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3 August 2016

To save the “Eurasian Dream”

Unable to satisfy economic demands of its allies, Russia is forced to negotiate with China 

The Eurasian Union is very different from other integration projects. Despite all attempts to present Eurasian integration as similar to European integration which united Western, Central and parts of Eastern Europe, the Eurasian Union (EEU) looks more like a “Russia + club”. Russia makes up 80% of the EEU’s population, 84% of its territory and 84.3% of its GDP. By comparison, Germany - the largest economy of the European Union (EU) - makes up only 16.3% of the EU’s population, 8.1% of its territory and 18.1% of its GDP. For Russia, Eurasian integration is a political project first which symbolizes Moscow’s leading role over the post-soviet space, and proves that Russia has an alternative to a “pivot to the West”. In order to convince Russia’s closest allies, Belarus and Kazakhstan, to join an invariably unequal union, Moscow has promised considerable economic benefits. It is clear today that most of those promises were unrealizable from the outset.

Promise #1: You can make money off geography

The Eurasian Union almost entirely fits Halford Mackinder’s dream of the Heartland. According to the author’s theory, control over the Heartland territory gives one tremendous geopolitical advantages, even ultimately giving control over the the world. This idea has inspired a number of Russian philosophers and “geopolitical theorists” and excites contemporary Eurasianists to this day. However, when faced with reality, Mackinder’s theory falls to pieces. As Vladislav Inozemtsev pointed out, in the beginning of the 21st century, it is clear as day that Mackinder was very wrong. Huge continental masses do not convert into economic or political success. On the contrary, they can be a burden or at least present a considerable challenge. Global economy develops more effectively near the ocean shore, and Eurasia’s transit potential in practice remains a dream of Vladimir Yakunin (former head of RZD -Russian Railway Company) and figures alike.

Even back in 2012, the Russian government had big expectations for the Northern Sea Route, promising to transport 64 million tons of cargo by 2020. In 2015, the transit accounted for only 39,000 tons of transported cargo, down from 274,000 in 2014, and 1.18 million in 2013. Russian Railway, which only a year ago proudly announced a 7-fold increase of Trans-Siberian cargo transit to 131,000 TEU (twenty-foot equivalent unit of cargo capacity) from 2009 to 2014, is dwarfed by only one Chinese sea port. The port of Shanghai exceeds the capacity of the biggest Russian transporter by almost 300 times, with an annual transport of 36.54 million tons of cargo. At this time, China’s Silk Road transit routes to Europe bypass Russia and there are no guarantees that Russia will eventually join the party.

Most importantly – participation of a particular member of the EEU does not convert into the success of others. Kazakhstan would be no less happy to take the volume of transit that could potentially be directed through Russia, but will go south instead since there is simply no necessary infrastructure in Russia.

Promise #2: More integration equals more trade

For the last six years, both Minsk and Astana have spoken only of the economic nature of integration which started in 2010 in the form of a Customs Union, and since 2015, as the Eurasian Economic Union. Having in mind the example of European integration, all parties involved were convinced that once trade barriers, quotas, and limitations were lowered, and rules harmonized, businesses would increase cooperation, and thus trade would grow considerably, bringing back the volume of trade lost in 1990s and 2000s. For example, the Commonwealth of Independent States’s share in Russia’s trade fell from 41% in 1993 to 14.6% in 2010, and the share of trade with the countries of the EEU to 7.8%. 

After 6 years of constant work, dozens of meetings of heads of states, hundreds of decisions to liberalizes trade, and thousands of technical solutions, EEU countries’ shares in Russia’s trade today stands at the same 7.8%. However, it would be unjust to say that the trade stands at the same level as 6 years ago. In 2015, Russia’s trade with EEU countries fell by 16% compare to pre-integration figures of 2010.

Curious that even after the embargo of certain EU goods, the EU’s share in Russia's trade shrank by only 4.2%, from 49% to 44.8%. And the share of trade with the “adversary” - the United States - rose by 0.4% over the course of the last 6 years, and now stands at 4.1%. Russia’s trade with U.S. surpasses its trade with allied Kazakhstan by 35%, and is 15 times greater than its trade with Kyrgyzstan. Trade with “hostile” Ukraine is 7 times larger than trade with “friendly” Armenia.

This data only suggests that it is harder to adapt the economy to political or ideological provisions than the  Kremlin’s “Eurasian strategists” desire. It also confirms that EEU members’ potential for integration was limited from the beginning. The economies of Russia and Kazakhstan are too alike (especially when it comes to exports), Belarus was already deeply integrated with Russia, and Armenia and Kazakhstan are too small to considerably influence the overall results.

The only chance to go beyond “Russia + club” was ultimately lost in February of 2014, when Russia’s “little green men” began to annex Crimea. Without Ukraine, Eurasian integration is unable to reach the much needed critical mass of scale which brings about economic growth on its own.

Promise #3: Integration into the global economy with Russia’s help 

In 2010, Moscow convinced both Minsk and Astana that it would be easier to negotiate with international economic bodies together with Russia, acquiring more preferential conditions, and generally, to get integrated into the global economy more quickly. The logic here (as proposed by Moscow) was that it would be easier to give Moscow the right to negotiate with the EU for all EEU members than to deal with, say Eastern Partnerships on individual basis, getting less lucrative deals. 

Truly, in the late 2000’s, no one could have foreseen the troubles ahead - the Russian economy was steadily growing, sharing surpluses with its neighbors. Even the 2008 crisis seemed under full control. Russia was headed by “almost a westernizer” President Medvedev who constantly proclaimed the goals of increasing cooperation with the EU and other leading global economies. The events of 2014 were unthinkable.

The possibility of “integration of integrations” loomed in the distance. This economic union with EU would have satisfied all the needs of both Belarus and Kazakhstan for decades to come. But Russia’s annexation of Crimea and its war in Ukraine has destroyed all of those hopes.

When Russia speaks of the “integration of integrations” now, it rarely finds any interest on the part of the Europeans, remaining mostly a debate topic for some researchers. However, Russia keeps trying, with the two latest attempts of Putin’s General Assembly speech and EEU commission proposal on cooperation in 2015.

In China we trust?

The domestic crisis of the Russian economy, the drop in GDP, and virtually no chances to break out of the isolation of the West, makes Russia’s EEU partners, and Russia itself, seek solutions with China.   

Russia’s allies clearly understand that there is no hope for a quick rebound of Russia’s economy. However, there is a huge demand for investment in the broader sense, and since Russia is incapable of satisfying those needs, and the West is closed, only China is left. Practically speaking, China has been a part of the “Eurasian space” for years now and in many instances its role is much greater than of Russia - for example, Chinese investments in Kazakhstan surpass those of Russia by 7 times.

The start of negotiations on trade cooperation between the EEU and China is an attempt to institutionalize long existing practice of interactions between China and EEU members, where Russia wants to acquire resources to satisfy its own needs, on the one hand, and on the other, to “control” how China does business with Russia’s allies. Moscow clearly demonstrates both to China and to its allies that all negotiations should go through Moscow, which causes discontent - especially in Astana. What it comes down to is that Moscow simply does not have a choice: either it negotiates an accepted form of EEU-China cooperation, or its allies will go to China directly, bypassing Moscow.

It may be that by trying to build a “Greater Eurasia”, Russia and its EEU partners will end up in “Greater Asia”, becoming “China’s little brother”, not only in rhetoric, but in practice. Although for now, China is perfectly capable of “financing” the continuity of Russia’s “Eurasian dream”, which would be more than enough for the EEU heads of states lifetimes.

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