Medvedev Casts Customs Deal as Stepping Stone

The presidents of Russia, Kazakhstan and Belarus gave the final blessing Monday for a trilateral customs union to enter into force, even as Moscow and Minsk continued to spar over the timing of key parts of the deal.

They also agreed to move forward with the creation of common economic space, which could eventually lead to a shared currency, President Dmitry Medvedev said on the sidelines of a meeting of the Eurasian Economic Community in Astana.

"We've now neared a very high level of integration," Medvedev said during a bilateral meeting with his Kazakh counterpart, Nursultan Nazarbayev.

"Looking forward, there's cooperation on the common economic space, and in the future … a common market and, I think, ultimately the creation of the foundations for a shared currency zone," Medvedev said. "You've backed it several times, and Russia has always passionately supported it."

The customs union, along with regular talks about currency integration, are seen as a way for Russia to use its economic might to build closer political ties with its former Soviet neighbors.

But analysts were skeptical about whether the union would ultimately bring about a shared currency.

"If this happens, then only in the long term. About 10 or so years," said Eugene Belin, head of fixed income, currencies and commodities for Russia, CIS, Israel at Citibank.

"Practice shows that monetary union without a fiscal union is a dangerous idea," he said. "It took the European Union about 15 years after forming a united economic space to come up with a common currency. I doubt Russia could do it any time soon."

The customs bloc won shows of support Monday from the presidents of Tajikistan and Kyrgyzstan, who said they were interested in joining.

Kyrgyzstan, which is already a member of the World Trade Organization, would face objections if it joined immediately because the customs union has higher tariffs than the global trade body allows.

"We are very determined to enter," Kyrgyz President Roza Otunbayeva said, Interfax reported. She also suggested that financial support from the Eurasian Economic Community, or EurAsEC, anti-crisis fund would be "timely" for Kyrgyzstan, which saw hundreds killed in ethnic unrest last month.

Tajik President Emomali Rakhmon also told reporters that his country was "very seriously" involved in talks on entering the union.

But tensions with Belarus — already part of a loose union state with Russia — remained in focus as the EurAsEC kicked off a two-day meeting in the Kazakh capital.

Belarussian President Alexander Lukashenko said over the weekend that he had signed off on a common Customs Code, a move he had delayed over disputes with Moscow on their energy ties.

Under the agreement signed Monday, the customs union would take effect between Russia and Kazakhstan from July 1, the original target date. Belarus would be included starting Tuesday.

Lukashenko offered a hint of conciliation after the EurAsEC meeting, saying "any union, particularly one among close, brotherly states, should be beneficial, including our new formation, the Customs Union.

"That's where we're coming from. We'll wait and see," he said.

Cabinet officials from Moscow and Minsk continued to disagree, however, over when customs duties within the union would be banned.

The issue is of vital importance for Belarus, whose economy relies heavily on refining and re-exporting Russian crude.

"Duties on oil and oil products for Belarus will be removed automatically, without having to wait for the documents on the common economic space to be signed and ratified by Russia and Kazakhstan," said Belarussian Deputy Prime Minister Andrei Kobyakov, Interfax reported.

But Russia countered that it had Kazakhstan's backing on its reading of the customs agreement.

"Kazakhstan is also adamant that until the formation of the common economic space … each side has the right to collect export duties," First Deputy Prime Minister Igor Shuvalov told reporters. "When the common economic space is formed, that possibility is eliminated."

Nazarbayev did not comment on the matter Monday.

All three countries will have to make concessions in the initial stage of the union, since many issues will need to be resolved in the short term, said Nikolai Petrov, a political analyst with the Carnegie Moscow Center.

"Having weighed all the pros and cons, Lukashenko might have decided that it makes no sense to put himself in opposition to Russia and Kazakhstan. Nevertheless, problems remain and the bargaining continues," he said.

"By signing the documents, Lukashenko agreed to the conditions they stipulate, particularly the conditions related to the oil duties," Petrov said.

Other members of the EurAsEC were considerably more enthusiastic Monday about further economic integration with Russia, which will host the group's next summit in late December.

The seven states — Russia, Kazakhstan, Belarus, Tajikistan, Ukraine, Armenia and Kyrgyzstan — agreed to create a new court that would mediate in trade disputes among member states of the EurAsEC and the customs union.

Medvedev said the court would have jurisdiction "not only over member states but also over economic entities that operate within the EurAsEC."

Each country will have no more than two representatives on the court appointed for six-year terms.

Russia is also trying to conclude its 17-year bid to join the World Trade Organization, and Shuvalov said Monday that the customs partners would step up their deadlines for the union to help.

The full common economic space will take effect Jan. 1, 2012, he said, while all documents to create it should be signed by Jan. 1, 2011.

Shuvalov said Russia was likely to "settle all disagreements" with the WTO in the coming weeks.

There have been "encouraging signals," but Russia is unlikely to settle disagreements with the WTO before the fall, said Alexei Portansky, a senior research fellow at the Higher School of Economics.

"Russia has a chance to complete talks this fall or by late 2010. In that case, Russia would likely become a WTO member at the beginning of 2011," said Portansky, who is also head of the information office for Russia's bid negotiators.

Medvedev has repeatedly said creating the customs union will not affect his country's plans to join the WTO, and U.S. President Barack Obama said last month that he hoped Russia could be ready to join by Sept. 30.

The WTO would like Russia to join as soon as possible, spokesman Keith Rockwell said, declining to give a forecast on when the talks might be completed.

"The general level of discussion has … improved," he said. "If there's a will, there's always a way."