"Expert" - The magnificent four or how to reintegrate the CIS core
Evgeniy Vinokurov, Director, Center for Integration Researches of Eurasian Development Bank, Doctor of Economics.
The overall effect of trade, industrial and technological integration of Russia, Belarus, Kazakhstan and Ukraine over the next two decades could exceed a trillion dollars. However, this bonus should still be earned.
Twenty years since collapse of the Soviet Union mainly characterized by centrifugal tendencies in the development of economic systems of newly independent states. However, in recent years, some of them have more pronounced trend toward reintegration and enhance not only trade but production, cooperation and investment relations. This trend is most clearly expressed in member-countries of the Customs Union (CU) of Russia, Belarus and Kazakhstan, which began operating in 2010. Since January 1, 2012 first 17 agreements that form the basis of the Common Economic Space (CES) has came into force. These agreements regulate the number of key themes of economic convergence of the «three» — from coordination of macroeconomic policies to labor migration.
Nowadays one of agenda items is enlargement of countries-participants of an integration association. In particular, Kyrgyzstan and Tajikistan are interested in joining the process of economic convergence, but not at any cost. However, countries of integration «core» insist on the adoption of the entire package of standards and agreements of CU and CES by new members. Indeed, membership in the integration association means rights and responsibilities. It is quite a different situation with Ukraine. Given the economic, social and technological weight and capacity of Ukraine its membership in a particular format in the integration association in the territory of the former USSR would seriously strengthen his position. The share of largest CIS economies — integration «three» and Ukraine — is consistently over 90% of the GDP of CIS countries. The share of «four» in mutual exports and imports of CIS on average during
At the same time Ukrainian leadership is not in a hurry to move towards its eastern neighbors, preferring, at least in rhetoric, convergence with the EU including economic and trade.
To evaluate the cost-effectiveness of the Customs Union, Institute of Economic Forecasting of Russian Academy of Science (RAS), Institute for Economics and Forecasting of National Academy (NAS) of Ukraine and Integration Research Center of Eurasian Development Bank (EDB) have carried out a research project, under which a numerical evaluation of different scenarios of integration of CES countries and Ukraine was carried out**.
The general conclusion is as follows. According to our calculations the total accumulated effect of CES creation and subsequent accession of Ukraine for the period
In the country context the effect is about 14% of Belarus GDP, 6% of Ukraine GDP, 3.5% of Kazakhstan GDP and 2% of Russia GDP. In per capita terms basic integration’s beneficiaries would be Belarus, Ukraine and Kazakhstan, in absolute terms — Russia.
However, it should be understood that integration is not deusexmachina, which automatically leads to success. Rapid effects based on elimination of tariff barriers are quite small. The main effect can be achieved only in the long term — within the framework of specific initiatives and projects in technological industries, food and knowledge-intensive sectors, with positive changes in markets of capital and labor, development of education and health changing the logic of enterprises’ operating, taking into account new rules. Integration agreements offer wide opportunities, but they still need to be implemented.
Effects
Results of complex simulations demonstrate that creation of CES by Russia, Kazakhstan and Belarus will have a positive impact on the development of three countries.
The largest effects of the prevailing economic structure, directions of foreign trade and economy scale are observed in Belarus. The Belarusian exports to the CES, in accordance with model calculations, will double — from $
Calculations of results show that success of integration processes in the territory of former USSR will be critical for development of the Belarusian economy in the long term. In the production structure the share of mechanical engineering, food industry and other industries is increasing. Thus, the increase in the share of mechanical engineering in the Belarus production structure
Reducing of power and energy consumption in Belarus production should thus be one of key objectives of economic policy. Due to high economic dependence of Belarus on imported energy it is impossible to talk about strengthening the competitiveness of the Belarusian economy without solving the problem of energy efficiency. The growth of productivity of primary resources use will limit expansion of energy imports, primarily natural gas.
Kazakhstan economy remains largely dependent on the dynamics of hydrocarbon production. This is largely due to the fact that Kazakhstan has a relatively high potential for increasing of oil and gas production. Exports to CES countries while growing remain at a relatively low level relative to GDP. At the same time integration processes due to convergence of technological level of production, reducing its energy and material capacity can get an extra amount of GDP and its growth at the end of the forecast period will exceed 4% compared with the baseline scenario.
