Available online at www.sciencedirect.com ScienceDirect Procedia Economics and Finance 22 ( 2015 ) 402 411 2nd International Conference Economic Scientific Research - Theoretical, Empirical and Practical Approaches, ESPERA 2014, 13-14 November 2014, Bucharest, Romania Contemporary Reshaping of Eurasian Integration: Russia s Policies and their Implication for the EU and EurAsEC Vasily Erokhin a * a Moscow University of Finance and Law, 8, build. 1, Presnenskaya Embankment, MFUA Business School, Moscow, 115114, Russia Abstract This paper covers contemporary global developments with involvement of Russia, particularly trade and economic integration, establishment of new international unions and alliances, and recent actions of Russia on the world stage and its efforts on shifting of global balance of power. The specific issues, addressed in the paper, are related to the concept of globalization in general, its idea and some theoretical and practical approaches; specific challenges of globalization for economies in transition and application of those general challenges in Russia. Particularly, the paper describes the latest Russia s actions as an initiator of geopolitical changes and discovers the major threats and opportunities for Russia and for Western countries. 2015 The Authors. Published by by Elsevier B.V. B.V. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/). Selection and/or peer-review under responsibility of the Scientific Committee of ESPERA 2014. Selection and/or peer-review under responsibility of the Scientific Committee of ESPERA 2014 Keywords:integration; international trade; globalization, economies in transition Introduction Countries of the Eastern Europe and the Commonwealth of Independent States (CIS), including Russia, have their special way of development. They are referred to as economies in transition. Most of them are highly dependent on global market, particularly global demand on natural resources and primary products. Also, most of the economies in transition are not very much diversified, they are not able to spread risks of lower global demand in particular industries on the entire domestic economy. The common challenge for the economies in transition is to * Corresponding author. Tel.: +7-499-995-19-63; fax: +7-499-995-19-63. E-mail address:basilic@list.ru 2212-5671 2015 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/). Selection and/or peer-review under responsibility of the Scientific Committee of ESPERA 2014 doi:10.1016/s2212-5671(15)00313-5
Vasily Erokhin / Procedia Economics and Finance 22 ( 2015 ) 402 411 403 broaden and diversify their growth base (Agarwal, 2014). In their efforts to do this, these countries need to improve market access through trade policies and accession to the WTO, to introduce active industrial and other production sector policies, to develop infrastructure and attract investment and new technologies (Boling et al., 2014). Russia, being the largest country in the region (and worldwide) does not want to consider itself as a developing nation, and is now actively seeking opportunities to become one of the global powers, alternative to the USA and the EU. Recent actions of Russia on the global stage affect its neighbors, reshape Eurasian integration and influence the region of the Eastern Europe, the CIS, the EU, and the EurAsEC. Results and Discussions The dynamic growth of world merchandise exports and imports after the Second World War is one of the most important factors of global economic development (Fig. 1). Such a growth was conditioned by quick restoration after the war, knowledge and technology transfer from military sectors into production, steady supply of energy resources, and growing economic integration (Heijman and Schipper, 2010). General Agreement on Trade and Tariffs was established in 1947, integration processes in Europe started in 1950s. Naturally, liberalization of trade regimes gave a boost to international trade. Since 1950 average tariffs have fallen significantly and are now at about 4% (Gusev, 2012). Fig. 1. World merchandise exports and imports, bln. $ Larger and more developed nations were more involved into international trade, therefore their economies were more globalized (Dan, 2014). The EU, USA, Germany, UK are still among the top-ten countries of the world on foreign trade turnover. However, the major trend of international trade over past decades is the increasing share of developing and newly-industrialized countries. In 1960 the USA accounted for over 40% of world economic activity. By 2013 it accounted for less than 20% (Trading Economics, 2014). The USA together with the EU and Japan still accumulate a significant share of global exports, but new exports powers are rising. They are China, South Korea, Hong Kong, Brazil, India and other emerging economies (Fig. 2).
