NATO Economic Colloquium 1997

Economic Cooperation Within the CIS: Problems and Outlook Yuri V. Shishkov Institute of World Economy and International Relations Russian Academy of Sciences, Moscow Following the disintegration of the USSR, the leaders of Russia and other post Soviet states naively believed that new opportunities would be opened up for mutually beneficial ties between them. To achieve this, a number of multilateral agreements were concluded, interalia on the principles of customs policy and creating a customs union (10 CIS states, March 1992), on a common monetary system based on the Soviet rouble, and on coordinated credit and monetary policy (8 CIS states, October 1992). All proved to be a waste of time. Once it became clear that it would be impossible to maintain a single post-Soviet economic space, several CIS leaders hoped that it would be possible to "reintegrate" their national economies on a new market basis. This was to be achieved by the frame Agreement on Economic Union concluded on 23 September 1993 by 11 CIS states (Ukraine joined later as an associated member). It envisaged a gradual transformation from "free trade association" through customs union and common market to monetary union. To develop this agreement, treaties on free trade areas, on Customs Union, on Payments Union, on common science-technology projects and on a great number of potentially less important subjects were signed. But still there has been no real integration of CIS economies. At the beginning of 1997 the Managing Secretary of the CIS, Ivan Korotchenja, could present only three real results of CIS activities in the past five years. First, thanks to the CIS, it was possible to manage the disintegration of the USSR in a peaceful manner unlike in Yugoslavia. Second, the long-term interests of each member country were aired in that it became clear who wanted what and how far they were prepared to go to get it. Third, institutional mechanisms and a legal basis were created as a framework within which dialogue between member states could occur (1). Thus, it is officially accepted that the CIS is as yet no more than an interstate instrument of civilized divorce. To date, it has ensured the more or less peaceful coexistence of former Soviet republics.

Why has the CIS under-performed? Ivan Korotchenja states that thanks to the efforts of the CIS, "legal channels have been opened for the fruitful cooperation of states in all spheres - from collective security to transport tariffs and from cooperation in space research to searching for a person who does not pay alimony". However, during the five years of the CIS about 800 agreements, protocols and other documents have been signed, yet these legal channels remain unused. Most observers would say that this is because leaders and political elites within these new states do not want to lose newly acquired independence and the power and/or personal material benefit that follows. This is true especially in respect of some Asian CIS states. But this is only a part of the truth. The main causes of failure are rooted in the economic sphere. Firstly, real integration is only possible between countries with developed market economies where everyday cooperation and economic interaction is going on at grass roots level. Only such cohesion of national economies leads to their gradual transformation into single multistate social-economic organisms on a regional level. This not only leads to economic gain for the member countries concerned, but also makes the process irrevocable. By contrast, the socialist integration of the centrally planned economies within Comecon was based on intergovernmental interaction, artificial prices and virtual, not real, economic gain. The very first push from outside ruined this economic block because connections within it were held together with bad "cement". In essence, Comecon gave only the appearance of integration. That is why real integration within the CIS cannot begin until member countries are much further advanced along the road towards a market economy. At present, this journey is far from finished even in Russia to say nothing of other countries in the CIS. In some member states the non-state sector produces 75% of GDP, whereas in others only 15-20%. Integration of such diverse economies is not possible. Belarus, where the President is attempting to freeze and even reverse the privatisation process, is a case in point. But even when transition within the CIS is complete, the "reintegration" of the Soviet economic space is still not likely to occur because of a number of other reasons set out below. Second, it is necessary to bear in mind that only national economies that have reached a high level of industrialisation and diversification can integrate. In such countries, the gains of entrepreneurship on a transnational scale become a powerful force in business. Less developed countries with agricultural and raw materials specialisation interact with each other as competitors rather than as mutually complementary partners. Exchange between industries and especially within industries under such circumstances is very poorly developed. Thus there is no material base or economic stimuli for interaction at a higher, national, level. This is confirmed by the empirical experience of economic integration in developing regions of the world. There are about 30 "free trade areas", "customs unions" and "common markets" in Latin America, Africa, South and