The Russian Federation and Its Neighbourhood: A Eurasian Economic Space

Dr. Hanna DanilovichMiddlesex University Business School

Eurasian Economic Integration: An Overview

• 1994 – The President of Kazakhstan first suggested the idea of the economic union• 2000 – The Agreement on Eurasian Free Trade Zone • 2010 – The Customs Union between Russian Federation,

Belarus and Kazakhstan • 2012 – The Agreement on the Single Economic Space (Russian

Federation, Belarus and Kazakhstan) • 01.01.2015 – The Eurasian Economic Union (initially Russian

Federation, Belarus, Kazakhstan, Tajikistan), Armenia and Kyrgyzstan joined within five months

Main integration zones in the post-Soviet region

• CIS – 12 (Commonwealth of Independent States) – former Soviet republics sans the Baltics

• EurAsEC (Eurasian Economic Community) – 5

• SES (Single Economic Space)– 3

Main indicators of economic integration

• Mutual trade

• Labour migration

• Mutual investment

Structure of mutual trade

• EurAsEC countries can be divided into two groups by the structure of their exports and imports within the region:• Countries whose intra-regional exports and imports is

dominated by natural resources and labour-intensive products (Tajikistan, Kazakhstan, Kyrgyzstan)

• Countries whose intra-regional exports and imports is centred around capital-intensive products (Belarus, Russia – the latter especially in imports)

Main indicators of economic integration: mutual trade• Until the start of the civil war in Ukraine, main trade flows

were between Russia, Belarus and Ukraine. In 2013-2014 the dynamics of the mutual trade flows within EurAsEC has been relatively stable

• Trade within EurAsEC was more stable than within CIS in general; the stability was mostly determined by mutual trade between the members of SES (Russia, Belarus, and Kazakhstan)

• Trade integration is volatile, based on preferential treatment Russia gives to its neighbours

The dynamics of the index of mutual trade in the CIS, EurAsEC and SES, 2010-2014 (percent to GDP)

Source: author’s calculations based on the Eurasian Bank of Development data

19992000

20012002

20032004

20052006

20072008

20092010

20112012

20132014

0

5

10

15

20

25

CIS-12EurAsEC-5SES-3

Main indicators of economic integration: labour migration

• The dynamics of labour migration within CIS-12 and EurAsEC -5 has demonstrated a declining trend in 2010-2014, possibly due to increased illegal migration (which is paradoxical)

• Within CIS-12 the main migration flows went from Central Asia to Russia (especially significant for Uzbekistan and Tajikistan)

• The only (partial) exception is academic mobility with Russia being the main recipient and Belarus, Kazakhstan and Turkmenistan – the main donors. Here the data shows two contrasting trends

The dynamics of labour and academic migration in CIS-12, EurAsEC-5 and SES-3, 2010-2014

Labour migration

19992001

20032005

20072009

20112013

0

1

2

3

4

5

6

7

CIS-12EurAsEC-5SES-3

Academic mobility

19992001

20032005

20072009

20112013

0

50

100

150

200

250

300

350

400

450

CIS-12EurAsEC-5SES-3

Source: author’s calculations based on the Eurasian Bank of Development data

Main indicators of economic integration:mutual investment

• Investment activity within the region has been declining during the last two years• The number of new investment projects in the region has

been steadily declining for the last five years• 85% of mutual FDI in the region came from Russia,

another 9% - from Kazakhstan• Until 2014, Ukraine was the biggest recipient of FDI• Investments into energy sector represent the largest

share within the industry structure of investment

Structure of intra-regional investment in the CIS, 2013-2014, (percentage by industry)

37%

1%5%

7%1%2%0%1%

9%

2%

14%

5%

11%

4% 0%

Percent of total investment Energy industry

Agriculture

Ferrous metallurgy

Non-ferrous melallurgy

Chemical industry

Machine-building industry

Other industrial in-vestment

Construction

Infrastructure

Transport

Communications and IT

Wholesale and retail trade

Financial sector

Tourism

Other services

Source: author’s calculations based on the Eurasian Bank of Development data

Dynamics of economic convergence of post-Soviet countries

• Despite claimed progress in integration, there is little evidence of growing economic convergence between the economies in question:There has been no dramatic change in the degree of

macroeconomic convergence (monetary, fiscal and financial policies) in the region since 2007, moreover, growing indexes for the pre-2008 period indicate divergence rather than convergence

The exception are the four economies of Central Asia which were converging towards one another but not to the rest of the region

The highest degree of convergence is among the SES-3 economies

Dynamics of the indexes of economic convergence in former Soviet Union

19992000

20012002

20032004

20052006

20072008

20092010

20112012

20132014

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

Central Asia-4

CIS-12

EurAsEC-5

SES-3

Source: author’s calculations based on the Eurasian Bank of Development data

Convergence in the monetary policy: key features

• Belarus is the least converged economy in terms of her monetary policy due to high inflation and falling exchange rate of the Belarussian rubble since 2011.

• The level of convergence in monetary policy in the rest of the region has been relatively stable during mid-2000s, and decreased sharply after 2008 due to differences in handling the economic crisis by individual governments which resulted in the divergence of macro-economic models

Dynamics of monetary policy convergence in former Soviet economies in 1999-2014

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140

0.1

0.2

0.3

0.4

0.5

0.6

0.7

CIS-12EurAsEC-5SES-3

Source: author’s calculations based on the Eurasian Bank of Development data

Convergence of financial policy: key features

• In the area of fiscal policy the level of integration has been changing frequently during 1999-2014

• During the last five years the level of integration has declined considerably, it is currently lower than it was in 1999

• Main reasons for low financial integration include:Lack of a common payment system within the EurAsEC and the SES; price instability and considerable difference in inflation rates across

the region;Lack of the single regional financial centre;Differences in the macroeconomic models of the countriesUnderdeveloped financial market and underuse of internal

investment sources

Dynamics of financial policy convergence in former Soviet economies in 1999-2014

19992000

20012002

20032004

20052006

20072008

20092010

20112012

20132014

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

CIS-12EurAsEC-5SES-3

Source: author’s calculations based on the Eurasian Bank of Development data

Convergence of fiscal policy: key features

Integration in the area of fiscal policy differed significantly across integration unions:

The data for the CIS shows steady decline in fiscal integration for the last five years

At the same time, EurAsEC demonstrated a relatively stable level of integration, which is affected by the integration within SES which remained at the same level until 2011 when it started to decline

Dynamics of fiscal policy convergence in former Soviet economies in 1999-2014

19992000

20012002

20032004

20052006

20072008

20092010

20112012

20132014

0

1

2

3

4

5

6

7

8

CIS-12EurAsEC-5SES-3

Source: author’s calculations based on the Eurasian Bank of Development data

Political integration: hitting the wall (1)

Political integration in the post-Soviet region lags far behind economic integrationPolitical and economic elites of former Soviet economies want

to further strengthen their role which is only possible if their sovereignty remains intact, hence further political integration is seen as a threat

Most former Soviet economies do not want to go back to their former ‘economic specialisation’, with Russia being the only dominant force

The speed and extent of economic and political reforms differ considerably across the region

Influence of external political forces (EU, US, etc.)

Political integration: hitting the wall (2)

• The only country interested in further political integration is Russia

• The next stage in the integration is the creation of a joint parliament which other countries are reluctant to do

• The latest Putin’s initiative was to create a common currency (did not receive support from the rest of the partnering countries)