The New Eurasian Economic Union – A China FTA in the Offing?

January 9, 2015 Posted by China Briefing Reading Time: 5 minutes

Op-Ed Commentary: Chris Devonshire-Ellis

Flag_of_the_Eurasian_Economic_Union_svg The long awaited Eurasian Economic Union (EEU) came into effect on January 1 this year, establishing a bloc of ex-Soviet states that is the Eastern European and Central Asian version of the European Union. Members of the EEU include Russia, Belarus, Kazakhstan and Armenia, with Kyrgyzstan set to join from 1 May 2015, and Tajikistan and Turkey having been approached about joining. The EEU effectively replaces the Eurasian Customs Union, established back in 2010, which created a single market for goods and services among members, with the removal of internal tariffs and common external tariffs on goods imported from outside the Union.

Armenia, which just joined the EEU on 2 January this year, has also introduced new restrictions on commodity imports, and the nation will gradually reduce its import tariffs in line with arrangements under the Customs Union by 2022. Meanwhile, Belarus recently slashed its duties on oil and oil products for export outside the Customs Union, to align its rates with Russia’s. Belarus has been a major gateway for post-sanctions products into Russia, with many E.U. products now transversing Belarus from Europe on their way through to its larger, sanctions-hit neighbor.

The Eurasian Economic Union consists of a single integrated market of 183 million people and a gross domestic product of over US$ 4 trillion in purchasing power parity. The Union has introduced free movement of goods, capital, services and people, and provides for common transport, agriculture and energy policies, with provisions for a single currency and greater integration in the future. The union operates through supranational and intergovernmental institutions, namely the Eurasian Commission (executive body), the Court of the EEU (judicial body) and the Eurasian Development Bank. National governments are typically represented by the Eurasian Commission’s Council.

The EEU is also proving to be potentially attractive to other Central Asian and Eastern European nations. Uzbekistan is currently negotiating a related free trade agreement, while the complicated situation in Eastern European is demonstrated by the fact that Moldova, Ukraine and Georgia have been offered to join both the European Union and the Eurasian Economic Union. All three countries opted for the European Union by signing association agreements in March 2014, however the Russian-backed break-away regions of Moldova (Transnistria), Ukraine (Donetsk and Lugansk) and Georgia (South Ossetia and Abkhazia) have expressed a desire to join the Eurasian Customs Union and integrate into the Eurasian Economic Union instead.

The Eurasian Customs Union, the EEU’s predecessor, has already attracted interest from other Asian states. India has declared an interest in signing a trade agreement with the ECU, and Vietnam has signed an FTA with the trade bloc. China meanwhile, will be keeping a close watch. The EEU fits in extremely well with President Xi Jinping’s mooted “New Silk Road Free Trade Area” – which we cover in some detail in the current issue of China Briefing (complimentary download here).

As I predicted in December, Russian-Chinese trade can be expected to boom in 2015, partly in response to American sanctions on Russia, but also as a direct need to re-invest in Russian manufacturing capabilities. Given recent U.S. hostilities towards Russia, President Putin would like to see the nation turn its face eastwards once more, and China offers the ideal partner for this. Russia needs to become more self-sufficient and increase trade within the EEU in order to wean itself off Western market imports, while China needs Russia’s energy resources.

The likely scenario would be the commencement of an EEU-China Free Trade Agreement. China already possesses double tax treaties with Russia, Armenia, Belarus, Kazakhstan and Kyrgyzstan (available in the Dezan Shira & Associates Online Resource library here) and both countries dearly enjoy thumbing their noses at U.S.-initiated trade agreements. For China, it is a way to further secure trade concessions with Central Asia and Eastern Europe, and then attack E.U. markets through EEU members such as Belarus. Russia meanwhile also stands to gain, as it would generate more investment into an economic union in its own backyard, and minimize the threat of future American-led sanctions or trade obstacles. It may also have the effect of further dividing the European Union to Russia’s advantage. Should China announce a feasibility study into an FTA with the EEU, then China-savvy entrepreneurs may well find welcome homes in Armenia, Kazakhstan and Belarus, in addition to Russia itself.

Chris Devonshire-Ellis is the Chairman of Dezan Shira Asian Alliance and Publisher of Asia Briefing. Dezan Shira & Associates maintain offices throughout China and Asia and have a strategic relationship with Russia Consulting, with offices in Moscow. Both firms provide foreign direct investment, strategic advisory, legal, tax and accounting services to foreign investors in their respective regions. Please contact the practice concerning China-EEU trade at china@dezshira.com.

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