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Interview by the Chairman of the EEC Board Victor Khristenko to Vedomosti Newspaper: “The efficiency of integration within the Customs Union determines the attitude of other states to integration within the CES”

Interview by the Chairman of the EEC Board Victor Khristenko to Vedomosti Newspaper: “The efficiency of integration within the Customs Union determines the attitude of other states to integration within the CES”

12/19/2012

- What do you feel about the role of an international official? Don’t you miss your previous job?

- Moving from one job to another, I have never suffered from “phantom-limb” pains. I do my job only if it is exciting, if there is a real challenge, and I am really satisfied with my new job and this complicated project, into which I plunged.

- How did they manage to get you interested?

- Two things got me interested. Firstly, the topic is close to me. I have been dealing with integration on various positions since 1999. Secondly, it’s the unique nature of the project. For us, it is the first and unparalleled case, when a supranational body is set up, with a considerable portion of national competencies delegated to it. Many decisions, previously made by the national governments, now should be taken by the Commission and then should be enforced by the national authorities. Such structure breaks the existing administration schemes in the three states. The probability of conflicts is high, because no bureaucratic machine is willing to lose its powers. And we have tough deadlines: the Agreement on the Eurasian Economic Council shall enter into force on January 1, 2015. It’s a great challenge.

- Do the national governments resist integration? Are there any conflicts?

- There have been no conflicts so far, but we do feel resistance.​

- Give an example, please.

- We signed an agreement on services as part of the basic package. It should be admitted that it has many exceptions, about 80. These are a kind of compromise, because we wished to move forward with our agreement on the Common Economic Space (CES). And now the question arose again: let’s come back to this list. What do you think happened? The states submitted about one hundred proposals for new exceptions.

- Do the national governments try to recover the powers that have been delegated? 

- It would be strange, if they don’t. I think it’s a natural process.​

- How many exceptions in that list were requested by Russia?

- You may laugh, but none. Although I know that initially certain industries did request some. However, the government of Russia through its competent authority, the Ministry of Economic Development, replied that Russia would not request any exceptions and thought that none should be allowed. To tell the truth, I was happy to see such reply. Exceptions are similar to a cancer cell: if neglected, it grows and kills everything.

- What do you do with all newly requested exceptions?

- We’re still discussing them (laughing).

- The three Customs Union (CU) member-states are totally different, all having their own peculiarities that sometimes seem to be incommensurable. Is it easier with Kazakhstan than with Belarus?

- We are really different. Sometimes we have opposite views on some things, and we have different experience. However, all this makes more excising the challenge of transitioning to a common legal framework, which will enable us to realize the four freedoms – free movement of goods, services, capital and labour.

- The Commission has been functioning for almost one year. Do you have anything to boast? From the outside, it seems that red tape is all you do.

- We had a lot of organizational issues, indeed; and you may call it red tape. It’s impossible to do without it. We had our first working day on February 2, and nine people worked then. That was our staff. We held the first meeting and made our first decisions. Since then, our organization has evolved: we have 675 people, and next year our headcount will exceed 1,000. You see it’s a rather huge organization. Over this period, we held 36 meetings of the Board, made approximately 300 decisions, most of which have a direct action. There were decisions that suspended those made by the national governments. I think the machine is working and the mechanism was launched. This applies to tariff and non-tariff policy, customs administration, protection of the common domestic market, and technical regulation. First of all, this means free movement of goods, since the other freedoms, such as free movement of services, capital and labour, are still under development. This year, 17 new CES-related agreements became effective on January 1.

- They have too general wording.

- These are framework agreements. These 17 agreements should evolve into 52 regulations that will become instruments having a direct action. These also include a number of international agreements. A large package of instruments, more than 10, deals with competition. They cover everything from the concept of cross border markets to application handling and investigation methods. A model law on competition will be adopted by July 1, 2013.

- Does it mean that the Commission will become an antitrust committee?

- An international antitrust committee that will investigate all situations connected with cross border markets. We will monitor all violations committed on the territory of at least two states, not one. It is important in terms of both subject and consequences. Significant and loud cases will be addressed. This field is very sensitive.

- When will you finalize the antitrust package?

- It shall become fully effective by July 1 next year. I hope that a decision on cross border markets will be made at the presidential summit to be held in December.​

- Will national antitrust services become smaller after the EEC engages in antitrust activities?

- As regards staff, the national governments should decide. They may transfer redundant staff to other areas. I don’t know. However, you should also understand that the people we employ at the EEC are not recruited in the streets. Many people come to us from ministries and agencies, including Russian ones. For example, we assumed the competence to conduct investigation and take measures to protect the domestic market. Until now, that was a national competence exercised by the national ministries. We assumed it with the core staff.

- Regulation of flow of goods is more or less clear, but what is the situation with regulation of services?

- It is a difficult area. Nonetheless, we should address it: if we look at GDP of the three states, we will see that services account for approximately 56%. The range of services is huge – from transportation to financial services.

- The services sector is very important for business. We can hardly speak of a common economic space until it is harmonized.

