Barriers and solutions to economic integration of Caspian Sea countries

Aydin, Ulviyye Working Paper Barriers and solutions to economic integration of Caspian Sea countries ADBI Working Paper Series, No. 1108 Provided in Cooperation with: Asian Development Bank Institute (ADBI), Tokyo Suggested Citation: Aydin, Ulviyye (2020) : Barriers and solutions to economic integration of Caspian Sea countries, ADBI Working Paper Series, No. 1108, Asian Development Bank Institute (ADBI), Tokyo This Version is available at: https://hdl.handle.net/10419/238465 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc-nd/3.0/igo/ ADBI Working Paper Series BARRIERS AND SOLUTIONS TO ECONOMIC INTEGRATION OF CASPIAN SEA COUNTRIES Ulviyye Aydin No. 1108 April 2020 Asian Development Bank Institute The Working Paper series is a continuation of the formerly named Discussion Paper series; the numbering of the papers continued without interruption or change. ADBI’s working papers reflect initial ideas on a topic and are posted online for discussion. Some working papers may develop into other forms of publication. In this report, “$” refers to United States dollars. Suggested citation: Aydin, U. 2020. Barriers and Solutions to Economic Integration of Caspian Sea Countries. ADBI Working Paper 1108. Tokyo: Asian Development Bank Institute. Available: https://www.adb.org/publications/barriers-solutions-economic-integration-caspian-seacountries Please contact the authors for information about this paper. Email: ulay[email protected] Ulviyye Aydin is an associate professor at the Department of Political Science and International Relations of Manisa Celal Bayar University in Manisa, Turkey. The views expressed in this paper are the views of the author and do not necessarily reflect the views or policies of ADBI, ADB, its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms. Working papers are subject to formal revision and correction before they are finalized and considered published. Asian Development Bank Institute Kasumigaseki Building, 8th Floor 3-2-5 Kasumigaseki, Chiyoda-ku Tokyo 100-6008, Japan Tel: +81-3-3593-5500 Fax: +81-3-3593-5571 URL: www.adbi.org E-mail: [email protected] © 2020 Asian Development Bank Institute ADBI Working Paper 1108 U. Aydin Abstract The aim of this paper is to analyze the barriers to economic integration of Caspian Sea countries ‒ specifically the Russian Federation, Kazakhstan, Azerbaijan, Turkmenistan, Uzbekistan, Iran, and Georgia ‒ and suggest solutions. A literature review is used as a methodology for conducting this research, synthesizing research findings to determine the current level of integration in the Caspian Basin, barriers to it, and to uncover solutions that can deepen it. It was concluded from this research that Caspian states have a long experience of economic integration. However, it was found that the obstacles that prevent economic integration among Caspian states can be summarized under three main headings. First of all, the geographic location of Caspian states is so critical that it is impossible to define clear borders in the region. Second, the different governance structures of Caspian states make it difficult to evaluate the co-benefits of economic integration. Third, the geopolitical interests of foreign actors are a serious handicap for the region’s economic integration. On the other hand, ongoing geopolitical and economic processes are increasing Caspian states’ need for each other. In this context, existing bilateral and trilateral agreements can be classified by the number of sides and subjects so that a multi-speed integration can be achieved among the region’s countries and they can choose the level of integration according to their own interests. Keywords: Caspian Sea, economic integration, energy cooperation, geopolitical interests JEL Classification: F02, F15, F50 ADBI Working Paper 1108 U. Aydin Contents 1. INTRODUCTION ......................................................................................................... 1 2. METHODOLOGY ........................................................................................................ 2 3. EXISTING COOPERATION PLATFORMS AMONG CASPIAN SEA COUNTRIES ... 2 4. A DELAYED CASPIAN INTEGRATION: OBSTACLES AND POSSIBILITIES ........... 6 5. CONCLUSION .......................................................................................................... 11 REFERENCES ..................................................................................................................... 12 ADBI Working Paper 1108 U. Aydin 1 1. INTRODUCTION “International integration is a process by which countries remove the barriers to free trade and the free movement of people across national borders, with the goal of reducing the tensions that can lead to international conflict” (Garza 2006). According to Balassa (1961, 174), “economic integration encompasses measures designed to abolish discrimination between economic units belonging to different national states; it can be represented by the absence of various forms of discrimination between national economies.” Depending on varying degrees of integration, economic integration can take several forms, namely a free-trade area, a customs union, a common market, an economic union, or complete economic integration (Balassa 1961, 174). Regional integration trends aimed at stimulating deeper and comprehensive economic cooperation between countries accelerated after the Second World War. As a result, several integration models have been created, such as the European Union (EU) (formerly the European Community [EC]), the USMCA (formerly NAFTA), and ASEAN, which represent three major regions of the world – North America, Western Europe, and Southeast Asia. With its sui generis structure, the EU represents the best model of integration