Eurasian Economic Integration Must Go through Thorough Consideration

OshakbayevThe closer the date of signing of the Eurasian Economic Union (EEU) treaty determined by the three presidents of EEU member countries, the higher the degree of discussions in society, both about the need to create such a union and the principles of its creation, as well as what the union treaty should represent. Deputy Chairman of the National Chamber of Entrepreneurs Rakhim Oshakbayev discussed the state of negotiations and the draft document.

What is the status of the negotiations process regarding the agreement on the formation of the EEU, and what are the problematic issues of the current stage of integration?

This year marks 20 years since President Nursultan Nazarbayev gave a speech at Moscow State University where he introduced the concept of Eurasian integration. Now this idea finds its real, practical implementation. We have passed three stages of integration: first, the Customs Union (CU), then the Single Economic Space (SES), now we stand on the threshold of the EEU – a very high degree of economic integration. To be rightly understood, I want to explain our position. We, as a business, are interested in economic integration, access to markets of Russia and Belarus, and this is why we really need to make this integration association sustainable and competitive on the quality of its regulation. However, we are concerned about what happens in the stage of the legal framework of the EEU. First of all, it concerns the structure and quality of the developed, codified treaty which, in fact, constitutes a threat to the stability of this integration association.

What are the problems?

First of all, currently in a very short period of time, we are trying to develop and agree on a draft treaty on the EEU, which should codify some 60 international agreements concluded within CU and SES. It includes a variety of topics relating to competition policy, natural monopolies, transport, industry and others. In fact, it affects all sectors of economy, the entire GDP. Taking into account, firstly, deadlines, and secondly, that it will be a single document that will go to the ratification by three, and in the future, when Armenia and Kyrgyzstan will join the union, by five parliaments, it will be almost impossible to change this regulatory framework.

Why do you think so?

This is evidenced by our experience. The Supranational Customs Code can be taken as an example, which I think was adopted in November 2009. Actually, after its agreement before its entry into force in July 2010, it changed in 166 articles. Therefore, when the code was under ratification, the protocol on introducing changes to it was also ratified. After that, for four years no amendments have been introduced. On the contrary, our tax code in the first four years after its entry into force was changed on average four to five times a year, and in 2012 it was amended nine times.

Today, the formation of the treaty on the EEU is extremely fast. To analyse 800 pages of various legal norms, 35 applications and assess their impact on the conditions of doing business with all the amendments to the treaty in the codification process is not possible. Often the annex to the treaty, which is an integral part of it, contains absolutely excessive details, which do not correspond to the level of the document to be adopted. For example, the parliaments under the agreement will be asked to ratify even the methodology of the interstate transmission of electric energy (power) among member countries, which contains a very specific formula for determining components included or not included in tariffs of natural monopolies.

So I think that almost immediately after the entry into force of this treaty there will be a need to finalise some of its provisions, and possibly entire sections. Thus, taking into account, firstly, tight deadlines, and secondly, the fact that by the time of ratification (by the time of creation of this union) some provisions will either lose relevance or will not properly match the economic realities, a paradoxical situation will occur. We see this in the functioning of the basic agreements. If they contradict the economic interests of the parties, they are not enforced despite the fact that they have the status of treaties. I have two examples to this. One is a basic agreement on transport, which involves application of the so-called unified tariffs by all parties since 2013. These unified tariffs are not applied so far, which is a direct violation of the achieved agreements. This is disadvantageous for the parties. The second example is a basic agreement on agriculture under which the parties committed themselves to limit the volume of support for agricultural producers. Nevertheless, there is no proper control over the implementation of these commitments and we see that subsidies and unfair competition continue to occur.

Correct me if I am wrong, but today there are two approaches to the draft treaty: the first is to specify in detail all the agreements concluded, ratified, and even not yet concluded and not yet ratified. And the second approach is to make it a framework, i.e. to define some general principles. Will other aspects be identified within the agreement?

Yes, now there are two approaches. The first approach is quite simple: they take all treaties and try to merge them into a single document. As a result, it will be large and cumbersome, will be ratified, and as I said, will not change.

The essence of the second approach is the following: we are convinced that we must, as President Nazarbayev says, follow the principle of economic pragmatism, i.e. if now it is clear that some provisions of the basic agreements of the CU are outdated and do not correspond to economic interests or are irrational in their content, they should be changed. Not just rewritten, but changed. If we decided that we do not need unified tariffs, then we should reject them and need to change the basic agreement and consider this at the time of codification. At the same time in the negotiation process, in the Eurasian Economic Commission (EEC), the Russian side says it is a deviation from the basic agreement, from common understandings, “you are overreacting,” etc. This position reflects a misunderstanding of the process of codification. What our Russian colleagues are referring to is called “incorporation” – mechanical incorporation of agreements into a single document. Codification means not just the transfer of existing norms, but their processing and, if necessary, cancellation of obsolete provisions and filling gaps.

