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The misleading eastern alternative: Republic of Moldova and The Russia – Kazakstan – Belarus Customs Union

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The misleading eastern alternative: Republic of Moldova and The Russia – Kazakstan – Belarus Customs Union

  1. 1. Institute for Development andMoldova’s Foreign Policy statewatch Social Initiatives “Viitorul” Issue 12, November 2010The misleading easTern alTernaTive:republic of moldova and The russia –KazaKhsTan – belarus cusToms unionEduard Țugui Next topicsMoldova’s Foreign Policy Statewatch represents a series of briefanalyses, written by local and foreign experts, dedicated to the to be covered:most topical subjects related to the foreign policy of Moldova,major developments in the Black Sea Region, cooperation with Free trade Agreementinternational organizations and peace building activities in the region. between Moldova and eUIt aims to create a common platform for discussion and to bringtogether experts, commentators, officials and diplomats who are the treaty regarding theconcerned with the perspectives of European Integration of Moldova. border regime betweenIt is also pertaining to offer to Moldova’s diplomats and analysts a Moldova and romaniavaluable tribune for debating the most interesting and controversialpoints of view that could help Moldova to find its path to EU. T he internal political instability and its collateral effects are marked in the Republic of Moldova from the perspective of foreign policy orientation, which on the geopolitical background are orbiting between the European integration and the integrationist projects from the former soviet space, articulated around Russia. Despite the greater openness of the European Union towards Moldova, the new Russian geopolitical project: Russia – Kazakhstan – Belarus Customs Union was rapidly seized by some Moldovan political parties in the campaign for the elections of parliament that will take place on November 28, 2010 and will be perhaps a real issue of foreign policy in negotiating the future government alliances. As for Moldova, this alternative does not represent only a simple tactical move but a strategic perspective, it is important to emphasize a series of economic indicators primordial in sustainable development which do not support the inclusion of Moldova in the Eurasian economic space.
  2. 2. 2 Moldova’s Foreign Policy statewatchResuscitation of the former sovietspace integration On the background of the inefficiency of the Commonwealth of Independent States, the formersoviet space has tried different integration models, from state unions to joint military structures designedaccording to the interests of Russia, which is forced to propose alternatives against EU in Eastern Europeand against China in Central Asia. At the end of 2009, the presidents of Russia, Kazakhstan and Belarussigned the hasty establishment, under an agreement concluded on 6 October 2007 within the EurasianEconomic Community (EvrAzEs), of the Customs Union (CU), which provides a common custom tax onthe territory of these 3 countries, the elimination of the customs control at the borders between them andthe implementation of common regulatory mechanism of external trade1. The agreement entered intoforce beginning with 1st January 2010, and beginning with July 6 the new joint customs code is applied,after a confrontation on gas related issues between Russia and Belarus, and from 2012, the aim is tocreate a Common Economic Space.Institutional uncertainty For Moldova it is difficult to integrate, first of all, institutionally in a customs union and evenmore in common Eurasian market. Since 2001 Moldova is a member of World Trade Organisation(WTO), whereas the CU members are in different stages of negotiating accession to the organisation.Russia (the leader of any possible post-soviet integration) is negotiation the accession to WTO since1993 and has tried at a certain moment to negotiate a “package” accession, together with Belarus andKazakhstan, or through the voice of PM V. Putin to blackmail the western partners that they renouncedto WTO membership, in favour of regional (protectionist) integration. The subsequent resumption of thenegotiations with Americans for speeding up the individual accession of Russia, make the CU for the timebeing an instrument in the negotiations with US and EU or a “geopolitical asylum” for the amortization ofthe risks of the future trade openness. The fact is that Russia is not yet a member of the WTO and the trade is often hampered by thebilateral political relationship between Chisinau and Moscow, and repeated embargoes in 2006 and 2010imposed by Russia to Moldovan wine and other food products have preceded the (geo)political events.Otherwise, since Russian investors control many companies in the sector, it is difficult to understandhow to develop a competitive sector of the Moldovan economy when even the state of origin of theseinvestments