Eurasian integration: Caught between Russia and China

Essay



European policymakers worry about Russian and Chinese integration efforts, which push them to think more strategically about the Eurasian landmass

In recent years Russia and China have both embarked on ambitious projects to integrate the Eurasian landmass. Russia has established the Eurasian Economic Union (EEU) in hopes of creating a Russian-dominated geopolitical bloc. In a very different approach, China has promoted the “One Belt, One Road” (OBOR, or New Silk Road) initiative that aims to use Chinese financial power to physically and economically integrate Eurasia, with China at its core. The two initiatives differ greatly and even clash in many respects, but they share one important trait: both prompt European policymakers to think more strategically about issues and territories outside their usual scope.

Europeans naturally worry about Russian efforts to integrate Eurasia at the expense of the European Union. They worry perhaps even more about the potential of Chinese economic power to overcome the attractive power of the European idea and divide the EU. The EU’s own efforts at Eurasian integration have degenerated into a grab bag of initiatives that have often confused and disappointed potential partners. For better or worse, the EU lacks the flexibility to target politically motivated investment to a single country, the way China and Russia do. EU instruments are bureaucratic and rule-bound, and the Union has often failed to align its integration efforts with its geopolitical goals.

But this weakness is also a strength. No country in Eurasia welcomes Russian or Chinese domination. The closer the neighbour, the greater its reservations about undue influence, hegemony, or security issues in these regional projects. Just as Kazakhstan is most fearful of Russian domination, so Mongolia is most wary of Chinese efforts at integration. Russia and China’s neighbours want to enhance their prosperity and safeguard their independence, even as they increase their links and dependencies with larger powers through the process of integration. Smaller countries welcome the competition between these projects as a guarantee of their independence and see the EU as a power that can help limit Russia and China and also create a standard to which Russia and China’s integration efforts can be held.

The EU cannot use the same tools as Beijing or Moscow in Eurasia, but it has important competitive advantages. The Union has unique capacities to build institutional frameworks, comprehensive cooperation agreements, and long-term relationships of trust, along with setting standards. Simply by embarking on broad, multilateral integration efforts, the Chinese and the Russians have chosen to compete on the EU’s terrain. European policymakers need not fear cooperating with these initiatives. Of course, the EEU and OBOR are intended to some extent to compete with the EU’s integration efforts. But responding to this competition with a refusal to engage would simply exclude the EU from processes it could benefit from.

Rather, the EU should respond by absorbing these projects into an inclusive order, bounding the competition with cooperation, and making the competition about what the EU does best: negotiating the nitty-gritty of complex frameworks of cooperation that are the sinews of multinational integration. Russia invades and China buys; the EU negotiates, monitors, and implements. It is an impressive form of power, even if it doesn’t make great television.

With that advantage in mind, this paper describes the Russian and Chinese projects for Eurasian integration, as well as the relationship between the two. It concludes with a strategy for how the EU should respond to these initiatives.

 

Russia’s Eurasian Economic Union

On the most fundamental level, Moscow sees Eurasia as a power base that will allow it to remain a major power. Moscow believes that the future world order will consist of macro-blocs, and that in order to have leverage over world affairs, countries will need to be affiliated to one, or better still to dominate one. That vision was evident in an article that President Vladimir Putin wrote about the EEU in 2012, which suggested that “existing regional institutions, such as the EU, NAFTA, APEC, ASEAN” might become “the integration bricks that can be used to build a more sustainable global economy”. The progress of the Trans-Pacific Partnership (TTP) and the Transatlantic Trade and Investment Partnership (TTIP) trade deals has only strengthened Russia’s macro-bloc-centric worldview. With the rise of China, it is clear that Russia also needs a strategy more focused on its Eurasian neighbours, lest they all be absorbed into a Chinese bloc.

On paper, the EEU is in many ways a copy of the EU. A substantial part of Russia's technocratic elite hopes that, over time, it might turn into something similar in reality: a truly integrationist project that benefits its neighbours as well as its members, not least the EU; and that, by multilateralising decision-making, curbs the hegemonic tendencies of Russia itself. So far, however, the EEU’s multilateralism has not worked. Now, in an increasingly xenophobic political climate, the same Russian elites – sidelined from policymaking – fear that it might never work; that the EEU could instead turn out to be a Russia-led isolationist geopolitical project, an attempt to barter security links for closer and more exclusive economic ties. The dilemma was well outlined by a young civil servant at the Eurasian Economic Commission: “We lack clarity. We still do not know whether we need to model the EEU to the face of Sergey Glazyev or Jean Monnet.”

And indeed the countries of the EEU are not really ripe for EU-style integration. The biggest economies in the group have profiles that are too similar for them to benefit from integration. EEU members trade less among themselves than with outside partners, and in recent years the slump in oil prices and the slowdown of Russia’s economy have caused internal trade to decline still further. Cooperation with China’s OBOR project could add a significant transit aspect to the EEU: after all, goods could move from China to Europe via the EEU, passing just two customs checks. But in order to gain real value from integration, the EEU economies would need to modernise and diversify. This is not something that transit corridors would automatically bring about.

