FREE TRADE AREA: NOW YOU SEE IT, NOW YOU DON’T.

No one could realistically have expected the treaty on the CIS-wide free trade zone (FTZ) to take effect on January 1, as originally scheduled. On January 25, however, the would-be FTZ took a potentially decisive hit. Motivated by protectionist interests and fiscal considerations, Russia at this summit did more than just defer its consent to FTZ in attaching conditions and reservations which would void the project–if ever realized on paper–of any real meaning.

First Deputy Prime Minister Mikhail Kasyanov clarified Russia’s position and was backed up by Deputy Prime Minister Viktor Khristenko and CIS Affairs Minister Leonid Drachevsky, during and following the summit. Before ratifying the FTZ treaty, Russia will negotiate separately with each member country to conclude bilateral trade treaties, which will codify exemptions from the FTZ treaty in Russia’s favor. Moscow has prepared lists of exemptions, consisting of anywhere between forty and 100 commodity groups–apparently depending on the country affected, as well as on the specific interests of Russian government departments. On some of those commodities, Russia intends to continue applying unilateral protectionist measures at its border. On other commodities, it intends to continue levying value-added taxes at the place of origin, as opposed to the place of destination. That VAT procedure and surcharges affect, in particular, Russian oil and gas exports to all the CIS member countries, thus raising the prices paid by those countries for those supplies. Because oil and gas form the lion’s share of Russian exports to CIS countries, excluding those goods from the free-trade regime would at one stroke compromise the FTZ. The multiple exemptions on other commodities seem likely to bury it altogether.

The FTZ’s likely demise should, on balance, be received with equanimity by Georgia and Kyrgyzstan. Those are the first CIS countries to have gained admission to the World Trade Organization (WTO). Russia reacted by warning both countries that they would forfeit the putative benefits of the CIS Customs Union and of the planned FTZ, unless they withdraw from the WTO. Georgia in turn made it clear, and Kyrgyzstan implied, that their interests are better served by the WTO than by the CIS. Russia’s reaction posed a more serious dilemma for such countries such as Ukraine, Moldova and Kazakhstan, which are seeking WTO membership but remain heavily dependent on Russian trade. Moscow’s pursuit of unilateral advantage should facilitate those countries’ ultimate choice in favor of the open international economy, as opposed to a Russian-dominated trade area (Itar-Tass, Federal News Service, January 24-27; see the Fortnight in Review, October 8, December 17, 1999; the Monitor, September 27, October 8, December 9, 16, 1999, January 6).

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