of international problems. We thus need to prepare ourselves for long and difficult negotiations. Launching this most difficult of mechanisms should be our key priority right now. Perhaps the best way to do this, as President of the Russian Federation Vladimir Putin has suggested, would be to organize a meeting of the leaders of the UN Security Council permanent members as soon as possible.

If such a meeting happens, its participants will need to acknowledge that the world is approaching the proverbial “point of no return”, conceding that a global war knows no winners. As soon as they reach this self-evident conclusion, they could then set about forming a working group under the auspices of the UN Security Council to organize and hold negotiations on the most pressing international relations issues. In doing so, the permanent members of the UN Security Council would be fulfilling its “primary responsibility for the maintenance of international peace and security”, as set out in the UN Charter.

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Isolation Can Only Be Splendid

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The coronavirus pandemic, which arrived in Russia exactly a year ago, in April 2020, greatly exacerbated the issue of the modern state’s resilience to challenges that have an objectively external origin. Of course, one cannot compare the scale of the threat to that of the military interventions the country has experienced throughout its history. However, the ubiquitous nature of this challenge from the very beginning made such comparisons the most appropriate, especially in contrast to the crises and disasters of the 1990s and early 2000s; in any case, it had not been a product of the Russian state. The exogenous nature of the problem was combined with the fact that, for the first time, it did not have a specific source in the form of an adversary which could be defeated through a single exceptional effort.

The most important cultural consequence of the pandemic has been Russia’s pivot inward. First, because the national media focused on news from the regions related to the peculiarities of the pandemic in each of them. The increased attention to the activities of the regional authorities, which received rather broad powers, contributed to the formation of a single information space from Kaliningrad to Vladivostok. For the first time in national history, major news stories across a vast territory were devoted to a single topic.

Second, for the first time in the past 30 years, the citizens of Russia had to spend their holidays at home — in cities, at their dachas or traveling domestically. The issue of the accelerated creation of recreation infrastructure within the country has become relevant. No one disputes the fact that most Russian destinations are seriously inferior in terms of amenities to those in Europe or the Middle East. Not to mention the climate factor, which no state policy can overcome. But even if, in the future, international borders become open again (this is unlikely to happen in the foreseeable future), the emergence of such infrastructure and the habit of taking holidays without going abroad will further contribute to the localisation of the interests of Russian citizens.

Thus, for Russia, the pandemic has become an important factor in national cohesion and the localisation of interests within its own borders, the real consequences of which we will be aware of in the coming years. First of all, we can talk about the understanding that internal stability and development are more important for survival than the ability to respond to external challenges or to take advantage of opportunities that arise outside the Russian state.

These changes are of a strategic nature and inevitably affect foreign policy, keeping in mind those features of strategic culture that, while maintaining the same level of openness, would hardly be in demand. It is no coincidence that the most important issues of Russian foreign policy over the past year have been the deepening split in relations with the West, a more outspoken approach to interaction with China, and attempts to create a new system of relations with Russia’s neighbours: the countries that emerged from the former USSR. The latter can be interpreted as a distancing from them, to some extent.

The acute conflict between Russia and the West is the product of a massive change in the balance of power at the global level and the evolution of Russia itself 30 years after it acquired a new quality and borders. The former requires most of the world’s states to strive to maximise their advantages and provokes mutual pressure, attempts to change the balance in their favour. The latter forces Russia itself to abandon foreign policy attachments that have been established over the centuries. These changes seem especially dramatic in comparison with the period after the end of the Cold War, when Russia felt the need to constantly search for a compromise with the most powerful nations, which received the maximum benefits from the disappearance of the bipolar international order.

Until recently, the desire to preserve the most constructive relations with the West remained the central element of the post-Soviet Russian foreign policy. Now it is present only in the form of rhetoric, the main purpose of which is to point out to other nations that their behaviour is unacceptable. The completion of the post-Soviet stage of development for Russia requires an end to attempts to integrate systemically with the European Union and a willingness to establish a formula for stable working relations with the United States.

