CC BY
95
Stanislav ZHUKOV
D.Sc. (Econ.), leading researcher, Energy Research Center, Institute of World Economy and International Relations (IMEMO), Russian Academy of Sciences. He has published over 100 research papers. He specializes in the problems of economic growth and transition economies.
Oksana REZNIKOVA
Ph.D. (Hist.), senior researcher, Center for Development and Modernization Studies, Institute of World Economy and International Relations (IMEMO), Russian Academy of Sciences. She has published over 50 research papers. Her research interests are connected with the place of developing and post-Soviet countries in the system of international relations and with the humanitarian aspects of conflicts.
ECONOMIC INTERACTION IN THE POST-SOVIET SPACE
Abstract
Ever since the breakup of the U.S.S.R., the post-Soviet space (former Soviet Union) has been the scene of cease-
less attempts to create various integration alliances and groupings aimed at strengthening bilateral and multilateral economic
cooperation with the prospect of economic integration. Over the past three or four years, the integration rhetoric has markedly increased, which is due to the consolidation of the newly independent states and to the fact that some of them have entered the path of positive growth rates. Are there any
economic prerequisites for the integration of the newly independent states? What is the contribution of state policy to the integration process? What processes and actors are the real driving forces behind integration? These and other related questions are the main focus of attention in this article.
Proto-Integration Groupings in the Post-Soviet Space: “Spaghetti Bowl”
Today there are several proto-integration groupings operating in the post-Soviet space: Commonwealth of Independent States (CIS), Eurasian Economic Community (EurAsEC), Common Economic Space (CES), Russia-Belarus Union State, Shanghai Cooperation Organization (SCO), GUAM, Community of Democratic Choice (CDC) and the Economic Cooperation Organization (ECO). At the same time, a number of post-Soviet states are already members of the World Trade Organization (WTO). The actual picture of involvement of the post-Soviet economies in regional and global integration groupings is shown in Table 1 (on p. 98).
This situation appears paradoxical. Countries with national economies of more than modest size and, consequently, with limited export volumes (with the exception of Russia) are simultaneously members of organizations and groupings with similar and often overlapping goals and purposes. UNDP experts describe this situation as a “spaghetti bowl” of integration agreements with a “conflicting and confusing” set of rules.1
Let us start with a short characteristic of the existing official alliances and agreements. The “oldest” organization is the CIS. In retrospect, it is obvious that the CIS has played a key historical role by enabling the former Soviet republics to “get divorced” in a relatively peaceful and civilized manner (even if not without regional military conflicts) and to gain some diplomatic experience in bilateral and multilateral relations. By the end of the 1990s, the CIS had virtually outlived its usefulness, as the presidents of Belarus, Kazakhstan and Russia have declared on many occasions. It is also obvious that the CIS never actually got underway as an effective mechanism of economic cooperation. It should be borne in mind here that numerous bilateral and multilateral trade and economic agreements between the former Soviet republics have in effect resulted in the creation of a free trade area in the post-Soviet space, which has emerged irrespective of the CIS.
The EurAsEC sprang up within the CIS from the customs union agreement. The Treaty Establishing the Eurasian Economic Community was signed in October 2000 by Russia, Kazakhstan, Belarus, Kyrgyzstan and Tajikistan. In May 2002, Moldova and Ukraine acquired observer status in the Community. In late 2005, the EurAsEC was joined by the Central Asian Cooperation Organization (CACO), and in January 2006, by Uzbekistan.
The EurAsEC’s special executive bodies include an interstate council, an interparliamentary assembly and an integration committee. Its activity is financed depending on the economic potential of its member countries. Since the accession of Uzbekistan in 2005, Russia has a quota of 40%, Belarus, Kazakhstan and Uzbekistan, 15% each, and Kyrgyzstan and Tajikistan, 7.5% each. Accordingly, voting strength in decision making is equal to the country quota.
1 Central Asia Human Development Report. Bringing Down Barriers: Regional Cooperation for Human Development and Human Security, UNDP, Bratislava, 2005, p. 57.