among nation states, and has achieved more than removing the barriers to free trade and free movement of people. During the last few years, blocs such as ASEAN, USMCA, MERCOSUR, APEC, etc. have presented a different integration structure because of the geographic, political, economic, social, and cultural features of the regions that they represent. But in any case, economic integration is still a preferable cooperation option among states. The Caspian region has become one of the most attractive regions of the world in recent years mainly due to its geopolitical location and natural resources. The dissolution of the Soviet Union and increasing global trade movements created new opportunities for the region’s economic development. In this context, the emerging states of the region have adapted to the free market economy and opened up to the world. However, evidently it has not been possible to transform these individual achievements into an initiative to establish regional economic integration. Considering the characteristics of the region, the barriers to developing the EU model of economic integration among the Caspian states are understandable. But there are also significant opportunities for the Caspian states to come together in the region for a common cause and to benefit from a type of economic integration like that among the ASEAN countries. So the aim of this paper and its five constituent parts is to research the possibilities of economic integration of the Caspian Sea countries and the barriers to it. Following the introduction, the second section explains the chosen methodology. Existing cooperation platforms among Caspian Sea countries are reviewed in the third section. In the fourth and main part of the study, the possibilities of deeper integration and barriers to it are discussed. The final section ‒ the conclusion ‒ presents the article’s findings and policy implications. ADBI Working Paper 1108 U. Aydin 2 2. METHODOLOGY In conducting this research, a literature review is used as a methodology, with the aim of synthesizing research findings to determine the current level of integration in the Caspian Basin and barriers to it, and to uncover solutions that can deepen it. This study is based on primary sources, academic research articles, policy documents, scholarly journals, working papers, workshop reports, interviews, political speeches, and declarations, as well as newspaper articles in four languages: English, Russian, Turkish, and Azerbaijani. It was preferred to examine the research topic from several perspectives in different languages, referring to the academic research articles indexed in prevalent and reputable databases. Using empirical data collected from the aforementioned sources, the aim is to measure the level of the possibility of integration among Caspian states and to determine the specific obstacles to it. Thus, first of all, the existing cooperation platforms among the Caspian states are examined, using these sources. Then, the study attempts to define the concrete barriers to integration in the Caspian Basin. The article mainly focuses on the period after the 2000s, although it also covers the important events of the 1990s – the first years following the dissolution of the Soviet Union. Because of various challenges and limitations, the study has been limited to five Caspian Sea littoral states, Georgia, and Uzbekistan. Armenia, the Kyrgyz Republic, and Tajikistan have been left out of the research scope. Because of the ethnic dispute, it is not logical to think about any economic interaction in the near future between Armenia and Azerbaijan, which is one of the leading economies of the region. The Kyrgyz Republic, with its landlocked position and poor economy, needs to act more rationally, such as by building close relations with the neighboring and cheaper People’s Republic of China (PRC) rather than distant Caspian ones. In order to participate in any economic integration, first of all, Tajikistan needs to improve its basic internal political and legal structure. Moreover, it was found that existing sources mainly address the regional cooperation among the above-mentioned Caspian states rather than the integration between them. More importantly, there is a serious difficulty in gaining access to national economic data as well as data regarding bilateral and multilateral economic transactions. These three points represent a limitation of the study. 3. EXISTING COOPERATION PLATFORMS AMONG CASPIAN SEA COUNTRIES In order to draw a picture of the Caspian Basin in terms of any possible economic integration, the current situation in the region needs to be understood. Apart from Iran, other countries that are the subjects of this study ‒ the Russian Federation, Azerbaijan, Georgia, Kazakhstan, Uzbekistan, and Turkmenistan ‒ were part of a unique state-controlled economic system for approximately 70 years. There has been a “type of obliged integration” among these states, allowing them free movement of people, goods, and services inside the union, isolating them from the outside world. The relations between the former Soviet Union and Iran continued in a restrictive cooperative environment in the shade of political issues. ADBI Working Paper 1108 U. Aydin 3 The dissolution of the Soviet Union changed the map of the Caspian Basin, with an increasing number of states in the region gaining the opportunity to act independently. Iran was among the first states to recognize the independence of new emerging countries around it, specifically the Russian Federation, Azerbaijan, Georgia, Kazakhstan, Uzbekistan, and Turkmenistan, and since then the countries have been developing relations. Contacts have certainly not been limited to the bilateral relations among these states, and some attempts have been made to undertake common