This means if we extremely simplify the situation, the following will happen. The first option is not to implement the agreements that do not meet the changing economic situation. And the second option means that there are real conditions of life, and the regulatory framework needs to be adjusted for them to make it executable and observe mutual agreements. About sixty existing agreements, each one ratified by the parliaments of three countries, will be included in the EEU treaty. Almost all sectors of the economy: competition, natural monopolies, technical regulation, industrial, macroeconomic policy, services, which constitute more than a half of Kazakhstan’s GDP, will be regulated by the treaty.

In the national legislation, such problems are solved by amending certain legislative acts, however, in case of adoption of the treaty, these amendments shall be adopted by three, and eventually five parliaments. Each time, when the treaty will be reviewed on a particular issue, there will be attempts to introduce additional norms in other parts of it and protocols. Thus, any change to this treaty will become a banal bargaining. It will be difficult to introduce any changes to it, not only because of the ratification procedure complexity, but also due to the blocking of these changes by separate parties as a way to lobby their own interests.

Can you discuss the lobbying in detail? What is it about? Can you explain the problem with a simple example?

It’s about details. For example, the three of us decided to introduce some changes to the annex of the treaty on technical regulation. But since we have a comprehensive treaty, the Russian side may say, “We also have proposals on a ‘single sky,’ let us also include them.” And Belarusians, for example, will comment on the oil products market. And that’s it, we leave for two to three years with an unknown outcome. Any amendment can be blocked, not just because it does not suit any side, but because one side has another interest that it also wants to insert in the treaty.

We need to bring this simple idea: that in order for integration to be competitive and stable, a regulatory framework must be properly constructed, it must be flexible. If it does not happen and the treaty is not adopted in such a comprehensive edition, it will very quickly become obsolete, will not meet the economic interests and will not be applied.

We already see the practice when national authorities adopt their regulatory acts that are contrary to a supranational regulatory framework, but in general all agreed that this is normal. We can give examples of decisions of Russia’s Federal Customs Service, which are also contrary to the basic principles, the Supranational Customs Code. And the practice of such “exceptions” will expand. In such circumstances, we are compelled to urge the development of this practice in Kazakhstan if the rules do not correspond to any economic interests. There is nothing personal, I repeat, as the President said, economic pragmatism only. What will we get as a result? The supranational database of the integration association will increasingly become contrived, will exist only on paper.

To summarise, I will say that approach we agitate is that the codification of all agreements by the basic provisions of the treaties, the basic principles such as the conditions and the scope of provision of the national treatment, most favoured nation treatment, common approaches to implementation, shall be specified in the treaty. That is, to make them “inviolable” and pass ratification. And the rest – all industrial and functional annexes governing the functioning in detail, shall be transferred to another level where decisions are made faster, facing fewer conflicts, and where for the qualitative study of issues industrial experts without regard to political terms will be involved.

Who proposed the idea of a codified law in such a way? EEC?

I don’t know the authorship of the idea. It is legitimated by the decision of the heads of three states on the need for codification. But we are quite sure that the presidents, when they made their decision, had in mind the codification for the creation of a sustainable economic integration for the purpose of attracting investments and entrepreneurial activity.

Now, I will discuss another disturbing moment that we have. Kazakhstan over its independence created a system that allows for a checking of proposed legislative provisions with the interests of the business community and the interests of society as a whole through various mechanisms: scientific expertise, legal monitoring, examination of legal acts concerning the interests of entrepreneurship. If we take the applied tools altogether, in my opinion, the more practical one is still the examination of projects through accredited associations. The National Chamber Atameken and our other colleagues and other business associations over the years have provided their suggestions. There is a mechanism of expert tips, in which standard regulations of their work are prescribed in each state agency and local authority. As a result, there is a mechanism where we create a regulatory framework, laws, codes, government decrees, and they, at least publicly, undergo examination and a formal conclusion is formed about them. If it is the law, the conclusion of an accredited association is a compulsory part of the package, which is submitted to the parliament. Thus, these filters allowed us to get the legislation more or less corresponding to the economic realities. Certainly, there are many reasons for criticism, but the EEC does not have even that. When we talk about it with colleagues in the Commission, they state the Commission usually appeals to the three institutions that they have currently.

The first is advisory committees that were created in almost every department. Accordingly, the committees have own regulatory acts. We are included somewhere, or not included.

How many committees exist now?

About 17 committees were created. The National Chamber participates in three or four. Moreover, subcommittees are created in these committees. When the subcommittee on agriculture is held, I, as a member of the committee, am not invited, and I don’t receive the materials because this is a subcommittee and I am a member of the full committee, so I’m not supposed to be there. State agencies’ representatives prevail in the committees, the status of the committee’s decisions is not clear and business is represented sporadically, not representatively. In general, it is good that business community representatives have a platform for discussion of industry issues with the EEC, but advisory committees should not be considered as an institution that fully takes into account the interests of the business of the three countries.

The second tool is public discussion of technical regulations. The technical regulations shall be posted on the EEC website 60 days prior to adoption. As a result, the practice is as follows: a version of technical regulations is posted and offered for public discussion, however, this version is also being finalised. The EEC department coordinates it and holds other procedures, and after some time the regulation takes a completely different look. But publicly the old version is discussed and is still online. All proposals received are summarised, not taken into account and just informatively reported as just being received.

