New customs agreement underpins economic union with Belarus and Kazakhstan

Russia, Kazakhstan and Belarus have agreed to relax customs rules. They've signed an agreement that other countries have already expressed their willingness to join.

Together once again. This time a customs union, not political. Russia, Kazakhstan and Belarus signed an agreement in Minsk at the summit of the Eurasian Economic Community.

The three participating countries will, from the 1st of January 2010, have unified customs tariffs and a common trade list.

But that is just the beginning – from July 2011 customs checkpoints along the Belarusian-Russian border will be closed, then a year later Kazakh-Russian checkpoints will also become a thing of the past.

Russian President, Dmitry Medvedev says the agreement represents a new form of economic union.

“The customs union will mean a completely new freedom for the turnover of capital, workforce and trading goods. The unification of custom tariffs is important but it's not the main aim. The main aim is to prepare for the transition into a common economic space. In principle, it's a completely new way to integrate our economies.“

Russia is likely to be the main investor into the Union. Russia is already lending Belarus unprecedented sums of money – $3 billion during the last 2 and a half years.

And, while there are benefits to a union there are also drawbacks. For instance, Belarus might struggle from higher car import tariffs. Currently the duty on vehicles is much lower than in Russia. But time has been set aside to settle the difficult questions, with the original member states agreeing to a transition period of three years.

Aleksey Moiseev, Chief Economist at Renaissance Capital, says balancing out of protection could see price increase for some goods in Kazakhstan and Belarus.

“It is clear that Russia has probably most industries to protect. At the same time Belarus also has, I understand, some industries which they protect more than Russia does. So it really is going to be quite interesting, but in general I believe that it is likely that customs tariffs are going to increase on average in Belarus and Kazakhstan, therefore probably resulting in certain price increases for certain goods in those countries.”

Overall the compromises are in everyone's interest – there are more tariffs being lowered than being raised for all the participants. According to preliminary calculations the GDP of all the countries might grow as much as 15% in 5 years.

This is just the first step for what, in the future, might become a common economic space that more countries from the post-soviet space will be looking to join. And reducing the number of trading barriers might be not just good for participants, but also welcomed by the outside trading partners and trade organizations.