| By Oleg Remyga

In May, a milestone agreement on trade and economic cooperation was signed between the countries of the Eurasian Economic Union (EEU) and China. The deal reduces some trade barriers and simplifies customs procedures, creating a foundation for deeper integration. It takes the relationship between the EEU and China’s Belt and Road Initiative (BRI) to the next level, giving EEU members the opportunity to start building a partnership with China on relatively equal terms.

This agreement is a part of a process that began in May 2015 after signing a previous agreement that pairs the EEU and the BRI. The initiative dramatically changed the member economies of the EEU, which includes Armenia, Belarus, Kazakhstan, Kyrgyzstan, and Russia. Over the past seven years, China has provided these countries around $98 billion in investment to implement 168 projects, many of which are part of the BRI.

At the same time, the relationship between China as a project investor and the countries where these projects are implemented is not always equitable. On one hand, Chinese money inevitably stimulates the economies of these countries. On the other hand, these countries can become too dependent on Chinese investment, such as the case of Kazakhstan. Over the past few years, the role of Chinese business has increased so much so that entire industries have come under its control, especially the energy sector. Oil and gas projects comprise 98 percent of investments from Chinese transnational corporations in Kazakhstan. Nowadays, around 20 percent of all oil extraction in the country is linked to China National Petroleum Corporation, China’s largest state-owned energy company.

Furthermore, although Chinese investments within the BRI framework are powerful, they are not a fully stable source for economic development because they are difficult to forecast. In 2013, China allocated $18 billion for the initiative’s needs whereas in 2016 the amount was just $10 billion. It is still unclear how much China is willing to spend in the future or on which projects.

Under these circumstances, the agreement on trade and economic cooperation becomes particularly important. It enables EEU members to transition to equitable business trade cooperation with China. The EEU is interested in the Chinese market, and it has a lot to offer, primarily in natural resources which is in surplus in the EEU. It is an especially pressing issue for Russia since the European and American markets are partially closed due to sanctions. It is the reason why member countries of the EEU agree to sell natural resources on favorable terms to China. In turn, China needs a partner that is able to ensure a large and stable supply and a relatively low price.

Agriculture is another industry that has the potential to build a mutually beneficial partnership, if China can improve its regulations. Russia became the largest exporter of wheat to China in 2017. This event was preceded by intensive negotiations about the method of transportation that took more than a year. There was a requirement in China for grain to be transported in bags whereas in Russia it is transported in bulk. It was economically unprofitable to change from bulk transportation to comply with the Chinese requirement; thus, Russia asked to abolish it.

Russia also aims to increase its meat exports to China. Russian agricultural companies, including large livestock holdings like Miratorg and Rusagro, have already invested about $1 billion in their facilities in the Far East. Currently, due to sanitary standards, they operate at a loss because they cannot export their products to China. Negotiations on the required changes are underway, however, the changes can hardly be called fast and simple. The May 2018 agreement signed in Astana should help as well.

China usually seeks to negotiate with each partner separately because a more powerful economy inevitably shifts the power equation in its favor. Thus, another important feature of the agreement on trade and economic cooperation concluded in Astana is that it is signed between China and the entire EEU rather than just Russia, Belarus, or one of the Central Asian countries individually. The most optimal strategy is for them to act together rather than cooperate with China on a country-by-country basis. This way, member countries of the EEU have the opportunity to build relationships with China from a multi-stakeholder partnership perspective and creating a relative balance of power and interests.

Of course, the EEU in its current state is clearly not perfect. Member countries have difficulty in achieving a consensus on different matters. They do not always have matching interests. It takes slow and long-term negotiations to find a balance within the Union, and this process is not yet entirely efficient. Also, the EEU bodies have not yet begun to operate fully. The EEU is a relatively young organization, so naturally, it needs time to reach its full capacity.

Russia is the central force behind the EEU. It has tried to act gradually, building up partnerships step by step. Moscow has realized that too much political and economic pressure on post-Soviet countries will only push its neighbors away. That is why there is a focus on building significant common ground, and, most importantly, on understanding that the EEU, sooner than later, will become an effective tool to protect common economic interests.

China has more room for maneuver while EEU member countries have nowhere to retreat. For them, China is irreplaceable. China firmly intends to turn its Belt and Road Initiative into reality, and it has alternative opportunities. If negotiations with the EEU are unsuccessful, China will turn to Turkey, Pakistan, or other Middle Eastern countries because these alternative countries would also benefit from implementing the initiative.

Ultimately, the EEU and China should work toward a free trade area and, potentially, liberalized capital movement within the area. Those ambitious goals will not be achieved soon, but the agreement signed in May represents an important step forward.

Oleg Remyga is the Head of China Studies in the SKOLKOVO Business School and representative of the business school to China. He also is an expert in the HKUST-SKOLKOVO EMBA for Eurasia.