Moscow still hopes the EEU could become a Russia-dominated integrationist bloc that, even if it cannot compete with big Western-led blocs such as TTIP, will still be able to guarantee Russia a sufficient degree of leverage and autonomy. Moscow’s direct aim is to ensure its political foothold in Central Asia. There is hope that China’s rise will be a help here: the smaller countries in the region will not want to find themselves in the “sphere of influence” of one dominant power; their instinct will always be to find other powers for balance. China’s rise as an economic power will make the smaller countries more relaxed about Moscow’s presence as a political and military power – indeed, they might even welcome it. In addition, by virtue of the Soviet past, Russia has considerable soft power in the region. Moscow’s hope is that China, reluctant to assume the responsibilities of a security provider, will find the arrangement mutually beneficial.

Economically minded thinkers in Moscow criticise this arrangement for reducing Russia to a mere “security firm” guarding China’s economic expansion. The Kremlin – which has a strong tradition of valuing hard power over soft and economic power – is not disturbed. Neither is Beijing, which, at least for the time being, has no rival ambitions here.

However, it remains unclear to what extent Moscow is really willing or capable of dealing with the obvious regional security problems that are looming on the horizon. For the time being, it is largely unclear how Russia would approach its self-proclaimed role as security provider, and even whether it would prefer to act unilaterally or through bodies such as Collective Security Treaty Organization (CSTO or the Tashkent Treaty) or the Shanghai Cooperation Organization (SCO).

 

China’s One Belt, One Road initiative

The One Belt, One Road (OBOR) initiative, or New Silk Road, was first announced by President Xi Jinping during a visit to Astana in 2013. More than two years later, the concept, scope, and nature of the initiative are still fluid, and OBOR is likely to evolve over time. It is therefore not surprising that most people in China know little about the specifics of the project. Within China, the initiative is being implemented top-down by the State Council and the ministries (Commerce, Foreign Affairs, and the National Development and Reform Commission) via local governments and state-owned enterprises (such as the China State Construction Engineering Corporation, China Communications Construction Company, and China CAMC Engineering Co.), and some of the few private businesses (such as the Sany Group), with input from academic and social institutions (such as universities and think-tanks). Silk Road research centres and working groups, companies, and banks are in the process of studying the risks, the feasibility, and the implementation of OBOR.

China’s OBOR initiative has very broad geographical coverage, including institutions such as the Asian Investment Infrastructure Bank (AIIB) that could stretch as far as Egypt – the external boundary of “West Asia” in Chinese parlance. The finance involved is potentially enormous. China has set up a Silk Road Fund of $40 billion, aimed at promoting private investment along OBOR. Official foreign exchange reserves, the China Investment Corporation, the Export-Import Bank of China, and the China Development Bank all sponsor the fund. The China Development Bank is said to be investing over $890 billion into more than 900 projects involving 60 countries as part of its efforts to bolster the initiative. The Economist reported that China intends to spend $1 trillion in “government money” on OBOR.1

But, as often with China, the headline figures are misleading. The initiative’s capacity to absorb projects is in doubt, and paid-in capital is much lower than authorised capital.

On the other hand, doubts about China’s investment capacity arising from its economic downturn are largely unfounded: China’s mammoth trade surplus (now 6 percent of GDP) and the structural need to diversify, ensure that there is plenty of money available. China’s OBOR-related funds will be able to finance, year after year, as much as the World Bank and Asian Development Bank (ADB) combined, in the range of $20 billion per year.

China’s key problems are the ability to supervise lending and to limit risks. Working through some institutions, like the BRICS-founded New Development Bank (NDB), requires the approval of the other emerging economies that are its co-funders. In its early stages, the OBOR scheme is a web of connections rather than a single highway. However, a variety of geopolitical issues in the wider region considerably narrow the choices for where these web connections can reach.

The motive for OBOR is found in the context of its economic and, as Chinese experts such as Wang Jisi see it, strategic purpose of pushing China’s state apparatus to look beyond the rivalry with the United States in East Asia. The initiative is a means for China to invest its global foreign exchange reserves, to continue to grow and export its increasing excess capacity in the construction industries, in a context of slower growth at home and slower domestic investment. We were told in China that “The Silk Road is China’s soft power now”.

According to Chinese estimates, the number of middle-class consumers in the regions serviced by the Silk Road will reach three billion by 2050, and the Silk Road will create $2.5 trillion in trade among the 65 countries and involve over four billion people. But there is a long way to go: of the 65 countries included in OBOR, China had signed the relevant memorandums of understanding on OBOR with just nine, as of August 2015.2

Between January and July 2015, Chinese firms had already invested $8.6 billion in 48 countries along the Silk Road. China accounts for, on average, 13.8 percent of imports and 8.9 percent of exports of the countries along OBOR.3 China accounts for more than 10 percent of total trade in 29 of them, and of more than 20 percent in a further 13. According to the International Monetary Fund (IMF), trade between China and the CCA (Caucasus and Central Asia), for example, has increased tenfold from $5 billion in 2005 to almost $50 billion in 2014.4 Over the years, China has the capacity to invest up to $35 billion more in the CCA region.

There is also likely a geopolitical component to OBOR. China may be intending to use the initiative to expand into areas of the world where the US is weaker than it is in East Asia. It may also seek to attract some traditional US partners into its sphere of influence, and to gain political and strategic influence in Russian-dominated regions. China denies these geopolitical goals, but the New Silk Road does allow China to bypass Russia economically, politically, and geographically, as there are several alternative corridors to a Russia-dependent route. For example, an alternative route that skirts Russia starts in Xinjiang province and passes through Kazakhstan, Azerbaijan, and Georgia, across the Caspian into Turkey. The recent tensions between Russia and Turkey, as well as the longer-standing difficulties between Turkey and the EU, suggest that Turkey will welcome Chinese interest in providing it with alternative sources of investment and trade.

