Grocery store in Moscow, Russia (Bezik, CC BY-SA)
The problematic and imperfect nature of the Eurasian Union – even for Russia, which was the main initiator of integration – can be clearly seen on the example of problems with customs controls within the community. Russia, which is wedged between two huge economic blocks – the European Union from the West, and China from the South-East – has experienced a partial loss of ability to enforce customs controls at its borders.
Three members of the community: Belarus, Kazakhstan and Kyrgyzstan, decided to make the most of their access to the Russian market, consisting of over 140 million people, and to play the role of intermediaries in the import of goods from the European Union and China into Russia. The elites in these countries have used their ability to influence the local customs authorities and the justice system in order to achieve the greatest possible profits. Having limited control over the customs authorities of its allies, Russia was forced to accept the fact that huge amounts of goods are flowing – often illegally – into its territory.
The history of Eurasian integration
The Customs Union of Belarus, Russia and Kazakhstan was established in 2009 as the initiative of Russia. The new integration project included references to the experience of gradual European integration, in which, this time, economic integration came before political integration.
In 2012 the Customs Union transformed into the Common Economic Space – providing for the introduction of the free movement of capital, people, goods and services and the harmonization of economic legislation and the principles of industry and agriculture subsidies, etc., in the three member states. This process was concluded in 2014 with the establishment of the Eurasian Economic Union, which is the equivalent of the EEC, with a strong Supreme Council of Presidents, the Council of Deputy Ministers, and the Eurasian Economic Commission, modelled on the European Commission, as well as incipient common political institutions.
Compared with European integration, Eurasian integration was carried out at a rapid pace. Europe began to integrate starting with the creation of the European Coal and Steel Community in 1951 – an experimental field for the introduction of a deepened common market, which was established seven years later.
Russia – the initiator of Eurasian integration – managed to carry out the entire process of transition from the Customs Union to the Eurasian Economic Union in four years. In addition to the three founding countries, the community currently also includes Armenia and Kyrgyzstan.
There is a way for everything
Belarus discovered the advantages of the common market, and in particular the lack of a customs border with Russia, in August 2014, when the Russians introduced a ban on the import of Western food products in response to the sanctions imposed by the West for the annexation of Crimea. Russia introduced its counter-sanctions without consulting with its partners and had no real tools to enforce them. Belarus, which didn’t join the embargo, decided to exploit this niche, announcing an increase in the export of Belarusian food products to Russia. In reality, however, this resulted in the organized re-exportation of mainly Polish food sold as Belarusian products, or goods from third countries. The Russians, who quickly discovered this practice, destroyed 17,000 tons of seized Western food during only the first years of the embargo.
Smuggling into Russia is made easier due to the fact that Kazakhstan, another member of the Eurasian Economic Union, also hasn’t joined the embargo. As a result, there were cases where trucks with Polish food going from Belarus to Kazakhstan disappeared after crossing the Belarusian-Russian border. The goods were unloaded in Russia, and after a few days the truck once again crossed the Belarusian-Russian border with a new batch of goods but with the same certificates as before. According to the Russians, the Belarusian state structures were involved in these illegal activities.
According to reports of the newspaper Viedomosti, at the beginning the smugglers brought Polish products with veterinary and phytosanitary certificates proving that they were produced in Belarus, or used transport documents showing entirely different goods. Later, when mobile inspection brigades were activated, they changed their tactics. They started falsifying or buying certificates of origin from third countries. This led to a situation where, for example, according to Belarusian data, Ecuador exported more apples to Belarus than it even produced. In September 2016, Vladimir Malinovski, the deputy head of Russia’s Prosecutor General’s Office, informed that according to Russian data Belarus sent five times more apples and mushrooms to Russia than it produced. The excess quantities supposedly came from the re-export of Western food products.
According to the Russians, the procedure of re-exportation is facilitated by decentralization. And even though Belarusian trade is heavily state-controlled, the re-exportation of food covered by the embargo is carried out by local businesses. The head of the Rosselkhoznadzor (Russian Federal Service for Veterinary and Phytosanitary Surveillance), Sergei Dankvert, complained that even tiny Belarusian communal cooperatives can easily obtain permits for export to Russia and then export Ukrainian beef. In an interview, Dankvert also quoted the example of a Belarusian dairy plant through which 100,000 liters of Polish milk was exported to Russia.
