RONDELI BLOG

Eurasian Custom Union and problems of Russian – Georgian FTA

2017 / 12 / 28

Author: Amb. Valeri Chechelashvili, Senior Fellow at Rondeli Foundation

In mid-September 2014, the Russian Federation stated its intention to cancel the Free Trade Agreement with Georgia due to the Signature of Association Agreement with the EU, of which the Deep and Comprehensive Free Trade Agreement is an integral part (See https://ria.ru/world/20140910/1023547655.html ). This statement was not followed by any action. For some reason, the Russian Government decided that it was not right time to complicate trade cooperation with Georgia, but this doesn’t mean that this will not happen at some point in the future.

I completely agree with the assessment of those who think that the Free Trade Regime’s cancellation is not a tragedy, as WTO provisions are in force, although the fact remains that Russia never cared very much about legal issues. At the same time, it goes without saying that, for the Russian Government, the multilateral global WTO framework means much more that a bilateral Free Trade Agreement with Georgia.

Nevertheless, here is some food for thought.

First. A Free Trade Regime means that there are no custom duties for goods, originating on the customs territory of one state with the destination being the customs territory of another state. There is no controversy whatsoever between the Free Trade Regime of an individual country with different groupings. There are some matters of customs regulation and technicalities, which can be easily regulated, provided that the will to achieve a positive outcome exists. The EU-Georgia DSFTA poses no danger to the Russian Federation. Just the opposite, as companies that are registered as Georgian legal entities by Russian investors may enjoy DCFTA preferences with the EU, as an investor from any other state. By the way, this also pertains to the lucrative Chinese market, since a bilateral Chinese-Georgian Free Trade Agreement was signed on 13 May 2017 and will probably enter into force at the beginning of the next year (See http://mfa.gov.ge/News/saqartvelosa-da-chinets-shoris-tavisufali-vachrobi.aspx?CatID=5). All these factors contribute to the attractiveness of trade with Georgia. Thus, the decision to cancel the FTA with Georgia is of purely political in nature.

Second. There is no Eurasian Customs Union (Russia, Belarus, Kazakhstan, Kyrgyzstan and Armenia) in the picture. The Agreement (hereinafter simply referred to as the Agreement) on the Eurasian Economic Union Custom Code (hereinafter referred to as the Code) was signed in Moscow on 11 April 2017 (See https://docs.eaeunion.org/docs/ru-ru/01413569/itia_12042017). It has three Annexes as an integral part, which abolish dozens of international agreements and protocols, signed in anticipation of the Code entering into force. According to the ongoing ratification process in the signatory countries, the Code will most likely enter into force at the beginning of next year (See http://www.eurasiancommission.org/ru/nae/news/Pages/14_11_17.aspx). The Code is a very serious document comprised of 1169 pages and two Annexes, which exhaustingly cover the whole field of custom matters and regulate all spheres of the custom activities of signatory countries. It contains references to the Eurasian Economic Commission (hereinafter referred to as the Commission) as an Institution, entrusted to rule the process of implementing the Code’s provisions. It is worth mentioning that, according to Eurasian Economic Union regulations, the Commission is a supranational institution, responsible for many areas of international cooperation and equipped with an impressive variety of instruments. The Commission has many areas of responsibility, including macroeconomic, competition, energy policies, etc. Among others, the Commission’s areas of activity include the establishment of trade regimes with third countries (See http://www.eurasiancommission.org/ru/Pages/about.aspx ).

Third. If Russia is a member of the Customs Union, its foreign trade regime should be regulated by the respective supranational institution, which, in this case, is the Commission. This is similar to Germany’s foreign trade regime being regulated by the EU Commission, for instance. Germany cannot establish/cancel the DSFTA with Georgia – this was negotiated with the respective bodies of the EU. So, with respect to the trade regime with Russia, Belarus, Kazakhstan, Kyrgyzstan and Armenia, Georgia has to negotiate with the Eurasian Economic Commission and namely, with Mr. Tigran Sarkisyan, Chairman of the Board, or Mr. Mukai Kadirkulov, Member of the Board (Minister) for custom cooperation (See http://www.eurasiancommission.org/ru/act/chairman/Pages/default.aspx). This is no longer a subject of bilateral relations. If we are invited to negotiate separately, this means that there is no Customs Union in reality. Because, in theory, having in mind possibility of such an attitude, different countries may establish different trade regimes with Georgia according to to different interests. For example, Armenia, for understandable reasons, is more interested in developing its trade with Georgia than with some of its partners in the Customs Union.

Fourth. The fact is that both the success and challenge of Georgia’s foreign trade is the impressive growth of exports to the Russian market. Institutions in Russia are weak, subject to political pressure and respectively rubber stamping politically charged decisions. This was vividly demonstrated in March 2006 with the Russian embargo, despite the existing bilateral Free Trade Agreement, ratified by both the Russian State Duma and the Georgian Parliament. The mentioned Agreement contained dispute regulation mechanisms, in accordance with international legal practice. (See http://base.spinform.ru/show_doc.fwx?rgn=23995). Nevertheless, the Russian Government, without hesitation, unilaterally introduced a politically charged embargo decision. It is worth mentioning that Georgia is not the sole example of such Russian treatment. Violating political treaties and economic agreements demonstrates Russian authorities’ routine attitude to signed and ratified international documents. In this respect, any neighbor of the Russian Federation, from Belarus to Japan, can provide examples from its own experience.

Fifth. Legal arguments don’t mean much to Russian officials. If Russia wants to punish anybody and has the opportunity to do so, legal issues don’t matter. Currently Russia’s approach to trade with Georgia is more careful and legally correct. This is progress we have to welcome. But our own historic experience questions the sustainability of this approach.

Conclusions. There is no sense in arguing with Russia on trade matters. We will waste plenty of recourses with no guarantees. We have to leave it to them to decide and act respectively. More preferential trade with Russia means more exports, which is good. Less trade with Russia means less dependence on an unsustainable market, which is even better. Russian Government should be aware of the fact that deterioration of trade with Georgia will:

downgrade the illusions of Georgian entrepreneurs and exporters;
upgrade the competitiveness of Georgian exports; our wine exporters will have to learn to compete with French, Spanish and Italian winemakers not only on the Russian market, but beyond that as well; this will upgrade our exporters’ capacity to compete on the EU market;
prove once again that the Russian market is lucrative, but risky;
decrease Georgian exporters’ dependence on one market that is lucrative, although unsustainable;
assist in diversifying markets for Georgian exporters, keeping in mind the DSFTA, the FTA with China, the FTA with EFTA, and the future FTA with the USA;
diminish Russia’s capacity to influence Georgia (the earlier, the better);
assert a better position for Georgia in the network of international division of labor.

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Eurasian Custom Union and problems of Russian – Georgian FTA

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