 

Russia and China: Integrating Eurasia together?

At first glance, the EEU and the OBOR initiative look completely different. The first is a typical Russian undertaking, focused on maintaining economic and political control. It has only two European participants so far (Belarus and Armenia, neither of which are EU members) and two Central Asian states (Kazakhstan and Kyrgyzstan). The second is a broad initiative that officially covers 65 countries, and, with a typical Chinese approach, mixes the pull of trade ties with public diplomacy.

The two countries are very differently placed. Russia is receding in importance as an economic partner to the countries in the post-Soviet space – which largely coincides with the part of Eurasia that is outside the EU – but it is still a significant military power, with demonstrated and probably growing ability and will to use force abroad. China has become by far the biggest economic partner of the countries in Eurasia, but the bulk of its huge military drive over the past 30 years has been invested in maritime capabilities. It is a very reluctant security actor – except on the murky issue of anti-terrorist cooperation within the Shanghai Cooperation Organization (SCO). Members of the SCO have agreed to prepare joint military anti-terrorist exercises (“Peace Mission-2016”) on a bi-annual basis, and since December 2015 have engaged with China’s initiative to sign a new anti-extremism treaty within the SCO framework.

For a long time, Moscow viewed China’s presence in Eurasia, including its OBOR initiative, with suspicion, considering Beijing as a geopolitical competitor. This changed when Russia became alienated from the West after the Ukraine crisis. The Xi–Putin summit in May 2015 effectively announced Moscow’s U-turn, and it agreed to view the OBOR and the EEU as complementary, rather than competing structures.

Moscow has three key aims related to the OBOR initiative. First, it hopes that China’s agreement to recognise the EEU and to consider the union as its main interlocutor on OBOR-related matters will be the first step towards gaining greater international legitimacy for the EEU; and will give Moscow access to and a say over China’s hitherto bilateral relationships with the Central Asian EEU members.

Second, Moscow hopes that its acceptance – though late and grudging – of China as the inevitable future economic hegemon of Central Asia will make it easier for Moscow to stay in the region as a political power and security provider. Many smaller Central Asian countries would happily accept this, as they do not want to be under China’s monopolistic influence; also, for the time being, Beijing does not have rival security ambitions in the region.

Third, Russia needs China as a source of investment because European money is blocked by sanctions and counter-sanctions. Here, Moscow has made another U-turn. It previously refused to give China access to its raw materials, but it now welcomes Chinese investment, even in sectors previously considered “strategic” and hence off-limits to Beijing. However, so far China’s cash has not been as abundant as Moscow had hoped, and China is making use of the difficulties faced by Moscow to get bargains. At the same time, China has taken over some projects that were initiated with European capital in mind, but which hit a wall because of sanctions.

China is certainly skilled at giving Russia the symbolic respect that it craves. Beijing’s agreement to “recognise” the EEU is exactly the right sort of gesture. However, on many occasions such symbolism is paltry compensation for the changes in the real balance of power, which are not in Moscow’s favour. For now, Moscow is happy to trade real leverage for symbolic respect, but this may not last forever. Moreover, the risk of China reverting to bilateral relationships with Central Asian countries remains strong. This is rooted not so much in Beijing’s normal style of diplomacy (overwhelmingly bilateral) as in Moscow’s inability to make the EEU work as a truly multilateral organisation.

Even though Xi and Putin decided that the EEU should be China’s interlocutor for conversations on integration, Russia’s bureaucracy did not adapt. The follow-up to Xi’s May 2015 visit to Moscow was handled by the China department of Russia’s Ministry of Foreign Affairs – which does not communicate with the department that handles the EEU. Many months were lost, until “non-papers”, i.e. non-official documents written by state-affiliated experts, alerted the Kremlin. The EEU Astana summit issued a directive to the Eurasian Economic Commission to coordinate the Union’s communication with OBOR. But that was only in October.

Even more importantly, the EEU and OBOR clash as economic projects in some ways. While OBOR is partly about dealing with China’s over-capacity by investing it abroad – which is, by and large, fine with Russia – it is also about trade; and here a clash is looming. The EEU, with its high external tariffs, is designed to stimulate internal, not external, trade. While China has agreed to push back any free trade agreements with the EEU into a distant future, Moscow is still nervous that cheap Chinese goods might invade its markets through porous Central Asian borders and thereby jeopardise the prospects for developing the EEU’s internal production capacities, which are already fragile due to corruption and the lack of rule of law.

Corruption is also a good example of one of the many problems that can manifest on a practical level. Even though China does not aspire to set formal rules in the OBOR area, it has its own ways of working, which may not be compatible with Russia’s. For example, in Russia, corruption is the basis of the political system, the motor behind social mobility. While corruption is certainly not alien to China, it may be reluctant to accept the peculiarities and extent of Russian corruption. Aside from natural resources, Silk Road-style transit projects are the main area where public resources are invested in Central Asian states, and therefore are the main risk area for organised corruption.

