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Interview: U.S. Economist Judy Shelton Skeptical Of Customs Union

U.S. economist Judy Shelton
After months of hesitation, Armenia says it will join the Moscow-led Customs Union of Belarus, Kazakhstan, and Russia. Ukraine, instead, appears determined to sign an Association Agreement with the European Union in Vilnius in November. Other countries in the region face a similar dilemma, given that membership in both clubs is not compatible.

RFE/RL's Charles Recknagel spoke with Judy Shelton, an economist and the vice chairwoman of the board of directors of the U.S.-based National Endowment for Democracy, about why Russia is creating its own economic zone as a rival to the EU and how it is pressing states to join.

RFE/RL: Russia created a tariff-free Customs Union with Kazakhstan and Belarus in 2010 and is now trying hard to expand it to a larger version that would include most of the former states of the Soviet Union. Russia clearly has strong new regional economic ambitions -- what are they?

Judy Shelton: Moscow definitely wants to reassert not only economic but political dominance over the area that it formerly controlled. The problem for Russia, though, these days, is this drive to reassert a new union, or in some ways to resurrect an old union, is coming at a time when the economic outlook for Russia is not a very inspiring model. The Russian economy is overly reliant on raw materials, on oil; I think corruption is a huge problem, and we have seen the unequal opportunities provided to very wealthy oligarchs at the expense of regular citizens.

So, for Moscow to think that it is offering a model or an opportunity to potential countries that would join a customs union, they have to evaluate if they also want to see a potential decrease in outside investment, in foreign trade. In Russia's case industrial production, even the labor market, is declining, they recorded growth for the second quarter of just 1.2 percent, and meanwhile [annual] inflation is close to 6 percent. So, you don't want to emulate that model, be part of that model, and as far as the political aspects of it as well, any nation considering joining it would have to wonder why they would want to take a step backward in terms of individual freedom.

RFE/RL: Moscow says closer integration only makes sense because Russia is already the largest buyer of these post-Soviet countries' goods and, simultaneously, it is their energy supplier. How much economic merit does that argument have?

Shelton: Not really, and the drivers of economic growth are certainly changing as countries modernize and develop. But I would just point out that, right now, Ukraine exports to Russia about 12.3 billion euros worth of goods. They export more to the European Union -- about 12.9 billion euros worth. Those are last year’s figures. And, as far as [it concerns] Russia being their energy supplier and that suggesting some kind of natural alliance, that has not really been a happy experience for these countries.

Countries should be wary of joining an organization that does not think transparency, rule of law, or fighting corruption is important.
Now, I will say this, look at the United States. It is true that geographically it matters, in that, of our top 10 trading partners, Canada and Mexico would be No. 1 and 2. But in third place would be China, then Japan, then Germany, and South Korea, the U.K., France, Switzerland, India. These are countries all over the world, so it is not a matter of being on our border, and they account for 67 percent of imports to the United States and 60 percent of our exports.

In spite of Russia saying to countries that being near us gives you a benefit of having a customs-union relationship, and even suggesting to Ukraine that not to do it would be suicidal, let's see how that kind of logic is working, for example, with Belarus. Already, we see this past week that Russia has announced a 25 percent drop in oil supplies going to Belarus for this month, and maybe into the future, they are suggesting restrictions on Belarusian dairy products, and they banned pork imports from Belarus on Friday [30 August]. A country that would then be so dependent through a customs union upon Russia as their partner has to consider whether they really want to be like Belarus, where Russia counts for half of their imports and 40 percent of Belarusian exports. I think there is a question of not wanting to be subject to dominance and control that makes any country subject to extortion and punishment.

RFE/RL: Kyiv has said it is ready to go both ways -- move toward the EU and join the customs union -- but first Brussels and then Moscow have both made it clear that this is not an option. Could you explain why both Brussels and Moscow say so?

Shelton: From the point of view of the European Union, every country that would have an association agreement or a relationship to trade and have good political relations with the EU has to have a sovereign external trade policy. And if Ukraine were to join the Customs Union, they would then be subject to a common external-trade policy, a joint external-trade policy, and it would clearly be dominated by Russia.

Now from Moscow's point of view, they are saying the reason you can't have both is that Ukraine would be able to import goods from the European Union with no tariffs and then they could export cheaper to countries belonging to the customs union and that might hurt domestic production in those countries. But you have to say if you are one of those potential members of the customs union, what is wrong with being able to buy European products cheaper and without tariffs? You really are not helping your own domestic economy to improve by charging people more to buy those products, which can make you more productive. Instead, what you would be doing is just artificially protecting and prolonging inefficient production in your own country.

I think we should also realize that the European Union is by far Russia's biggest trade partner, so even as Russia is discouraging and even threatening these other countries, particularly Ukraine, from having a good trade relationship with the European Union, they enjoy benefits of trade with the European Union and they just don't want the former republics to have those same opportunities.

RFE/RL: Should we imagine that Russia’s economic ambitions include building a new economic zone in Eurasia that would also one day include China? And is that something ex-Soviet states should consider as they weigh whether to tie their economies to Russia’s or, instead, find their own independent positions with major trading powers like Europe, Russia, and China?

Shelton: I think that China would even find it amusing to think that Russia would want to entice China to join their economic model when, frankly, China's growth model is working far better. And the message to independent countries is that they should really preserve their options. They should look to the future and figure out the best way to deal with all potential major trading powers and, particularly with regard to the European Union. If they can move ahead in their trade relations with the European Union that will overall enable them to move forward and that would enhance their capabilities to interact with the world, versus joining a customs union with Russia, Belarus, and Kazakhstan, which would restrict their future actions and limit their development.

In evaluating that choice I think any former Soviet state needs to think of their own country's future and recall their history and to remember that coercion has been a factor in the past and it is already being used by Moscow today in proposing the customs union, that is an echo of prior experience. I think we are seeing this because Russia is demanding this kind of allegiance more out of fear than out of being able to provide a more positive vision that would attract talented creative people in any country. So, I think it is really a bit of a threat to Russia if other countries, particularly Ukraine, show that they can succeed as a normal European state or as a normal sovereign state that interacts with the world. So, it is very important that countries look out for their own best interests and do not feel compelled to join a customs union.

RFE/RL: Finally, Moscow does not require that prospective members go through any legal and political reforms to make their governments more transparent or increase the rule of law or reduce corruption -- all things the EU, with its step-by-step progress toward partnership, insists upon. Is this a reason, perhaps, why publics in states being wooed for the customs union should look at Russia's drive with skepticism?

Shelton: Countries should be very suspicious of the fact that Russia is making it so easy to join, with no legal or political reforms and no request that a country concentrate on increasing the rule of law or reducing corruption. Basically, to say 'come with us, we have no standards, no values;' that is not a great enticement. I don't think that a country should want to join a customs union which boasts that they don't effectively believe in, or is ruled by, a culture that doesn't show sufficient respect for democracy or human rights or political freedom or even economic opportunity. Countries should be wary of joining an organization that does not think transparency, rule of law, or fighting corruption is important.