The structure of Kazakhstan economy will experience a gradual decline in the share of mining sectors (from 28.1 to 22.6%) and metallurgy (from 7.7 to 5.0%). But rapid increase in the services sector, mechanical engineering, transport and communication will provide an increase in their share of the gross output: in services from 20.6 to 24.3%, in engineering — from 2.8 to 7.2% (more than 2.5 times), in transport and communications — from 13.1 to 14.2%.
Due economies scales disparate with other CES countries results of integration processes in the territory of the former Soviet Union will not have a decisive influence on dynamics of Russia’s GDP. At the same time development of integration ties allows Russia to receive an additional 2% of GDP of the baseline year by the end of the forecast period. The share of chemical industry in total output will rise from 3.0 to 3.7%, mechanical engineering — from 7.1 to 9.6%, transport and communication — from 8.0 to 9.3%.
In general deepening of integration within CES of Russia, Kazakhstan and Belarus due to development of trade, production cooperation and alignment of technological level of development will lead to the fact that total annual GDP of these countries by the end of projection period will be about 2.5% more than their total GDP in the absence of integration. Gained national GDP growth will be achieved by increasing accumulation of capital, mutual investment, and growth of economies’ competitiveness (increasing productivity means a decline of share of primary resources and increasing the share of value by added processing) and growth of trade turnover both within CES and with partners abroad.
Ukraine and CU
From an economic perspective a wide range of scenarios is possible for development of relations between Ukraine and CES countries. These include maintaining the status quo, ratification and entering into force of the Agreement on free trade zone (FTZ) within CIS; signing an agreement on «deep and comprehensive» FTZ with the European Union; Ukraine’s accession to Common Economic Space. Calculations showed that the maximum positive effect would be achieved from Ukraine’s accession to the CES followed by deep technological convergence. Technological convergence, in particular, will lead to balancing of indicators of energy and material capacity and achieving similar values of productivity from primary resources use.
This scenario assumes that energy and material consumption of Ukrainian economy will decline more rapidly reaching the level of still more advanced Russian economy. This will reduce energy consumption and thus — reduce dependence on imports. In addition, lower production costs increase opportunities to reduce prices to increase demand and production volumes.
The same factor determines additional increase in exports. In general, scenario of the best use of opportunities for integration on the basis of CES significantly diversifies Ukrainian economy. The share of machine engineering at the end of the forecast period will increase from 5.9 to 7.7% of the total volume of gross output. The share of industry and agriculture reduces slightly. In general the structure of Ukrainian economy is becoming more balanced.
Favorable economic and trade relations between Russia and Ukraine will significantly intensify relations in development of mechanical engineering industries. Ukrainian and Russian scientists believe that the use of available machine engineering capacity will increase the share of machinery and equipment in Ukrainian export to CES countries up to 20% in 2030.
In addition to machine engineering one of the most interesting sectors for economic cooperation is iron and steel industry. Russian steelmakers in the past 15 years have much more successfully upgraded their facilities, management and strategy. The Russian steel industry is more stable by supply structure: the ratio of supplies to domestic and foreign markets for Russian steelmakers is 50:50, for
In the coking industry Ukrainian economy has a surplus capacity from the perspective of growth in domestic consumption. In addition, these enterprises are burdened with high specific energy consumption and low productivity that given the contraction in domestic demand leads to their displacement from the market, along with several other suppliers of Ukrainian metallurgical enterprises. It is known that a large part of production of Russian and Ukrainian metallurgy and chemicals is sold in the domestic market at prices above the world ones providing a pool for sellers. In particular due to this reason opening of opportunities associated with a potentially high demand on the market of CES countries is a modernization alternative to simple reductions of enterprises and capacity in the Ukrainian iron and steel sector and allied ones.