404 Vasily Erokhin / Procedia Economics and Finance 22 ( 2015 ) 402 411 Fig. 2. Top-10 countries by foreign trade turnover in 2013, bln. $ Each country has its own degree of globalization. There are several indices, which measure globalization in relation to economic, political, social, and other aspects of globalization (Johnson, 2014). One of the most popular indices of globalization is the KOF Index, which measures the three main dimensions of globalization: economic, social, and political. Small EU countries are considered as the most globalized. Small countries always score higher than large ones. For small countries high rank is more a reflection of their close linkages with other EU countries. Nevertheless, in order to maintain the economic growth, large countries need to open up more to the global economy (Mulligan, 2015). However, such a statement is a controversial one. Proponents of globalization argue that it allows poor countries and their citizens to develop economically, while opponents of globalization claim that the international free market has benefited multinational corporations in the Western world at the expense of smaller developing nations (Glac, 2014). How exactly globalization affects developing countries in general and economies in transition in particular? The economies in transition have come a long way in opening up their economies to the global market (Popescu Ljungholm, 2014). After decline in the early 1990s, the economies in transition found new pathways to economic growth. Countries of Eastern Europe progressed into well-functioning market economies and have become members of the EU. For most of the CIS countries, including Russia, process of market reforms is still incomplete (Tarr and Volchkova, 2010). Russia returned to pre-crisis level of GDP only in 2006, fifteen years after the start of reforms. Ukraine and Belarus are still under their pre-transition levels (Erokhin et al., 2014). Annual rates of GDP growth in developed, developing and transition economies are different (Fig. 3). Since 1990s developed countries have grown on 2-3% annually, expect the two crisis years of 2008 and 2009 (Vos and Koparanova, 2011). The rates of GDP growth for developing countries have been even higher about 5-6% in average (Trading Economics, 2014). As for the economies in transition, the rates have been very fluctuant. This is the result of high dependence on global market, particularly global demand on natural resources and primary products (Nica and Potcovaru, 2014). Also, most of the economies in transition are not very much diversified, they are not able to spread risks of lower global demand in particular industries on the entire domestic economy (Alexashenko, 2012).
Vasily Erokhin / Procedia Economics and Finance 22 ( 2015 ) 402 411 405 Fig. 3. Trend in GDP of economies in transition (index, 1990=100) Economies in transition, including all ex-soviet republics, are now committed to free market economies and are also moving toward greater free market reforms (Tarr and Volchkova, 2010). Every country tries to find its unique place in the changing world, or even to change it by itself. There are strong indications of such attempts in Russia, which does not want to consider itself as a transition or developing nation anymore, and is now actively seeking opportunities to become one of the global powers, alternative to the US and EU. I have considered several recent trends of Russia s foreign policy. In general, the policy is aimed at development of closer economic, trade and political relations with such emerging global powers, as countries of Asia and Latin America. Naturally, Russia is now actively seeking for strategic allies. Through such strategic geopolitical alliances Russia would like to strengthen its positions in order to withstand USA and EU on the global stage. One of the most promising alliances is BRICS, which is an association of five major emerging national economies: Brazil, Russia, India, China, and South Africa. The BRICS members are all developing or newly industrialized countries, distinguished by their large, fast-growing economies and significant influence on regional and global affairs. As of 2014, the five BRICS countries represent almost 3 billion people which is 40% of the world population, with a combined nominal GDP of $16 trillion, which is 20% world GDP (BRICS, 2013). China is the largest economy of the bloc with 56% of its GDP. Second largest is Brazil. Russia is on the third place with less than 14% of BRICS GDP. The same dominance of China is observed in international trade 60% of total imports and 62% of total exports of BRICS. Russia is second in exports with almost 17%. India is the second in imports, followed by Russia, which accumulates 12% of import (WTO, 2014). As of Goldman Sachs (2007), by 2050 BRICS s economies would be wealthier than most of the current major economic powers (Fig. 4). China and India will become the world's dominant suppliers of manufactured goods and services, while Brazil and Russia will become similarly dominant as suppliers of raw materials. Indonesia and Turkey have been mentioned as candidates for full membership of the BRICS, while Argentina, Egypt, Iran, Nigeria and Syria have expressed interest in joining BRICS. With inclusion of these economies BRICS is expected to become the world largest economic alliance in the very near future.