- The services sector is not only important, but is also very sensitive, with each particular sector having a unique structure. It can not be built horizontally, as in the case of competition. Banking services are one thing, and transportation services are another thing. So, negotiations to harmonize the services sector are expected to be difficult. The result is more likely to be visible beyond 2015-2017. By that time, harmonization of the legal frameworks will achieve a degree, when a license issued in one state will be sufficient to provide the licensed services in any of the three states.


- On what other agreements are you working?

- These include transport, energy, natural monopolies, macroeconomics, and monetary policy. All agreements have a different depth perspective. Competition requires a common policy, so that the market feels like a common market. Possibly, we will end up with a competition code. In the field of macroeconomics and monetary policy, we will achieve a harmonized policy, but clearly there will be no common rules for everyone.

- Do you mean we are not aiming at a common currency?

- There is no such goal at the moment. We are occupied with establishing the CES. Much work needs to be done: 17 framework agreements need to be evolved into 52 instruments that should be supported with implementing regulations. Then we will move forward. The CES with its supranational regulatory competence is the second alliance in the world to have such depth. No one, except for us and the European Union, has gone so far. The EU set up a monetary union only after a part of their member-states were ready for that. Maybe, the CES member-states will also reach that point sometime. If the heads of states decide that we should move towards that, then we will. Currently, we are not ready to launch a monetary union. I think we should move step by step. We will complete the Eurasian Economic Union by 2015, will function for several years, and probably then we will set the next goal. We should study the European experience. We need to see how the EU monetary union survives the financial crisis. I am not a eurosceptic, but it is already clear that, working on integration, more attention should be paid to its depth rather than breadth. The EU expanded when global economy grew. It seems to me at that very moment they lost depth, they missed things connected with the financial sector, including bank regulation, macroeconomics, and fiscal policy. It is only now that the EU decided to harmonize banking supervision. It is a considerable step for deepening integration. It’s a sound decision.

- Will the Customs Union deepen only, but not expand, being guided by the EU experience?

- Depth is similar to roots. No leaves will grow without them. A blow of wind will crush the tree! Large-scale expansion of the union requires a considerable depth of integration.

- What about other countries? The President of Russia Vladimir Putin, for example, said that Ukraine could join the union. Other countries may also want to join.

- It’s better to live, as people say now, in 3D: depth, width and height. Of course, staying closed during development would not be correct, and we need to be ready to accept new partners. At present, we have only one official application filed by Kirghizia. A working group was set up, and an activity plan was prepared and approved. It’s an unconventional plan: we need to evaluate not only opportunities and risks for Kirghizia and the CU member-states, but also assess the country’s legal framework and commitments to the WTO. Kirghizia joined the WTO long ago, and its accession conditions differ from those of Russia. We will finalize a roadmap for Kirghizia’s accession to the CU by next November.

-What about Ukraine?

- We are processing only one accession application. All the rest originates from mass media and domestic policy of the states concerned. Ukraine, as we see, is living inside a discussion what alliance to join – the EU or the CU.

- Can it join both?

- Probably, it would be the best alternative. However, it is impossible to be a member of two customs unions at the same time. It is similar to polygamy (laughing).

- Yes, it’s not customary for the Slavs.

- Open polygamy at least (laughing). However, seriously speaking, there various expert forecasts about the consequences of this or that decision made by Ukraine. No one can and should do it, but for Ukraine itself. Ukraine is an observer state in EurAsEC. Ukraine is among the CU’s trade partners. We have signed two memoranda of cooperation in the field of trade and technical regulation with the Ukrainian government. These are dialogue platforms, i.e. in case of any problems in the trade relations with Ukraine, such as signs of dumping or any other incorrect behaviour in the market, we will start consultations before using force.

- Are there any other states willing to join the CU?

- Recently, we have agreed with the government of Armenia to prepare memoranda similar to the Ukrainian ones. I believe that the progress with Armenia can be even faster than with Ukraine.

- Aren’t you confused by the fact that the CU has no common border with Armenia?

- Many people think it’s an insurmountable obstacle. However, I think it’s not. The Russian Federation has an exclave territory - Kaliningrad Region. Modern communication technologies allow the CU to have an exclave, as well. Certainly, Armenia has very sensitive infrastructure-related limitations: it has only one transport corridors leading to the CU, which passes through Georgia. Nevertheless, Armenia has articulated its strategic interest, which reduces to the fact that it’s a Eurasian country. We should loot at all interesting formats. In general, the world is changing, and we may find new models for cooperation, which have never existed before.

- What are you hinting at?

- I am only hinting so far (laughing). We will wait and see.

- Do you mean that you could invite not only former Soviet states, but also other, more remote neighbours to join the CU?

- Please don’t say “invite”. We are not organizing a party, where we invite all those who are willing to come. First, we should address our challenges. Our future, as well as the desire of other states to join us will depend on how effectively we will manage to build our trilateral integration. We will be of interest for others only provided that we show positive dynamics and create a new growth driver that will provide a larger market. By the way, this year we saw that the growth rates of mutual trade between the CU member-states are two times higher than those of foreign trade. Economic growth starts to be driven by domestic market expansion. That’s the first effect from the CU. Please note that it happens against the background of Russia’s accession to the WTO, when markets became open. Besides, the structure of mutual trade between the CU member-states is much healthier than that of foreign trade. While in the first case, products of the fuel and energy sector account for 37% only, in the second case their share is incredible 74%. This year, mutual trade between the CU member-states grew by approximately 10%, with foreign trade up by 4.7%. Nevertheless, our ultimate task is winning foreign markets in addition to developing our own one.

