Next Steps in the Merger of the Eurasian Economic Union and the Belt and Road Initiative

On June 9th, 2018 the Shanghai Cooperation Organization (SCO) held its annual summit at the Chinese seaside city of Qingdao. The past three summits have been preoccupied with the impending membership of India and Pakistan, but now that the two are full members, the focus has shifted. Both pre- and post-summit statements suggest that one of the highlights of the conference was the unveiling of concrete steps towards the merger of the Eurasian Economic Union (EAEU) and the Belt and Road Initiative (BRI). The initial merger of the two organizations was announced in May of 2015, just four months after the EAEU’s launch, but there has thus far been little visible progress of integration. Still, over the last three years the EAEU and BRI have gradually evolved and the announcement of actual projects can be seen as a victory for both China and Russia.

The Eurasian Economic Onion: Many Layers, Few Nutrients

The EAEU was ostensibly created as a Eurasian alternative to the European Union, with the goal of building a common market without internal barriers. Despite its name, the EAEU was envisioned by Moscow as a geopolitical rather than an economic animal. It was to be akin to a new Commonwealth of Independent States (CIS), but with real, functioning institutions whose main organ, the Eurasian Economic Commission (EEC), would be headquartered in Moscow, while a new Court of the EAEU would be based in Minsk, and a financial regulator would make a home in Almaty (cer.eu, March 16 2017). 

Although these grandiose dreams have not been realized, the EAEU does have a well-structured institutional organization, which is perhaps the greatest advantage it has to offer the BRI in any potential merger. The EAEU’s most important decisions are made by the Supreme Eurasian Economic Council, which is composed of the heads of member states, while a secondary level, consisting of prime ministers, roughly corresponds to EU’s Council of Ministers. Most of the day-to-day bureaucratic work is conducted by the EEC (Russian Analytical Digest, May 3, 2016). These bodies could potentially streamline policies and facilitate the construction of the infrastructure envisioned by the BRI. They can also enact and enforce the various legal arrangements that may be agreed to as part of an EAEU-BRI merger.

Despite Russia’s ideological and geopolitical aspirations, in practice the EAEU has remained a purely economic institution. The organization has functioned primarily as a limited customs union, whose most successful element has been the improvement of cross-border commercial transit (New Eastern Europe, January 9). The EAEU has also raised external tariffs on imports from non-EAEU countries and thus made products from within the EAEU more competitive. In addition, the EAEU has eased conditions for laborers from Kazakhstan and Kyrgyzstan who are working in Russia by eliminating burdens, including mandatory language tests, and payment for a monthly work permit (these hurdles remain for workers from non-EAEU countries). This matters especially for Kyrgyzstan, which derives 25.7 percent of its GDP from labor remittances (crisisgroup.org, July 27).

The EAEU has also served as a useful platform for the creation of Free Trade Agreements (FTAs) with foreign countries. Thus far, Vietnam, Moldova, Uzbekistan and, most recently, Iran have signed FTAs with the EAEU. It is likely that the “agreement on trade and economic cooperation” with China, announced in May and elaborated upon at the Qingdao summit, will be based on the same premises as these previous agreements.

These notable successes notwithstanding, the EAEU faces many problems. First and foremost among these is that the Union was born just as Russia’s economy began to crumble under the weight of low energy prices, international sanctions, and Moscow’s subsequently imposed counter-sanctions. Russia’s economy accounts for 84 percent of EAEU GDP; its stagnation has sapped the union’s forward momentum, as Russia’s trade with EAEU partners fell by 15 billion US dollars year-on-year in 2015, and declined further in 2016 before rebounding slightly in 2017 (Chatham house, May 2 2017). The collapse of the Ruble only worsened the problem, cheapening Russian goods and hurting other countries’ competitiveness vis-a-vis Russia. Secondly, little headway has been made in creating a common market for oil, gas, and electricity, all of which are supposedly among the union’s main goals. Third, non-tariff barriers remain a huge problem in many sectors (cer.eu, March 16 2017). Although efforts have been made to liberalize the services market in areas such as construction, engineering, agriculture, retail, and wholesale trade, the opening has been slow and only partial.

The EAEU remains popular among the elite of all five member countries and, according to polls, retains public support. Its existence is secure for the short and medium term, but its influence will largely depend on how closely it is integrated with the BRI. The EAEU, as a relatively new creation, lacks the deep set norms that define older institutions. This immaturity could work in its favor, however, as it could mature alongside the BRI, as the two mechanisms develop jointly without infringing on each other’s core interests.

The Nebulous One Belt, One Road Initiative

Contrary to its name, the Xi administration’s flagship foreign policy initiative actually includes six different “economic corridors”: four for the Silk Road Economic Belt and two for the Maritime Silk Road (ndu.edu, October 4). Integration with the EAEU focuses on three: the New Eurasian land bridge connecting China with Europe via Kazakhstan, the China-Central Asia-West Africa Economic Corridor, and the China-Mongolia-Russia economic corridor (National Bureau of Asian Research, July 15).