South-East Asia. Many of them have turned out to be sterile flowers. In the CIS, some economies are very much more industrialised than others, as Table 1 below demonstrates. On this basis, the CIS cannot be considered as a prime candidate for economic integration. However, of even greater importance is the structure of industrial production. In the CIS, the overwhelming share is accounted for by the extraction and processing of raw materials and fuel. But the industry that ideally provides for deep diversification of production and wide ties between and within industries is machine-building, which throughout the CIS accounts for at most 6% of GDP and in most cases substantially less than that. As far as high-technology industries are concerned, almost all are concentrated in the three leading CIS countries. Of the 60,000 most advanced enterprises within the Soviet defence complex, 70% were located in Russia, 17% in Ukraine and 4% in Belarus. All other Soviet republics accounted for only 9% (3). The relative backwardness of most CIS countries vis--vis the four leading CIS states is mirrored by per capita income disparities of 4-5 fold. This huge difference is in part due to slow progress with market reform and also because of military operations on the territories of Tajikistan, Georgia and Azerbaijan. But the difference will not narrow quickly because of demographic dynamics. Over the next 20 years, the growth of the population in Azerbaijan and Kyrghyzstan will be 2.8 times higher than in Russia, in Tajikistan - 3.5 times, in Uzbekistan - 3.6 times, and in Turkmenistan - 3.9 times (4). Indeed, the CIS has a "North" and a "South" of its own. To prevent this disparity from increasing, rates of economic growth in the "South" would need to be at least two and perhaps even four times higher than in Russia, which is not a likely prospect. Real integration between the "South" and "North" of the CIS is not a realistic prospect, even in 10-15 years. Third, the transition from planned to market prices has changed the relative values and effectiveness of former close ties between Soviet republics. A trade that may have been profitable before reform has now become unprofitable. Moreover, every CIS country can chose between partners not only within the CIS but also in the "far abroad". The whole system of economic criteria has changed from one based on command planning to one based on comparative advantages. This has led to a considerable reorientation of trade flows for all CIS countries (see Table 2 below) with the share of regional trade contracting by more than 50% over the last five years. For Russia, intra-CIS trade has contracted by over 70%. Moreover, the share of mutual trade of CIS countries in their joint GDP has fallen even faster: from 19.2% in 1990 to 5.2% in 1996. For Russia, the figures are 14.7% to 3.6%. (See Figure 1 below.) Figure 1: Intra-regional exports of CIS states a proportion of GDP (%) Note: GDP and inter-regional exports have been calculated in $ on PPP basis. Source: EIU Country Report: Russia. 4th Q, 1996, p.37-38; Foreign Trade Statistics in the USSR and Successor States. The World Bank. 1995, p.148-150; Economic survey of Europe in 1996-1997, Appendix tables B-1, B-10; Russian Economic Trends, 1997, N1, p.95. This means that the former pattern of interlocking national production processes is rapidly weakening. CIS economies, especially Russia, are becoming more and more isolated from each other, despite all the agreements and declarations about "reintegration" from the CIS bureaucracy. Fourth, there is no symmetry between CIS states either in economic size, political influence, military-technical capacity or in overall potential. Basically, Russia dominates with 69% of CIS GDP, 72% of exports and absolute dominance in military-technical potential. By contrast, the EU is more a partnership of equals. In 1958, Germany had 36.2% of GDP of "the six", France - 32.8%, Italy - 18.5% (5). Thus small countries could manoeuvre within this triangle and successfully lobby for their own interests. When Great Britain joined the EC this equilibrium became even more stable. Under these circumstances and taking into account Russia's imperial past (as well as her far from irreproachable present policy towards some CIS countries), small CIS states have more than enough grounds to be against super-state institutes which Moscow would dominate. Thus most CIS member states are strictly against the idea of a customs union and other supra-national bodies, preferring to conduct economic relations with CIS neighbours through bilateral consensus instead. It comes as no surprise therefore that even the CIS statute was not signed by three members - Moldova, Ukraine and Turkmenistan. In January 1996, Ukraine, Turkmenistan, Azerbaijan, and Armenia did not sign the common decision of the Heads of States Council on the formation of a customs and payment union (6). In Spring 1997, the agreement on the "Conception of Economic Integrating Development of the CIS to 2000" has only been signed at the Head of State level by the chairman of this Council, one Boris Yeltsin. Thus for the foreseeable future, the CIS will not have effective institutes for multilateral cooperation. This will have consequences both economic and political. Probable Perspectives It is clear that the "reintegration" of the post-Soviet economic space within the framework of the CIS will not be possible for some time. Even external political events, such as NATO