Lisbon 2 Vladivostok

_ Yuri Kofner, editor-in-chief, Eurasian Studies. Munich, 8 February 2020.

Azerbaijan joining the Eurasian Economic Union (EAEU) could reduce the costs of imported intermediate goods for the Azerbaijani industry, increase exports of the agricultural and non-oil sectors of the republic by USD 280 million, improve the working and living conditions of Azerbaijani labor migrants and create favorable conditions for attracting foreign direct investment . As a result, Azerbaijan’s GDP could be 0.6% higher than it is now.

The Eurasian Economic Union is primarily a customs union and the desire to create common markets for the free movement of goods, services, labor, capital and digital data. In addition, the EAEU is in the process of forming an extensive network of free trade areas around the world. Accordingly, it would be necessary to analyze the possible difficulties and likely benefits of closer cooperation between Azerbaijan and the EAEU in all of these areas.

According to a survey conducted by the Analytical Center under the Government of the Russian Federation in the summer of 2018, almost 40% of the business community in Azerbaijan would welcome closer trade and economic relations between the republic and the Eurasian Union

Commodity Market


In the beginning, it must be recognized that in foreign trade the republic does not depend on the EAEU as a buyer of Azerbaijani products. Only 2% of its exports go to the countries of the Eurasian Union. However, the point is not that the voluminous Eurasian market of 184 million people is not interesting for Azerbaijani entrepreneurs, but in Azerbaijan’s overwhelming focus on the sale of mineral products, which make up almost 95% of the republic’s export. With such an export structure, it certainly competes with the EAEU, where oil and gas also make up almost 63% of supplies to foreign markets. It is not surprising that the composition of Azerbaijani exports corresponds to the structure of the EAEU import by only 7%. For comparison, in Uzbekistan and the EAEU, the index of trade complementarity is 36%.

But this is not so bad either. Firstly, large flows of mutual trade are desirable for regional economic integration, but not necessary. In such integration associations as MERCOSUR and USMECA, the share of mutual trade in the entire trade of the bloc is only 14-16%. The EAEU falls into this category. At the same time, creating one’s own regional market for the sale of non-commodity goods is an important step towards getting rid of the “oil curse”. This was one of the important reasons that led Russia and Kazakhstan to integration. What can really become a regional market for potential sales of non-raw materials for Baku? The Middle East, on the one hand, and the post-Soviet space, on the other. This is the first argument in favor of the EAEU.

By the way, since October 2019, the EAEU has a free trade area with Iran. Now, Armenia as well has a preferential access to the Iranian market. And due to the combined weight of the “Eurasian” market, the conditions that were agreed upon during the negotiations between the Eurasian Economic Commission (EEC) and Tehran are much more beneficial for Armenia than if Yerevan would have held negotiations in a bilateral format. This is the second argument why participation in the EAEU could be interesting for Baku – to improve its negotiating position with respect to third parties. In the near future, the EEC plans to sign FTA agreements with Egypt and India. And this is only southward.

Secondly, 20% of all imports to Azerbaijan come from the EAEU countries. This is a significant ammount. Many people think that participation in integration associations is necessary only so that their country can export better and more to such an enlarged market. But this is actually only half the question. Trade liberalization within the framework of a regional integration bloc also helps to improve the quality of imported goods and make them cheaper. After all, producing everything by oneself is simply ineffective. As a result, both households and national businesses benefit from better and cheaper imports.

The EAEU’ export structure corresponds to the Azerbaijani import structure by 38%, which is quite a lot. In 2018, the three main goods imported from the EAEU into the republic were: metal products for USD 325 million (14.5% of all imports from the EAEU), timber for USD 268 (12%), and grain for USD 225 million (10%). The first two are semi-finished products, the third is a raw material. That is, with a hypothetical entry into the EAEU, Azerbaijan in principle would abolish its import duties on these goods. Consequently, this import will become cheaper for the further processing by Azerbaijani enterprises, which means an increase in the profit of the national businesses, and, possibly, cheaper products for the final consumer. This is the third argument in favor of the EAEU.