Russia is fighting back
The Russians had to undertake a number of activities in order to protect themselves against the influx of unwanted goods. At the end of November 2014, inspections on the common border were de facto restored. The provisions of the Customs Union did not allow for the reintroduction of border controls, therefore mobile brigades of customs officers, policemen, veterinary and phytosanitary service inspectors were dispatched to check the trucks carrying food in order to detect possible smuggling and to confirm the authenticity of the veterinary and phytosanitary certificates issued by Belarus.
The Russians also announced the introduction of special corridors for the transport of imported food, which were subjected to special inspections. In February this year they launched a system for tracking meat and meat products from the border to the point of sale, in order to prevent the entry of products from unknown sources.
In light of the vast scale of smuggling in May, the Russian Federal Customs Service proposed that all food items produced within the territory of Eurasian Economic Community should be marked, for example, with special microchips, which would enable their identification. This concept was prepared by the Deputy Head of the Russian Federal Customs Service Ruslan Davydov, who complained that customs officers did not have sufficient powers to check the transported goods and that the country was being flooded with contraband. All these projects go against the spirit of Eurasian integration, violating the freedom of movement of goods, not to mention the fact that they generate additional costs.
Recently, Russians have complained about unfair practices in the sugar market in Belarus and Kazakhstan. According to the legislation of the Eurasian Economic Community, these countries have the right to import sugar raw materials duty free, provided they export the sugar made from these raw materials to third countries. The Russians believe, however, that this sugar is illegally entering the Belarusian and Kazakh market, and the Russian market, causing losses for Russian sugar refineries. As a result, this leads to a decrease in the price of sugar, which could drop by about 44 per cent during one month. Such price fluctuations cause huge problems for Russian sugar plants, which are often the sole industrial plants in a given area. These accusations are mostly directed at the Kazakh sugar factories, which import 95 per cent of the sugar raw materials from abroad.
You can’t beat Belarus
Belarus previously exploited the provisions of the Customs Union in the export of fuels, which were disguised as solvents in order not to pay customs duties to the Russian budget. In 2011, Belarus exported over nine times more solvents than in the previous year. The situation was repeated in 2012. Back then, the Russians evaluated their budget losses at USD1-2bn.
When Russia finally stopped the solvent racket in 2014, the Belarusians developed a new scheme. According to the Belarusian newspaper “Belorusy i rynok”, at that time there was a significant increase in the export of bituminous mixtures, i.e. petroleum products mainly used by road workers and in the construction industry. In the first half of 2014, Belarus exported nearly half a million tons of such products, i.e. 182 times more than in the same period of 2013, when their export only amounted to 2,600 tons. It is not difficult to guess that bituminous mixtures were exempted from customs duties as well.
According to the Belarusian economist Tacciana Manionak, these problems resulted from the nuances of the production specification in the Customs Union. In an interview with Belsat TV she stressed that it is difficult to determine why customs duties were introduced for some products and not for others. In her opinion, this could be associated with the interests of individual Russian officials or with the desire to stimulate specific types of production. Belarusian businessmen simply used this for their own purposes. Andrei Molchan, an officer of the Belarusian KGB, who emigrated to Sweden, presented certain documents in Belsat TV, proving that the representatives of Belarusian special services and the justice department were involved in the illegal export of fuels.
The problems with Belarusian smuggling are a repetition of the situation that Russia faced in the mid-1990s, when Belarus and Russia signed an agreement on a free trade area in 1995. That attempt resulted in failure. For over 14 years the parties were not able to establish a common customs code. Unable to control the external border of the free trade area, Russia was exposed to the smuggling of Western goods and the confiscation of allegedly improperly declared goods imported to Russia and exported from Russia.
