Troika moves forward

Almost six months have passed since our three states launched the Single Economic Space. The initial idea became a project and is now a geo-economic reality. The real, declarative union of our three former Soviet republics (170m people and $2 trillion GDP) is the first such in Eurasia (since the collapse of the USSR), located between the European Union and China.
Of course, it’s no secret that the strength of integration depends on the benefits incurred. On 1st January 2012, Mogilev residents set off to congratulate relatives on the New Year in Russian Smolensk, unconcerned by possible border restrictions. No border control or customs inspection has ever existed between our countries. Even prior to this, Belarus and Russia had achieved in depth integration.
Naturally, changes have occurred, revealing themselves ever more vividly. While it has taken the European Union decades to achieve today’s level of integration, the Single Economic Space is being established much more quickly.
Businessmen oriented towards the Russian market have been the first to feel these changes, with positive trends apparent countrywide (in the first three months of this year, mutual trade between our three states rose by almost 20 percent). SES activity can’t but influence the welfare of ordinary citizens — as has always been intended.
In addition, problems are coming
to light, allowing us to weigh the pros and cons.
Trade in hand
Andrey Anisimov, an expert with the Integration Research Centre at the Eurasian Development Bank, believes that integration will most immediately impact on trade. The evident benefits of membership of the Customs Union and SES are primarily our common customs territory, with its single system of regulations, allowing free movement of goods for our trio.
Companies trading with non-CIS states will pay less for logistics and customs clearance, making goods inside the SES more competitive (since there are no fees for transportation, customs duties or brokers, or for certification). By reducing bureaucracy, time and money are saved, with clear advantages.
Remote prospects under closer examination
Although the internal economic benefits are already apparent, economists believe that the SES’ full effect won’t be felt for a decade. Meanwhile, membership could be further expanded. Ukraine’s joining would bring a significant spur to economic growth, since its economy is so greatly connected with those of the existing three member countries. Sadly, political factors currently stand in the way.
The Eurasian Development Bank believes that the SES (with Ukraine as a member) could generate annual trade worth $1 trillion by 2030. Igor Finogenov, the EDB’s Chairman of Management, spoke recently at the Astana Economic Forum, noting, “Belarus’ GDP should grow by an additional 14 percent as a result of integration, while that of Ukraine could rise 6 percent. Kazakhstan’s GDP should grow by 3.5 percent and that of Russia by 2 percent. Belarus, Ukraine and Kazakhstan will receive major benefits from integration per capita of population, while Russia will receive benefits in absolute value. Of course, success is not automatic — it must be earned. Projects declared only on paper won’t bring economic benefits; it’s an issue of political will, tolerance and courage.”
What will we receive from membership?
It’s generally conceded that Belarus will benefit most from joining the SES, as the Economy Ministry agrees. However, Belarus’ Economy Minister, Nikolai Snopkov, admits that there are also a few disadvantages. Foremost, the Government will lack the power to regulate the internal market as it has been able to in the past. Nevertheless, delivering a report in Moscow, at a conference dedicated to the trilateral association, he asserted that our membership is likely to raise GDP by about 15 percent — more than for our partners.
Last year, the imminent unification of import duties on passenger cars resulted in a sharp rise in imports (estimated at 6 percent of GDP) — a major cause of the Belarusian rouble’s crash. Meanwhile, incomes drastically differ across our SES member states (especially following Belarusian devaluation) — which will make some imported goods appear expensive.
A joint session of the Belarusian Economy Ministry and the Russian Ministry of Economic Development, held on April 6th, 2012, adopted a decision regarding the need to minimise the number of economic ‘surprises’. Programmes of development for the major sectors must be discussed, so that they complement each other.
Three ‘whales’ of Belarusian exports
It can only be a matter of time before tangible economic growth is seen from the SES. Already, exports have risen rapidly, solving the ‘chronic’ problem of the Belarusian economy within a few months. This March, Belarus achieved unprecedented success in foreign trade. According to National Bank data, the recent positive trade balance was the highest of the last decade, with exports exceeding imports by almost 30 percent. However, this success was primarily due to sales of oil products — including solvents, diluting agents and lubricants (all connected with oil processing).
The contribution of other commodities to export revenue is less significant. Evidently, the positive effect of devaluation has been exhausted (as forecast by Belarusian officials). Now, our foreign trade revenue relies on the ‘oil discount’ we receive from Russia.
Following its success in achieving equal prices for natural gas for Belarus and Russia, Minsk has ensured duty free oil supplies from Russia for the next four years. Since oil products account for the lion’s share of Belarusian exports, the agreement can be viewed as Minsk’s great achievement. However, Belarus is also dependent on a single supplier for its oil.
Time to test successes
Irina Tochitskaya, Director of the IPM Research Centre, notes that the positive trade balance of the first three months of this year was largely due to export growth and reduced imports.
“In the first quarter of this year, our consumer imports fell, as did investment imports,” she admits. In the first three months of 2012, investments from abroad fell by almost $100m (compared to last year). Meanwhile, imports of consumer goods reduced in value by almost $650m.