disputes the quality products made by them. If Russia eventually joins the WTO, it is stilluncertain the legal relationship of CU with WTO as uncertain remain the settlement mechanisms ofpotential trade disputes within the Eurasian space. Will we address to World Trade Organization, asmost of the countries do, or we will continue to settle the problems in Moscow? Furthermore, the factthat Ukraine is not, at least for now, a CU member brings an additional uncertainty on the geographicalcustoms unification between Moldova and the current members. Moreover, in 2006 Moldova became a member in the Central European Free Trade Agreement(CEFTA), which includes Moldova into a southeast European free trade area, along with the Balkan states,aimed to adjust the trade and economic standards to European members, not Belarusian standards. Thus,membership in the CU, which involve common customs tariffs, would suggest to impose, for the Balkanstates, the tariff regime modeled after the Russian economy, given that we are with them in a free tradearea aspiring to integrate into a common European market. To not mention that part of the negotiationson the Association Agreement between Moldova and the European Union launched in January 2010,there will be negotiations on the signing of a Deep and Comprehensive Free Trade Agreement, expectedto be launched in early 2011. It is an irreversible process, and Moldova cannot afford not to benefit from1 Договор о создании единой таможенной территории и формировании Таможенного Союза. Art. 2; 3. [On-Line]. 2010. http://www.tsouz.ru/Documents/TCform_dog.doc. (accessed 20.10.2010).str. iacob hîncu 10/1, chişinău Md-2005 republic of Moldova 373 / 22 221844 phone 373 / 22 245714 fax office@viitorul.org www.viitorul.org
  3. 3. Moldova’s Foreign Policy statewatch 3free access to European markets, respectively, to suspend a comprehensive mechanism of negotiationswith the European Union.Economic incompability As an economic entity, CU is a market of 170 million consumers with a GDP of 1.86 trilliondollars2 and a share (for the whole CIS) of 3% of world trade.3 Difficult to compare with the EU, whichrepresents a market of 500 million consumers with a GDP of 17 trillion dollars and a 42% share of worldtrade in goods.4 Specializing in oil exports, which bring the largest reserves in the case of Russia andKazakhstan, this entity may give to other candidates, as is the case of Belarus, only lower prices foroil and segments of the market for some goods under the global market quality. The engine of the newstructure – Russia, has no productive capital and technology to be invested in the economies of CUpartners, and they link, in turn, hopes of a real economic recovery (not based on high prices on rawmaterials) of Western technology and investments. European companies, which until 2007 had invested17 billion Euros in the Russian economy,5 provide approximately 75% of FDI stock in Russia and entireRussian economic sectors (from cars construction to food industry) link its future to European productivecapital. In the context in which Russia already sells gas and oil at market price throughout the formerSoviet Union, including Belarus, its partners cannot revive the economies by stimulating production withlow energy prices. However, despite it calls for creating an internal market, even a common currency,Russia does not want to liberalize energy markets, including oil transport infrastructure that would allowdirect purchase of energy from Central Asia. Thus, in a common economic space, the Russian state willhave a monopoly on transportation and on the price of hydrocarbons. If we assume that the CU becomesattractive to foreign investors, although it could never compete with the EU that attracts half of globaldirect investment, then there is a real risk that Western capital and technology will move further towardsthe market where energy is cheaper, and the Government has cash (at least compared with Moldova)to support in times of crisis, some Western companies, as was the case of Renault. Moreover, Russiaas not being WTO member, seeks to protect with customs tariffs certain industrial sectors that Moscowis willing to re-launch, and high taxes were imposed in the CU to the import of cars and textiles, forexample. For other members, this will mean an inflationary pressure, the more expensive European cars(well preserved) and Chinese textiles (let’s say affordable). For Moldova, thus, economic recovery and return of its citizens home is more real within anintegrationist project in which European companies, trying to recover from the global economic crisiswill prefer eastern markets in the EU. Also, an economy with free trade with the EU, not to speak ofa common market, will attract a large flow of Asian investments, particularly Chinese, who have beenseeking for a while for opportunities to penetrate the largest market in the world. Moldovan workers flowinto the European labor market, inevitably the first phase, will stabilize and reverse the process oncethere will be opportunities to work at home.The problem of cohesion Any kind of economic openness is accompanied, at least in the mid-term, with series of negativeexternalities that are directly felt by economy and some social segments. Moldova, in which a largepart of its budget revenues are from taxing imports / consumption, would substantially reduce customs/ budget revenues, that would happen in a case of free trade area with the EU and CU with Russia.At the same time, Moldovan farmers and companies will compete, unprotected by tariffs, with highly2 United Nations Conference on Trade and Development. Handbook of Statistic 2009. [On-Line]. 