Russia Attempts to Play Catch-up with US, China Trade Blocs

With 12 Pacific Rim nations well on their way to establishing the Trans-Pacific Partnership, and China backing a rival Regional Comprehensive Economic Partnership among 16 nations, Russia has risked falling behind with its own faltering efforts to launch an agreement in the South Caucasus region.

The Russian bid, launched in 2014 to try and counter other agreements including the European Economic Union, appears to be falling flat, at least partly a victim of the chill in relations with the west, which arguably could get worse given the growing mess in Syria that has enmeshed Russia.

The zone, known as the Eurasian Economic Union and initially consisting of Russia, Belarus and Kazakhstan, promised free trade among partners, a huge market for neighboring countries and increasing economic activity. With China hungrily seeking to add the South Caucasus to its own so-called “One Road/One Belt” initiative, Russia has been left with little room to maneuver.

Countries involved in the Union expected to distribute their goods into the new market, especially Russia itself, faster, cheaper and on a larger scale. But a year and a half since the Union was established, official statistics and ongoing economic events make it obvious that not only have expectations not been met, the situation has got worse for each country in the union, including Russia itself as the global economy has staggered and Putin’s adventurism in Ukraine has led to western sanctions.

[Here's an interactive map exhibiting the whole economic decrease of the Union.]

Russia and the world

A major culprit in wrecking Putin’s plans is sanctions put in place by western countries over Russia’s Ukraine misadventures. The economy is also suffering from falling global oil prices and by sanctions set by Russia itself in retaliation. Given these problems, the ruble has fallen sharply against the US dollar.

Western country leaders almost certainly didn’t take into consideration the effect of the sanctions on the economies and social lives of Russia’s neighboring countries. Russian economy is huge for the region, it survives. But when Russia catches cold, as the saying goes, its satellite countries, with small markets and limited economic activities catch pneumonia.

Russia is the number one or at least second trading partner for all of the union countries and is the major consumer of their goods and products. Bank of Russia statistics from January to July show Russian imports fell by 38.6 percent – to US$94 billion. Consequently, EU countries hoping for a sizeable Russian market have been left empty-handed.

The same statistics show first-half exports fell by 28.5 percent to US$182.5 billion. The chill in relations with the United States has also had major consequences. US Commerce Department figures for the first five months of 2015 showed trade turnover between Russia and the US declined by 34 percent, or by US$3.5 billion.

Russia's foreign trade January-September turnover was US$399.2 billion, a 34 percent decrease year-on-year, according to the US Federal Customs Service (FCS). Russian Federation exports for nine months were US$263.4 billion, down by 31.3 percent. Overall, Imports to Russia fell by 38.6 percent to US$135.8 billion.

The turmoil between Western countries, the US and Russia, is not new .The cold war has now extended to financial markets and the main warriors are the ruble and the dollar. The sanctions set by European countries and the US were aimed at the most vulnerable parts of Russia, decreasing the oil price and consequently weakening the ruble.

The US no longer has much of a connection to Russian markets. Russian businessmen can no longer seek loans from US banks and foreign investors have cut investment to Russia, with the result that Russians are surviving in an economy with a twice-devalued currency and much cheaper oil prices. Apparently, the shots of Russia's rivals aimed at Russia’s economy were quite well targeted, with gross domestic product falling by 2.2 percent in the first six months of this year, with further contraction expected in the second half as well.

Russian President Vladimir Putin acknowledged the coming economic strains, repeating in recent press conferences, that in the upcoming two years the economic situation in the country will be tough. It is tougher for its satellite countries. Russia is not only a trade market for the neighboring countries, but also a large job market, with many of their residents opting for Russia for jobs and to transfer the money earned back home. Given the falling ruble and the cooling economy, salaries have decreased and money transfers have fallen concomitantly.

False start on national currencies

Russia has suggested eliminating US dollars and making trade deals only in national currencies, a plan being implemented in the Eurasian Union. That suggestion doesn’t seem realistic. Every country is trying to save itself. Armenia has already announced it would resume negotiations with the European Commission for a new agreement from December.

Belarus has sought to develop relations with comparatively new business partners as well as with traditional partners in Latin America such as Brazil, Venezuela and Ecuador, and in Asia, notably with China, India, Indonesia and Turkey. Kazakhstan is in a better situation because of its favorable location in Central Asia. There two major China and Japan have signed several deals and Kazakhstan is seeking to the boundaries of cooperation. Kyrgyzstan has other alternatives. Except for Russia and other post-Soviet countries the main counterpart countries are Switzerland, and Emirates. The top exports of Kyrgyzstan are gold and refined petroleum.

Russia is also seeking alternatives and seems to have found them in China, the largest market in the world. As Russia’s political problems with the west have grown, Chinese-Russian relations are unprecedentedly favorable. Moscow seems to be in a search for any realistic outlook to recover its economy, which would entail the improvement of neighboring countries’ economies as well.

Some analysts consider Russia’s fight against ISIS a step to seek international approval against its opinion on Russia as an aggressor on annexation of Crimea. Vladimir Putin, three times winner of Forbes designation of the world’s most powerful person, tries to ease the situation with its former counterparts, lift up the sanctions and finally provide Russia’s comeback.

Until that happens – if it does – the Eurasian Union is still a vague and powerless concept. The countries somehow seem victims. They have been unable to outmaneuver Russia and not to help Vladimir Putin to implement his ambitious Union. Armenia and Kyrgyzstan to some extent are transfer-based countries. EEU membership eases regulations for working in Russia. Each has large communities in Russia. It goes without saying that this Union is not able to compete with other Unions such as the European. The continued existence of the Union is already in doubt since it is now more a decoration than a business platform to improve economies.

Manvel Kesishyan is a master’s degree candidate at Hong Kong University and an Asia Sentinel intern