Last summer’s rise in customs duties later led to a sharp fall in imports of passenger cars. Meanwhile, individual incomes fell drastically in US Dollar equivalent (compared to the previous year). This resulted in people buying fewer imported goods. However, Ms. Tochitskaya emphasises, “We plan to raise salaries to $500, allowing the country’s population to buy imported goods once more, raising volumes of consumer imports.”
Investments won’t arrive automatically
Unfortunately, we are yet to see the SES bring increased investments from abroad, showing that foreign investors are not yet convinced of the wisdom of setting up their enterprises in Belarus — despite access to a market of 170m people.
Belarus has achieved serious progress (up 22 places within a year to 69th worldwide) in the latest World Bank Doing Business ratings. However, compared to our SES partners — Russia and Kazakhstan — Belarus has a more complex taxation system, lacking free pricing in favour of state inference. According to experts, these factors are deterring potential investors. Meanwhile, Belarus is keen to develop local manufacture of passenger cars despite Russia having already cornered the local market. The Russian Ambassador to Belarus, H.E. Mr. Alexander Surikov, has spoken against the manufacture of Chinese cars in Belarus.
Of course, we shouldn’t expect a significant inflow of capital to Belarus purely as a result of the SES. Rather, improved economic conditions and reformed economic structures are needed. Belarus’ Economy Minister, Nikolai Snopkov, tells us, “Our SES colleagues are outstripping us in institutional transformation, so we need to accelerate our work with international investors. Why are we the first to form ideas while not being the first to implement them?”
Might is right?
Nikita Belyaev, in his review at naviny.by, notes that Minsk cannot control every aspect of the competitive struggle within the SES, since it occasionally suits some members to ignore the principle of free trade and true competition.
The flash of the first trade war within the SES occurred this January, when Belarusian Belkommunmash was prevented from selling trams to St. Petersburg. Another instance of breaking SES principles occurred in the second quarter of 2012, when supplies of Belarusian dried milk to Russia were stopped by the National Dairy Producers Union of Russia. Most recently, on March 26th, flights between Minsk and Moscow were cancelled following a dispute between our two countries’ aviation authorities.
According to the naviny.by expert, we should expect periodic conflicts, as SES members seek to protect their interests against a background of rising competition. Manufacturers in Russia, Kazakhstan and Belarus will seek assistance from national regulating bodies, with their success governed by the degree of influence of the state within the SES.
WTO: thorns and roses
One of the most often asked questions of recent times (in view of Russia’s joining the WTO) is how the Belarusian economy will be affected when barriers between our two states are utterly removed. The Economy Ministry sees advantages to Russia’s WTO membership, including the increased likelihood of Belarus gaining admittance. The Head of the Main Foreign Economic Policy Department, Roman Brodov, also notes that the legal and regulatory framework of the SES is based on that of the WTO, bringing our economy closer to international norms.
On the other hand, competition on our Russian and Belarusian markets will inevitably intensify. WTO membership will result in Russia reducing customs duties, including for many types of goods which Belarus currently sells on the Russian market duty-free.
According to preliminary estimates from the Russian Economic Development Ministry, reduced customs duties on imported new trucks and buses (by 2015) will lead to a fall in truck manufacturing of 18 percent, and that of buses of 32 percent. It therefore seems unlikely that MAZ and other automobile manufacturers will raise their sales on the Russian market.
Membership of the WTO also prevents direct state support for farming. In putting aside agricultural subsidies, Russia will demand the same measures from its SES partners. Belarusian agriculture currently enjoys significant subsidies and needs urgent reform; without this, it won’t survive competition.
Clearly, SES membership brings thorns as well as roses.
Belarus — western gate of the SES
It seems that the positive effects of the Single Economic Space outweigh any disadvantages, since competition is itself a driving force for economic modernisation. Accordingly, we shouldn’t be afraid of change. As the Russian proverb says: ‘if you’re afraid of wolves, don’t go into the woods’.
The SES will enable us to reveal the true advantages of Belarus, such as its geographical position as a bridge between the West and the East. It is a crossroads between Europe and Asia, at the heart of Europe. These may be beautiful words but the most vital aspect is that we use this favourable location for our economic advantage. The SES gives us this opportunity.
According to the National Bank, domestic international haulers generated $940m from exported services last year (up 40 percent on the same period of the previous year). The Ministry of Transport and Communications plans to imminently raise this to $1bn and similar plans exist for the expansion of cargo transportation by rail and other types of transport. Over 100m tonnes of cargo annually travel between the EU and Russia through Belarus and the figure is set to grow, so it would be unwise to fail to take advantage of this.
“As Transport and Communications Minister, I see great prospects in the co-ordinated development of the transport and logistics potential of the Single Economic Space over all, and for Belarus in particular — the western gate of the SES,” notes Ivan Shcherbo.
The potential for developing the Belarusian economy within the Single Economic Space is huge. Naturally, the ultimate goal is to raise people’s standard of living. This will be the only objective way of judging the success of integration.

By Igor Slavinsky