February 21, 2014

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TSG IntelBrief: Russia’s Push to Counter the EU and EuroMaidan

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In Pursuit of Some Sense of Importance

Since the collapse of the Soviet Union, Russia’s aspirations for greatness have been the underlying goal of every aspect of its foreign policy. Becoming an energy superpower and reintegrating former Soviet states into the Russian orbit through trade policies are two of the directions that the pendulum of Russian foreign policy has swung over the past two and a half decades. The formation of the Eurasian Customs Union (ECU) in 2011 is part of Russia’s extensive efforts to create the Eurasian Economic Union (EEU), slated to start work officially in January 2015.

The ECU was formed in 1995 among Russia, Belarus, and Kazakhstan and modeled after the European Union (EU). The idea was first proposed by Kazakhstan’s president Nursultan Nazarbayev. Its goal was to include most former Soviet states and create a Eurasian trading bloc to compete with the EU. Russian President Vladimir Putin has embarked on a serious drive to make the eventual EEU a reality in order to ensure the advancement of Russian political and economic interests and to protect against European encroachment in the form of trade agreements with former Soviet states and their resulting democratization. In Ukraine, Moscow’s efforts to draw the former Soviet satellite back into the Russian orbit have resulted in the eruption of pro-European demonstrations, collectively known as EuroMaidan, which have recently escalated into violence. The current strife in Ukraine can be summed as the extraordinary tension between modernity and longing for past (Soviet) glory. That is, it’s a battle between those demanding representative democracy, a liberal economy and Western orientation and those wanting rule by elites, economy by oligarchs and embrace of Putinist Moscow.

Last fall, Ukranian President Viktor Yanukovich, rejected a much hoped-for trade deal with Europe and instead decided to join ECU, thereby choosing Russia over Europe. Behind his decision are a number of geopolitical and geo-energy concerns. Ukraine, in addition to being one of the most populous countries (45 million) among the former Soviet states, is also a key energy transit state. Russia provides 25% of Europe’s natural gas, with over 80% coming from a network of pipelines in Ukraine. Ukraine has a relatively high per-capita income compared to other ex-Soviet states, which makes the country an attractive market for foreign—particularly European—investors.

But Ukraine is equally, if not more, important to Russia. Russia wants the lucrative Ukrainian market to be under its sphere of influence so that Russian businesses, not European businesses, benefit from the development of an economic interdependence. Moreover, the city of Sevastopol in Ukraine is home to Russia’s Black Sea Fleet, a crucial and strategic naval presence for Russia that enables it to project power on the European continent. In the run-up to the anti-government protests that began in November, Russia reduced gas prices and offered significant financial assistance ($20 billion) to the government of Yanukovych, who was elected in 2010 after five years of the pro-European presidency of Viktor Yushchenko. The incentives were a successful move by Russia to entice the Ukrainian government to join the Russian trade umbrella.

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Strategic Analysis

The ECU and its planned incorporation into EEU begs the question as to what kind of an economic and trade relationship these states will have with Russia and with each other. A handful or factors for change include fledging political systems, their citizens’ desire (as painfully demonstrated in Ukraine) to interact and trade with the rest of the world, and China’s immense financial arm that continues to transform the region’s economic and energy landscape.

Most of the states, including the founding ones, have authoritarian regimes with weak political institutions and little appetite for rule of law and human rights. They have differing foreign policy objectives with subsequent impact on their trade policies, which in turn can make coordination of trade a challenging task. And there is China with its own economic, energy, and trade interests. The push for the creation of EEU does not appear to consider the weight of Chinese interests and the impact of this emerging relationship on massive Chinese investments in the region—and how China will react to its establishment.

A coerced relationship with Russia, which contributes to the Russian objective of resurgent imperialism, can also inhibit the ability of member states to compete globally on the world stage and take advantage of opportunities in direct foreign investment, given their young and developing economies and growth potential. Russia believes it can replicate a Soviet-like empire, through economic ties and a forced relationship that uses tools of repression with practices of political favoritism while at the same time modeling itself after the EU. Such tactics supporting immediate and longer-term strategy are a harbinger of bad prospects.

The EU, with all its weaknesses and shortcomings, is about offering a level-playing field in trade for member states relative to their geographic size and economic output. Russia, however, in pursuit of past glory above cooperative gains, imposes terms on member states at the expense of economies that do not have the capacity to compete regionally, let alone globally. The EuroMaidan is the most relevant current movement that seeks to reject this.

There are already expressions of discontent among ECU states as well as prospective members. Kazakhstan seeks to limit ECU to economy and trade without giving up political sovereignty. Similarly, Kyrgyzstan, a would-be and reluctant member, wants special terms from the founding ECU states, asking for continued ability to re-export Chinese goods to other markets from which it generates significant revenue. The Kyrgyz also complain that the terms of the membership were put in place without any consultation with them and other regional states. These demands have yet to be negotiated with Moscow.

Efforts are needed that aim to prevent the development of two mutually exclusive markets and ensure the formation of trade rules compatible with the rest of Europe. The countries of ECU and the EU cannot erect a trade wall between the two parts of Europe and prevent investment flows between the two sides. This is something that Putin is most certainly aware of. Moreover, for Russia subsidizing member and would-be member states with cash and cheap energy may prove an untenable policy in the long term, as Russia’s economy falters and energy predominance diminishes.

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• Instability and bloodshed in Ukraine could force other regional states to take a closer look at their membership in ECU and the terms of their agreement with Russia. This, as a result, could alter the course of ECU and the planned EEU

• Revenue from Russia’s vast energy resources is at the core of the country’s confidence. Developments in the energy sector in the United States and Canada and resulting diversification of European energy resources could put a dent in Russia’s ability to create a market to its design and liking

• Reactions from China to EuroMaidan and their impact on developments in ECU and EEU remain to be seen.

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