Russia-led bloc set to expand borders

Today, a train car loaded with coal in Kazakhstan can rumble thousands of kilometres across the Eurasian steppes to a factory in Belarus, all without once clearing customs.

Citizens of three former Soviet countries - Belarus, Russia and Kazakhstan - can work legally on the territory of one another's countries.

And in a skyscraper in Moscow, hundreds of officials at a new international organization have quietly taken over trade policy for these three governments.

After years of fits and starts, a Russian-backed idea to form a free-trade zone on the territory of much of the former Soviet Union is closer to fruition than ever before.

Adding to the momentum was the decision last week by the Ukrainian government to hold talks on aligning with this group, called the Customs Union, rather than with the European Union. Two other former Soviet states, Kyrgyzstan and Armenia, have also committed to joining this group, a sort of Eurasian version of the North American Free Trade Agreement, or NAFTA.

"The main Russian point here is to formalise a zone in which Russia has preferential economic interests and privileges," says Alexander Kliment, a Russian analyst at Eurasia Group in Washington. "Russia has informally been trying to do that for the past 10 years. But the Kremlin wants a formal structure."

Now, it has that structure. The decision by Ukrainian President Viktor Yanukovych to halt talks with the EU and turn instead to the Customs Union seems a pivotal moment. It also touched off protests in Kiev, illustrating how the choice was also about more than trade: the EU deal was also supposed to help democratise former Soviet states and spread Western values.

Lost in the broader tug-of-war between east and west were the workaday advantages that the Russian-supported trade bloc is increasingly able to provide as more countries join.

The bloc's larger population means companies that invest within the region, such as Ford, which builds cars in Russia, have more potential consumers without crossing a customs barrier.

Russia offers lower energy tariffs to members. Sergey Glazyev, an economic adviser to Russian President Vladimir Putin, has said Ukraine will save $US9 billion ($9.9 billion) yearly on energy.

As measured by gross domestic product, the Customs Union in its three-member format of Russia, Belarus and Kazakhstan still appears tiny beside the European Union. The output of the Customs Union states was $US2.3 trillion last year, compared with $US16.6 trillion for the EU, according to the International Monetary Fund. Ukraine's economic output of $US176 billion last year would only modestly bolster the Russian bloc.

But bulking up with Ukraine's 46 million consumers would narrow the population gap with the EU. A Customs Union that included Ukraine would have a total population of about 215 million people, compared with the total population of the 28 nations in the EU of about 507 million.

Other potential members of the Customs Union in Central Asia and the south Caucasus, poor nations all, add less in economic output than population. Adding Armenia, Kyrgyzstan and Tajikistan, which has also expressed interest in joining, would contribute a combined additional $US26 billion in GDP and 16.6 million people.

Circling the wagons in the former Soviet space has disadvantages as well. Borrowing rates for businesses are high in Russia, sometimes above 10 per cent, and countries that join the union join also the Kremlin's high-risk, high-interest-rate world, rather than having access to the lower rates associated with better governance in the European Union.

Arkady Moshes, an analyst at the Finnish Institute of International Affairs, noted that some consumer prices rose in Kazakhstan as more expensive products from Russia and Belarus supplanted cheaper items from China, something Ukraine might expect if it joined.

The Customs Union took effect at the start of 2010 and most barriers went down by July 2011. A second stage of integration called the Single Economic Space followed on January 1, 2012. In 2015, it and the Customs Union will be formally combined and renamed the Eurasian Economic Union.

The headquarters, called the Eurasian Commission, employs about 800 people. Already the commission negotiates on trade matters involving this group, instead of the Russian government.

Like NAFTA, the Customs Union frees the movement of products across borders. But it goes a step further, by also allowing mostly free movement of labour. It is less tightly woven than the EU, having no transnational political power or common currency.

Tatyana Valovaya, one of the nine governors on the board of the Customs Union, describes the group in terms of the many new trade and economic blocs taking form these days, such as the US-backed trans-Atlantic and trans-Pacific free trade areas.

The post-Cold War ideal of homogeneous global trade under the umbrella of the World Trade Organisation is breaking down, she says. The institutions that govern trade are weighted to favour developed countries, where these institutions got their start.

"The market is global but there is no global regulation," Valovaya says.

The response has been a rush to recruit nations into regional trade blocs. It is a rivalry recalling the Cold War, but these new trade groups are mostly creedless structures, able to espouse little if any distinguishing ideology.