- There is an opinion that Russia loses from its membership in the CU. Doing business, for example, is much more convenient and easier in Kazakhstan, and taxes are lower there.

- Tax rates differ even in the EU. I don’t say it is good, but it is really so. Look at the most recent example with France: they raised personal income tax rates, and many tax payers moved to the neighboring countries. This, however, was an informed decision of the French authorities, and it would be funny to criticize Belgium, where many tax payers register now.

- May it happen that by opening the borders Russia started to compete with its partners? Do Russian companies move to Kazakhstan?

- I don’t have an exact answer to this question. However, in the World Bank Doing Business rating, Russia ranks 112th, Belarus is 58th and Kazakhstan is 49th. We can compare statistics of new enterprises against this rating. In terms of new enterprises, Kazakhstan demonstrates better dynamics than the other CU member-states. So, think about it. The jurisdictions compete, and it’s excellent. It encourages everyone to adopt best administrative practices.

- Year after year, Russia raises excises on tobacco and alcohol, while those in Belarus and Kazakhstan are lower. Don’t you think that such a difference makes any higher excises in Russia senseless?

- All states have different approaches to excises: while some think it’s a fiscal instrument, others ascribe additional meaning to it, such as an anti-smoking effect. However, a harmonized excising policy should be adopted. Alcohol and tobacco markets are obviously outside the common market and are regulated by the national governments. It is a barrier to development. Here are some more painful examples of exceptions: medicines and medicinal products. As regards these, we have already drafted agreements that should create common markets of medicines and medicinal products. We are willing to harmonize the regulations for circulation of such products so that everyone could be guided by them and develop their industries. The same is true for alcohol. Currently, the CU member-states are discussing options to align excises. An instrument drafted by our Commission proposes that the states should harmonize their excise rates, but certain differentiation is allowed. This option being negotiated at the moment, but I don’t know when an agreement will be reached.

- Was it proposed that Belarus and Kazakhstan increase their excise rates to the Russian levels?

- The thing is that excise rates shall be increased gradually. Excises on alcohol and tobacco influence not only budget revenues, but nation’s health as well. I believe it should be approached in this way.

- Maybe, Kazakhstan doesn’t need to raise their excise rates, since they consume less alcohol than Russian people...

- Sure, this factor should also be considered. But alcohol and tobacco affect nation’s health and life expectancy. We must not disregard this. So, the only way for the CU member-states is harmonizing the tax component.

- A common electricity market of the CU members – is it a pipe dream? Russia is unable to put in order its own market… So, it would be better not even to try...

- That’s true. However, frankly speaking, I would say that the CES will be incomplete without a harmonized electricity market or a common transport policy. Such exceptions will become an obstacle and even a burden for business. It affects not only residents, but also entities from other countries. For example, a businessman comes to a CU member-state and suddenly finds out that he is engaged in cross-subsidies – he compensates the costs of other consumers. It’s terrible. It should be admitted that we are very far from tackling this issue, although technically, all the CU member-states used to belong to one energy system. So, I think that from technical point of view the states are ready. However, in terms of operation of market structures and regulations we have three unique stories that differ considerably. Nonetheless, I am convinced that we can and must move towards a common electricity market and common rules. Otherwise, sooner or later this segment will hamper the development of other sectors.

- Is the Commission engaged with uniting the electricity market?

- We assumed such task. We are launching such study. It will require a year or two. Intermediate results will be presented to the heads of governments and states to receive approval for further steps in this direction. Currently, we are drafting conceptual documents that would confirm that uniting the electricity markets is possible and reasonable. Speaking about a common electricity market, we don’t mean that, for example, one grid company should be created. This in no way means that one entity will acquire another one. The thing is that the rules governing the operation of these complex markets shall be common. An investor should feel the same in any CU member-state. The same is true for transport services.

- Do you mean launching a common transportation space?

- Yes. We don’t need any artificial barriers. We decided to launch the CES, so transport routes, including air, railway and road corridors, should be logical and harmonized. The Commission is drafting a concept of harmonized transport policy. Recently, our Minister Danial Akhmetov discussed this topic, including drafting of single Eurasian sky package, with the ministers of transport from the three states.

- Recently, the President said that a court of arbitration should be established for the CU member-states. Will this be addressed also by the Commission?

- We shall finalize the Agreement on the Eurasian Economic Space by 2015. This huge document will cover many things: codified CU and CES framework. It should also cover the renewed institutions of the Eurasian Economic Union. Our Commission is an executive body, but it will also cover parliaments and courts. There is a EurAsEC court that in most cases judges us, because its primary function is to hear disputes between the governments and economic agents on the one side, and the CU executive bodies, on the other side. A court of arbitration will be able to resolve other disputes. Its existence will be one more guarantee for the investor.​

 
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