Some liberal Russian promoters of cooperation between OBOR and the EEU even hope that, when it comes to corruption, China will have a civilising influence on Russia. This might sound far-fetched, but, should it materialise, it would probably be seen to be politically subversive by the Kremlin. On the other hand, the EEU has its own set of standards which, being copied from the EU, are often stricter than those applied by China. If Russia chooses to enforce them, this may not go down well with Beijing. And one can foresee problems when it comes to the ownership of different projects: differences over who invests in what, and who gets what share of the profit.

Russia has already had to moderate its expectations of how much it can rely on China. China has made it very clear that it is not prepared to offer Russia uncritical political support, and is wary of being dragged into other countries’ confrontations where it has no clear stake. For China, OBOR is a non-confrontational initiative, a component of its “peaceful rise”. This has forced Russia to scale down its earlier hopes of cultivating China as an ally in its struggle against what it calls “US attempts to impose a unipolar world order”.

Investments from China these have not lived up to Russia’s hopes. On a fundamental level, Beijing cannot give Moscow what it needs: access to the technology necessary to modernise its economy. Even though China is more and more advanced as a technological power, it still cannot replace Europe as a source of modernisation for Russia. And with oil prices predicted to stay low, modernisation becomes a more acute need once again.

On the more immediate issue of “emergency cash”, China’s help to Russia also remains limited. Many hoped-for investment projects have not materialised, while others have, but with a scope or price level that leaves Russia disappointed. Still, some deals can be viewed as compensation for Western sanctions. The Moscow–Kazan high-speed railway is so far the most visible example of China taking over a project that was intended to be carried out with western money. But even more interesting is the purchase by the Silk Road Fund of a 9.9 percent equity stake in Russian company Novatek’s Jamal gas project. Though not large in size, this deal is an interesting example of a means to circumvent sanctions: Novatek is under US sanctions, which means that no financial institution with exposure to the West could afford to do business with it. The Silk Road Fund, however, was prepared to.

In the end, OBOR and the EEU are neither strictly compatible nor strictly competitive. Russia and China have a certain will and interest in joining the two projects, but also distinct interests, distinct styles, and distinct capabilities that will tend to drive them apart. Again, this represents a challenge, but also an opportunity for the EU.

 

The EU’s reaction

The EU’s response to both the EEU and OBOR to date has failed to grasp this strategic opportunity. The EU has long been accused of taking a reactive rather than proactive approach towards the countries in its neighbourhood, and the further away they are geographically, the more reactive it has been. This pattern holds true in its response to the EEU and OBOR.

The EU and the EEU

Formal cooperation between the EU and the EEU is virtually non-existent. This is not for lack of vision: the idea of a common economic space between Lisbon and Vladivostok has often been articulated in the past. Even after the invasion of Ukraine, the idea of a “joint humanitarian and economic space from the Atlantic to the Pacific” is still cited, to quote European Commission President Jean-Claude Juncker at the G20 summit in Turkey. In a November letter to Putin, Juncker suggested building closer ties between the EU and the EEU to develop the relationship between Russia and Europe, though he pointed out that this remained conditional on the implementation of the Minsk peace deal, and the agreement of EU member states.

Russia has been very eager to gain legitimisation for the EEU from the EU. This has been signalled in various statements and documents, most recently in a letter to Juncker sent by Eurasian Economic Commission chairman Viktor Khristenko in September. But it remains uncertain how wide-ranging any real cooperation between the two blocs can be. Conversation is inevitably confined to trade issues, as, for the time being, the Eurasian Economic Commission’s mandate does not cover any other areas. It is also questionable to what degree progress can be made on trade issues. Before the annexation of Crimea, the EU had repeatedly offered to move bilateral trade relations with Russia to a new level, possibly with a free trade area, but Russia was unenthusiastic. In the EEU context, such a move would be further complicated by the fact that Belarus is not a member of the World Trade Organization (WTO) – a near-inevitable pre-condition for any further bilateral trade liberalisation.

The Eurasian Development Bank has suggested that in the future the EU and EEU could be bound together by a Deep and Comprehensive Free Trade Area (DCFTA) – similar to the Canada-EU Comprehensive Economic and Trade Agreement (CETA) –which includes visa-free travel and technology exchange. The aim would be to balance the perceived asymmetrical nature of the relationship, because of EU domination, that would apply if the EU and EEU were to conclude a simple FTA. This idea – though still conditional on the internal integration of the EEU, the prospects of which remain uncertain – has potential, in theory, but there are still three stumbling blocks in the way.

First, the EEU does not function as a proper customs union at the moment. Its trade relations are not handled by a single multilateral authority (i.e. the Commission) followed by all member states. The case of Russia’s “counter-sanctions” against European food products speaks volumes - Moscow did not consult its EEU partners before imposing the measures, nor did its partners feel bound by them. The EU’s trade department, DG TRADE, could not establish a contractual relationship with a body that is a customs union in name only.

Second, EU–EEU cooperation remains hostage to geopolitical differences, particularly the lack of implementation of the Minsk II ceasefire agreement on Ukraine. The sanctions against Russia are likely to be extended at least until mid-2016. The EU has made full implementation of Minsk II a condition for cooperation with both Russia and the EEU, as the EEU is largely understood as a political project of Russia to regain influence in the post-Soviet space; and trade talks in particular would work against the sanctions.

The third issue is the nature of the EEU. Many Europeans consider it to be an involuntary union, imposed for political ends. It would be difficult for the EU to lend legitimacy to the EEU without simultaneously encouraging Moscow’s instincts to forcefully expand it.

