Who Benefits From the Eurasian Economic Union?

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Who Benefits From the Eurasian Economic Union?

Russia needs the support of its “old friends” more than ever and views the EAEU as a vehicle for that support.

Who Benefits From the Eurasian Economic Union?
Credit: Russian Presidential Press and Information Service

On May 24-25, 2023, Moscow hosted a forum and meeting under the auspices of the Eurasian Economic Union (EAEU), an economic association led by Russia. 

The EAEU was created in 2015 on the basis of the Customs Union established by Russia, Belarus, and Kazakhstan. Since its inception, the members of the EAEU — which include Armenia and Kyrgyzstan in addition to Belarus, Kazakhstan, and Russia — have aimed for comprehensive economic integration. This effort has touched on, among other things, free movement of goods, capital, and labor within the union. But on the threshold of the forthcoming 10-year anniversary of the EAEU, these goals remain unfulfilled.

Russia is still the main and dominant player within the union, and even more so since it took over the leadership of the EAEU bodies in 2023. Russian President Vladimir Putin once again began his speech at the recent meeting in Moscow by mentioning a multipolar world, which the EAEU aspires to help form. At the meeting, Putin put on display an ambitious initiative to develop “industrial cooperation and increase production” under the brand “Made in EAEC” (Eurasian Economic Community). At the same time, the Russian president did not talk about a new standard for the distribution of customs duties. At the moment 85.1 percent of all duties that come into the EAEU remain in Russia; the rest – less than 15 percent – is distributed to the other countries of the union. This issue has been raised by all EAEU members and became especially urgent after the introduction of international sanctions against Russia and Belarus in 2022.

To this day, one of the key tasks of the EAEU is to increase the competitiveness of the member states’ national economies. But the volume of markets and the unequal interests of the five countries have always skewed such efforts. This imbalance unambiguously complicates the task of achieving mutually beneficial cooperation. 

Among other things, at the recent meeting Putin stated the need to develop the cultural space and a common Eurasian ideology within the union, which doesn’t align with the mission of the organization to develop the national economies. It is clear that Russia, as a country increasingly isolated from Western partners, needs the support of its “old friends” more than ever and views the EAEU as a vehicle for that support.

Is a Common Gas Market Realistic?

The energy crisis caused by the war in Ukraine has affected not only the European Union, which is the largest importer of Russian energy resources, but also Russia itself. According to IFRI experts, Russia lost its best market, Europe, and has no realistic alternative that can consume as much oil and gas. In 2021, Gazprom exported 185.1 billion cubic meters of gas to non-Commonwealth of Independent States (CIS) countries, of which over 150 billion cubic meters per year went to the West. According to Sergey Vakulenko, a nonresident scholar at the Carnegie Russia Eurasia Center, for Russia “[t]he only alternative to the European market is China.” But redirecting gas flows from west to east is not a simple task, not the least because of the planned common gas market within the EAEU. 

The decision to create a common EAEU gas market was taken by the heads of member states and enshrined in the EAEU Treaty of May 29, 2014, and in 2016 the concept of forming a common gas market was approved. The principles of forming such a market are to meet the internal needs of EAEU members for gas and set prices and tariffs for gas transmission services. 

However, the energy market of EAEU members is uneven. Despite the EAEU’s dominant position on the external gas market, none of the members except Russia and Kazakhstan can satisfy their own domestic gas needs. In terms of volume of domestic gas consumption, Russia ranks first in the EAEU, followed by Belarus – according to pre-war figures consuming 20 billion cubic meters annually. Kazakhstan consumed 16 billion cubic meters, Armenia 2.2 billion, and Kyrgyzstan 260 million. 

Although the goal of forming a common gas market is to increase the availability of gas at a reliable price within the EAEU, there are sharp disagreements between the members regarding transportation of gas. Russia and Kazakhstan are net exporters of natural gas. The other member countries of the union (Armenia, Belarus, and Kyrgyzstan) are net importers, and this technically distorts the rhythm of the supposedly equal partnership. These two groups of countries have different goals and expect different results from a common gas market, and accordingly, they have different understandings about the energy security of the union as a whole.

For example, it is important for Russia and Kazakhstan to maintain the current status quo. Meanwhile, Armenia, Belarus, and Kyrgyzstan are dependent on energy imports and seek security in equal treatment of all customers within the union. Net importers want to be sold gas at the kind of domestic prices Kazakhs see, but in Kazakhstan gas production and distribution are subsidized by the state budget. Therefore, a step toward harmonizing gas prices across the union’s borders would be an unprofitable deal for Kazakhstan.

