Quo vadis Russia?

Quo vadis Russia? On Second thought' By Dietmar Jost

      On Jan. 1, the agreement on establishing a Customs Union between the Russian Federation, Belarus and Kazakhstan entered into force.
   By July 1, a common Customs tariff and a common Customs law will be put in place and the Customs Union will become fully operational.
      Clearly, the creation of a Customs Union is a very welcome development from a business perspective, in particular if the Customs Union is accompanied by institutional reform and strengthening of the respective customs administrations concerned. Much has happened in recent years and the World Bank is funding large-scale multi-annual reform and modernization programs in these countries. But much remains to be done.
      The agreement to form a Customs Union among the three countries was signed Nov. 27 at the summit of the Eurasian Economic Community (Eurasec) by the presidents of the three countries. Other former Soviet neighbor countries are considering to join the Customs Union. Initially, Tajikistan will have the status of an observer, while Kyrgyzstan is working on becoming a member.
      Customs Unions are very substantial and critical steps towards regional economic integration, which has become a worldwide trend, partially caused by the slow process at the World Trade Organization (WTO) to conclude the Doha round of trade negotiations.
      For the Customs Union between Russia, Belarus and Kazakhstan, the Customs Union could indeed be seen as a first step towards a 'European Union of the East.' The European Union started as a Customs Union in 1958 with only six member states at the time. However, it took a few decades before the common internal market came true in 1993 and the process is still not completed.
      Regional economic integration is a slow process requiring strong political will over a longer period of time and works best among equal partners. Looking at the economic data of the three countries, it comes clear that Russia is by far the strongest economy of the three. In 2008, the International Monetary Fund's (IMF) world gross domestic product ranking saw Russia in eighth place, Kazakhstan in 55th place and Belarus in 71st. It is difficult to imagine that negotiations among the three countries and with potentially new members will be conducted on a level playing field, as Russia is politically, strategically and economically too powerful.
      Much can also be speculated about the inner motives and intentions of forming the Customs Union. After the collapse of the Soviet Union, many attempts were made by Russia to re-establish some form of regional union such as the Commonwealth of Independent States (CIS). With Belarus, for example, Russia has tried to establish a Customs Union since 1995, which now has come true and is a clear sign of Russia's ambitions and political wish to dominate its former Soviet neighbors.
      There is also the discussion at the Geneva-based WTO about the three countries' intention to jointly pursue WTO membership as a Customs Union. WTO membership is a high priority matter for Russia and Kazakhstan. Russia has sought membership for more than 16 years, and while the country may have hoped to accelerate the process by seeking membership via the Customs Union rather than through individual membership, negotiators in Geneva fear that the process could be even further delayed.
      Regardless of the political motivations and intentions of Russia and its neighbors with regard to the Customs Union and towards regional integration, for the business world inside and outside of the three countries, the Customs Union means good news. It will take some time before the three respective customs administrations will be able to fully apply the new common Customs code and common cross-border Customs procedures. As for the Customs code, this will hopefully be fully based on the Revised Kyoto Convention, the international standard for customs legislation developed and governed by the World Customs Organization. So far, only Kazakhstan is a contracting party to this important international convention and this only very recently, since June 19, 2009.
      However, the prospect of abolishing or significantly reducing border crossing formalities between the three countries will reduce cost and unleash additional economic growth. So far, the three countries do not show impressive international rankings when it comes to logistics, ease of doing business and Customs performance. Much remains to be done and the Customs Union can present an important milestone towards tangible Customs reform and performance improvements.
      In the Doing Business Ranking of the World Bank, Belarus ranks 129th followed by Russia at 162nd place and Kazakhstan at 182nd place of 183 countries measured. The Logistics Performance Index (LPI) of the World Bank and its Customs performance sub-index show Kazakhstan on 62nd and 79th and Russia on 94th and 115th place of 155 countries measured. Belarus is not even included in the LPI ranking.
      Hopefully, the three countries will engage in open and formal business consultations about the implementation of the Customs Union, as the trade and transport industries have much experience to share with the Customs administrations with regard to prioritizing and developing efficient and effective cross-border operations and cooperation.