The EU and OBOR

The EU’s response to OBOR has been similarly reactive, and even more disjointed. The EU only really began assessing the initiative in 2015 – though, to be fair, China’s plans have been extremely vague. However, even on the much more concrete issue of the AIIB, the EU lacked a clear policy, and some member states joined the bank individually.

In 2013, the EU and China agreed an “EU-China 2020 Strategic Agenda for Cooperation”, which includes infrastructure, investment, and connectivity as areas of interest.5 The agenda expressed the desire on both sides to enhance security consultations on Central Asia, to negotiate a comprehensive EU-China Investment Agreement, to expand cooperation on infrastructure networks between Asia and Europe, and to explore models of infrastructure cooperation, but gave little clarity on how and when these goals should be pursued.

With the announcement of OBOR, however, some concrete steps did begin to crystallise. The EU-China Summit Joint Declaration 2015 highlights the two parties’ mutual interest in the Chinese Silk Road projects, as well as the Chinese will to support Juncker’s Investment Plan for Europe.6 The declaration introduces a range of tools to improve EU–China relations in several areas, namely the Connectivity Platform, EU-China High Level Economic and Trade Dialogue, cooperation in the AIIB, EU-China Economic and Financial Dialogue, and the possibility of an EU-China Investment Agreement. In September 2015, during the High Level Economic and Trade Dialogue,7 China announced its contribution to Juncker’s plan – the first non-EU country to do so, followed by the inauguration of a joint working group to increase cooperation in all aspects of investment, including the Silk Road Fund and the European Investment Bank (EIB).

The countries of Central and Eastern Europe (CEE), in an attempt to catch up with the rest of the EU, are leading the way in terms of working with China along the Silk Road, with a huge interest in Chinese investment. In 2011, China launched the 16+1 format to promote cooperation and exchange in a region composed of both EU member states and non-EU states. The format has been controversial, as it bypasses the EU and makes it harder to achieve a common EU policy on China. China’s engagement in CEE threatens to turn the region into a strong advocate for China within the EU, regardless of Beijing’s record on issues such as human rights and democracy.

For smaller states, though, the 16+1 offers an opportunity to tap into Chinese investment – just as Germany, France, and the UK have strong bilateral economic ties with China – even if this is through regional clusters. To date, China’s engagement in Eastern Europe has not been significant enough to change any minds. Beyond the rhetoric, China’s top EU investment destinations have been the UK, Germany, and France. China sees CEE as a testing ground for a new approach to Europe, but also as an area with less political stability and greater risks than Western Europe. The CEE countries, in turn, are excited about the potential volume of investment. Hungary was the first country in the EU to start talks with China on OBOR and signed a memorandum of understanding with China in June 2015, followed by Poland (mainly on railway projects) shortly after. Other countries may well follow suit. If this engagement aims to close the infrastructure gap between China, Eurasia, and the EU, then it will strongly serve European interests by bringing connectivity to Europe’s least interconnected region.

Overall, reactions in Europe to OBOR have been mixed. European interest, where it exists, has seemed to come from the Baltic countries, southern Europe, and central and east European countries. A common or strategic approach is distinctly lacking.

 

Recommendations: How should Europe respond?

All of the above will force Europe to consider its place in Eurasia. It is likely that both China and Russia – and the smaller post-Soviet Central Asian countries – will want to keep Europe and the US involved in the region, but each for their own distinct reasons. Europe will always have different stakes and approaches to the region than the US and cannot count on Washington to protect its interests. The EU must decide what its goals are in the region, and how it can best pursue them.

It is clear that Europe – both as a Union and as member states – can and should engage with both OBOR and the EEU, using the leverage that comes from its market, its soft power, and its expertise to mould and even absorb them. A principled abstention or opposition will simply encourage greater cooperation between two powers that in fact have much that might otherwise push them apart.

The EU has a clear interest in maintaining competition between Russia and China in Eurasia. Ukraine and the resulting Western sanctions against Russia created an intense but limited rapprochement between China and Russia – most visible in the resumption of sales of sophisticated Russian arms to China (the S-400 missile defence system, and Su-35 planes). This rapprochement poses a challenge to the EU – regardless of whether it turns out to be a win-win arrangement for the two parties. Their cooperation could affect Europe’s whole relationship with Russia: political ties, the treaty base, and trade structure. Europe – and the West in general – will still want to be in a position that allows it to set the global, universal rules of the game in both politics and economics. The Russia–China relationship, though far from a perfect match, could make that more problematic in the future.

Most of the countries covered in our research warmly welcome Chinese investment, largely because of the lack of normative strings attached, while there is an awareness of the costs of cooperation with Russia. Many of the case-study countries would prefer EU regulations and Chinese investment, without Russian interference. But despite Russia’s unpopularity, efforts to shut it out are not viable. Lately, the EU has learned from hard experience that Russia reacts in harmful ways when it feels threatened. In this case, it is clear that intense pressure on Russia will simply drive it into China’s arms as a junior partner, which from Europe’s perspective would be a bad outcome.