406 Vasily Erokhin / Procedia Economics and Finance 22 ( 2015 ) 402 411 Fig. 4. The ten largest economies in the world in 2050, measured in GDP, $ bln Russia highly values its BRICS membership, since today BRICS seems to be the only alternative to the alliance of USA and EU. There is a range of opportunities, which BRICS may bring to Russia. BRICS have a common core, it unites a group of emerging economies that grow fast, but until now had no chance to influence on global economic regulations. Russia would like to revisit those regulations, but it lacks the economic and political power. That is why Russia is going to involve its BRICS partners into creating of alternative global institutions. Russia s foreign policy is aimed at development of multipolar world. BRICS is the very union which may serve this goal through trade, investment and political support. BRICS is considered by Russia as both an alternative supplier and alternative market. In the conditions of increasing economic and trade sanctions against Russia and ban on import of agricultural products from Western countries, recently imposed by Russia, BRICS economies transform into the largest suppliers of Russian market. As for the export, Russia has already signed the long-term gas contract with China, with a view to diversify its export destinations. As soon as the Western financial market is now limited for Russia because of the sanctions, BRICS becomes the largest source of investment. In July 2014 BRICS countries signed the long-anticipated document to create the BRICS Development Bank worth over $100 bln. This reserve pool is now accessible for Russia in case of escalating restrictions on the Western financial market. In spite of BRICS common core as an alliance of emerging economies, politically, economically and geographically BRICS countries have little in common. Member countries have distinct political systems and, which is more important, unequal economic resources. China is the dominating economic force within BRICS. Its economy is bigger than those of all the other BRICS combined. Moreover, China is the second largest economy in the world, and it is growing faster than any other country. Generally speaking, China may survive without BRICS, while BRICS would hardly survive without China. Brazil, India, and South Africa have the alternative organization, which is the IBSA Dialogue Forum. In case the BRICS breaks up, these three countries still have a platform for integration. It seems that Russia is the most interested party. Russia has an economy based on raw materials extraction as opposed to other BRICS members, which try to focus their economies on innovation and high-tech manufacturing. Russia needs those technologies for development, as well as those markets for its natural resources. In view of escalating sanctions, growing trade and financial isolation from Western countries, BRICS is becoming the only alternative for Russia. The recently established Customs Union of Russia, Belarus and Kazakhstan is not an alternative at all because its incomparably smaller size. Moreover, Belarus and Kazakhstan do not support Russia s ban on agricultural imports from the US and the EU. Nobody knows how far those trade sanctions may go, and what the future of this Customs Union would be in case they go too far. Growing isolation from Western countries pushes Russia into seeking even closer ties with China. Russia has huge gold and foreign currency reserves, but its economic and production capabilities are still limited. The harder the Western sanctions, the more desperately Russia will seek a reliable strategic partner outside the Western pool,
Vasily Erokhin / Procedia Economics and Finance 22 ( 2015 ) 402 411 407 which of course happens to be China. There is one geopolitical interest, which is mutual for China and Russia. It is a desire to reshape the world and create a multipolar global system, which is not dominated by the USA and the EU. Russia wants to maintain good relations with all Asian states, including its closest neighbors. There is the Eurasian Economic Community, which unites Russia and countries of Central Asia. It originated from the Commonwealth of Independent States in 2000. The Community was established for effective promotion of the creation of a Single Economic Space and for coordinating approaches of member states while integrating into the world economy (Khusainov, 2011). The Eurasian Economic Community includes 5 countries (which are Russia, Kazakhstan, Belarus, Kyrgyzstan, and Tajikistan) with total population of 214 mln people. Its total GDP is $2.4 trl, out of which Russia s share is 87% (Fig. 5). Second is Kazakhstan with 9% (Turlubekov, 2011). Fig. 5. The percentage breakdown of total GDP of EurAsEC area by countries in 2013 Even including Armenia who has not joined yet but plans to, the Eurasian Union mounts about a sixth of the European Union's GDP (Fig. 6). So, the size of this block is too small to become any real alternative to Russia s relations to China, to BRICS countries, or to grow into the regional power, comparable with the EU. The vast majority of wealth comes from Russia, so it is not like Russia is getting access to huge new markets by developing this union (Ivolga and Erokhin, 2013). Fig. 6. EurAsEC and EU GDPs in 2009-2013, $ bln
408 Vasily Erokhin / Procedia Economics and Finance 22 ( 2015 ) 402 411 What are the exact implications of current Russia s policies? What kind of new global order Russia would like to built? The USA, China and Japan are the largest producers and traders (Fig. 7). China has surpassed Japan as the world s second largest economy, after the United States, and now China the only one convincing rival to the US. Fig. 7. GDPs of the largest economies and unions in 2013, $ bln Russia s economy is smaller than most of the developed countries. Being under Western sanctions, it displays all the political and economic risks of a critical dependence on fossil-fuel exports. BRICS may become an alternative for Russia, since it gives access to new export markets for Russia s oil and gas and new sources for agricultural and merchandise imports (Erokhin, 2014b). BRICS is larger than the EU, and is fitted up with all opportunities for development. Member countries are interested in each other, which is the fundamental background for integration. Another Russia s integration initiative, the Eurasian Economic Community, does not have much potential. Due to its overdependence on Russia, it can not rival the wealth of a single EU country, Germany. Moreover, the Eurasian Economic Community has not much room to expand in Europe. Few Central Asian states, in case they join the union, will not impact much into its economic power. The only country, which involvement could tilt the balance, was Ukraine. Russian pressure on Ukraine to join the Union and to stop the EU integration was a key cause of the current Russian-Ukrainian crisis. However, this crisis has snowballed into the global one, with involvement of the EU and USA.. Such a changing geopolitical policy might be costly for Russia. The country is under economic, financial and trade sanctions. EU banks are barred from purchasing certain bonds or stocks issued by state-owned Russian banks. The main function of the sanctions is to curtail the financial institutions' ability to access international debt markets. Access to credit is really important. If Russian banks and Russian companies are not able to raise money in Europe and the USA, they are forced to go to China or to the newly established BRICS Bank. In return, Russia has recently banned agricultural and food imports from the EU, USA and a number of their allies. This again forces Russia to go to BRICS countries seeking for alternative suppliers. In such a manner Russia, curtailing its dependence on Western countries, is becoming more strategically dependent on China and BRICS. Russia s economy is navigating an economic downturn with real GDP growth slowing to an estimated 0.5% in 2014 from 1.3% of 2013 and 3.4% of 2012. During 2000s, the lack of comprehensive structural reforms was masked by a growth fueled by sizeable oil revenues. Recent events around the Russian-Ukranian crisis clearly exposed the economic weakness of this growth model. As it stands, the permanent downturn of Russia s economy and stagnation are expected. There are four major factors (Fig. 8).
