Does Russia’s Trade Bloc Have a Future?

April 11, 2024 Topic: Economics Region: Eurasia Tags: Eurasian Economic UnionRussiaCentral Asia

Does Russia’s Trade Bloc Have a Future?

While the Eurasian Economic Union helps Russia evade Western sanctions, the bloc’s long-term future remains doubtful, and its neighbors are reacting accordingly.

February 2024 marked the tenth anniversary of the Maidan Revolution, in which Ukraine moved decisively away from pursuing membership in Russia’s then-nascent Eurasian Economic Union (EEU), choosing rapprochement with the European Union (EU), given the role of the EEU in creating tension, which eventually led to the Russian invasion of Ukraine, surprisingly little analysis has been conducted on the trade bloc. Conversation on the Eurasian Union remains polarized: Western politicians have blasted the trade bloc as “a move to re-Sovietize the region,” while others have dismissed the bloc as irrelevant. 

Yet, EEU market integration projects are continuing, at least in official pronouncements, focusing on energy and labor markets. In contrast, the member heads of state continue to meet yearly and pay lip service to the idea of a unified economic space. A more accurate picture of what the Eurasian Union has become lies less in the grandiose pronouncements of politicians and more in trade data and decisions by other states lobbying for projects integrating the Eurasian landmass.

The times have significantly changed since the original Customs Union uniting Russia, Belarus, and Kazakhstan was formed in 2009, which served as a basis for the EEU. The Global Economic Crisis had devastated commodities prices, with the economies of some countries in the region, such as Ukraine and Armenia, shrinking by 15 percent. Russia’s economy took a hit, but currency reserves built from a bull run of oil and gas prices and careful Central Bank policy preserved Russia’s economy. President Vladimir Putin proclaimed in 2011 that the EEU would be a dynamic economic union uniting Europe and Asia. Soon after, Russia began an aggressive lobbying campaign of other former Soviet states to join the trade bloc as the Eurozone slipped into a crisis.

In the years since the EEU formally emerged out of the Customs Union in 2015, with Kyrgyzstan and Armenia as additional members, the trade bloc has accomplished little in terms of increasing internal trade: official data from the beginning of the war found that trade between the five member-states constituted only 15 percent of their total trade volume, a much lower number than those achieved by the EU, and a number that had barely changed between 2015 and 2021, the last year complete data is available for. Russia’s trade with fellow member-states had also barely budged.

One of the main arguments for creating the trade bloc has been the unification of labor markets, as remittances sent home from guest workers in Russia have historically constituted a substantial percentage of the economies of other post-Soviet states. A unified labor market would ease access to Russia’s neighbors for the Kremlin’s near abroad, and while labor flows from post-Soviet states initially increased in 2022 to replace Russian workers now on the front, the decline of the ruble’s value led to a decrease of 40 percent in the number of arriving guest workers in 2023, including a 15 percent decrease in guest workers from other EEU member-states. Post-Soviet states in the Caucasus and Central Asia have also slowly gained more access to labor markets in the Middle East and East Asia, which has decreased their dependence on Russia.

Given these results, it is not surprising that other former Soviet states have cooled on the trade bloc: Azerbaijan’s long-time President Ilham Aliyev participated in the annual meetings for the EEU’s Governing Body in May 2023 for the first time, but the country is neither a formal partner nor observer. Tajikistan snubbed Moscow by refusing to discuss EEU membership in the summer of 2023, despite a personal visit by Russia’s indefatigable Foreign Minister, Sergei Lavrov, and the impoverished Central Asian state’s continuing dependence on Russia for remittances. Following the ascent of a pro-Western government in 2023, Moldova has only moved further away from Moscow by exiting the Commonwealth of Independent States, as the country has gradually become less dependent on remittances from guest workers in Russia. Uzbekistan, which typically sends the most guest workers to Russia, has held EEU observer status since December 2020 but has not pursued full membership. 