Regional, Bilateral and Global Economic Organizations in the Post-Soviet Space Table 1
CIS 1991 EurAsEC 2000 CES 2003 Russia-Belarus Union State 1999 SCO 2001 GUAM 1997 Economic Cooperation Organization 1992 Community of Democratic Choice 2005 WTO
Armenia + + (2003)
Azerbaijan + + + +
Belarus + + + +
Georgia + + + + (2000)
Kazakhstan + + + + +
Kyrgyzstan + + + + 00 & cn +
Moldova + Obser- + + + 2 o o
ver
Russia + + + + +
Tajikistan + + + +
Turkmenistan + +
Ukraine + Obser- + + +
ver
Uzbekistan + + + +
PRC + + 2 o o —k
Turkey + + (1995)
Iran +
Pakistan + 5) 9 9 1 +
Afghanistan +
In January 2006, Kazakhstan and Russia instituted within the EurAsEC framework a Eurasian Development Bank with an authorized capital of $1.5 billion (shared between Kazakhstan and Russia in the proportion of 1 to 2). One of its purposes is to finance investment projects in the EurAsEC member countries, especially in the energy and transport sectors.
The main declared goal of the EurAsEC is to create a customs union. In 2000, its members signed an agreement on a common customs tariff, under which they had to create a customs union within five years (with the possibility of prolongation). In the event, Kyrgyzstan and Tajikistan are to accede to the common tariff under a special arrangement. By the beginning of 2006, the EurAsEC members had coordinated 62% of their tariffs. About 80% of their customs legislation has been harmonized. In the longer term, they are aiming at a transport and a monetary union.
At first glance, the EurAsEC members have made significant progress in coordinating their tariff policy. However, let us recall that in 1996 the members of the Customs Union officially declared that they had already harmonized 100% of their import tariffs. But the main point is that it is not quite clear how the EurAsEC members can in principle resolve the problem of Kyrgyzstan.
That country has long joined the World Trade Organization, and for an overwhelming majority of product items, with the exception of agricultural products for a certain period of time, has
reduced import tariffs virtually to zero. Incidentally, this period is coming to an end. It is impossible to induce Kyrgyzstan to withdraw from the WTO or even to review the terms of its membership in that organization. At the same time, by allowing the republic’s special membership in the EurAsEC its member countries would officially agree to the existence of a “Trojan horse” in the Eurasian space, a kind of window for duty-free inflow of goods from all over the world. Given the diverse and highly developed offshore, virtual and criminal forms of business organization in the post-Soviet space, this will inevitably result in a state of affairs where the bulk of exports going to EurAsEC markets are fictitiously cleared through Kyrgyzstan. Considering the dramatic domestic situation in that country, Kyrgyzstan would probably have nothing against such a turn of events, but it is obviously not in the interests of the EurAsEC “wheel horses.” In all fairness, one should note that it did not take any particular bureaucratic effort to turn Kyrgyzstan into a channel for the penetration of Chinese goods into the post-Soviet economic space. As shown below, this took place quite naturally.
It is interesting to note that the creation of a customs union is also the main purpose of the CES, officially established in September 2003. Some analysts say that the CES agreement was specially arranged to stimulate negotiations with Ukraine, which refused to join the EurAsEC and categorically refuses to even discuss the problem of transferring part of its sovereignty to the supranational level. However, even within the CES framework Ukraine is prepared to agree only to the creation of a free trade area. Given the parallelism in the activity of the EurAsEC and the CES, it is quite probable that in case of the signing of a customs union agreement these two organizations will be integrated into some kind of new structure.
Apart from the CIS, EurAsEC and CES, another agreement operating in the post-Soviet space is the 1999 Treaty Establishing the Union State of Russia and Belarus.
During a summit in Shanghai (PRC) on 15 June, 2001, the leaders of Kazakhstan, China, Kyrgyzstan, Russia, Tajikistan and Uzbekistan set up the Shanghai Cooperation Organization (SCO). At the second SCO summit in St. Petersburg (Russia) in June 2002, its members signed an agreement on a Regional Anti-Terrorist Structure (RATS), which is a standing body of the SCO and is designed to coordinate the interaction of the parties’ law-enforcement agencies and special services in the fight against terrorism. The SCO Charter provides for the admission of new members to the organization and for the granting of observer or dialog partner status to interested states and international organizations.
The leading role in the SCO is played by the PRC, which, in effect, is the main “locomotive” of this organization. China aims to gear the SCO to the solution of problems of its economic cooperation with the Central Asian countries, and this is actually taking place. But one should bear in mind that throughout its long history China has pursued its foreign policy through bilateral agreements and contacts: multilateral political activity is contrary to the spirit and traditions of Chinese diplomacy and politics. It is no accident that the PRC has concluded parallel bilateral agreements on partnership and cooperation with all the SCO countries.
