Signing Ceremonies Do Not Ensure Future Success for Economic Blocs

In the Commonwealth of Independent States, experience has shown that a signing ceremony alone does not ensure future success for a trade initiative. Such is the case with two competing economic blocs comprising former Soviet states. One, a four-year-old entity called GUUAM, incorporating Georgia, Ukraine, Uzbekistan, Azerbaijan and Moldova, is virtually moribund. A newer alliance, the Eurasian Economic Community (EEC) – joining Belarus, Kyrgyzstan, Tajikistan, Kazakhstan and Russia – would appear to have greater potential. But substantial obstacles stand in the way of success.

The EEC formalized its organizational structure in late May. [For additional information see the Eurasia Insight archives]. For all the EEC's possibilities, much needs to happen before potential translates into prosperity. There is broad agreement that member states can all benefit from freer trade. Yet while the EEC is firmer about sanctions than previous CIS treaties, it lacks a proven vehicle for resolving disputes. And absent that, it's hard to see how it can steer the countries' currencies, or reduce the danger of corruption.

Anders Aslund, senior associate at the Carnegie Endowment for International Peace's Russia and Eurasia program, doubts that the EEC's experimental court and sanction system will run smoothly. "First you need to have the World Trade Organization framework which forms the base for all trade agreements," he said in an e-mail interview. "The European Union is a superstructure on the general WTO rules, and it would be foolhardy to build an alternative structure." So the mood is tentative: experts at the IMF and other Washington think tanks have no statement to make about the EEC, and currency traders hesitate to draw any conclusions from the treaty announcement.

Their reluctance makes sense. Without agreed-upon rules, especially given Russia's history of regional hegemony, it remains difficult to say what the economic alliance truly covers, or means to its members. Is it a regime for WTO preparation? Russian President Vladimir Putin, who controls 40 percent of the group's voting shares, has characterized it that way. But the body still needs to develop tariff and tax policies toward that end. Until it does, Aslund fears, internal trade disputes will quickly become the burden of high-level governmental officials – officials who already face dizzying challenges.

So there appears to be a good chance of the EEC devolving into a springboard for individual and regional agendas. Its integration committee chairman, Nigmatzhan Isingarin, has already raised the specter of isolationism. Interfax quoted the Kazakh official as saying that Kyrgyztan's WTO membership constituted a "problem" – albeit one he is declaring resolved. The EEC's crucible will consist of interstate conflicts over philosophy, diplomacy, and plain old rules. So far, it still seems to rely on the old (and somewhat feeble) structures of the CIS Customs Union, says Aslund. "Therefore, they cannot introduce really free trade, and even less opt for a common market."

Another potential pitfall concerns Russia's ability to interact with other former Soviet states in a collaborative spirit . Other EEC members remain sensitive about Russian ambitions to maintain a controlling interest in regional affairs. The selection of Kazakhstani President Nursultan Nazarbayev as head of the group's coordinating council is doubtless aimed at allaying such fears. Nevertheless, some observers say Russia will be tempted to try to manipulate the EEC to support Moscow's own policy goals. Such attempts would doubtless give rise to resistance from other EEC members, stunting the growth of the organization.

Meanwhile, the chief basis for GUUAM's existence seems to be a common desire to resist Russia's hegemonic tendencies. This shared desire does not appear sufficient, however, for GUUAM nations to move beyond rhetoric and engage in substantial cooperation. For example, at a June 7 summit, GUUAM leaders were unable to agree on a free trade framework.

The EEC's barriers are clearer in some ways than its inner workings. Some or all the GUUAM nations may yet join the EEC, but not before further wrangling. Moldova's president has called for all former Soviet trade mechanisms to grow "through the CIS." At the same time, Uzbek President Islam Karimov has been openly dismissive of the EEC. This relationship won't sort itself out tidily, and doubts presently outweigh progress.

Investors speak of "country risk," or the uncertainty that a nation's sovereignty will support young companies or currencies. The EEC steps up an effort toward addressing that risk, so foreign observers should watch it closely. But they also figure to watch it skeptically. "Weak states make weak partners," says Aslund. "There is no reason to take anything in this sphere of agreements at face value." The EEC has a treaty, yes; yet it may still prove as disjointed as any other CIS construct – a fact not lost on potential investors.