Vasily Erokhin / Procedia Economics and Finance 22 ( 2015 ) 402 411 409 Fig. 8. Russia under sanctions: expected course of events Source: author based on literature First is lower investment opportunities. Without access to Western capital markets, Russian banks will have to look to either Russia's Central Bank or other foreign lenders for support. Resources of the Central Bank of Russia are limited. It has already raised its refinancing interest rate to help stem the ruble's slide. The cost of capital for banks will rise, and domestic investments will shrink. Capital drain from Russia grows rapidly, since investors would like to secure their money as geopolitical risks rise. In case of growing isolation of Russia export revenues are expected to fall as well (Erokhin, V., 2014a). While incomes fall, expenses are expected to grow (Herr and Ruoff, 2014). This is the second factor. Russia increasingly injects more and more money to Crimea, which is like a black hole. New and new investment projects are approved, including development of transport infrastructure. Crimea is a political project, and it seems that the government even forgets other regions. Many investment projects in other regions of the country are cut, with money being redistributed and forwarded to Crimea. Military and security expenses are growing as well (Erokhin, V., 2014a). Russia has to mobilize internal resources. There are governmental initiatives to do that by freezing the Pension fund and increasing of tax burden. Such measures will withdraw money from turnover, cut investment opportunities even further, and slow down business activity, especially in the sector of small and medium business (Erokhin, V., 2014a). Finally, the economy will not get the necessary innovation impulses, since access to Westerns technological and advanced goods is banned, while more and more skilled workforce and advanced intellectuals are tend to leave stagnating and repressive Russia and seek for better economic, social and political environment abroad (Erokhin, V., 2014a). Conclusions Russia does not want to consider itself as a developing nation, and is now actively seeking opportunities to become one of the global powers, alternative to the USA and the EU. One of the most promising strategic geopolitical and economic alliances for Russia is BRICS, which is the union of five large, emerging economies. BRICS gives Russia a capability to participate in the revisiting of existing global regulations and creating of
410 Vasily Erokhin / Procedia Economics and Finance 22 ( 2015 ) 402 411 alternative global institutions. BRICS may act as an alternative supplier and alternative market for Russia in the conditions of escalating Western sanctions. Finally, with the establishment of the BRICS Development Bank, the alliance becomes the largest source of investment, which is now accessible for Russia. However, it seems that Russia is more interested in BRICS, than any other member of the alliance. Russia, curtailing its dependence on Western countries, is becoming more strategically dependent on BRICS, and particularly on China. In view of escalating Western sanctions, growing trade and financial isolation from Western countries, BRICS and China are becoming the only alternatives for Russia. The existing Eurasian Economic Community and the Customs Union of Russia, Belarus and Kazakhstan are not the alternatives at all because of their incomparably smaller sizes. How much the current geopolitical shift, driven by Russia, may cost? Russia s economy is in stagnation, GDP growth rate is expected to be around zero in 2014. Western sanctions, growing isolation and unpredictable actions and decisions (Nica and Molnar, 2014), made by Russian government, are negative for Russia s economy. There are four major negative impacts: lower investment opportunities; raising non-production expenses, growing tax burden, and lower innovation component (Nica, 2014). Russia s long-term outlook will depend on a sustained positive shift in investors, business and consumers confidence, which is only possible through trust to the government, stable and predictable economic and political situation, and effective structural reforms. Global power has nothing to do with acquisition of new territories or formidable army. 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