Proto-integration groupings of a political nature constitute a special group. One organization of this kind is GUAM (in some periods, it included Uzbekistan and its acronym was GUUAM). Its establishment was encouraged by the U.S. and Western Europe. In late 2005, Georgia and Ukraine initiated the creation of an organization known as the Community of Democratic Choice (CDC) in the Baltic-Black Sea-Caspian region. The first CDC forum took place in August 2005 with the participation of Azerbaijan, Georgia, Ukraine, Moldova, Lithuania, Latvia, Estonia, Poland, Macedonia, Slovakia, the U.S., European Union and OSCE.
Neither GUAM nor the CDC have a serious economic basis. As regards the post-Soviet space, there are two pairs of countries: Georgia and Azerbaijan, on the one hand, and Ukraine and Moldova, on the other, engaged in fairly active trade with each other simply because of their geographical proximity. In fact, GUAM and the CDC are more of interest to the U.S., which seeks to create a strategic corridor for the export of Caspian hydrocarbons through Azerbaijan, Georgia and Turkey.
In 1992, five Central Asian states and Azerbaijan became members of the regional Economic Cooperation Organization (ECO) together with Turkey, Iran, Pakistan and Afghanistan. As in the case of CAEC and CACO (see below), ECO mostly remains a “rhetoric society” and its members have not taken any serious steps to promote mutual trade, especially as in the early 1990s the postSoviet countries still pinned great hopes on economic assistance from Turkey, whereas today these hopes have been disappointed.
Let us recall the fate of other post-Soviet regional economic organizations that have now ceased to exist. In 1994, Kazakhstan, Kyrgyzstan and Uzbekistan set up the Central Asian Economic Cooperation Organization (CAEC). In 1998, they were joined by Tajikistan, and in 2002, by Russia. Subsequently, CAEC was transformed into the Central Asian Cooperation Organization (CACO). Its member states established an interstate council at presidential level, a prime ministers’ council and a foreign ministers’ council, and also a Central Asian cooperation and development bank, but the activities of CAEC and CACO did not yield any positive practical results. In 2005, the latter disbanded and joined the ranks of the EurAsEC.
At the official level it is often argued that the diversity of regional organizations in the postSoviet space reflects the mosaic pattern of the given region and that integration between its states develops at different levels and at a different pace depending on the specifics and readiness of each of them. In actual fact, all integration groupings in the post-Soviet space yield a low (in most cases, zero) practical return. The situation with post-Soviet integration resembles the integration initiatives of developing countries in the Near and Middle East and in Africa, where tens of organizations designed to promote integration have operated for decades with zero results. Serious experts have good reason to take a highly skeptical view of the activities of regional economic cooperation organizations in the post-Soviet space and believe that these organizations have no future.2
But how then can one explain the persistent attempts by the post-Soviet states to create diverse alliances and proto-integration groupings? In the event, real economic interaction processes have been developing in the post-Soviet space for the most part independently of (or even despite) the activities of official institutions, and it is a mistake to analyze the situation through the prism of the organizational and diplomatic activities of the bureaucracies. A sound basis for such an analysis can only be provided by an investigation of objective trends reflected in the movement of trade flows and factors of production.
Objective Prerequisites for Economic Interaction
Under close examination it turns out, first, that all the post-Soviet countries are characterized by extremely difficult conditions for market-based development. Eurasia has no common border with the developed economic centers of Europe or Asia: Western Europe and Japan (see Table 2). Along its perimeter, Eurasia is “hemmed in” by countries with a low or, at best, medium development level. The distance between the post-Soviet countries and the economically developed states (just as between some post-Soviet countries) is several thousand kilometers, which significantly increases transportation costs in foreign trade. Second, Armenia, Azerbaijan, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan are landlocked states without an outlet to the sea and, consequently, to global trade routes. This means a further increase in foreign trade costs for these countries. And third, many post-Soviet states have difficult topographies (with mountains, deserts and
2 See: Yu.V. Shishkov, Integratsionnye protsessy na poroge XXI veka. Pochemu ne integriruiutsia strany SNG. Moscow, 2001, Chapter 7.
semi-deserts occupying a significant part of their territory), which additionally increases the costs of economic exchanges.
That is why it is not surprising that the summary index of geographic conditions for the development of the CIS countries lies in the range of values extremely unfavorable to economic growth (see Table 2). And difficult geographic and economic characteristics, for their part, prevent the development of economic cooperation between these states.
