Page 25 - bne IntelliNews newspaper 14 July 2017

Opinion
July 14, 2017 www.intellinews.com I Page 25
to its staff to get a sense of the ambition of the organisation. Its previous incarnations have been almost insulting to Russia’s partners in terms of their lack of resources and attention. The EEU is getting too many resources for it to be a sop.
The other implication of this motivation for the creation of the EEU is that its success needs to be judged on a longer-term basis. The key per- formance indicator for the EEU is not trade flows in the short term, but the degree to which it gets Russia a seat at the table of the OBOR.
Even so, the EEU is achieving its short-term goals on the trade front. Some American commenta- tors have pointed to the fall in trade between EEU members in the year following its creation. This would have got them thrown out of my first-year economics class at Cambridge. The fact is that all trade flows in the region fell in that year, because of the recession in Russia that was induced by sanctions and the fall in the oil price. The share of EEU trade in the overall trade of the EEU mem- bers actually rose slightly that year, which is about all that can be expected.
At the same time, a little reflection on the economic reality would recall that the trade flows between these countries are dominated by energy, and it takes more than a year or so to change these flows. Pipelines create rigidities in many ways, which brings us back to Russia’s role in OBOR. It should not be forgotten that the EEU members are devel- oping countries, and as they develop, they may well trade less with their neighbours as they integrate themselves better into the global division of labour.
The other point that critics of the China-Russia land route make is that it costs about $500 to send a ton of goods from China to Europe by sea, and it costs about $1,500 to send it by rail through Russia. This is actually out-dated, as the fall in the price of fuel and the weakness of the ruble mean that it costs about the same to send a con- tainer by land as it does by sea. But the maximum possible container throughput is at best a tenth that of what can be done by sea, so the land route
via Russia will never replace container traffic.
The land route will likely be limited to goods with shorter lives, like clothes, where modern retailers now order for as many as thirteen different seasons, and expect a much quicker turnaround. These goods cannot spend a month at sea, and clients need to get them faster. This brings China into the European fashion supply chain and allows them to compete with Southern European manufacturers. No one
is expecting all Chinese goods to reach Europe by train, but large sub-categories will.
This means that companies need to include the EEU in their long-term calculations. It is explicitly modelled on the EU, but its second mover advan- tage enables it to avoid the pitfalls. There will be no single currency, because the member countries look even less like an ideal currency area than those in the Eurozone. The focus will be on harmonising laws to allow the free movement of goods. This is likely to cause friction with contradicting laws at the EEU and local levels, which will not be made easier by the fact that the courts in these countries are not as independent as one would like. That said, the civil courts are much more willing to rule against the government than criminal courts are.
Immigration is unlikely to be a political issue in Russia, because it desperately needs the extra workers, until 2030 at least. Oddly enough, the main issue about freedom of movement may be that some member countries will object to too many of their workers leaving for Russia. However the macroeconomic benefits of remittances will outweigh this uncomfortable fact.
The EEU has the potential to do tremendous good because it can force countries to accept legislation that would otherwise be squashed by entrenched bureaucracies. The problem in all
of them, and in Russia in particular, is whether these bureaucracies can learn to obey their laws, which will in many cases be written outside local government. But that has been the central ques- tion of reform in the entire post-Soviet space, and the EEU alone cannot solve it.