To maintain Russian-Chinese competition, the EU needs to carve out a space and role for itself in Eurasia. The countries of the region value access to Europe’s market and look to Europe to protect them from Russian – and to a lesser extent Chinese – control. More prosaically, the EU’s knowledge and expertise is highly valued in Central Asia, often transferred bilaterally from single EU member states, notably Germany, to single Central Asian countries. These countries understand that both the EEU and OBOR would profit from more accountable institutions, better border controls, and lower corruption levels, and that European know-how will be essential for achieving those goals. Even the most corrupt leaders in these countries, who have happily ignored the rules to enhance their power and enrich themselves, understand their value once they become the weaker parties in any negotiation. The EU should make use of that leverage.

Europe’s approach will depend on which problem it fears most: Russian political hegemony or Chinese economic hegemony. Should Europeans encourage Russia’s security role in Eurasia, particularly to counter the rise of Islamic fundamentalism and reduce Chinese influence? Or does the danger that Russia could be tempted to reunify the post-Soviet space through a sphere of influence, or direct annexation, outweigh these merits?

Regarding the economy, should Europeans encourage a regional economic pact – which, at the very least, would facilitate trade, including for third parties, in the Eurasian space? Or is Chinese economic hegemony – imposed through bilateral relations, and largely without security undertakings – a preferable option that would reduce Russia’s overall capacity for making itself a geopolitical nuisance, and force it to reconsider its relations with Europe in a more positive light? The two countries in which these questions are most acute are Uzbekistan (because of its fragile security situation) and Kazakhstan (where an economic tilt towards OBOR would provide a viable Silk Road, potentially bypassing Russia).

The stakes are also high for Europe itself, particularly when it comes to OBOR. Europe needs cheap Chinese capital to compete with other sources for large public projects, both inside and outside the EU (the Commission has been pushing Trans-European Transport Network corridors, particularly in the Balkans). China’s participation in the Juncker plan (the European Commission’s Investment Plan for Europe) and the EIB has enormous domestic implications for Europeans.

Given these competing considerations, the EU will want the flexibility to promote different levels of Russian and Chinese involvement in different countries depending on their individual circumstances. Engagement with both OBOR and the EEU offers Europe the opportunity to influence these projects at a detailed level – where the EU excels – and to tailor their approach in a given country depending on whether China or Russia represents the greatest challenge.

This engagement should occur principally in areas of Europe’s greatest interest in Eurasia: energy, infrastructure, security, and migration. Here we recommend a few immediate steps to help this overall approach:

  • Set a framework for bilateral investment with China: Push for finalisation of the comprehensive China-EU Investment Agreement, in order to institutionalise and regulate bilateral investment. Include provisions on cooperation in Eurasia in order to secure and expand continental trade and investment between the two entities.
  • Enable and promote EU investment in OBOR: Enable EU member states, the EIB, and the European Bank for Reconstruction and Development (EBRD) to invest in OBOR through the Connectivity Platform in Eurasia and beyond.
  • Ensure that Chinese investment meets European needs: Strengthen and expand the EU-China Connectivity Platform in order to coordinate Chinese investment in the EU with the European Investment Plan.
  • Leverage EU investment and coordination to set standards: Create a set of rules and standards that ensure that Chinese investment through the Connectivity Platform complies with European standards and regulations. For the Chinese, corruption at Central Asia’s borders is a major cost that significantly reduces the speed of transactions and therefore undermines connectivity.
  • Ensure that the various EU instruments work in harmony: Develop a European-Eurasian connectivity strategy to coordinate cross-regional projects, investments, and policies between all related EU instruments and foreign policy fields. This implies better cooperation of financial instruments in the four policy areas: European Neighbourhood Policies, Enlargement Policies, Central Asia strategy, and internal EU development and investment programmes for Eastern and Central European member states.
  • Leverage Europe’s existing stake in the region: Increase Europe’s visibility in Eurasia as the single biggest trading and investment partner of nearly all relevant countries, by promoting infrastructure and connectivity projects to develop trade relations.
  • Support projects with Chinese involvement to reduce Russian leverage in Eurasia: For example, recognise the recent China-Kazakh-Azeri-Georgian-Turkish joint agreement on transport cooperation in Eurasia. The EU has lost leverage since 2009 when it stopped its financial assistance to the Transport Corridor Europe-Caucasus-Asia (TRACECA), the most important European infrastructure project in the region, which is now financed by member states.
  • Create a platform for EU–EEU cooperation: Cooperate directly with the Eurasian Economic Commission and on a multilateral level. A joint working group on EU–EEU trade cooperation could be a starting point, coordinating cooperation in areas such as technical barriers to trade, sanitary and phytosanitary issues, and customs. This should involve not only Russia, but also the ENP states of Armenia and Belarus, and the Central Asia partners Kazakhstan and Kyrgyzstan – and might help strengthen their roles in the Eurasian Economic Commission.
  • Ensure that no country controls all energy routes through Eurasia: This will require strengthening cooperation in the field of energy trade and energy security between Central Asia and Europe. Azerbaijan is a crucial partner, since it provides the only means to bypass Iran and Russia, via the Caspian Sea. Therefore, Europe may have to develop its own pipeline projects in order to avoid future project failures like South Stream and the recently halted Turkish Stream.
  • Support eastern export routes for Russian gas: This will reduce Russia’s obsession with retaining a monopolistic position on European markets and routes leading to Europe – something that has been the source of much tension between Russia and its neighbours, and Russia and the EU. Combined with the reforms in Europe’s energy policy, this will help to provide the whole continent with energy markets free of excessive geopolitical stress.
  • Maintain the attractive power of EU membership: Develop a real prospect of accession for the Balkan candidate countries, especially Serbia. Increased assistance will be necessary to help Serbia meet the necessary conditions to join the EU in a reasonable time. This will create incentives for Serbia to develop its relations with Kosovo, and help the EU to counter Russian and Chinese influence on Belgrade.
  • Develop deeper relations with key Eurasian countries, particularly Kazakhstan: Increase technical assistance to Kazakhstan, the key country of Central Asia, through new financial assistance mechanisms. Astana left the EU’s Development Cooperation Instrument (DCI) in 2014 due to its middle-income status and will not receive any basic EU assistance that is comparable to Russia’s and China’s government-coordinated investments. However, European foreign direct investment (FDI) still amounts to 60 percent of FDI in Kazakhstan.
  • Create a platform for EU–EEU–OBOR coordination: The EU should establish a trilateral mechanism for EU–EEU–OBOR coordination, once EU–Russia relations normalise. There is already a mechanism for cooperation between the EU, Russia, and Ukraine on the DCFTA with Ukraine, which is intended to revise parts of the deal that Russia finds problematic. This platform has not been productive thus far, but it can be sustained and widened.