Objectively speaking, the purely economic characteristics of the post-Soviet countries do not favor integration either. First, all of them belong to the group of economies with low or medium per
Table 2
Index of Geographic Conditions for the Development of the CIS Countries
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Ukraine 3 0 1,200 24 4
Belarus 3 0 950 0 0
Turkmenistan 2 0 3,800 0 11
Russia 2 0 1,650 11 11
Moldova 2 0 1,260 12 0
Kazakhstan 1 0 4,800 0 31
Georgia 0 0 2,600 26 80
Azerbaijan 0 0 3,090 0 53
Uzbekistan 0 0 4,300 0 44
Tajikistan 0 0 4,450 0 88
Armenia 0 0 2,865 0 100
Kyrgyzstan 0 0 4,570 0 100
* Total score for four characteristics. The higher the score, the more conducive are the country's physiographic characteristics to economic development. Each characteristic is measured on a scale from 0 to 2 points as follows:
• Distance between the country’s largest city and major West European centers: less than or equal to 600 km—2 points, from 600 to 1,200 km—1 point, and over 1,200 km—
0 points;
• Proportion of population living within 100 km of the sea: 80% or over—2 points, 50-80%—
1 point, and under 50%—0 points;
• Proportion of population living 500 m above sea level: under 20%—2 points, from 20% to 50%—1 point, and over 50%—0 points.
S o u r c e: J. Sachs, Geography and Economic Transition, 21 November, 1997 (mimeo).
capita income. At the official exchange rate, per capita GDP in the most developed post-Soviet economies in 2005 was within the limits of $3,705 (Kazakhstan) to $5,365 (Russia). In Tajikistan, Kyrgyzstan and Uzbekistan, per capita GDP was under $500 (see Table 3).3 As a rule, integration between states with low development levels tends to be weak.
Second, very wide gaps in development levels are an additional obstacle to closer economic interaction. The variation coefficient for per capita GDP in 2005 was 79% (in 1995, 87%), and the difference between the highest (Russia) and the lowest (Tajikistan) per capita GDP in 2005 was 16.3 times (in 1995, 20.7 times).
It should be noted that the gaps between countries have remained very wide and have even increased. This impedes economic cooperation both on the level of the entire post-Soviet space and in its various subregions. Clearly, the growing divergence of socioeconomic development levels hinders economic interaction. In light of these circumstances, the self-dissolution of CACO is hardly accidental.
Third, world experience shows that the real driving force behind cross-border integration is the manufacturing industry. In all the post-Soviet economies, manufacturing (with the exception of metallurgy) is in a slump. The share of engineering in GDP is small and continues to shrink. In effect, these countries (except Russia) do not export any machinery or equipment. Consequently, the very
Table 3
Development Level and Factor Endowment in the CIS Countries
GDP per capita, U.S. dollars Share of manufacturing in GDP, %, Factor endowment
2005 1995 2003 capital labor
Armenia 1,655 340 22 shortage surplus
Azerbaijan 1,545 320 23 shortage surplus
Belarus 3,025 1,024 23 command economy |
Georgia 1,465 352 19 shortage surplus
Kazakhstan 3,705 1,050 16 surplus shortage
Kyrgyzstan 475 320 8 shortage surplus
Moldova 795 330 18 shortage surplus
Russia 5,365 2,275 surplus shortage
Tajikistan 330 110 shortage surplus
Turkmenistan 2,160 1,505 command economy |
Ukraine 1,735 720 25 shortage surplus
Uzbekistan 490 395 9 shortage surplus
3 All computations for this article are based on official national statistics of the post-Soviet states and on the databases of international financial and economic organizations.
structure of the economy does not create any demand for closer economic interaction between the post-Soviet states.
And fourth, most post-Soviet countries are equally endowed with the main factors of production. This means that there is no structural complementarity between the post-Soviet economies not only at the level of economic structure, but also at the level of production factors, and in its absence any integration initiatives are doomed to failure.
Only two economies—Kazakhstan and Russia—somewhat stand out against this background. In these countries, spare capital resources have appeared in the past two or three years due to an increase in oil revenues. In view of depopulation, Russia is also in need of a constant inflow of labor from abroad. The special role of Kazakhstan and Russia in the market integration process is considered in greater detail below.
Dynamics of Mutual Trade
Current economic interaction in the post-Soviet space is almost entirely confined to trade. All countries have similar economic characteristics: labor surplus, capital shortage (except Russia and Kazakhstan) and low technological level of production (except, to a certain extent, Russia). On this basis, it is logical to assume that exports and imports of goods and services will remain the basic form of cooperation in the post-Soviet space for at least another decade. Hence the question: how important is mutual trade for the post-Soviet economies?
