Putin’s Eurasian Dream Is Over Before It Began

BY REID STANDISH

JANUARY 6, 2015

On Jan. 1, one of Vladimir Putin’s most ambitious foreign-policy projects and a longtime Kremlin dream became a reality. Unfortunately for Putin and his colleagues in Moscow, nothing about the plan will work.

The Eurasian Economic Union — a post-Soviet economic bloc of Armenia, Belarus, Kazakhstan, Kyrgyzstan, and Russia — was designed to allow the Kremlin to reassert influence in its backyard and counterbalance the Brussels-based, 28-member-state European Union, which has inched towards Russia’s borders over the past decade. Instead, the Kremlin’s prestige project, announced in 2011, but floated as an idea since 1994, limped out of the start gate in 2015.

Since taking power in 2000, Putin moved to rewrite the history of Russia’s tumultuous 1990s, a decade marred by war in Chechnya, an economic crisis in 1998, and a rudderless foreign policy in its former backyard. Putin not only made Russia’s military relevant once again by modernizing it and setting up military bases in neighboring countries, but also wielded influence with former Soviet countries by controlling economically vital oil and gas pipelines. The Eurasian Union was meant to be the next step to secure Moscow’s standing as the economic champion of the post-Soviet space.

The Eurasian Customs Union, the Eurasian Union’s precursor, formed in 2010 and designed to remove trade barriers and harmonize tariffs between prospective members, has already faced its share of problems. Originally comprised of Belarus, Kazakhstan, and Russia, the integration project expanded to include Armenia and Kyrgyzstan in 2014, but has not delivered the economic boom that its members were promised. Both Kazakhstan and Belarus have seen their exports become more expensive in the crucial Russian market due to the ruble’s exchange rate troubles, while cheaper Russian goods have made it hard for domestic producers to compete. As the ruble’s value tumbled some20 percent in mid-December, consumers from Belarus and Kazakhstancrossed the border into Russia to snatch up deals on anything from cars to fruit as they found their buying power suddenly increased.

But the ruble’s fall will continue to create economic strain for the Eurasian Union’s four non-Russian members and 180-million-person market. In the medium and long term, the economic bloc will likely fail to deliver on its promises of breathing new life into its members’ industries and stimulating much-needed economic growth. “As Russia’s economy grows weaker, the Eurasian Union becomes increasingly irrelevant and unappealing for its other members,” says Luca Anceschi, a Central Asia expert at the University of Glasgow. “Eurasian integration was supposed to be about economic development, but it’s coming with a much larger price tag than its members expected,” adds Anceschi. With Belarus and Kazakhstan slowly realizing the economic costs of allying with Russia, cracks in the Eurasian Union are already beginning to show even before the foundations are set.

Since Western countries imposed the first round of sanctions on Russia in March, trade spats between Belarus and Russia have become the norm. Despite the political alliance between Minsk and Moscow, Russia banned meat imports from its neighbor in November, saying that Belarus had become a smuggling route for foods banned under the Kremlin’s counter-sanctions against the West. Belarus’s autocratic President Alexander Lukashenko called the restrictions “indecent.” This was followed by another incident, on Dec. 18, when Lukashenko tried to head off devaluing the Belarussian ruble by ordering the government to denominate trade with Russia in U.S. dollars or euros. About 40 percent of Belarus’s exports go to Russia, according to Belarus’s Foreign Ministry, and much of the rest goes to other former Soviet countries closely linked to the Russian economy. The Belarussian ruble lost 13 percent of its value against the U.S. dollar in 2014 and Minsk is clearly worried about the spread of economic contagion from Russia and is looking for added protection. 

The Eurasian Union will only yoke the isolated Belarus even tighter to a very unhelpful partner.The Eurasian Union will only yoke the isolated Belarus even tighter to a very unhelpful partner.

In Kazakhstan, a key country for Moscow’s plans for Eurasian integration, relations with Russia have been strained by mounting economic and political pressures over the past year. Like Russia, Kazakhstan relies heavily on oil to finance its budget and has been hard hit by the price slump for crude. In February, Kazakhstan’s governmentdevalued its currency, the tenge, by nearly 20 percent in one day due to falling oil prices. Sanctions on Russia have also taken an inadvertent toll on Kazakhstan, with the International Monetary Fund (IMF) forecasting that growth in Kazakhstan will slip from 6 percent of GDP to 4.6 percent in 2014 as a result of falling oil prices and the importance of trade with the Russian market.

To keep itself afloat and back its way out of Moscow’s economic shadow, Kazakhstan is trying to show the world that it’s still a good place to do business. In November, Kazakhstan’s president of 25 years, Nursultan Nazarbayev, announced a $9 billion stimulus from the country’s national oil fund to boost infrastructure development and attract foreign investment. This summer, the government unveiled new exemptions that allow foreign investors to avoid paying taxes for 10 years. The government in Astana has also announced that it is prepared to offer 30 percent reimbursement of capital costs to investors once a foreign facility is up and running in the country.

