The Russian government should put the completion of a free-trade zone among all CIS countries among its top trade priorities for the coming two years. However, the process must comply fully with WTO rules on free trade areas and must be treated as a prelude and not an alternative to WTO accession.

Introduction

The process of regional trade integration will be useful as a political and economic trial case for the more important and difficult process of WTO accession. Analysis suggests that Russian officials are seriously underestimating the complexity and political difficulty of WTO accession and that it is in fact several years and many negotiations away. Integration with the CIS countries is technically and politically more feasible. Additionally, the exercise will help the relevant government bureaucracies, including yours, build political and technical expertise in negotiating and implementing reductions in trade barriers, further the development of domestic political coalitions supporting freer trade, and at the same time bring real benefits to the Russian state in terms of closer regional cooperation. Meanwhile, negotiations with the WTO must continue and the goal of WTO accession must be made clear and public at all stages of CIS integration.

Current State of CIS Customs Union

Even by the admission of the five presidents, the customs union among Russia, Belarus, Kazakhstan, Kyrgyzstan, and Tajikistan currently exists more on paper than in practice. Political bickering, uncertain and conflicting goals, and lack of clear leadership have contributed to a sharp decline in internal trade recently and an effective halt to integration. While a customs union is particularly difficult given the different stages of WTO accession among the five (Kyrgyzstan and Georgia are already WTO members) and differing priorities for trade integration with non-CIS countries, a free-trade zone is a more realistic goal. President Putin has recently stated his preference for the creation of a free-trade zone and most of the other Presidents have agreed. This trade zone should include all CIS countries. Closer cooperation with the CIS countries in general is a chief policy aim of the Russian government, as noted in The Foreign Policy Concept of the Russian Federation, signed by President Putin in June of 2000. Trade integration will be an easier start than other areas, including military cooperation.

CIS Countries' Positions

The CIS countries differ greatly in their interests. But all are interested in increasing trade with Russia and with each other. All are also interested in joining the WTO. A free trade zone, rather than a customs union, will allow each member to cooperate with other CIS countries while keeping sovereignty over its non-CIS trade policy. After initial negotiations, it may be necessary to allow for differing speeds of integration. Every effort should be made to keep the integration process as uniform as possible since that will be easiest to maintain long-term.[1]  Immediately adopt the international practice of adding value-added taxes on goods from the other CIS countries according to "county of destination." This will defuse a political conflict with other CIS countries and will not do much harm to the budget balance.  It will also further negotiations with the WTO.  Negotiations on transit of goods through Russia may be trickier, but progress in this area will show CIS countries that Russia is willing to take the lead on trade integration.

Domestic Obstacles

Real political barriers to free trade remain in Russia. Despite a large trade surplus, politically powerful (and largely uncompetitive) industries demand “protection” from international competition. High unemployment and the continuing difficulty of economic reform make such calls popular. Furthermore, since revenue from tariffs is still considered an important source of revenue for the federal budget, high tariffs enjoy a reasonable degree of political legitimacy and get the support of a diverse coalition.

In general, the issue of tariffs must be reframed in the political debate as a trade issue and not as a way to bring in revenue for the federal budget. This must be done now, given that high oil prices and economic growth have combined to eliminate the budget deficit. It will also help to break the political coalition of protectionists and those who want to balance the budget.

At the same time, the national security lobbies must be brought in to support the free trade zone. The example of the European Union can used to explain the political benefits of free trade. Closer integration of CIS countries is in Russia’s national security interests and there are powerful political lobbies supporting this goal. As mentioned, trade is a more viable start than cooperation in other spheres.  A coalition of economic reformers, internationalists, and national security officials would prove a powerful political bloc in support of a CIS free trade agreement and in turn, would add needed momentum to the WTO accession process.

WTO Accession

The development of the CIS free-trade zone should be understood as a prelude to WTO accession. The temptation to raise trade barriers to non-CIS goods must be avoided at all stages - it violates key WTO rules on regionalism. Both you and President Putin, as well as other Administration officials, must constantly and publicly make the case for WTO accession.

The WTO must be kept informed of developments in this area, again as required under WTO rules on regionalism. Perhaps more importantly, Russia must secure support from the United States and the EU for the CIS free trade area. With strong and clear Russian leadership on the issue and explanation of the project as a method of furthering political stability and economic reform in the region, this support should be forthcoming so long as barriers are not erected to trade with outside countries. Finally, trade groups in these countries should be mobilized to support the project. For example, the U.S. Business Information Service for the Newly Independent States has stated that, “U.S. companies which do business in more than one CIS country could benefit from the elimination of internal customs restrictions and the standardization of legislation governing inter-republic trade.”  Such groups form a natural base of international support for the project.