The generally accepted indicator of the significance of regional trade flows is the share of intraregional exports (less frequently imports) in the given region’s total export (and import) flows. Table 4 (on p. 104) shows the movement of this indicator in 1996-2004.
The data presented in Table 4 suggest the following conclusions:
• Caucasus-3. Mutual trade within this group of countries has little significance. In 2004, regional exports amounted to only 6% of the total exports of these three countries. Regional imports play an even smaller role. These patterns have in large part been inherited from Soviet times. In the final days of the U.S.S.R., the share of regional exports in the Caucasus-3 group was only 4.5%, and that of imports, 3.3%. This situation is not surprising: the three Caucasian countries have an extremely low degree of economic complementarity and, consequently, very limited possibilities for increasing their economic cooperation.
Unfortunately, regional economic cooperation between the Caucasian countries is additionally complicated by the far from simple geopolitical and regional political processes effectively blocking regional trade. The main political obstacles to an expansion and deepening of economic and trade relations in the Caucasus are as follows: the military conflict between Armenia and Azerbaijan; competition between external centers of power for the routes of transportation of energy resources from the Caspian region; the “historical trauma” of Arme-nian-Turkish relations; and the U.S. policy of isolating Iran.
• Central Asia-5. These five countries have no objective prerequisites for more intensive cooperation either. As Kazakhstan and Turkmenistan increase their exports of oil and gas, and Tajikistan, its exports of aluminum and raw cotton, the share of regional exports in the total exports of these five Central Asian countries will continue to decline. In view of its geography, Kyrgyzstan is more interested than the others in the closest possible cooperation in the region, if only because its goods can reach the Russian market only through the territory of its neighbors. However, over the past few years Kyrgyzstan has been a channel for the supply of Chinese goods to the markets of Central Asia and Russia under the guise of Kyrgyz products.
Table 4
Share of Intra-Regional Trade in Total Exports and Imports, %
1996 1997 1998 1999 2000 2001 2002 2003 2004
Exports
Caucasus-3 12.8 15.0 4.1 8.4 5.3 4.65 4.6 4.7 6.0
CA-5 ... ... 8.6 8.2 6.6 7.1 5.4 5.0 ...
GUAM-4 4.5 4.3 3.3 2.7 2.4 2.5 3.1 3.6 3.5
CIS-12 32.2 31.5 26.3 21.0 20.1 21.1 19.7 20.2 20.6
Imports
Caucasus-3 6.9 8.1 5.0 3.7 3.6 3.6 4.3 2.9 3.7
CA-5 .......... 10.1 9.9 ... 6.6 ... 7.6 ...
GUAM-4 2.0 3.2 2.7 1.9 1.9 2.2 2.5 2.6 2.8
CIS-12 35.8 36.2 37.5 39.0 45.4 40.1 36.8 37.0 38.2
For comparison
Exports
ASEAN 25.4 21.9 22.4 23.9 23.2 23.7 23.0
MERCOSUR 20.3 25.0 20.6 20.0 17.1 11.5 11.9
GCC 6.8 8.0 6.7 4.9 5.3 5.8 4.9
NAFTA 46.2 51.7 54.6 55.7 55.5 56.7 56.1
Caucasus-3: Azerbaijan, Armenia, Georgia;
CA-5: Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, Uzbekistan;
GUAM-4: Georgia, Ukraine, Azerbaijan, Moldova;
CIS-12: twelve CIS member countries;
ASEAN (Association of South East Asian Nations);
MERCOSUR (Southern Cone Common Market): Argentina, Brazil, Paraguay, Uruguay;
GCC (Gulf Cooperation Council): Bahrain, Kuwait, Oman, Qatar, Saudi Arabia United Arab Emirates;
NAFTA (North American Free Trade Agreement): Canada, Mexico, the U.S.
• GUAM-4. This is the most artificial grouping of those presented in Table 4. In fact, the four countries have nothing to trade with each other. In view of their geographical proximity, substantial mutual trade is maintained between Ukraine and Moldova, but Moldova has no real significance as a trading partner either for Azerbaijan or for Georgia.
• CIS-12. After the collapse of economic ties in the 1990s, in recent years mutual trade between the post-Soviet states has stabilized. The share of regional exports has “frozen” at the level of 20-21%, which is roughly equal to the figure for the ASEAN grouping. This shows that economically speaking the CIS is the most viable trading bloc.
