Russia’s Customs Union is the Wrong Turn for Central Asia

Central Asia should focus on further developing its rapidly growing economic ties with East Asia instead of placing its economic future in the hands of Moscow.

Experts from the Customs Union comprised of Russia, Belarus, and Kazakhstan recently arrived in Kyrgyzstan to begin inspecting the country’s dairy products in order to decide if they meet the requirements to be sold on the Customs Union’s common market. Kyrgyzstan, along with neighboring Tajikistan, are the two latest post-Soviet states to be considered for membership in Russian President Vladimir Putin’s pet foreign policy project, the creation of a “Eurasian Union” trade zone, which would link the former Soviet space. According to an editorial written by Putin, the zone would provide a “free flow of capital, services and labour.” The Eurasian Union is set to take effect in January 2015.

Much of the Customs Union’s appeal is built around the economic space connecting Europe and emerging markets in Asia – creating, in Putin’s words, “an efficient bridge between Europe and the dynamic Asia-Pacific region.” But the truth is that Russia’s infrastructure simply does not have the capacity to move goods between the two continents in a productive manner. Its roads remain neglected and out of date, hardly the network necessary to stitch together Eurasian transit. The World Economic Forum recently ranked Russia 101st out of 144 countries in terms of overall infrastructure quality. The nation also fell to an abysmal 136th place in terms of road quality. Even the Russian government appears pessimistic about the development of modern transportation infrastructure: Transportation Minister Maksim Sokolov admitted in December 2012 that at current rates of new road construction, which average 500 kilometers per year, Russia will need 1,000 years to build a modern highway system.

The creation of a new major railway in Asian Russia could serve as an artery linking Europe and Asia, but a 2012 study by Russian Railways put the average speed of Russia’s freight trains at 10.3 kilometers per hour. This rate is far below the 70 kilometers per hour average in Europe or that of China’s new railways, which boasts speeds of 90 kilometers per hour. As a result, the trans-Siberian railroad only carries 50,000 of the 42 million containers that move between Asia and Europe; most are shipped by sea. The Russian government’s own Transport Development Strategy recognizes the need for over $650 billion in investment in the country’s creaking infrastructure by 2020 to join the ranks of a globally competitive economy. However, this is an enormous sum considering that the Kremlin already intends to spend the same amount modernizing Russia’s armed forces within the same timeframe.

If Central Asian states desire to modernize their economies and compete effectively in the 21st century, they could do much better than attaching themselves to a supra-economic space dominated by the Russian Federation. Russia has faced capital outflows since the 2008 economic crisis that total over $350 billion, with $25.8 billion leaving Russia in the first quarter of 2013. In addition to attracting foreign direct investment, one of the biggest problems that many post-Soviet states face is developing a climate that encourages the development of small and medium businesses – the bedrock of both a diverse economy and a healthy democracy. Currently, the environment for the development of these businesses in Russia is terrible. Small and medium enterprises comprise less than 25 percent of Russia’s GDP, far lower than the 60 percent that China’s economy can boast of. The situation only appears to be worsening: a mere 2 percent of Russians surveyed by the 2012 Global Entrepreneurship Monitor expressed entrepreneurial intentions, far lower than any other East European country. The largest problem that entrepreneurs face in Russia, alongside corruption, red tape, and difficulty obtaining loans, is the total monopolization of many spheres of the Russian economy, which has largely disabled growth in the entrepreneurial sector. Small enterprises in Central Asia will likely be overwhelmed by Russian big businesses in the Eurasian Union.

A Eurasian Union dominated by Russia is not a healthy path to economic modernization for former Soviet states. Although the common labor market will allow Central Asia to send more guest workers into Russia and Kazakhstan, Russia’s massive levels of corruption and capital outflows, combined with a climate hostile to entrepreneurship and the rule of law, would likely harm the development of small and medium enterprises across the former Soviet space. Furthermore, an economic space that makes the former Soviet region more centrally dependent on Russia’s infrastructure is a poor choice. Most former Soviet states in Europe have rejected the Customs Union, recognizing that integrating with the European Union is a much better choice in terms of economic stability and modernization. Central Asia would do well to recognize this and focus on further developing its rapidly growing economic ties with East Asia instead of placing its economic future in the hands of Moscow. The West should make it clear that it also supports this approach to Central Asia’s modernization.

Photo courtesy of Jerrold Bennett via Flickr.