In the end, Eurasian integration remains a distant prospect, whether or not it is a desirable outcome for Europe. The political obstacles to Russia, China, or the EU realising their goals of integrating the region are daunting. Instability, historic rivalries, and corruption haunt both Russia and China – not to mention the competition between them. But the importance of the region means that progress towards a certain degree of Eurasian integration is both possible and in Europe’s interests. The prospect of Chinese and Russian failures should not make Europe feel better about the region or about itself. Rather, European cooperation with both the Russian and Chinese projects is necessary for progress in Eurasia, and, if properly structured, can promote European interests.

 

EU instruments

The Eurasian landmass is currently subject to two major integration initiatives: China’s “One Belt, One Road” (OBOR) and the Russian-led Eurasian Economic Union (EEU). These initiatives have emerged and taken shape in a relatively short period of time, and target, in a broad sense, all countries in Central Asia, the Caucasus, and Eastern Europe. At the same time, the European Union has various policies, instruments, and tools that guide its relations with the countries in these regions. With the EU’s major foreign policy tools under revision – the European Neighbourhood Policy (ENP) and the Global Strategy – it is a good moment to ask what Europe’s interests are in the neighbourhood it shares with Russia and China, and what resources it has to hand. What are Europe’s choices in an environment where it is not the only game in town, and where it may have diverging interests, and limited resources to pursue them?

The EU has developed varying relations with the countries of Eurasia, depending on geographical proximity and its interests. Some are candidates for membership and subject to its enlargement policies (i.e. Turkey and Serbia ), some are part of the ENP and the Eastern Partnership (Azerbaijan and Ukraine), others are part of Europe’s Central Asia strategy (Kazakhstan), and a fourth category is EU member states. The EU has diverse interests in these different sets of countries, and, because of the dynamics vis-à-vis Russia and Syria, these change quite rapidly. The variation in EU policies towards the countries covered by our case studies (see below) points to the need to reassess the existing tools, and potentially work on a more coherent approach towards the countries targeted by the EEU and OBOR. The EU has no policy yet towards the EEU, but has made more progress towards a common approach to OBOR via the new Connectivity Platform with China.

The EU assists Eurasia through various policies and instruments, whose financial volume is larger than Russia’s assistance to the region, but smaller than what China has announced it will invest through OBOR.

Between 2007 and 2013, the EU spent €13.4 billion on the ENP through its European Neighbourhood and Partnership Instrument (ENPI), of which €3.9 billion went to the Eastern Partnership. After the European Commission proposed in 2011 to increase ENP funding to €18.2 billion, the EU agreed to spend €15.4 billion, through its newly created European Neighbourhood Instrument (ENI), to finance the Southern and Eastern Partnerships between 2014 and 2020. From 2007 to 2013, the EU budget for bilateral and regional cooperation in Central Asia was €675 million, which increased to €1.028 billion for 2014 to 2020.

In terms of its enlargement policies, the EU spent €11.5 billion on its Instrument for Pre-accession Assistance (IPA) from 2007 to 2013, and its successor, the IPA-II, has a budget of €11.7 billion for 2014–2020. However, Russian and Chinese investments are directly targeted to single countries, while the EU takes issue-based bilateral and multilateral approaches.

The EU has allocated around €82.2 billion for 2014–2020 through nine funding instruments, seven of which are related to countries in Eurasia. These are:

  1. The European Instrument for Democracy and Human Rights (EIDHR), with a budget of €1.3 billion.
  2. The Instrument contributing to Stability and Peace (IcSP), with a budget of €2.3 billion.
  3. The Partnership Instrument, with a budget of €954 million.
  4. The Instrument for Nuclear Safety Cooperation (INSC), with a budget of €225 million.
  5. The Development Cooperation Instrument (DCI), with a budget of €19.6 billion.
  6. The European Neighbourhood Instrument (ENI), with a budget of €15.4 billion.
  7. The Instrument for Pre-accession Assistance II (IPA-II), with a budget of €11.7 billion.

Only the Instrument for Greenland (IFG) and the European Development Fund (EDF) do not contribute to projects in the Eurasian landmass. The budget allocated to projects with Central Asia falls within ENI, and amounts to €1.028 billion.