In an article on the portal Russia in Global Affairs, the Russian economist and political scientist Andrei Suzdaltsev from the Higher School of Economics in Moscow estimated the losses of the Russian budget in the years 1995-1997 at around USD4bn. As a result of this situation, in 1998 the Russians reintroduced customs controls at the border. According to the Russian analyst, at the same time the Belarusian state was making money on the goods going into Russia or leaving Russia, which were confiscated on a mass scale under the pretext of violations of the customs legislation. According to Suzdaltsev the conclusion of the agreement on the Customs Union was also disadvantageous for Russia, because the Belarusian companies generously subsidized by the government were granted access to the Russian market, whereas the access of Russian companies was restricted through non-tariff barriers.
Kazakh and Kyrgyz traders filling the niche
Kazakhstan and Kyrgyzstan, which joined the community in 2014, filled a different niche in the exploitation of access to the Russian market. As shown in an analysis of the flow of goods between China and the Eurasian Economic Union, the Kazakhs and the Kyrgyz mastered the practice of underreporting the customs value of goods on a mass scale. This is such a lucrative business, that both countries are virtually competing with each other.
Two Russian analysts dealing with economic relations with China – Ivan Zuenko from the Russian Academy of Sciences and Semyon Zubania, a representative of the Russian customs service in Kazakhstan – examined the changes in the volume of imports of Chinese goods to Kazakhstan after its accession to the Customs Union, and then to the Eurasian Economic Union.
It turned out that in the case of Kazakhstan, imports increased by 15 per cent in the years 2011-2013, whereby the increase in imports from China exceeded the increase in imports from other countries. In these years, the share of Chinese imports in overall imports increased from 27.5 per cent to 32 per cent. The import of clothing increased four times, and the imports of shoes increased 3.5 times. These are goods which have some of the highest customs tariffs in the Eurasian Economic Union. The import of these goods to Russia during the same period only increased by 6.9 per cent.
The researchers are convinced that the level of imports far surpassed the needs of the Kazakh market, and that the Chinese products mostly went to Russia. It turned out that Kazakhstan and Kyrgyzstan, which together have a total of around 23 million citizens, import footwear and clothing for an amount almost equal to the imports of those same goods into Russia, which has 143 million inhabitants.
“The analysis of the situation allows us to conclude that the cause of the increased import of goods through the Kazakh and Kyrgyz section of the customs border is the result of the poor quality of the customs administration. In other words, we are talking about the organization of illegal import schemes,” the authors of the report claim.
According to the analysts, thanks to arrangements with the customs officers, importers are widely underreporting the value of the imported goods. According to Zuenko and Zubania, this scheme is profitable for the intermediaries and the corrupt local officials. According to their assessment, in 2016 the Russian budget may have lost USD650m as a result of customs fraud.
Community? Not exactly
According to the Belarusian economist Yaroslav Romanchuk, to this day the Union has failed to implement the freedom of movement of goods, services, people and capital. Even the decisions of the court appointed to resolve various disputes must be approved by the courts in the individual countries.
Numerous non-tariff barriers play a peculiar role in the union. The Belarusian government is imposing, for example, a mandatory list of goods that must be offered in all shops and catering establishments – 90 per cent of them have to come from Belarus. Similar tricks are also applied in the other countries of the community.
Participation in the community is reminiscent of a game in which everyone tries to fool the other players, which leads to constant disputes. As a result, unlike in the case of European integration, which has contributed to economic growth, over the last 7 years Belarus recorded average GDP growth of 1 per cent. Participation in Eurasian integration increased the country’s dependence on the Russian market. According to Romanchuk, 10 years ago 34 per cent of Belarusian goods were exported to the Russian market compared with 46 per cent today. The competitiveness of the Belarusian economy declined, as investments were directed to the inefficient state sector.
Zuenko and Zubania believe that by launching the project of the Eurasian Economic Union Russia was mainly pursuing political objectives: building closer ties with the republics of the former Soviet Union was supposed to prevent the participation of the other members of the Customs Union in integration projects with countries other than Russia. According to them, the project is encountering problems because the integrating countries are at different stages of institutional development and have divergent interests. For this reason, for the time being Eurasian integration is just a facade. Romanchuk has a similar opinion and believes that the Russian objectives behind the Eurasian Economic Union boil down to geopolitics and the ideology of unification of the post-Soviet area rather than economic objectives.