The fourth argument in favor of Eurasian integration is that it would open up significant opportunities for increasing Azerbaijani exports to the Eurasian market. Using a gravity model to assess export potential (Decreux et al. 2016), we can estimate that, upon joining the EAEU, Azerbaijan’s exports to the Union’s common market could increase by USD 251 million, which is equivalent to an increase in Azerbaijan’s GDP by 0.5%. In this case, the total exports to the EAEU member countries would be almost 4% of the republic’s world exports. Conventionally, from the entry of the republic into the EAEU, every Azerbaijani would become richer by USD 25 thousand.

Compared to the scenario without integration, Azerbaijan’s exports to Armenia could increase on average by 107%, to Belarus by 154%, to Kazakhstan by 161%, to Kyrgyzstan by 121%, to Russia by 44% and to the EAEU as a whole by half.

Azerbaijani tomatoes and fruits have the greatest export potential. Becoming member of the Union, additional deliveries of only tomatoes from Azerbaijan to the markets and supermarkets of the EAEU may amount to USD 101 million.

But this is not all. As already mentioned, the EAEU has free trade agreements with Serbia, Iran, Vietnam and Singapore. By 2025 (most likely much earlier), FTAs with India, Israel and Egypt will be concluded. Upon joining the EAEU, Azerbaijan would gain free access to these markets, which could lead to an increase in exports to them by USD 28 million additionally. Thus is the fifth argument for the EAEU.

Thus, in total, upon joining the Eurasian Economic Union, Azerbaijan’s GDP could be 0.6% higher and every Azerbaijanian could be USD 28 thousand richer than without joining.

To be correct, it should be noted that the above estimates are quite preliminary and do not take into account possible negative effects due to a possible increase in the average tariff protection of the republic in relation to third parties by 2.2% to the customs union level. At the same time, the final positive effects may be even higher, because this model does not take into account the multiplicative intersectoral effect in the economy, i.e., how the above-mentioned increase in exports can lead to an increase in demand for goods and services of indirect sectors.

Transit


The largest and well-known transport and infrastructure project, which is of interest to Baku, is the North-South International Transit Corridor (“Spice Way”) project. This railway freight corridor should connect the northwestern part of the EAEU with India, with which the EEC plans to sign an agreement on a free trade area, through Iran, with which the Union already has a free trade agreement. Geographically, Azerbaijan would be ideally located in order to become the central link on this route. The volume of potential cargo flows within the North-South corridor is estimated at 20 million tons per year. However, non-participation of the republic in the CIS free trade area and non-membership in the EAEU have so far been one of the main factors restraining the break-even feasibility of such a corridor.

Along with this, work is underway within the EAEU to create a single transport space. In fact this means that domestic tariffs for the railway transportation of goods have already been unified. Concurrently, the EAEU member states are also negotiating the introduction of a unified transit tariff. The effects are already evident: for the period from 2014 to 2018, railway freight turnover (measured in ton-kilometers) inside the EAEU grew by almost 3% on average annually, while in Azerbaijan it fell by 11.5% on average every year. This is the sixth argument: Azerbaijan could significantly benefit from its geographical position by becoming a member of the EAEU’s unified transport space.

Labor market


The success of the EAEU was most pronounced in creating the single labor market. All citizens of member states are free to move and work throughout the territory of the Eurasian Economic Union. Everyone enjoys the same labor and social rights, including: hiring in most professions without additional documents and permits; mutual recognition of most educational certificates; tax and pension residency; free basic health insurance – including all family members; free education (from kindergarten to university) – including all family members. Therefore, the seventh argument is: as a member of the Eurasian Economic Union, Azerbaijani citizens who come to work in the other member states of the Union will receive the same preferences as the citizens from all the other member states.

The effect of creating a single labor market is noticeable: the annual growth rates of money transfers of individuals from Russia to the EAEU countries in 2015-2018 were on average one and a half times higher than such transfers to Azerbaijan. Over the past five years, about 25 thousand Azerbaijani citizens arrived annually in Russia. Most came for work. Their remittances amounted to USD 800 million on average annually.

Direct investments


Foreign direct investment regulation is not directly assigned to the supranational level of the EAEU and is not within the powers of the EEC. Nevertheless, it can be assumed that regional economic integration within the Union created relatively more favorable conditions in this area. So, due to the economic crisis as a whole, direct investments from Russia to the countries of the post-Soviet space fell in 2015-2018. However, they fell to the EAEU member states on average 15 times less than the annual average than Russian FDI to other CIS countries. Over this period, Russian FDI in Azerbaijan amounted to USD 27.5 million on average annually. Thus, the eighth argument is: joining the Eurasian Economic Union can create more favorable conditions for attracting Eurasian investments to the republic.