The objectives of the instruments are highly diverse, as are the needs of the target countries. This is why it is key for the EU to establish common rules and principles with the China- and Russia-led projects.

Trade figures

Trade between the EU28 and the case study countries (for Greece, intra-EU trade)

Trade in goods (€bn)

Total trade

Trade balance

Trade growth

2011

2012

2013

2014

2011

2012

2013

2014

2012

2013

2014

KAZ

28.9

31.5

31.4

30.7

-16.9

-17.6

-16.4

-17.1

9%

-0.3%

-2.2%

AZER

18.4

17.3

18.1

16.7

-12.6

-11.3

-10.6

-9.7

-6.3%

4.6%

-8.4%

UKR

36.4

38.5

37.8

30.7

6.1

9.2

10.0

3.3

5.8%

-1.8%

-23%

SERB

14.3

14.7

16.5

17.5

3.9

4.6

3.3

3.2

2.7%

12%

6.1%

TURK

122.1

124.2

128.2

129

24.4

26.6

26.9

20.3

1.7%

3.2%

0.6%

GRE

36.2

33.8

33.4

34.3

12.1

10.2

9.3

9.9

-7.1%

-1.2%

2.7%

Sources: European Commission, *for Greece, Trade Map

Trade between Russia and the case study countries

Trade in goods ($bn)

Total trade

Trade balance

Trade growth

2011

2012

2013

2014

2011

2012

2013

2014

2012

2013

2014

KAZ

21.1

23.3

22.9

21.0

7.3

5.5

11.5

6.7

10%

-1.7%

-9%

AZER

2.8

3.4

3.5

2.6

1.6

2.2

2.3

1.7

21%

2.9%

-35%

UKR

38.1

32.8

31

22.1

-1.9

-3.2

-0.6

0.6

-16%

-5.8%

-40%

SERB

1.4

1.4

1.5

1.6

0.4

0.6

0.7

-0.6

0%

7.1%

6.6%

TURK

21.5

22.9

22.4

21.4

8.7

9.3

7.8

8.1

6.5%

-2.2%

-4.6%

GRE

4.1

5.3

5.6

3.5

3.9

4.1

4.4

2.5

29%

5.6%

-60%

Sources: UN Comtrade

Trade between China and case study countries

Trade in goods ($bn)

Total trade

Trade balance

Trade growth

2011

2012

2013

2014

2011

2012

2013

2014

2012

2013

2014

KAZ

24.9

25.7

28.6

22.5

-5.7

-3.7

-3.6

3.0

3.2%

11%

-27%

AZER

1.1

1.3

1.1

0.9

0.7

0.9

0.6

0.4

18%

-18%

-17%

UKR

10.4

10.3

11.1

8.6

3.8

4.3

4.5

1.6

-0.1%

7.8%

-29%

SERB

0.5

0.5

0.6

0.5

0.3

0.3

0.3

0.4

11%

20%

-24%

TURK

18.7

19.1

22.2

23

12.5

12.1

13.2

15.6

2.1%

16%

3.6%

GRE

4.3

4.0

3.6

4.5

3.5

3.5

2.8

3.8

-7.5%

-11%

25%

Sources: UN Comtrade

Foreign direct investment (FDI) from the EU28 into the case study countries (for Greece, intra-EU investment)

FDI (€bn)

2012

2013

2012

2013

Inflows

Balance

Inflows

Balance

EU stocks

Balance

EU stocks

Balance

KAZ

N/A

N/A

-1.9

-5.1

N/A

N/A

51.2

35.6

AZER

N/A

N/A

-11.8

-11.6

N/A

N/A

5.1

4.8

UKR

N/A

N/A

2.4

2.2

24.7

23.2

27.1

26.6

SERB

-0.9

-0.7

2.1

2.1

12.3

12.2

18.1

18.3

TURK

6.9

4.6

0.9

-1.6

65.5

55.9

57.6

50.4

GRE

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

Sources: Eurostat/DG TRADE


 

1 “The new Silk Road”, the Economist, 12 September 2015, available at http://www.economist.com/news/special-report/21663326-chinas-latest-wave-globalisers-will-enrich-their-countryand-world-new-silk-road.

2 China signed relevant documents (MOUs) on OBOR with Hungary and Poland (on a country level), and Tajikistan, Kazakhstan, Qatar, and Kuwait (on the level of government departments), and a memorandum with Russia and Mongolia on the China-Mongolia-Russia Economic Corridor.

3 The figures presented here are drawn from meetings and interviews that took place in China and Europe around this project.

4 “Regional Economic Outlook – Middle East and Central Asia”, International Monetary Fund, October 2015, available at http://www.imf.org/external/pubs/ft/reo/2015/mcd/eng/pdf/mreo1015.pdf.

5 “EU-China 2020 Strategic Agenda for Cooperation”, available at http://eeas.europa.eu/china/docs/eu-china_2020_strategic_agenda_en.pdf.

6 “EU-China summit”, European Commission, press release, Brussels, 29 June 2015, available at http://europa.eu/rapid/press-release_IP-15-5279_en.htm.

7 “Investment Plan for Europe goes global: China announces its contribution to

#investEU”, European Commission, press release, 28 September 2015, available at http://trade.ec.europa.eu/doclib/docs/2015/october/tradoc_153844.PDF.

Absorb and conquer: An EU approach to Russian and Chinese integration in Eurasia

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