Contemporary relations between Russia and China are the product of a changing global balance of power and historical experience. The rapid rapprochement of the positions of Moscow and Beijing, as well as the coordination of their actions on the world stage, are, of course, the result of pressure on both partners from the West. Both powers understand that for quite a long time, their success in the fight against the main enemy will depend on their ability to act as a united front. In this respect, there are fewer reasons for hesitation — Moscow and Beijing have begun to move towards the creation of a formal alliance. Moreover, it is China that has shown fairly good results in the fight against the pandemic. Historical experience suggests that it would be wrong to strive for a clear distribution of roles according to the principle of “leader and follower” that can lead to instability in the long term. Therefore, now Moscow and Beijing are trying to avoid such a scenario of relations, although it is not easy.

Most importantly, the year of the pandemic set in motion Russian politics in the other states of the former Soviet Union. Here, surprisingly, Russia’s inward focus on itself has the ability not to weaken, but to strengthen its position in relations with partners in the region and non-regional players. First of all, because Russian politics is gradually becoming more demanding and diversified. By adopting this outlook, it refutes well-established notions about itself and immerses its partners in an unfamiliar situation, which is extremely useful for Russia.

One of the most important issues connecting international politics, history and geography in Eurasia is the question of the transformation of the geopolitics of the post-Soviet space over the past 30 years. The traditional point of view is that as historical experience was gained, each of the sovereign states that emerged from the USSR obtained unique characteristics and gradually their scale became so significant that it overcame the factors that ensure the existence of a certain community.

Finally, the history of this community should be completed by the transformation of Russia into the “last empire” — a power resembling Russia of 1917 in terms of its resource potential, and in terms of foreign policy behaviour — a 21st century nation-state which participates in the global balance of power. This is what is happening now, and the practical consequences are encouraging for some countries and discouraging for others.

Russia’s ability to somewhat distance itself from the former Soviet countries has a serious material basis — the preserved and partially increased resources and power capabilities of Russia, which make it possible to speak of a certain self-sufficiency in the international arena.

The understanding of the scale of these resources and opportunities came as Russia developed independently, including through the intellectual conceptualisation of the wealth that Siberia and the Far East represent for the Russian state. In this sense, the pandemic laid the groundwork for self-reflection and a focus on domestic problems.

The “turn to the East,” which has remained significant in Russian foreign policy discussions over the past 10 years, meant, first of all, strengthening ties with Asian countries and attempts to forge regional trade, economic and political relations. In many ways, it was carried out reluctantly — there was a lot of inertia of orientation towards Europe, Asia presents Russia with no security threats, while the creation of truly serious economic relations is practically impossible, amid the current conditions.

The development of Siberia and the Far East has never been a central focus of the political “turn”. However, Moscow has become more far-sighted, and now considers the territory beyond the Urals to be the most important, albeit as a by-product of the “turn”. In a sense, the “turn” has helped Russia to realise its own geopolitical dimensions, which became important in the context of a return to real, forceful international politics.

It would probably be wrong to interpret the current state of Russian policy towards the countries of the former USSR in terms of a “farewell”. Natural security considerations will remain as binding as ever, as well as ethical notions, despite the fact that Russia’s military capabilities allow it to solve many problems without directly controlling territory. Russian policy is becoming more flexible. Despite the fact that ethically Moscow still perceives Russia and the other former republics of the USSR as part of a kind of community, the methods of diplomatic interaction and the depth of involvement in its partners’ affairs are already the result of a separate assessment of every situation. The CIS issue is disappearing from Russian politics, and this can only be welcomed.

At the same time, it may be important that the consequence of internal changes is the drawing of external players into the Russian security periphery. For example, Turkey, Iran or Afghanistan. This process may not be unambiguous, but it is taking place. As a result, we can observe both an increase in requirements for the policy of Russia itself, and an expansion of its room for manoeuvre. We cannot be sure that the policy of Turkey, for example, will continue to move towards independence from the West. But now Turkish activism is bringing obvious benefits to Russia, and Erdogan’s elements of adventurous behaviour make him a “pleasant and comfortable” partner for Moscow.

Apart from modern Russia, there is hardly any other major power in the world whose resources and power capabilities would so much encourage the culture of self-isolation, and whose geographical position and associated historical experience would so much hinder it.

