While Under Embargo, the Eurasian Economic Community (EEC) Cannot Function at Its Full Potential

Last week, President Alexander Lukashenko made it known that Belarus did not like the restriction on the transit movement through Russia's territory of EU products with their final destination point in Kazakhstan or some other country, and the denial of entry into the Russian market for dozens of Belarusian meat and dairy companies.

These problems were quite predictable. The point of creating a customs union is essentially to implement a well-coordinated trade policy and ensure free circulation of commodities across a single customs territory. The imposition, by Russia, of a unilateral embargo on the supplies of foodstuffs fr om the USA, EU, Australia, Norway and Canada, in face of absence of any decisions along the same lines taken by Belarus or Kazakhstan, is an example of an opposition policy, which is incompatible in principle with the idea of a single customs territory.

If a commodity crosses the Belarusian border, the absence of customs control between Russia and Belarus ensures that this commodity can then enjoy free access to Russia's territory.
After the introduction, by Russia, of retaliatory sanctions, her other partners in the Eurasian Community - and primarily Belarus due to her geographic situation - can visualize two new ways of making money.

The first (so-called 'white') way relies on the fact that European producers, once having lost the right of entry to the Russian market, are forced to divert their commodity flows to other markets available nearby (in particular, to Belarus), wh ere they can sell their agricultural raw materials and foodstuffs. Cheap finished food products in part replace domestic products in the Belarusian market, whilst Belarusian producers have begun to buy the now cheapened raw materials in EU countries, thus gaining some competitive advantages and the possibility to increase their supplies to Russia. This scheme is absolutely legal because, according to the CIS rules for determining a commodity's country of origin, it is deemed to be Belarusian once it has been sufficiently processed in the territory of Belarus. From a formal point of view, it will be necessary also to alter at least one of the first four digits in the commodity's Customs Union numeric code - thus, say, canned fish preserves manufactured in a Belarusian factory (group code 1604) with the use of Norwegian salmon (listed under code 0302 - the group of commodities subject to Russia's embargo), will be treated as a Belarusian product to which the embargo does not apply.

The second (so-called 'grey') way to make money is the tried and true method (which is also quite easy to apply in absence of any border customs control) of re-exporting European products disguised as Belarusian ones either by substituting false documentation, or by registering these products as those earmarked for transit to a third country. Such a scheme especially successfully operates for those types of commodities that are also manufactured in Belarus: thus, large consignments of meat and vegetables produced in European countries can be much easier documented as those produced in Belarus than similar consignments of seafood or fruit.

On the one hand, the practical implementation of these two options makes it possible to somewhat soften for Russian consumers the consequences of the embargo on food imports, and the second method due to the complete transparency of the customs border between the countries may reduce consumer's losses to nearly zero. On the other hand, the emergence of forbidden products in the Russian market directly contradicts the government's decree on the introduction of retaliatory sanctions.

Under standard condition, the supervision over compliance with embargo is exercised by customs agencies, but since the customs border between Russia and Belarus is nonexistent, it has become the responsibility of Russia's sanitary, veterinary and phytosanitary control bodies (the Federal Veterinary and Phytosanitary Supervision Service (Rosselkhoznadzor) and the Federal Service for Supervision of Consumer Rights Protection and Human Welfare (Rospotrebnadzor)). So Rosselkhoznadzor, in order to shut down the second channel, is putting forth initiatives aimed at restricting commodity supplies or their transit through Belarusian territory.

As the embargo is clearly incapable of undercutting the increasing competitive capacity of Belarusian companies that has resulted from their resorting to the first money-making method, the Russian authorities are left with no other option but to 'find' some forbidden substances in the imported products, and so to declare these imports to be incompatible with the existing sanitary and veterinary requirements. For her part, Belarus threatens Russia with some unspecified retaliatory actions, as the Belarusian sanitary control bodies may also start looking for violations of their sanitary norms committed by Russian exporters.

As is well known, from 1 January 2015 Eurasian Economic Union (EEU) will begin to function on the basis of the Customs Union.

The current situation can serve as a very good illustration of one important issue associated with the EEU, namely the existence of non-tariff barriers to internal trade, in this case - in the sphere of sanitary and phytosanitary regulation. The member countries have not yet come to an agreement concerning mutual recognition of sanitary and veterinary certificates, nor made any decision concerning the creation of a single body for sanitary and phytosanitary supervision. Instead, they chose the path of harmonization: with regard to many norms, technical regulations at the Customs Union's level are introduced, which are to prevail over the national technical regulations. However, such measures are evidently insufficient: the supervisory bodies of each of the member countries will be passing different decisions with regard to one and the same rule, depending on a given moment's political feasibility. One should recall in this connection the Russo-Belarusian trade wars of 2009 and the declarations as to the rapid deterioration of the quality of Belarusian milk after the arrest of Uralkali's Director General Vladislav Baumgertner in the summer of 2013.

Of course, the sanitary supervision bodies of any country may sometimes be used as a trade policy tool, but to apply such a tool inside an organization calling itself 'an economic union' is indeed to go too far.

In macroeconomics, the so-called 'impossible trinity' is a well-known phenomenon: in conditions of free capital movement it is impossible for a sufficiently long period of time to simultaneously control both the exchange rate and the money mass. In this situation, the EEU is giving rise to its own 'impossible trinity'.

In conditions of the unilateral embargo imposed by Russia it is not possible to simultaneously maintain a fully functional Customs Union and a properly operating supervisory agency such as Rosselkhoznadzor.

If there exists a working Customs Union, which implies at least the absence of a customs border between Russia and Belarus, and at the same time an embargo is imposed, Rosselkhoznadzor will be unable to enforce the relevant government decree because there will be no barrier in the way of 'forbidden' products penetrating into Russia's territory.

If, however, the embargo is complied with, and Rosselkhoznadzor performs its functions properly, it effectively means restrictions on the supplies of certain commodities from Belarus (among other things, a partial control is thus reestablished at the border), and so we cannot seriously speak of a fully functional customs, union - let alone an 'economic' union.

Thus, as it would be impossible to simultaneously comply with all the three requirements, while neither Belarus nor Kazakhstan are likely to join Russia in her ban on food imports, we will have either to abandon the idea of full Eurasian integration, or to lift the unilateral embargo, or - while formally adhering to Russia's retaliatory sanctions - to put up with failures to properly enforce them.
Alexander Knobel – Head of the International Trade Department

This commentary is based on Alexander Knobel's article published by Forbes.