The Eurasian Economic Union – OBOR’s Free Trade Card

While China has been getting involved with organizing and financing numerous OBOR projects, a little-noticed revolution has also been getting underway within the OBORsphere that will also hugely impact China’s own import and export figures, and even influence the types of goods Chinese consumers will be purchasing in future.

The Eurasian Economic Union (EAEU) is a Russian backed free trade bloc that includes Armenia, Belarus, Kazakhstan, Kyrgyzstan, and Russia itself. That may seem like an eclectic group of countries, however, closer geophysical  examination reveals the true impact – the EAEU includes an entire land mass that sits between China and the European Union. The bloc came into effect on January 1, 2015,  with member states still coming into compliance over agreed issues such as harmonization of tariffs and customs procedures. This is normal; ASEAN has done the same with the smaller nations of Cambodia, Laos, and Myanmar in its own union, allowing time for internal reform.

However, the internal trade impact of uniting these countries into a free trade area has produced an immediate upswing in trade between them. The Q1 2017 trade among members was up 38 percent on the year, with exports also surging. That is significant; the EAEU’s annual GDP in 2016 was US$4.2 trillion, with its residents showing an average per capita income of US$13,151 in purchasing power parity (PPP) terms – higher than China.

It is that purchasing power, coupled with the ability to produce relatively inexpensive consumables, that is making the EAEU a sought after partner in terms of other countries wishing to trade with it. We can examine each of the member states’ attributes as follows:

Armenia
Population: 3 million
GDP: US$11.2 billion
GDP Growth Rate: 6.1%
Main Imports: Natural gas, petroleum, tobacco products, foodstuffs, diamonds, pharmaceuticals, cars
Main Exports: Machine tool, textiles, other light manufacturing

Belarus
Population: 9.5 million
GDP: US$47.6 billion
GDP Growth Rate: 1%
Main Imports: Machinery and equipment, mineral products, chemicals, metals, textiles, foodstuffs
Main Exports: oil products, potash and nitrogen fertilizers, metal products, automotive, tractors, tires, dairy and meat products

Kazakhstan
Population: 18 million
GDP: US$134 billion
GDP Growth Rate: 4.2%
Main Imports: Machinery, metals, silk, IT, electronic products, automotive
Main Exports: oil and oil products, ferrous metals, chemicals, machinery, grain, wool, meat, coal

Kyrgyzstan
Population: 6 million
GDP: US$23 billion
GDP Growth Rate: 6.4%
Main Imports: Oil and gas, machinery and equipment, chemicals, foodstuffs
Main Exports: gold, cotton, wool, garments, meat, tobacco; mercury, uranium, electricity; machinery; shoes

Russia
Population: 143 million
GDP: US$3.9 trillion
GDP Growth Rate: 1.7%
Main Imports: Temperature-change machinery, computers, optical readers, taps, valves, similar appliances, centrifuges, filters and purifiers, miscellaneous machinery, liquid pumps and elevators, air and vacuum pumps, Piston engines, lifting/loading machinery, rubber and rubber articles, plastics and plastics articles.
Main Exports: Petroleum and petroleum products, natural gas, metals, wood and wood products, chemicals, and a wide variety of civilian and military manufactures

(All GDP growth rate statistics courtesy of Kazinform via local government agencies)

A detailed analysis of the performance of each of the members states, issued by the Eurasian Development Bank, can also be found here. What is apparent is that the West’s sanctions upon Russia, together with a drop in the price of oil and a regional recession, all occurring at the same time, has seen a retraction in the value of each of these economies since 2014. The Russian ruble for example, has lost 50 percent of its value since 2014. While that may be bad news for the region, it represents good value for buyers of goods from the EAEU, which is one of the driving forces behind the mutual benefits to be gained by free trade agreements. The EAEU wants to encourage exports to kick start a weakened economy, other nations see great value in buying from the EAEU.

Another factor at play is a political one. Russia is deemed as a stable country politically, following a path of reform and adapting to the loss of traditional markets in the EU, yet still strong and still a global power. China too, has political stability, as do Iran, Turkey, Israel, and Singapore. India is the world’s largest democracy but itself seems to be entering a new period of economic and development stability under Prime Minister Modi. There’s is a new dynamic, challenging the modus operandi of the United States, and to some extent the EU. The latter two have also not enjoyed a particular level of stability themselves, leading Asian economies to hedge bets and start to look at the alternatives.

The EAEU, with a stable Russian-backed free trade area, and border windows to both China and the European Union, is starting to look increasingly attractive in a world where America’s free trade ambitions have become increasingly shelved, and at best, are politically shrill. Even the NAFTA agreement now seems in doubt, and this is with America’s two bordering countries, Canada and Mexico. The Eurasian Economic Union, in contrast, seems rather more embracing (see image below).

Although the negotiation period to work out bilaterally enhancing trade can take some time, and the impact on local economies assessed, Moscow has placed a sense of urgency on the development of the EAEU and its agreeing to free trade with other partner nations. It is likely that negotiations between other countries and the EAEU will take a matter of 36-48 months, rather than the ten years plus that agreements with an increasingly internalized EU take, or the ultimately non-productive deadweight of the TPP that the United States under President Trump recently exited from, again after substantial multilateral talks lasting years. Moscow will wish to project itself as a more reliable and to some extent flexible negotiating free trade partner than the United States and EU have recently been capable of, and the regional balance is shifting as a consequence. Concerning China, for example, the EU is China’s largest trading partner, and China is the EU’s second largest trade partner, yet discussions over a Free Trade Agreement have been going on since 2007 – with no end currently in sight. Both Moscow and Beijing see Eurasian free trade as an opportunity to get things done while the West appears engaged in other priorities.

The emergence, then, of the EAEU as a serious regional trade body cannot be underestimated, although it continues to fly under the radar for many. However, a region that combines Russia, India, China, Iran, and Turkey, together with other Near, Central, and South East Asia regional powers cannot be dismissed so easily. The development of the EAEU as a free trade bloc –  should this happen  – would mean an area with the following demographics, and one somewhat removed from American and European financial and sanctions influences:

Eurasian Economic Union & Projected Free Trade Partners
(based on most current available data)
Population: 3.26 billion
GDP: US$7.02 trillion

In the event that these agreements get formalized, it would make the Eurasian Economic Union a new global economic driver – one that will exert pent up trade, financial, and political influence upon both Europe and the United States, and that will massively affect global trade flows. The integration of Eurasia, and the development of the Eurasian Economic Union, makes this space well worth watching for investment and trade potential.

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