Since the CIS consists of economies that are very different in scale, more substantive conclusions on the significance of mutual trade for the post-Soviet economies require a more detailed approach.
The computations presented in Table 5 show that for the Caucasus-3, Central Asia-5 and GUAM-4 groupings, exports to CIS markets make up from one-fifth to one-quarter of total regional exports.
If we view the situation from the angle of individual countries, we will find that exports to the CIS are critically important to Belarus, Georgia, Moldova and, to a lesser extent, Turkmenistan. Post-
Table 5
Share of CIS Member Countries in Total Exports and Imports, %
1996 1997 1998 1999 2000 2001 2002 2003 2004
| Exports |
Caucasus-3 48.8 48.8 41.1 26.7 18.5 15.3 16.6 18.4 21.4
CA-5 46.4 42.7 34.2 33.6 33.6 35.5 29.0 27.5 25.3
GUAM-4 52.2 41.6 35.3 28.9 30.1 27.7 24.3 26.1 26.4
CIS-12 32.2 31.5 26.3 21.0 20.1 21.1 19.7 20.2 20.6
| Imports |
Caucasus-3 35.0 40.0 33.4 29.8 28.7 30.5 36.6 29.8 32.0
CA-5 48.6 45.5 42.4 38.6 49.3 47.0 45.5 47.2 46.2
GUAM-4 60.7 55.8 51.1 53.5 53.7 52.5 50.5 47.3 49.4
CIS-12 35.8 36.2 37.5 39.0 45.4 40.1 36.8 37.0 38.2
| Exports |
Armenia 44 41 37 24 24 26 19 19 17
Azerbaijan 46 48 38 23 13 10 11 13 17
Belarus 67 74 73 61 60 60 55 55 53
Georgia 65 58 56 45 39 45 49 49 51
Kazakhstan 56 45 39 26 26 30 23 23 20
Kyrgyzstan 78 53 45 40 42 36 34 35 38
Moldova 68 70 68 40 59 61 55 54 51
Russia 18 19 19 15 13 15 15 15 16
Tajikistan 43 37 34 46 49 33 26 24 17
Turkmenistan 68 64 60 26 45 51 45 43
Ukraine 51 39 33 28 31 29 24 26 26
Uzbekistan 39 34 26 30 36 27 28 26 31
Soviet markets are also very important to exporters from Kyrgyzstan and Uzbekistan, whereas Armenia, Azerbaijan, Tajikistan and Russia are least dependent in economic terms on the post-Soviet space.
Russia remains the leading center of economic attraction in the CIS. However, as all the postSoviet economies (including the Russian economy) are reoriented toward other markets, Russia’s role as the “center of gravity” for CIS trade tends to weaken. At present, exports to the Russian market are of critical importance to Belarus (47% of national exports in 2004), so that its Treaty on a Union State with Russia makes economic sense. Over a third (36%) of Moldova’s exports also go to the Russian market. This shows that economic relations with Russia should have greater priority for Moldova, whereas its participation in the GUAM bloc does not make economic sense. Export and import flows between Moldova, Azerbaijan and Georgia are either nonexistent or are close to zero.
For Azerbaijan, Tajikistan and Turkmenistan, exports to Russia are of little importance. At the same time, over the next few years Russia is planning to buy increasing amounts of Turkmen gas, which can bring the Turkmenistan economy back into the Russian trade “fold.”
Given that the structure of the Russian economy is increasingly assuming a natural resource character, it is obvious that opportunities for post-Soviet cooperation in the manufacturing industry are unlikely to increase. Azerbaijan and Kazakhstan, which are natural resource economies as well, will increasingly look toward markets outside the CIS.
Private Sector Interaction
Whereas at the level of nation states CIS integration remains an ideological and bureaucratic project with little chance of practical implementation, at the level of cooperation between private sector corporations and firms in the post-Soviet space there has been significant progress in the past two or three years. This is due to the fact that in a number of post-Soviet transition countries the private sector has reached a fairly high degree of maturity and, most important of all, has accumulated relatively large financial resources. Of course, this applies almost exclusively to the oil states: Kazakhstan and Russia. Large Russian private companies (in some cases, companies with mixed, state and private forms of ownership) are actively tapping foreign markets. Naturally, in the former U.S.S.R.—by virtue of the common historical past, continued use of the Russian language as a lingua franca (which is particularly true of business activity in the private sector: even in Azerbaijan, Armenia and Tajikistan, which have switched to their own language to a greater extent than other states, the positions of the Russian language in the business community are quite strong), close mentalities and similar business culture—the expansion of Russian and Kazakh capital is most perceptible.