However, discussions on this topic are constant and sometimes take the form of the political concept of “a bear that walks in the taiga”. For national foreign policy, the challenge of the pandemic had an indirect effect — on the world stage, the country behaved, in general, like most states. The fact that Moscow’s actions were less selfish than those of Western countries reflected a desire to consolidate a new field of world politics and, at the same time, to fulfil a moral duty, without which Russia cannot exist.

However, this indirect effect was very likely more significant than any direct foreign policy challenge. The fight against the pandemic changed Russia from the inside and these changes are more important than any foreign policy manoeuvres or adaptation to international affairs.

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Steering Russia-US Relations Away from Diplomatic Expulsion Rocks

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As the recent expulsions of Russian diplomats from the US, Poland, Bulgaria and the Czech Republic demonstrate, this measure is becoming a standard international practice of the West. For the Biden administration, a new manifestation of the “Russia’s threat” is an additional tool to discipline its European allies and to cement the transatlantic partnership. For many European NATO members, expulsions of diplomats are a symbolic gesture demonstrating their firm support of the US and its anti-Russian policies.

Clear enough, such a practice will not be limited to Russia only. Today hundreds, if not thousands of diplomatic officers all around the world find themselves hostage to problems they have nothing to do with. Western decision-makers seem to consider hosting foreign diplomats not as something natural and uncontroversial but rather as a sort of privilege temporarily granted to a particular country — one that can be denied at any given moment.

It would be logical to assume that in times of crisis, when the cost of any error grows exponentially, it is particularly crucial to preserve and even to expand the existing diplomatic channels. Each diplomat, irrespective of his or her rank and post, is, inter alia, a communications channel, a source of information, and a party to a dialogue that can help understand your opponent’s logic, fears, intentions, and expectations. Niccolo Machiavelli’s adage, “Keep your friends close and your enemies closer” remains just as pertinent five centuries later. Unfortunately, these wise words are out of circulation in most Western capitals today.

A proponent of expulsions would argue that those expelled are not actually diplomats at all. They are alleged intelligence officers and their mission is to undermine the host country’s national security. Therefore, expulsions are justified and appropriate. However, this logic appears to be extremely dubious. Indeed, if you have hard evidence, or at the very least a reasonable suspicion that a diplomatic mission serves as a front office for intelligence officers, and if operations of these officers are causing serious harm to your country’s security, why should you wait for the latest political crisis to expel them? You should not tolerate their presence in principle and expel them once you expose them.

Even the experience of the Cold War itself demonstrates that expulsions of diplomats produce no short-term or long-term positive results whatsoever. In fact, there can be no possible positive results because diplomatic service is nothing more but just one of a number of technical instruments used in foreign politics. Diplomats may bring you bad messages from their capitals and they often do, but if you are smart enough, you never shoot the messenger.

Diplomatic traditions do not allow such unfriendly actions to go unnoticed. Moscow has to respond. Usually, states respond to expulsions of their diplomats by symmetrical actions – i.e. Russia has to expel the same number of US, Polish or Czech diplomats, as the number of Russian diplomats expelled from the US, Poland or the Czech Republic. Of course, each case is special. For instance, the Czech Embassy in Moscow is much smaller than the Russian Embassy in Prague, so the impact of the symmetrical actions on the Czech diplomatic mission in Russia will be quite strong.

The question now is whether the Kremlin would go beyond a symmetrical response and start a new cycle of escalation. For example, it could set new restrictions upon Western companies operating in the country, it could cancel accreditation of select Western media in Moscow, it could close branches of US and European foundations and NGOs in Russia. I hope that the final response will be measured and not excessive.

The door for US-Russian negotiations is still open. So far, both sides tried to avoid specific actions that would make these negotiations absolutely impossible. The recent US sanctions against Russia have been mostly symbolic, and the Russian leadership so far has demonstrated no appetite for a rapid further escalation. I think that a meeting between Presidents Joe Biden and Vladimir Putin remains an option and an opportunity. Such a meeting would not lead to any “reset” in the bilateral relations, but it would bring more clarity to the relationship. To stabilize US-Russian relations even at a very low level would already be a major accomplishment.

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