The Sorry State of the Customs Union

On March 16, Russian Prime Minister Vladimir Putin flew to Belarus for talks to finalize the arrangements for the implementation of a common tariff on imports effective July 1. The previous day, Belarusian President Alyaksandr Lukashenka abruptly left Minsk for Venezuela.

This aerial pas de deux received little attention in the Western press. Stories about the impending Russia-Belarus Union started appearing in 1996, and reality has repeatedly failed to catch up with the politicians' promises. But the latest contretemps is worthy of attention. Sooner or later, the political stalemate between Moscow and Minsk will have to be broken.

The presidents of Belarus, Kazakhstan and Russia met in Minsk on Nov. 27 and pledged the formation of a customs union effective Jan. 1. Goods entering the three countries would face a common tariff and would be free to move across national borders within the union. The three countries agreed to harmonize all relevant tax legislation and administrative procedures by July 1.

The stumbling block to the introduction of the common tariff is Lukashenka's determination to import crude oil tariff-free from Russia - oil that is processed in Belarusian refineries and re-exported to the West at a hefty profit. After a marathon, eight-hour meeting with President Dmitry Medvedev on Dec. 10, Lukashenka won a promise that Moscow would continue to supply 6 million tons of crude oil to Belarus for domestic use at pretax prices (equivalent to a $1.3 billion subsidy for Minsk). But Belarus would have to pay a 100 percent duty on the remaining crude imports, which stood at 21.5 million tons in 2009.

Lukashenka, however, is now backtracking on the deal. Putin was not formally scheduled to meet with Lukashenko last week, and he went ahead with talks with Belarussian Prime Minister Syarhei Sidorski. But Lukashenka's demonstrative departure, announced only on the day of his exit, was a clear snub. All the more so since in Venezuela he won from President Hugo Chavez a promise to sell 80,000 barrels a day (about 4 million tons) of crude oil to Belarus.

The Venezuelan oil deal is an economic bluff. Given that Belarus has no ports and that supertankers cannot enter the Baltic Sea, there is physically no way for Belarus to directly import that oil (although some sort of swap deal could conceivably be arranged). Presumably, the main point of Lukashenka's trip was simply to annoy Putin. After all, Lukashenka and Chavez often placed more importance on demagoguery than economic logic.

Lukashenka has repeatedly railed against Russian efforts to increase the prices that Belarus pays for natural gas and crude oil imports, which have contributed to the deterioration of relations between the two countries over the past two years. Lukashenka declined to follow Russia's lead in granting diplomatic recognition to Abkhazia and South Ossetia in August 2008. Instead, Lukashenka turned to the European Union, which was abandoning its policy of isolationism in favor of a new approach of engagement with Minsk. It is notable that Lukashenka was absent from the initial May 2009 meeting at which Kazakh President Nursultan Nazarbayev and Medvedev agreed to create a bilateral customs union.

But there are signs that the global financial crisis may have dealt a serious blow to Lukashenka's economic model, undermining his capacity to play an endless game of chicken with Moscow. Belarus' international debts rose 45 percent last year to $22 billion, equal to 45 percent of its gross domestic product. Belarus relies on Russia for 60 percent of its imports and 32 percent of its exports. At a news conference at the end of his visit to Belarus, Putin pointedly noted that the discount price of $169 per 1,000 cubic meters that Belarus pays for Russian natural gas - versus $304 paid by Ukraine - amounts to a $2 billion annual subsidy. Putin may start insisting on more concessions from Belarus, including an ownership stake in the oil refineries and the introduction of a common currency. The election of the more pro-Russian Viktor Yanukovych as Ukrainian president further constrains Lukashenka's room to maneuver.

The Moscow-Minsk tiff has implications beyond these two capitals. The creation of the customs union, assuming that it actually moves ahead, will further complicate Russia's long-delayed entry into the World Trade Organization. It is also another nail in the coffin of the Commonwealth of Independent States since it will deepen economic barriers between members and nonmembers within the CIS. Countries like Kyrgyzstan and Ukraine may want to join the customs union, but they will not be able to since they are already WTO members.

The trend toward global free trade had already run into problems even before the 2008 financial crisis with the failure of the Doha talks aimed to lower barriers to trade in agriculture and services. The appearance of the customs union is another sign that protectionist sentiments are a permanent feature of the new international landscape.

Peter Rutland is a professor at Wesleyan University and an associate of the Davis Center for Russian and Eurasian Studies at Harvard University. Oleg Reut is a lecturer at Petrozavodsk State University.
The Moscow Times