The critical importance has technological cooperation in the sphere of military-industrial complex. According to the Center for Analysis of World Arms Trade (CAWAT)
The main area in which, on the contrary, there is a strong dependence of the Russian defense industry from Ukrainian companies — is aircraft engine engineering. After collapse of the USSR all helicopter assembly plants were concentrated in Russia, and the largest supplier of engines for them stayed in Ukraine. The vast majority of helicopters exploited by us as well as Russian helicopters supplied according to export contracts are equipped with engines
According to CAWAT the value of Russian supply of helicopters
What’s the problem? In particular, in that negative impact that borders has on trade and cooperation between units of one single technological chain located in different countries (and borders mean both tariff and numerous non-tariff barriers). While products reach the stage of the finished product, it has to cross the border several times. This leads to large losses — time, money and effort. Hence there is a desire to organize own Russian supplies instead of Ukrainian ones. However, creation of a single holding company, which includes dozens of Ukrainian and Russian companies and exists under the Common Economic Space, would be much more effective. These examples develop potentially large impact of technological convergence. This is how regional integration enhances global competitiveness of manufacturers.
After all, there are many areas where deep integration of technological systems is of considerable interest. For example, 126 Russian enterprises, where more than 60% of aircraft components are produced, take part in production
Almost 60% of components for
Technological effect of integration
Effects of integration are conventionally divided into rapid, associated with simultaneous improvement of trade terms (as a rule, such effects are fading with time) and constant associated with convergence of the level of economic development (such effects increase over the time). Among the experts nowadays there is a consensus, confirmed by experience of many regions: key effects of integration do not occur automatically, but rather represent new opportunities to be implemented consistently over the years.
Significant effect means moving up of technologically less developed countries — participants of integration to more advanced countries. This convergence is faster when technological gaps between countries are relatively small — as in case of post-Soviet states. In addition, countries are able to maintain national industrial capacity.
The union does not automatically lead to success: it opens up possibilities that have to be realized. If projects will be declared only on paper, they will not lead to economic effect. That’s why much more difficult and urgent task is to construct scenarios for development of mutual trade in goods of higher added value (products with high added value), primarily products of machinery engineering.
Currently from 70 to 90% of all machinery production is imported by Ukraine and CES members from third countries. For example, in 2010 Russia imported from third countries 92% of all engineering products, Ukraine — 83%, Belarus — 75%, Kazakhstan — 72%. A key reason for this is the lag in the level of technological development and production efficiency in the engineering sector.
In technological industries it is possible to get maximum effect from integration. Industrial cooperation in aviation and shipbuilding, engine engineering, rocket and space, atomic energy and power engineering sectors is based on the former, Soviet relationships and on relationships already formed in the CU and CES. A relatively new phenomenon is more widespread and meaningful participation of partners from third countries in the process of technological cooperation and collaboration in the CES market, such as in transport engineering (Siemens and Alstom in Russia, GE in Kazakhstan and so on).
In assessing possible development of trade of machine engineering products it can be assumed that mutual trade in machine engineering products can replace import from third countries to the extent of reduction of gap between these countries in the level of scientific and technological development. In other words, reducing of gap in technological development of third countries means that CES members will reduce the share of import of machine engineering goods from those countries. According to estimates while reducing the gap in technological development from third-country imports of machine engineering products from CES countries and Ukraine in the total import of machine engineering products in Russia will increase from 8.3% in 2010 to 17.1% in 2030, in Kazakhstan — from 28.3 to 46.6%, in Belarus — from 24.7 to 39.1%, in Ukraine — from 16.9 to 26.4%.
Thus, in the context of post-Soviet countries economic integration is a key instrument of modernization development.
Gas prices are one of the most acute problems of Russian-Ukrainian relations. Given the current cost structure energy prices can have a significant impact on competitiveness of the largest sectors of Ukrainian economy. It is important to understand the level of influence of gas factor both on trade balance of Ukraine and dynamics of prices and production.
Calculations show that if in 2011 the price of natural gas exported from Russia to Ukraine was reduced to $180 per thousand cubic meters, the value amount of Ukrainian natural gas imports from Russia in 2011 would be reduced to $7.72 billion. The deficit of trade balance of Ukraine would be reduced from $15.8 billion to $8.1 billion, equivalent to 2.9% of Ukrainian GDP in 2011. Under current structure of foreign trade of Ukraine trade deficit has nearly unit elasticity to higher prices for gas.
* EDB (2012). Comprehensive assessment of macroeconomic effect of different forms of deeper economic cooperation of Ukraine with countries of CU and EEA. EDB: Saint-Petersburg. Available at
https://expert.ru/expert/2012/14/velikolepnaya-chetverka-ili-kak-reintegrirovat-yadro-sng/