The one large economy aggressively pursuing integration with the EEU is Iran. Business delegations from Russia began arriving in Iran in the months following the invasion to study how Tehran had coped with decades of Western sanctions, and trade began to increase from exceptionally low initial levels as Iran supplied Russia’s war effort, leading to a permanent free trade zone with Tehran in December 2023. The addition of Iran to the trade bloc will do little to diversify the trade bloc’s industrial base, however, as Iran and Russia’s political economy increasingly mirror one another: opaque, patrimonial economies dominated by commodities exports, which in turn subsidize bloated state-owned enterprises, burgeoning security services, and irredentist military expansionism.

The EEU is still pursuing economic integration projects. Still, a common currency is highly unlikely: Discussions of a potential common currency, termed the “Altyn” (Turkic for gold),  surfaced periodically in official reports before the war, but such a project would face even greater challenges than the Eurozone has faced in the aftermath of the Global Economic Crisis: Russia remains the largest economy in the EEU, and if the Eurozone faced a near-meltdown as the structural differences between Northern and Southern Europe reared their ugly heads in the aftermath of 2008-2009, the economic disparity between Russia and resource-poor Armenia or Kyrgyzstan is even more significant. 

However, the bloc has proven valuable for Russia during the war as a tool for bypassing sanctions. Kazakhstani economists have noted that Russia is no longer discussing a single currency. Moscow currently benefits from using Kazakhstani banks to bypass sanctions and would lose the ability to do so if a currency zone were pursued. Exports from Kazakhstan, Kyrgyzstan, and Armenia skyrocketed following the invasion as business networks reexported newly sanctioned goods to their belligerent northern neighbor, and wartime conditions created the first actual increase in inter-member trade since the foundation of the EEU.

The EEU also remains a valuable tool for Moscow to keep weaker post-Soviet states in line, as demonstrated by the recent pronouncements by Konstantin Zatulin, a senior parliamentarian in Russia’s Duma Committee for post-Soviet integration, who blasted discussions in Armenia’s parliament on a resolution to strengthen ties with the European Union, threatening to review the Caucasus nation’s membership in the trade bloc if it continues to pursue Western-oriented foreign policy.

Kazakhstan has expressed the most unease about the EEU in the aftermath of the Ukraine invasion. Online petitions in Kazakhstan calling for departure from the EEU and the Collective Security Treaty Organization (CSTO), the post-Soviet military alliance that intervened to end anti-government protests in Kazakhstan in 2021, have gathered tens of thousands of signatures, but will likely go nowhere as long as the Central Asian state remains dependent on Russia for export logistics. 

Russia remains the largest economy in the trade bloc, but commodities are even more dominant in exports than at the beginning of the war. The Kremlin has announced an ambitious variety of measures to promote import substitution. Still, it remains to be seen whether the country can accomplish them or even whether the leadership will take them seriously: after all, Dmitry Medvedev, who as President billed himself as a modernizing technocrat touting the Skolkovo Industrial Park, now serves on Russia’s National Security Council, where he now regularly takes to social media to spew virulent anti-Western rhetoric and threaten nuclear attacks. Import substitution policies and manufacturing revival will undoubtedly play second fiddle to the Kremlin’s main economic priority: developing new oil and gas fields in Siberia over the next decade.

Putin laid out his vision and announced his plans for a Eurasian Union; he wrote that the bloc would drive global development alongside the EU, United States, China, and APEC. Moscow is aware of the increasingly crowded competition for influence in Eurasia and is struggling to expand the trade bloc and accelerate integration processes. The EEU has proven helpful for Moscow in the initial aftermath of the invasion, enabling sanctions avoidance and more foreign labor to replenish workers sent to the front. However, the long-term future of the bloc, as anything other than a commodities corridor, remains doubtful, and the trade bloc’s neighbors are reacting accordingly.

Luke Rodeheffer is the founder and CEO of Alpha Centauri, a cyber security and due diligence firm.