By the way, Azerbaijan could also consider becoming a member of the Eurasian Development Bank (EDB) and the Eurasian Fund for Stabilization and Development (EFSD). The terms of participation, most likely, could be similar to the terms of participation of Belarus, which has a similar level of GDP by PPP as Azerbaijan: USD 189 billion and USD 179 billion, respectively. Having contributed 1% (USD 70 million) to the bank’s charter capital (USD 7 billion), Belarus receives almost 14% of funds (USD 1.2 billion) from the total investment portfolio of the bank (USD 8.9 billion). And having contributed 0.1% (USD 10 million) to the fund’s total funds (total USD 8.5 billion), Minsk can claim 21% (USD 1.8 billion) of these funds in the form of loans and grants. The portfolio volume, taking into account the implemented and ongoing EFSD projects in the Republic of Belarus, amounted to USD 4.6 billion by the beginning of 2020. The EDB provides investments at preferential rates for infrastructure projects mainly in the fields of energy, transport, industry and agrobusiness. The EFSD aims to support macroeconomic stability and long-term economic development. The main “donors” in both development institutions are Russia and Kazakhstan (EDB: 66% and 33%; EFSD 88% and 11%). Profitable investment and financial support from the EDB and the EFSD is the ninth argument in favor of Baku’s potential Eurasian orientation.

National sovereignty


Upon joining the Union, Azerbaijan’s GDP would be 4% of the total economy of the EAEU, and its population – 5% of the total population of the integration bloc. In such an enlarged Union the Russian Federation would still make up 81% of its GDP and 76% of the population of the Union. At the same time, the combined economic and demographic weight of other member states would expand to 19% and 24%, respectively. Thus, in 2018 terms, GDP at purchasing power parity of such an expanded EAEU would ammount to USD 4.9 trillion, its population – to 194 million people.

But this is actually not so important. Unlike what populist propaganda insists on, the EAEU’s bodies and decision-making mechanism are built on a democratic basis. All decisions between the member states must be made by consensus, and each member state has one vote, regardless of economic weight or population size.

Not Vladimir Putin, but Nursultan Nazarbayev as the first of the post-Soviet statesmen proposed in 1994 to create the Eurasian Union. In his opinion, the new Union should be based on new principles: the priority of economic benefits over political considerations, the preservation of national sovereignty, voluntary and gradual integration, non-interference in the internal political system of member states. That is the wording which is now enshrined in the Treaty on the EAEU.

Unlike the EU, the EAEU integration agenda and the powers of its Eurasian Economic Commission are limited exclusively to economic issues. The Eurasian Economic Union does not pursue a “value policy” and does not intervene in the internal political system of its member states. David Lane, a researcher at Cambridge University, wrote the following about this: “The Eurasian Economic Union creates horizontal democratic conditions between its member states, while the European Union, at its discretion, prescribes” democratization “within states.”

Based on WTO rules and the European integration experience, the EAEU seeks to create greater legitimacy, better conditions for a liberal market economy and strict multilateral “rules of the game”, which all member states, including Moscow, must adhere to. And despite periodic exceptions and barriers, in terms of institutional integration and the formation of common markets, the EAEU is now in second place after the European Union, ahead of such associations as MERCOSUR and ASEAN.

By the way, the headquarters of the EEC does not resemble an old-fashioned Soviet ministry, but a modern office of some international consulting firm. In such an atmosphere, the EEC is constantly trying to implement best practices and standards from around the globe. In addition, the EAEU Court, which is located in Minsk, works pretty well and has already made a number of important cases against Russian actors and in favor of supranational law, for example, according to which EAEU sportsmen cannot be considered as foreign legionnaires.

For the first time in the history of Eurasia, the Eurasian integration project is the first fully peaceful, voluntary, formally democratic, equal and market-oriented association of countries and peoples of the region. The goals, structure and decision-making mechanism in the EAEU are the tenth argument why Azerbaijan should consider joining the Eurasian Economic Union.

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