Meanwhile, Kazakhstan is also actively strengthening ties with Western Europe. The European Union is already Kazakhstan’s largest trading partner, a relationship that will grow further after Brussels and Astana signed anenhanced Partnership and Cooperation Agreement in October — a deal similar to the one Ukraine signed in September. “The government is taking a gutsy approach to attracting foreign investment and it could actually work,” says Janet Heckman, the head of the European Bank for Reconstruction and Development in Almaty, Kazakhstan.

“Our foreign policy has always been about the national interests of Kazakhstan first and foremost,” Erlan Idrissov, Kazakhstan’s foreign minister, told Foreign Policy in a recent interview. In addition to looking West, Kazakhstan has also been deepening ties with neighboring China. In 2013, China signed $30 billion worth of gas and oil deals and became the top investor in Kazakhstan’s Kashagan oil field — the largest in the world outside the Middle East. The trend continued on Dec. 14 as China and Kazakhstaninked $14 billion worth of infrastructure and energy deals — an important move for Kazakh economic independence, given that 80 percent of its oil exports are currently dependent on Russia-controlled pipelines and railways.

“We are not pro-Russian, pro-Chinese, pro-European, or pro-American in our foreign policy. We are pro-Kazakh,” Idrissov said. “If Russia can help us, we will turn to Moscow, but if Russia can’t offer us what we need to pursue our interests, we will turn elsewhere. It’s simply pragmatic.” In Oct. 2013, Nazarbayev accused Moscow of erecting unfair barriers to trade, describing the Customs Union’s Russian-dominated regulatory body as politicized and complaining that foreign trade distortions were causing major difficulties for his country’s market. 

Kazakhstan hoped that joining the union would help it develop a strong market for its local exports beyond hydrocarbons, but since accession to the Customs Union in 2010 the country has been flooded with Russian imports.Kazakhstan hoped that joining the union would help it develop a strong market for its local exports beyond hydrocarbons, but since accession to the Customs Union in 2010 the country has been flooded with Russian imports. 

All of this has raised fears in Astana, as well as Minsk, that the Eurasian Union they just entered will, as per Russian design, lock the post-Soviet states into Russia’s political orbit. Fears over sovereignty were increased following the annexation of Crimea in March. “In the eyes of Kazakhstan, Crimea’s annexation was an announcement that Russia does not respect the sovereignty of post-Soviet states,” says Nargis Kassenova of Kazakhstan’s KIMEP University’s Central Asian Studies Center. Crimea has left both Kazakhstan and Belarus walking a diplomatic tightrope, unable to fully split with Russia, but weary of its new face. Lukashenko, despite advocating support for Putin,called the annexation of Crimea a “bad precedent” for the region in March. Speaking on Dec. 15, on the eve of two-day official independence anniversary celebrations, Nazarbayev said that Kazakhstan will celebrate the 550th anniversary of the Kazakh Khanate in 2015 and urged his citizens to defend the country’s independence. The speech appeared to be a direct answer to a statement by Putin in August, who publicly said that Kazakhs had never had statehood before the collapse of the Soviet Union in 1991.

And while Kazakhstan and Belarus are diversifying their economic and political options, the Eurasian Union’s smaller members seem resigned to accept their fates as Russian satellites. Armenia’s National Assembly voted 103-7 on Dec. 4 to join the Eurasian Union along with Belarus, Kazakhstan, and Russia on Jan. 1. But even lawmakers who voted “yes” were less than enthused about linking their future to Russia. “We cannot survive without the Russian people,” said Mher Sadrakyan, a member of parliament from the ruling Republican Party of Armenia, echoing the view that an alliance with Russia is a necessary evil. Without Russia, Armenia would be left without support in its conflict with Azerbaijan over the predominantly ethnic-Armenian territory of Nagorno-Karabakh. The conflict there has been in limbo since a Russia-brokered cease-fire in 1994. Russia has a military base in Armenia and is the main supplier of arms to the Armenian military. “Without them [the Russians], they will devour us,” Sadrakyan said, referring to Azerbaijan.

Kyrgyzstan will also become a member of the nascent union — but with caveats. Kyrgyz President Almazbek Atambayev signed on the dotted line on Dec. 23, while noting that his country’s economy would not be ready for accession until May 2015. Major doubts persist in Kyrgyzstan about how joining the Eurasian Union will benefit the country’s economy, which relies heavily on the lucrative re-export trade of Chinese goods to other former Soviet countries. Eurasian Union membership will place new tariffs on Chinese goods, which will effectively strangle the re-export trade and could close major markets in the country — a development that the Kyrgyz Ministry of Labor, Migration, and Youth warned could double unemployment. Still, Moscow is Kyrgyzstan’s main benefactor, providingbillions of dollars’ worth of aid to prop up its struggling economy. The country’s leadership is not prepared to put that vital lifeline in jeopardy.

The Eurasian Union looks like a major dud. With Armenia and Kyrgyzstan reluctant members at best, and Belarus and Kazakhstan looking for alternatives to closer ties with Moscow, it’s becoming clear that the Eurasian Union won’t be the geopolitical game-changer Putin hoped for. Eurasian integration was meant to be the final step in Russia’s return to dignity and leadership, but instead the union is evidence of the Kremlin’s decaying foreign-policy aspirations.