Unlike the EAEU, which was clearly modeled on the European Union, BRI has no real precedent. Some commentators have compared it to the Marshall Plan, although the proposed financial scope of the BRI is actually far larger. For example, the National Silk Road Fund (with a $40 billion endowment) is directly responsible for financing BRI projects, although its only large investment to date was its purchase of an equity stake in a Russian liquefied natural gas project on the Yamal Peninsula (Xinhua, November 1). The BRICS Bank is headquartered in Shanghai and has $70 billion at its disposal. Most important is the Asia Infrastructure Investment Bank (AIIB), with $100 billion in capital [1]. These three nascent financial institutions were all created within the last five years and have yet to truly flex their muscle. But their potential is substantial, despite the fact that, five years into its existence, the BRI remains somewhat nebulous from a bureaucratic implementation standpoint.

“Trade and Economic Cooperation”: The Meaning of Agreement

Immediately following the May 2015 signing of the Joint Statement on Cooperation on the Construction of Joint EAEU and the Silk Road projects, a Sino-Russian joint working group met in Beijing to define key issues for EAEU-BRI cooperation. They concluded that the key areas would be: major infrastructure projects, the creation of a system for the protection of mutual investments, and the creation of mechanisms for the resolution of investment disputes (iorj.hse.ru, December 8, 2016). The notion of an “agreement on trade and economic cooperation”, as opposed to a more conventional free trade agreement, was first proposed in September 2016 at a meeting of experts organized by the Eurasian Economic Commission (journals.aau.dk, June 29).

The idea found traction, and in May 2018 the two sides signed a Sino-EAEU agreement that is expected to take effect at the beginning of 2019. In an interview with Xinhua, Tigran Sargsyan, the chairman of the board to the Eurasian Economic Commission, said that the treaty “creates a serious legal framework for the interaction of businesses and makes the environment in which they will operate predictable. The proper alignment of transport infrastructure and logistics holds serious potential, and 40 specific projects in the sectors of rail transport, road transport, and other types of infrastructure are currently under discussion” (Xinhua, June 5).

It is likely that among the 40 projects that Sargsyan mentions are the Moscow-Kazan high speed railroad and the Western Europe-Western China expressway that would connect Lianyungang with St. Petersburg. Additionally, there are several hydropower projects in the Russian Far East that will be financed by Chinese investment (Central Asia Institute for Strategic Studies, July 15). The list also likely includes the agreement between the Russia Direct Investment Fund and the China Development Bank to create a new $10 billion cooperation fund for cross border projects, as well as the $850 million loan that the China Development Bank gave to the Russian VEB bank for the construction of an innovation fund (Gazetta.ru, May 29). It would not be surprising, however, if the majority of these projects were in Kazakhstan rather than in Russia, as Astana has worked hard to incorporate its “Nurly Zhul” infrastructure initiative with BRI. On the other hand, there has been a noticeable rise of anti-Chinese sentiments in Kazakhstan that may preclude some of these projects from reaching fruition (Eurasia Daily Monitor, January 8). It also remains unclear what the “legal framework” that Sargsyan alluded to actually entails, although the Valdai Discussion Club, a Russian think tank that has published papers on Russia’s Asia policy, has suggested it could encompass sectoral and customs cooperation, sanitary measures, technical barriers, intellectual property protection, and greater transparency in trade remedy actions (Valdai Discussion Club, September 8).                      

Conclusion

It is possible that Vladimir Putin’s vision of a greater Eurasia may have grown to include a free trade zone that extends from the borders of Poland to the Yellow Sea. This notion of a “greater Eurasia” has cropped up throughout the writings of Russian policy experts, such as Sergei Karaganov and Dmitryi Efremenko, and is seen by many as a paradigm for Russia’s geopolitical strategy in the second decade of the 21st century (Russia International Affairs Council, September 1).

The concept seeks to encompass a number of different trends that have defined Russian diplomacy over the last several years, namely, the “turn to the east”, the establishment of the Eurasian Economic Union, and the attempt to reinvigorate the Russian Far East. Interestingly, many Russian experts are looking to the SCO as the negotiating venue for this “greater Eurasia” partnership—a perspective that is certain to be met with approval by Beijing (Russian Analytical Digest, May 3, 2016).  

It appears that Russia and China share a long term vision for the Eurasian region. Smaller actors such as Kazakhstan and Mongolia will have to fine tune their foreign policy to meet the new challenges presented by Moscow and Beijing’s renewed focus on Central Asia. In addition to multilateral conferences, the SCO summit in Qingdao was replete with bilateral and trilateral sideline meetings between various actors in this new great game. Eurasia is coming into focus on the world stage. Somewhere, Halford Mackinder is smiling.

Gregory Shtraks is a PhD candidate in International Relations at the University of Washington where he is writing a dissertation on Sino-Russian and Sino-Kazakh relations.

Notes

[1] Prior to the establishment of the BRI, China has long advocated for the establishment of an SCO bank only to be blocked by Russia. Now, however, the tables have turned and it is the Russians who are more interested in the SCO Bank with the Chinese balking at the idea (Carnegie Moscow Center, March 19, 2015).