AND THEN THERE WERE THREE: CUSTOMS UNION BETWEEN RUSSIA,

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TAGS: ECON ETRD PREL PGOV KZ BO RS UZ UP
SUBJECT: AND THEN THERE WERE THREE: CUSTOMS UNION BETWEEN RUSSIA,
BELARUS, AND KAZAKHSTAN PROMISES FURTHER INTEGRATION


1. (SBU) Summary: In the view of Kazakhstani working-level
Industry & Trade officials, the newly announced
Russia-Belarus-Kazakhstan customs union within the framework of
the Eurasian Economic Community (EEC) is an acknowledgement of
Ukraine's refusal to take part. While the creation of the
customs union will not necessarily lead to impediments on
Kazakhstan's road to the WTO accession, it heralds a potential
breakthrough in reinvigorating the EEC and bringing about a
multi-faceted regional integration among Central Asia (minus
Turkmenistan),Russia, and Belarus. End summary.


2. (U) According to press reports, Russian President Vladimir
Putin confirmed on August 16 the creation of a trilateral
customs union between Russian, Belarus, and Kazakhstan. The
decision was reached at an informal summit in Sochi of the
Eurasian Economic Community. (Note: the EEC encompasses
Russia, Belarus, Kyrgyzstan, Kazakhstan, Tajikistan, and
Uzbekistan; Ukraine, Moldova, and Armenia have observer status.
End note.) Addressing other heads of state, Putin said that the
creation of the customs union should be closely coordinated with
the WTO accession process in regard to both the timeline and
quality of accession. He also stated that other EEC states
would join the customs union later.

SES IS WEAKENED: "IT'S UP TO UKRAINE NOW"


3. (SBU) The creation of the customs union appears to be the
culmination of a long-term effort to establish one within the
framework of the Single Economic Space (SES). (Note: the SES -
comprised of Russia, Ukraine, Kazakhstan and Belarus - has long
focused on establishing a customs union as part of its drive
towards economic integration among the four countries. End
note.) Zhanel Kushukova, Head of the Division on Development of
Trade at the Kazakhstani Ministry of Industry and Trade, told
Econoff that the effort to establish a customs union "has been
underway for ten years." In a later conversation, Damegul
Kabiyeva, Deputy Director of the Ministry's Department on Trade
Policy Development and WTO Accession, confirmed to Econoff that
the focus on creating a customs union has now been switched from
the SES to the EEC due to Ukraine's reticence. Ukraine,
Kabiyeva said, has been very slow in moving the process forward.


4. (SBU) Kushukova denied that the formation of a customs union
within the EEC spells the death of the SES, however. The future
direction of the SES, she explained, will be determined by
Ukraine's actions vis-a-vis the new customs union. "It's up to
Ukraine now," stated Kushukova; for the moment, she said, it is
much easier to form a customs union among the three countries.

INTEGRATION IS IN THE AIR: EEC IS REENERGIZED


5. (SBU) Kushukova stated that the customs union will further
liberalize the already liberal trade regime among Russia,
Belarus, and Kazakhstan. It will also provide additional
uniformity to their external tariffs (i.e. import duties charged
on goods from third countries). Currently, she said, the trio
shares external tariffs on 62% of goods. The goal, she said, is
to raise that ratio to 90%.


6. (SBU) Russia, Belarus, and Kazakhstan have signed the bulk of
agreements making up the customs union. The plan, according to
press reports, is to sign the remainder by the end of the year.
Kushukova confirmed this goal and added that among the key
agreements still to be signed are those that concern a common
external tariff, preferences towards third-party countries (a
system of preferences applied towards developing countries, akin
to the USG's General System of Preferences),and border crossing
regulations. Both Kushukova and Kabiyeva made it clear that
after all the agreements are signed, additional steps, such as
introduction of necessary legislation and ratification, must be
completed before the customs union goes into force.


7. (SBU) The new customs union is widely seen as an impetus
towards reenergizing the previously dormant EEC. Uzbekistan's
January 2006 entry in the EEC is another significant step in
this direction. The plan now is to expand the customs union to
include other EEC countries. The timeline for this process,
Kushukova said, should become clearer by October.


8. (SBU) The customs union is seen as only one aspect of a
renewed drive toward integration among the EEC countries.
According to press reports, Putin spoke at the Sochi meetings
about the importance of deepening cooperation between the EEC
and the Collective Security Treaty Organization (CSTO) and
working to restore Uzbekistan's CSTO membership. (Note: CSTO
is comprised of Russia, Kazakhstan, Tajikistan, Kyrgyzstan,
Belarus, Armenia, and Uzbekistan [currently rejoining]. End
note.) In response to Econoff's question about the link between

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the EEC and the CSTO, Kushukova said that the two are
independent of each other but both are part of the process of
"drawing closer" and "integration."


9. (SBU) Separately, Kabiyeva stated that integration under the
umbrella of the EEC will encompass regional harmonization of the
pension system, education system, the banking system, and the
telecom sector, as well as introduction of a unified transport
corridor. Directly involved in this work is the Minister of
Industry & Trade Vladimir Shkolnik, who represents Kazakhstan on
the EEC's "High-Level Group." "We used to have the CAU, the
Central Asian Union," Kabiyeva mused, "now we have the EEC."
(Note: the CAU was a framework initiated in the second half of
2005 by President Nazarbayev for cooperation between Central
Asian states in political and economic spheres. End note.)

"WTO FIRST, CUSTOMS UNION SECOND"


10. (SBU) Kushukova described the process of Kazakhstan's entry
into the customs union as "parallel" with its drive to accede to
the WTO, and not in any way impacting on accession plans.
Astana, she added, is still eyeing 2007 as the accession year.
In a separate conversation, Kabiyeva was emphatic that the
working assumption in her ministry regarding timing is still
"WTO first, customs union second."

COMMENT


11. (SBU) Comment: Some of Putin's remarks along with
speculation in the Kazakhstani media, suggest that the EEC
customs union may become a mechanism by which Russia attempts to
influence Kazakhstan's WTO accession. Moreover, Russia,
Belarus, and Kazakhstan's far-reaching plans to harmonize their
external tariffs could substantially complicate Kazakhstan's WTO
accession process if the customs union comes into force before
Kazakhstan accedes to the WTO. Still, it appears unlikely at
this point that the customs union creation will occur rapidly
enough to interfere with Kazakhstan's WTO accession, as long as
Astana continues to make progress on the WTO front. At the
working level at least, Kazakhstani officials are treating the
accession process as unaffected by the newly created customs
union.


12. (SBU) Comment, continued: The customs union, a significant
development in itself, may also serve as a catalyst for
revitalizing the earlier dormant EEC. With the SES apparently
undermined by Ukraine's reticence (for now),multi-faceted
regional integration among Russia, Belarus, and Central Asia
(minus Turkmenistan) may be taking center stage. Tashkent's
newly found enthusiasm for cooperation within the EEC supports
this vision. On the other hand, adding Uzbekistan to the mix is
likely to complicate and delay any plans for integration.
Uzbekistan's economy is not compatible with the more
market-oriented Russian and Kazakhstani economies, and achieving
agreement with Tashkent is likely to be a long and difficult
process. Still, the EEC integration process may help draw the
economies of Central Asia closer. At the same time, it may
further strengthen the region's gravitational pull toward Russia
and away from South Asia. End Comment.
MILAS