actions. The Commonwealth of Independent States (CIS) was created by the Russian Federation, Ukraine, and Belarus before the collapse of the former Soviet Union with the aim of helping to ease its dissolution and coordinate interrepublican affairs. Although Azerbaijan, Georgia, Kazakhstan, Uzbekistan, and Turkmenistan also joined the CIS in the 1990s, later – in the 2000s ‒ Turkmenistan changed its mind and Georgia left the organization for several reasons. There are primarily nine areas of cooperation within the framework of the CIS and the main purpose of this organization is the development of multilateral relations among CIS member states in economic, humanitarian, military, and political spheres. However, the CIS has been perceived as an attempt by the Russian Federation to collect the post-Soviet states under a single frame in order to preserve its influence in the region and in the world rather than as an integration initiative, which has also kept the members of the organization at a distance. According to another widespread view, as a priority of the Russian Federation’s foreign policy, the establishment and development of Eurasian integration in the post-Soviet region was mainly aimed at overcoming the destructive results of the former Soviet Union’s collapse in the geopolitical and socioeconomic context (Bykov 2016, 285). But existing serious problems, especially related to ethnic issues among the member states inherited from the former Soviet Union, are the main reason for its ineffectiveness. That is why at the end of the 1990s, it was already recognized, especially by the Russian Federation, that the CIS could not be turned into an effective integration tool. About 90% of all decisions made by CIS institutions are simply not implemented. The CIS was created as an interstate-type organization in which decisions are made on the principle of consensus among member countries. The absence of supranational institutions predetermines that the integration of the CIS takes place on an ad hoc basis and selectively, i.e., only among those member countries who are interested in a particular policy. For example, Azerbaijan clearly expressed its official attitude on this matter: “Azerbaijan conducts cooperation with CIS member states mainly on a bilateral basis. At the same time, Azerbaijan continues cooperation within the framework of the CIS on the basis of the national interests and considers the abovementioned organization as a platform for dialogue” (Republic of Azerbaijan Ministry of Foreign Affairs 2018). Another very important factor that predetermines the inefficiency of the CIS is the lack of a driving force for integration. The EU experience shows that the driving force of a political organization is a growing economic dependence among member countries. The role of the CIS in respect of economic integration is limited. Between the years of the Russian Federation’s financial crisis of 1998 and the global financial crisis of 2008, the countries of the CIS enjoyed robust economic growth. From 2000 to 2008, the economies of CIS countries grew at an average rate of over 6% (excluding the Kyrgyz Republic) (Jenish 2013, 4). However, the roots of these developments have been sourced mainly from outside the CIS as in the period 2000‒2006 all CIS countries, except Belarus, Moldova, and the Kyrgyz Republic, had more export and import ties with non-CIS countries than within the CIS. For example, in 2007, trade between the EU and the CIS countries was 87% higher than the volume of trade within the CIS (Kaschunas 2007). In order to promote trade and economic cooperation between the CIS member nations, the ADBI Working Paper 1108 U. Aydin 4 Free Trade Zone Agreement was signed on 18 October 2011 in Saint Petersburg; this was designed to give additional impetus to the growth of national economies and the CIS potential in general. Currently nine countries (the Russian Federation, Belarus, Ukraine, Moldova, Tajikistan, Armenia, Kazakhstan, the Kyrgyz Republic, and Uzbekistan) from the CIS have ratified a Free Trade Agreement (FTA) that allows free movement of goods within the territory of the member states. On the other hand, the ongoing conflict between the Russian Federation and Ukraine has resulted in severe disruption of trade between the two countries (The International Trade Administration 2019). Three countries ‒ Belarus, Kazakhstan, and the Russian Federation ‒ initiated a customs union in 1995, which the Kyrgyz Republic and Tajikistan agreed to join in 1996. The remarkable point here was the relations among member countries themselves. There was no glaring conflict among them at last. This was accepted as a factor in increasing the functionality of the union. However, it was clear that the aims of the customs union were unrealistic in the short term given the member states’ continuing economic decline, their different economic policies, and their substantial disagreements over trade policy with other countries (Kembayev 2013 718). In October 2000, member countries decided to upgrade it to the Eurasian Economic Community (EurAsEC). This decision was ratified in May 2001. The countries aimed to set a common external tariff with respect to the rest of the countries of the world (non-CIS) and harmonize the nontariff barriers. The Russian Federation has emphasized the union’s purely economic nature based on compatible markets of interdependent states far from any political ambition. Moscow called on the EU to recognize the customs union and invited Brussels to deal with the Eurasian Economic Commission, the union’s one regulatory body, on trade matters related to the Russian Federation. According to some, the customs union had a chance of becoming more than just a paper tiger (Shumylo-Tapiola 2012, 3). However, they failed to fulfill the announced aims (Tochitskaya 2010, 4). The diverse structure of the economy and different level of economic development in Belarus, the Kyrgyz Republic, Kazakhstan, the Russian Federation, and Tajikistan and the lack of an instrument to remove such obstacles were the major reasons. As a consequence, the countries’ willingness to accept protection and their openness to international competition among the economic sectors did not coincide. Besides, the Kyrgyz Republic has been a WTO member since 1990 and hence should conduct its trade policy in accordance with accepted obligations, including the level of external tariffs. In addition, for different reasons, countries have increasingly reoriented their trade away from regional trade agreements (Tochitskaya 2010, 4). The reluctance of member states to unify national tariff regimes has restricted the gaining of desirable results. A new step was taken toward regional economic integration and the Agreement on the Eurasian Economic Union (EAEU) was signed by Belarus, Kazakhstan, and the Russian Federation on 29 May 2014 and came into force on 1 January 2015. The Kyrgyz Republic and Armenia entered the union in 2015. The EAEU is a great market with 183.8 million people (2.4% of the global population and a GDP of $1.9 trillion [3.2%] of the world market). Providing 14.5% of the global oil production, the EAEU ranks first in the world and, in providing 20.2% of the global gas production, it ranks second (EAEU 2019). The creation of the EAEU was evaluated as a natural and logical desire on the part of the Russian Federation to bring together historically related people and to slow down the stripping apart of the post-Soviet space by foreign powers (Bykov 2016, 290). However, similar reasons – such as conflicts between states, and a lack of economic interest and desire to trade with developed economies ‒ have kept Azerbaijan, Georgia, Turkmenistan, Ukraine, and Uzbekistan away from the EAEU and overshadowed the future success of the union. Considering the potential of the aforementioned countries, it is hard to envisage full integration in the post-Soviet area. ADBI Working Paper 1108 U. Aydin 11 5. CONCLUSION To sum up, after the dissolution of the Soviet Union, the Caspian region seemed to be a conflict arena of states’ interests located here as well as among the great powers. Ethnic problems, energy issues, and issues regarding the legal status of the Caspian Sea led to a perception of the region from a purely geopolitical perspective. Economic cooperation between the Caspian countries has been shaped within this perception. In fact, geopolitical policies do not create enough conditions for the region’s development and solution of economic problems among the increasing complexities of the contemporary world. A lack of a common Caspian identity based on the region’s geographic, historical, and cultural features demotivates the states toward division. Russian-led regional integration initiatives did not achieve the desired results due to its limited resources for integration, which are insufficient to fulfill its leadership ambitions. On the other hand, fear of Russian domination of the Russian Federation’s regional partners is one of the great barriers to regional integration (Makarychev 2011, 6). The Russian Federation and Iran’s approach to regional ethnic conflicts arouses suspicion from other small states here, who are on the edges of the conflicts. The different political and economic systems among the Caspian states still represent a serious barrier to the harmonization of common implementations. Caspian states are energy-producing countries, except for Georgia, and their economies are highly dependent on energy revenues. These states need energy-consuming countries with stable energy incomes more than each other. This is also one of the major dividing factors in the region. However, the last crises in the region have been followed by pro-integration trends among the Caspian states. Of course, it would not be realistic to expect the EU type of integration here due to the geographic, historical, political, economic, social, traditional, and cultural realities of the Caspian Basin. It is also not easy to create a new integration structure in such a divided area, which exists between two economic powers, namely the EU, one of the best examples of integration in the world and an economic giant, and the PRC, the world’s fastest-growing and second-biggest economy. But the region still has some alternatives that can develop it into a cohesive area. Economic relations among the Caspian states on the individual level are remarkable. By identifying the areas in which the countries of the region primarily want to cooperate, a gradual integration within a multispeed structure may be possible. Thus, it will be better to start from the sectors where the Caspian states already cooperate. Cross-checking of the operating bilateral, trilateral, and multilateral agreements and unifying them under a single structure can be a first initiative. Here, the business communities of the countries in the region can perform perception operations. By utilizing modern technological facilities and the experiences of cooperation achieved thus far, technical infrastructure implementations for easy access, customs operations, and standardization of relative trading documents can be harmonized in a short time. In fact, there are currently several areas of cooperation among the Caspian states. The main aim here is to collect these scattered cooperation areas and organize them under the common integration institutions. Such an integration can motivate other states in the region. It can be particularly encouraging in the context of peaceful settlement of ethnic conflicts, one of the biggest problems in the region. 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