2010. p. 416. http://www.unctad.org/en/docs/tdstat34_enfr.pdf (accessed 10.10.2010).3 The World Trade Organization. World and regional Exports Profiles 2009. [On-Line].2010. http://www.wto.org/english/res_e/statis_e/world_re-gion_export_09_e.pdf (accessed 20.10.2010).4 Idem.5 For details see: http://ec.europa.eu/trade/creating-opportunities/bilateral-relations/countries/russia/index_en.htm. str. iacob hîncu 10/1, chişinău Md-2005 republic of Moldova 373 / 22 221844 phone 373 / 22 245714 fax office@viitorul.org www.viitorul.org
  4. 4. 4 Moldova’s Foreign Policy statewatchsubsidized farmers and companies, both in West and East. Also, when the European Community hasentered the phase of the Customs Union (1968), France managed to establish the Common AgriculturalPolicy, the policy that absorbed about 90% in the first decades of the Community budget and throughwhich are subsidized European farmers. Preparations to complete the internal market and later theEconomic and Monetary Union, assumed the creation of financial mechanisms and policies (StructuralInstruments) which only in the current financial framework (2007-2013) will allocate 347 billion of Euros6to disadvantaged states and regions to support investments in infrastructure, education, health, businessand administrative reforms. Lack of such compensatory mechanisms in the CU, will create financing problems of the Moldovaneconomy and local producers will be disadvantaged compared with those from Russia, for example.Large currency reserves of Russia allow it to invest in infrastructure projects (although not so many)or to support their own producers by tax exemptions. Although it has decided to reduce agriculturalsubsidies, they will anyway remain enormous compared with possibilities of Moldovan budget, whichwill return slowly after the deficit and the losses of some revenues from imports. Republic of Moldova, atleast in the medium term will not have comparable reserves (per capita obviously) with those of Russia,that could massively intervene from the state budget with big infrastructure projects to stimulate privateinvestments, thus European grants is currently the only alternative.Conclusions Therefore, the Eurasian economic space that is articulated by Russia based on the CustomsUnion is a misleading alternative to the economic and institutional modernization of the Republic ofMoldova. On the other hand, socio-economic development of the Moldovan state may have the strongestsupport for European integration, expressed in structural investments aimed at developing the mostimportant factors of production. Important is that Moldova should keep the European path, through a prudent and technical well-supported sectorial European integration. A political exercise which is not easy, especially since Russiawill often remind us about the eastern structure. It is also important that the liberalization of visa regime to precede trade liberalization or as abackup scenario, the two liberalization processes should occur concomitantly and Moldovan citizenscould begin to move freely on the European market along with the goods. Finally, the Moldovan authorities must negotiate with the European capitals to increase financialassistance grants for the Republic of Moldova. In the negotiation of EU budget for 2014-2020, theMoldovan state may ask in this period for funding through the Instrument for Pre-Accession Assistance(from which benefit Balkan states that are potential candidate), financial instrument absolutely providentialfor domestic producers in an area free and comprehensive trade with the EU.6 For details see: http://ec.europa.eu/trade/creating-opportunities/bilateral-relations/countries/russia/index_en.htm.This publication was produced by idis “viitorul” with the financial support of soros FoundationMoldova and the national endowment for democracy. The opinions expressed in this publicati-on reflect the author’s/authors’ position and don’t necessary represent the views of the donors.str. iacob hîncu 10/1, chişinău Md-2005 republic of Moldova 373 / 22 221844 phone 373 / 22 245714 fax office@viitorul.org www.viitorul.orgstr. iacob hîncu 10/1, chişinău Md-2005 republic of Moldova 373 / 22 221844 phone 373 / 22 245714 fax office@viitorul.org www.viitorul.org

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