Special note should be taken of three main lines of interaction between private and mixed (state-private) sector entities in the post-Soviet space.
1. An expansion of post-Soviet cooperation on the part of Russian and, to a lesser extent, Kazakh oil and gas corporations. Evidently, this is the most promising avenue. In both Russia and Kazakhstan, large oil and gas corporations have already accomplished the tasks of gaining control of the domestic markets and have launched out into foreign markets. It is no accident that Russia’s Gazprom and LUKoil have recently intensified their efforts to acquire assets and develop cooperation with Uzbekistan, Kazakhstan and Turkmenistan. Kazakhstan is also trying to build up its oil and gas business in the FSU republics. In this context, one should note Kazakhstan’s desire to purchase the Tbilgazi gas distribution system put up for privatization in Georgia, and also the Mazeikiu Nafta oil refinery in Lithuania.
2. An expansion of banking capital. Commercial banks in Kazakhstan and Russia have consolidated sizeable financial resources, which cannot find effective use at home. Being in posses-
sion of significant resources, Russian and Kazakh commercial banks seek to diversify their risks by entering the markets of other FSU republics. Thus, Russian banks have in effect bought up close to 70% of Armenia’s bank assets. They are also fairly active in Kyrgyzstan, Kazakhstan and, to a lesser extent, in Ukraine. Kazakh banks, which have virtually no investment targets in the national economy, are active in Kyrgyzstan (a significant part of its banking sector is controlled, directly or indirectly, by Kazakh capital), Russia, and recently in Ukraine and Georgia.
3. An incipient trend toward mergers and acquisitions in telecommunications. The telecom sector (mainly mobile communications) in the post-Soviet space is developing very rapidly. No wonder that Russian mobile companies (incidentally, significant equity stakes in these companies are held by Western investors) are actively acquiring smaller operators in Kazakhstan, Uzbekistan and Tajikistan.
The latest trends noted above have had little effect on the manufacturing sector: in view of its poor development, post-Soviet cooperation in this sector remains limited and insignificant. In most cases, it is a matter of maintaining the cooperation ties between manufacturing plants inherited from the U.S.S.R., and not between newly created enterprises. From this standpoint, economic interaction between the post-Soviet economies differs fundamentally from the experience of the ASEAN countries or other more or less successfully developing countries, where the driving force behind regional cooperation is interaction in the manufacturing sector. In the post-Soviet economies, the “locomotive of integration” is not the manufacturing industry, but natural resource, financial and trade capital.
Spontaneous Economic Interaction Under Globalization
Despite obvious trends in the post-Soviet space toward economic stabilization and an increase in the transparency of economic flows, this space is still to a certain extent in a state of chaos. A significant share of commodity flows is not recorded by official customs statistics, and there is continued intensive redistribution of factors of production between the FSU countries. Two processes are particularly pronounced: labor migration and unrecorded mutual trade.
Unrecorded trade. Through “holes” in the customs borders along the perimeter of the CIS countries, illegal imports (i.e., imports not reflected in official statistics) find their way into the post-Soviet space on a significant scale. One of the largest customs holes of this kind is Kyrgyzstan. Given its poorly controlled border with China coupled with its WTO membership, Kyrgyzstan has turned into a powerful channel for the penetration of Chinese goods into post-Soviet markets. It is clear that Chinese goods crossing the Chinese-Kyrgyz border are not intended for the microscopic Kyrgyz market, but are in transit to the Central Asian markets (mainly Kazakhstan) and to Russia. Paradoxically, Kyrgyzstan’s membership in post-Soviet integration groupings benefits not so much Kyrgyz exporters as Chinese goods. Since economic growth in Kazakhstan and Russia driven by growing oil revenues is unlikely to lose momentum in the medium term, the Chinese trade expansion into the Kazakh and Russian markets through Kyrgyzstan is bound to pick up speed.
Other major channels of unrecorded imports into the post-Soviet space include Belarus, the Kaliningrad Region (Russia), Russia’s eastern regions bordering on the PRC, and recently (to an increasing extent) Kazakhstan. In 2004, China and Kazakhstan reached an agreement to build a 200 hectare free trade zone in the border area close to the Chinese city of Horgos. Clearly, the opportunities it provides will be used, in the first place, by Chinese producers to increase exports to
Kazakhstan and through Kazakhstan to Russia. Unrecorded imports also flow in through Black Sea ports and Transdniestria.