The third tool, which is usually used by the Commission, is an advisory council for cooperation with business dialogue, with the business community of the three countries in which Atameken in the current form is presented. Within two years of its existence, only two committee meetings were held. During the first organisational board meeting, we came to an agreement, asked the commission in the first place to develop the assessment mechanism of the regulatory impact on the drafts of legal acts. Since then, this mechanism has not been developed. Thus, we have a very big gap. We have relatively efficient filters on the national legislation, but they do not exist on the supranational level.

Are there other problems in the interaction with the EEC?

First of all, it is a matter of timing with the draft documents. As the practice shows, the EEC does not fulfil even its own decisions. For example, Paragraph 10 of the EEC regulations specifies the timing needed to draft documents to the participating parties for their consideration and approval. We did the analysis in our chamber since the beginning of its operation, in October, November, December, and January. The analysis was conducted on the time of the receipt of documents that come to the National Chamber from the Ministry of Economy, from the Prime Minister’s Office, through which the draft decisions of the EEC and other regulatory acts are forwarded. As a result, the average term of execution of the document, i.e. from the receipt to the time when we need to give the consolidated position of the business community – minus two days to the Prime Minister’s office, four days to the Ministry of Economy. This is the average time in calendar days, not work days. The conclusion is that our government is under heavy pressure from the EEC. We accepted their rules of the game, the system of accelerated review of draft documents. When the public and the business community ask for the opportunity to participate in the discussion, its meaning is emasculated by unrealistic deadlines.

I would like to emphasise that there is a very important and fundamental point; based on the codified treaty in a compact version, it is needed to immediately prescribe where the boundaries of our integration are. This is conceptually a very serious aspect. That means we have to responsibly declare and prescribe that integration does not go into the sphere of fiscal policy, monetary policy, security, education, science, etc.

As far as I understand, it was specified and this has been repeatedly mentioned, including by the heads of states?

That’s right. But in practice, we see constant attempts by the EEC to expand its sphere. In general, we see a completely unambiguous tendency for us that the EEC, on the understandable rules of bureaucracy, strives to expand its area of influence. Through regulations of regulatory acts of various levels, the commission is trying to take credit for additional powers.

Competition and industry are given. Let’s take competition. The EEC wants to have supranational control. It will be a supranational body of control to protect competition in cross-border markets. Penalties that will be imposed on entrepreneurs who will violate the norms prescribed in the annex section “Competitive policy on cross-border markets” are calculated in roubles. They are disproportionately high, and they were also set by the EEC. In terms of transport, if you are a major consignor, in order to get a reduction factor in some direction you should turn to the EEC.

That means the Commission is working in strict accordance with the known Parkinson’s laws.

Within the CU and the SES, two spheres were unequivocally passed to the Commission: the customs and tariff regulation and technical regulation. For both areas we can unequivocally state that we received much worse quality of regulation than we had in Kazakhstan. And no major improvements are happening. If we are talking about customs regulations, we have repeatedly cited an example that Kazakhstan from year to year in the ranking of Doing Business on the component ‘international trade’ impairs its positions. We are now three slots from the bottom in the world, from among 189 countries, we are 186th. The President clearly stated that the unrestrained expansion of supranational technical regulation is contrary to the objectives of improving the business climate in Kazakhstan.

Summing up, we gave two spheres to the supranational level and got a very poor quality regulation and no prospect of improvement. So we need to hold back within integration, to be very conservative, to give to a supranational jurisdiction only those areas that are objectively necessary and that will ensure implementation of four freedoms of movement: goods, services, assets and labour force. All other areas should be left to the national jurisdiction because our national legislature and the government are much more flexible and much more progressive than the Eurasian.

Much has been said about new members joining the EEC. Recently, in addition to Armenia and Kyrgyzstan, they started talking about Turkey. How can the EEU be made really attractive?

If we take the European Union, why do the countries strive to become its members? Because there they get access to better institutions and better regulation, as well as rule of law and low level of corruption. Therefore, the only reliable way to make Eurasian integration attractive, is to dramatically and fundamentally improve the quality of supranational regulation, make it very comfortable for business, investment and entrepreneurial activity, and really take into account the national economic interests of the parties in decision making.

Is the problem in unskilled personnel working in the EEC or in the wrong representation of the participating countries in it?

The basic problem is the speed of integration. If I said before that the speed of integration exceeds the adaptive capacity of integration entities to these rules of the game, now I am convinced that the speed of integration exceeds the cognitive abilities of an average person. In the terms that they set, it is impossible to read, understand and track changes being made. We are all in the process of some strange race. The race goes from day to day.

Terms shall not be converted into a fetish. I want to reiterate that the business community in Kazakhstan is interested in economic integration, in an economic union. It’s enough to just look at a map. Russia is the largest country in the world, an enormous open area, a big market. We are very interested in it. And we are really lucky to be involved in this area and have an opportunity to have our own sovereign national regulation.

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