The launch of a common gas market in the EAEU would not be profitable for another reason. There is a probable risk that current Kazakh monopoly operator QazaqGaz “could be squeezed out of the market and effectively replaced by a ‘new monopolist,’” as a 2020 Kazakh government report cautioned. Kazakhstan’s energy market is already opaque and heavily monopolized. The economy is not diversified and there are systemic problems, the failure of which may lead to stagnation of the economy in the future. It may be more advantageous for the country to find an alternative route to the Southeast Asian market or the world market via China, rather than focusing on the EAEU and agreeing to Russia’s conditions.

In order to improve domestic gas markets, the first thing to do is to start regulating domestic prices and move away from the monopoly model. After all, there are all possibilities for the development of such a market with favorable energy integration within the union. The countries of the association already have gas transportation infrastructure from the Soviet period and they have been trading gas among themselves for a long time. But Russia’s Gazprom dominates production and transportation of gas through its subsidiaries, and the Russian gas market continues to contribute to the monopolistic development of the EAEU common gas market. All this serves as a tool to preserve Russia’s geopolitical influence in the region. Russia plays by its own rules, and EAEU is just one of its instruments, and not necessarily  beneficial for anyone but Russia.

Coming Back to Kazakhstan 

Since the beginning of the year, a number of Kazakh politicians have expressed their discontent with the country’s status within the EAEU. For instance, in a interview with with DW, Bakytzhan Sagintayev, the minister in charge of economy and financial policy of the Eurasian Economic Commission, was outraged that Kazakhstan could not manage to enter Belarus’ alcoholic beverages market because the list of importers could only be approved by presidential decree.

Since 2022, Kazakhstan has been discussing increasing its share in EAEU customs payments. At the moment, member countries participating in EAEU foreign economic activities redistribute incoming total customs payments from export-import according to the agreed proportions: although trade turnover between Kazakhstan and the EAEU countries increased by 11.6 percent, the country continues to receive less than 7 percent of the total customs duties; in Armenia it is 1.22 percent, Kyrgyzstan gets 1.9 percent, Belarus gets 4.86 percent. The rest — 85.1 percent — goes to Russia. This question has become especially relevant due to the war in Ukraine. As part of the sanctions confrontation with the West, Russia and Belarus have reduced foreign economic opportunities. According to Sagintayev, Kazakhstan’s (and other members) request on customs payments was rejected by Russia and Belarus. 

According to Kazakh officials, the country’s exports are declining within the EAEU because of bureaucratic hurdles. It is difficult for Kazakh companies to break into the Russian market, while Russian entrepreneurs easily promote their business in Kazakhstan. The EAEU has approved, for the most part, product quality standards that only large companies can meet, and smaller companies in Kazakhstan have little to no opportunity to enter the Russian market. 

In early May, Maulen Ashimbayev, speaker of the Kazakh Senate, commented on Kazakhstan’s position within the EAEU. Ashimbayev said that if there is no benefit for Kazakhstan then the country may need to seek changes to better promote its position. “If we once signed, it does not mean that we should not change these agreements,” he said.

Kazakhstan is a heavyweight member of the union, not only in terms of energy resources, but also in terms of total volume of foreign trade turnover with other members, especially with Russia: Russia accounts for 92 percent of Kazakhstan’s foreign trade within the EAEU, Kyrgyzstan 4.7 percent, Belarus 3.2 percent, and Armenia 0.1 percent. 

At the meeting in Moscow last month, this was mentioned by Kazakh President Kassym-Jomart Tokayev: “Over the years of the EAEU, Kazakhstan’s trade turnover with other members of the union grew by 74 percent, while exports increased by 98 percent.”

According to Qazstat, in January-March Kazakhstan’s trade with fellow EAEU countries amounted to $6.6 million. 

At the same time, Tokayev stressed at the recent meeting that Kazakhstan also needs to enter international markets through the development of various transport corridors. One option is the development of the International North–South Transport Corridor (INSTC) which ultimately envisions access to India. India is trying to achieve a more stable presence in Central Asia, which, in turn, could serve to displace the imperial influence of both China and Russia.

Currently, food prices within the EAEU are rising, and there are alarming distortions between member countries’ national currencies, indicating serious inflation. 

Thus, in the context of Russia’s geopolitical loneliness and that of its staunch ally Belarus, it is worth considering to what extent internal obstacles of the union contradict the national interests of Kazakhstan and other members of the union (which we will discuss in an upcoming article). Is the game worth the candle?