enlargement to the East, will not bind the CIS closer together. How thus will economic relations develop between CIS countries? First, despite the above-mentioned trends, Russia remains the centre of gravity for all national economies of the CIS, excepting Turkmenistan. Given the poor conditions for normal multilateral trade and payment relations, the less developed CIS states support their economic relations with Russia and other more developed CIS states on a bilateral basis in the form of the so called "hub and spoke" model (see Table 3 below). This hampers the development of multilateral economic ties within the CIS, but does not prevent member states from developing economic ties on a bilateral basis with other countries beyond the CIS. There have been significant changes in the geographical structure of export flows within the CIS over the past five years. Exports from Ukraine, Belarus, Moldova and Kazakhstan were notably re-oriented away from other regions of the CIS and towards Russia. Russian exports mirrored this shift, moving away from the Caucuses and Middle Asia and towards the European CIS and Kazakhstan. This confirms that certain factors are working towards the economic integration of Russia with a small group of relatively developed CIS countries - Belarus (in 1996 Russia accounted for 52.2% of its foreign trade), Ukraine (44.4%), Kazakhstan (49.5%). It remains possible that Moldova (Russia accounted for 50% of its foreign trade) may at some stage join these three. But even the above-mentioned 4-5 CIS states cannot begin the process of real integration when the right conditions for it to succeed do not exist. Besides, Russia itself as the centre of gravity must not only overcome its deep social-economic crisis but must also become a developed and prosperous country. A sick economy is not attractive to neighbours who are just as ill. Moreover, political tension within the CIS must be eliminated along with any residual territorial disputes. Such disputes in the recent past have pushed Ukraine towards NATO and the EC. CIS states in Middle Asia and the Caucusus are gradually reorientating their exports from Russia to Middle Asian markets. This confirms the assumption that this group is neither ready nor prepared to integrate with European partners in the CIS. They will look to their own forms of shallow economic interaction within the subregion, as well as in a wider geo-economic context. Institutions for this have already been created: in 1994 the Commonwealth of Central Asian States was created with the participation of Kazakhstan, Uzbekistan, Turkmenistan, and Kirghyzstan. Before this, in February 1992, these four states plus Azerbaijan entered the Organization of Economic Cooperation created in 1964 by Iran, Pakistan and Turkey. Efforts to force the creation of a Customs Union between Russia, Belarus and Kazakhstan (1995) - and to extend it to include impoverished Kyrghyzstan (1996) - will not help to further integration between this small group of CIS countries in the future. As to the Union between Russia and Belrus (April 1996 and May 1997), this is doomed to failure so long as the current and retarded state of Belarusan economic and political reform persists. Bilateral treaties signed by the two Presidents merely represent a political game and can only frighten other countries away from further rapprochement with Russia. If in the coming years Russia can achieve high rates of economic growth, re-establish its high technology industries and improve the welfare of its population, it could begin to realize the existing integration potential of the 4-5 European countries of the CIS. As to the other CIS states, some could join later as associated states. But if Russia fails to become an attractive centre of gravity then the disintegration of the post-Soviet economic area will become irrevocable and CIS countries will reach out for other centres of gravitation in Europe (including the EU) and in Asia (including China and the Middle East). The share of the EU in the foreign trade of Ukraine has already increased from 6.3% in 1992 to 13.5% in 1995, in that of Belarus from 16.4% to 17.8% and in that of Moldova from 2.8% to 12% (7). The EU share in Russian trade turnover rose from 16.4% in 1992 to 35.7% in 1996 (8). Inability to integrate economically would not necessarily preclude the close military-political union of all or a considerable part of the CIS, especially in the face of a growing threat from Islamic fundamentalism. But the enlargement of NATO to the East is unlikely to become a factor influencing the political unity or integration of CIS states. In the global market place, economic relationships between states are now conducted according to more complicated rules which leaders of CIS states have not considered up to now and, I am afraid, do not completely master today. Table 1 Structure of GDP and per capita income levels in CIS - 1995 (.PDF/16Kb) Table 2 Intra-CIS trade as a proportion of total trade - 1991 and 1993 to 1996 (%) (.PDF/18Kb) Table 3 Export trade flows within the CIS (% of total exports to CIS) (.PDF/13Kb) Footnotes Nezavisimaya gazeta) 17.01.97. Ibidem. Izwestiya, 15.03.96. Forecast of the experts of IMEMO. European Economy, N14, 1982 (November), p.195. Informazionnyj bulleten Mezhdunarodnogo ekonomicheskogo komiteta M., 1996, N3,p.41. Calculated upon: Statistical Handbook 1995. States of the Former USSR, 1993 and 1995. Calculated upon: Russian customs statistics data.