Labor migration. Russia and, to a lesser extent, Kazakhstan are the main “centers of attraction” for migrants from the FSU republics. It is also obvious that labor migrants come from such donor countries as Armenia, Azerbaijan, Georgia, Kyrgyzstan, Tajikistan, Moldova and Ukraine. The past two or three years have brought a noticeable increase in labor migration from Uzbekistan, but since statistical information on that country is very scant, the existing estimates are probably seriously understated and do not reflect the real scale of labor migration from that country.
Table 6 presents rough estimates of the macroeconomic significance of migrant workers’ remittances for some labor-surplus countries of Central Asia and the Caucasus. Several points deserve special attention. First, migration involves sizeable contingents of the economically active population in countries with modest local economic opportunities and a labor surplus. In Kyrgyzstan and Tajikistan, labor migrants constitute up to a third of the economically active population, and in Azerbaijan and Georgia, up to two-fifths. Second, about 70-85% of all labor migrants are oriented toward Russia. Third, migrant remittances are a major macroeconomic factor for the labor-exporting countries. In Tajikistan and Kyrgyzstan, total migrant remittances, including official bank transfers, cash and goods, make up (at the very least) 10-15% of the gross domestic product, and in Georgia and Azerbaijan, 20%.
Table 6
Macroeconomic Role of Labor Migration for CAC Countries in 2003
Migrant workers as % of official employment Remittances from labor migrants as % of GDP
Kyrgyzstan 32 10-12
Tajikistan 35 13-15
Uzbekistan 9 3
Azerbaijan up to 40 7-21 (up to 35)
Georgia up to 40 23 (up to 32)
It is hardly possible to present a dynamic picture of labor migration over several years, but it is clear, first, that the so-called Tulip Revolution in Kyrgyzstan has spurred labor migration from that country. Second, the continued decline in the living standards of broad masses of the population in Uzbekistan increasingly induces the country’s relatively immobile labor to look for jobs abroad. In 2004-2005, the large contingents of Uzbek labor migrants in Kazakhstan and Russia increased still further. Third, the Tulip Revolution followed by institutional chaos, and also the spring and summer events of 2005 in Andijan (Uzbekistan) gave a new impetus to the migration of non-indigenous peoples (i.e., Russians, Ukrainians, Belorussians, etc.) from the Central Asian region. And fourth, oil-driven economic growth in Kazakhstan and Russia turns these two countries into an ever more attractive market for cheap low-skilled and medium-skilled labor from the “labor-surplus” countries of Central Asia and the Caucasus, especially since Kazakhstan borders on Uzbekistan and Kyrgyzstan.
In other words, powerful factors stimulating mass labor migration in the post-Soviet space continue to operate on the side of both demand and supply. Closer to 2010, Russia will enter an acute phase of depopulation and, consequently, the need for imported labor in the Russian economy will sharply increase.
In countries hosting labor migrants there is evidence of an urge to bring the spontaneous labor movements under control. With this aim in view the authorities are tightening migration and labor legislation and raising fines payable by employers for the use of illegal labor. Nevertheless, these
measures have a limited effect. Pervasive corruption and the huge scale of migration hinder the attempts to bring labor flows under control. All the more so since the divergence of the post-Soviet countries in terms of economic development and pay levels continues to grow, objectively spurring the movement of large masses of able-bodied people from poor to rapidly developing countries.
* * *
In summary, one can say that serious opportunities for a significant increase in mutual trade in the post-Soviet space are lacking, which is mostly due to the generally difficult conditions for development. Nevertheless, regional trade simply must become one of the instruments for ensuring sustainable economic growth. Even the most insignificant increase in foreign trade flows is of great importance for economic dynamics. Given the generally adverse conditions for development in the post-Soviet space, it is necessary to fight for every possible export niche, however insignificant it may seem.
Numerous bureaucratic groupings and associations in the post-Soviet space have a very weak impact on economic cooperation. The latter is developing under the decisive influence of market factors. Proto-integration trends in the post-Soviet space are based on the complementarity of the main factors of production. Until recently, the most noticeable phenomenon was the movement of migrant workers from labor-surplus to labor-shortage countries. Over the past few years, the activity of private capital from relatively capital-surplus Russia and Kazakhstan is gathering momentum in the post-Soviet space.
