Eastern Europe would gain most from EU-EAEU Economic Alliance

September 22, 2018

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_ Yuri Kofner, research assistant, IIASA. Report given at the 28th Economic Forum. Krynica Zdroj, 6 September 2018.*

After Trump the world order is likely to become bipolar once again, divided by an “economic NATO” (“TTIP-2”) and a China-led “Greater Eurasian Partnership”. However, based on their incredible economic compatibility, an economic alliance between the EU and the EAEU would be more beneficial for both of them. And Eastern Europe would gain the most.The title of this year’s Economic Forum in Krynica Zdroj, Poland was “A Europe of Common Values or A Europe of Common Interests?”. In this regard I adhere to the school of neorealism. Common interests are more important than common values. A declaration for common values is possible, but common interests should precede them and build the foundations. Relations between nations should be built on common interests first and on common values only second.2014 has been a hallmark year for Russia. Europe’s irrational behavior in Ukraine during the Euromaidan and subsequent civil war has partially led and intensified Russia’s “Pivot to the East”.Firstly, the ideology of “Westernism” has fallen into a political and intellectual coma in Russia. From 2014 onwards we saw the rise of a new national feeling in Russia, most importantly, among Russia’s intellectual elite, e.g. Sergey Karaganov and Andrey Kortunov. This new sentiment is expressed in the support for Russia’s “Pivot to the East” and the acknowledgment of Russia’s “Eurasian” nature, both in the domestic and in the international sense.Secondly, in 2014 in Astana the Treaty on the creation of the Eurasian Economic Union was signed. Its importance for the future of the economic architecture of the wider Eurasian space cannot be underestimated. This is a new modus vivendi that Europe has to deal with. Since 2016 presidents Vladimir Putin and Nursultan Nazarbayev call for the creation of a “Greater Eurasian Partnership”, but which is officially “open for Europe”.Russia has seen that building relations with Asian nations can be more effective, since Asian nations are more pragmatic in their approach and they build their relations based on their national interests first and foremost. This once again shows that common interests are more effective than common values. Although additionaly Russia and the Asian states also share a lot of common values – cultural conservatism, multipolarity, supremacy of national sovereignty, and of course – pragmatism.This success can be seen by the following:

Signing of Russia – China gas deals in 2014 worth more than $ 400 bln;
Development of the Ice Silk Road (Northern Maritime Route) since 2017-2018, including an revolutionary new class of cargo-tanker ice-breakers;
Singing of FTAs between EAEU – Vietnam (2015) ; EAEU – Iran (2018); Non-preferential agreement EAEU – China (2018). More to come with India, Singapore, Korea.
Since 2016 the EAEU’s trade turnover has shifted away from the EU in favor of the Asia-Pacific Region.
Implementation of the conjunction of EAEU and Silk Road Economic Belt.

However, initially the final goal of creation of the EAEU was the creation of a common economic space “from Lisbon to Vladivostok”.The reasons for this are:The EAEU is an economic midget. According to the IMF, in 2017 the GPD adjusted to purchasing power parity of China was $23.2 trillion; that of the EU – $21 trillion; of the USA – $19.4 trillion; of the EAEU – only $ 5 trillion. The World Bank Group gives similar results.Thus, in order to “stay afloat” in the global economy the EAEU needs a strong(er) partner with whom equal cooperation would be possible. This could be either the EU, or China, or both.As shown above, where EAEU-EU interactions are at an all-time low, EAEU-China cooperation is already in full swing. However, increased cooperation with China has not only its benefits, but also bears the threat of creating an unhealthy dependence. Moreover, the EAEU is unlikely to receive technological transfers and investments from China, which it desperately needs to attain its goal of economic modernization.Despite being in the situation of a political stalemate, potential deepened cooperation with the EU has the following benefits for the EAEU:

Attaining the much needed technological transfer, which is unlikely to come from China;
Increased investments. According to the Eurasian Development Bank, in 2017 Сhina invested $ 33.7 billion into the EAEU (+ Az, Tj, Ukr), whereas only the Netherlands and Austria combined invested $ 43.7 billion (much of which is re-investment from the Eurasian side, admittedly);
Security of stable EU demand on EAEU oil and gas supplies.

The EU-EAEU common space has the following benefits for the EU:

The EAEU has a large market for the export of EU manufactured goods and food products (180 million consumers in 2017 and 210 million if Uzbekistan joins the Union);
The EAEU is a source of cheap resources (oil, gas, coal, lumber, metals, etc.) which is very important for keeping the EU economy competitive in the global competition.
The EAEU is a relatively high-qualified labor source, e.g. in the IT sector, where the EAEU implements an ambitious “Digital Agenda by 2025”.

Econometric models created by the Munich-based Ifo Institute in 2016 have shown, that countries Eastern European “shared neighborhood” countries [1] would benefit the most:

Three Baltic states: Increase of exports to EAEU by 80% (10% in overall exports). GPD growth by 1.2% to 1.8%, i.e. 200 Euro per capita.
Poland: Increase of exports to EAEU by 70% (5% in overall exports). GPD growth by 0.5%, i.e. 50 Euro per capita.
Belarus: Increase of exports to EU by 109% (46% in overall exports). GPD growth by 5%, i.e. 290 Euro per capita.
Ukraine: Increase of overall exports by 26%. GPD growth by 5%, i.e. 90 Euro per capita.

Currently the EU is a “junior partner” to United States of America. This mode of relations is likely to solidify after president Donald Trump. A post-Trump administration is likely wrap up the current protectionist policies of the United States and propose the signing of a “TTIP-2”, which Brussels is likely to accept. Thus sometime after 2020 or 2024 we are likely to see the creation of a “Transatlantic Economic Union”, i.e. “economic NATO”. This will lead to the formation of a new bipolar world order, since, extrapolating current trends, the EAEU is likely to become junior partner to China.However, the EU-EAEU combination would be better, since the EU and EAEU would be to each other relatively more equal partners, albeit of course asymmetric, than the USA are with the EU (in the political-security aspect) and China is with the EAEU (in the economic aspect).The EU and EAEU are incredibly economically compatible and through an alliance could secure their joint global competitiveness.The EU and EAEU share, if not common values, but still a common culture. Russian and Kazakh students are more likely to be familiar with the works of St. Augustine, Voltaire and Kant, than with Sun Tsu, Confucius and Lao Zi.Even the founding father of a united Europe, count Caudehove-Kalergi argued: “Russia not only constitutes a military threat for Europe, but also an economic supplement. […] Russia needs industrial products, Europe needs resources. […] Hostility between Europe and Russia would be to the detriment of both and would only benefit the American industry. […] Both Russia and Europe need each other to rebuild each other. For both, at least for a decade, political issues must recede behind economic ones, and politics must be dictated by the economy”.

Notes:

*The views expressed are solely that of the author and may not represent the position of any affiliated organizations.

[1] “EU-EAEU shared neighborhood countries” is a term used by the author to describe two groups of countries: Firstly, those member states of either the EU or the EAEU that share a common border (Finland, Estonia, Latvia, Lithuania and Poland from the EU side; Belarus and Russia from the EAEU side). Secondly, those countries of the former Soviet Union that either share a boarder with the EAEU or are member states of the EAEU and, at the same time, are members of the EU Eastern Partnership (Belarus, Ukraine, Moldova, Georgia, Armenia, Azerbaijan).

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