A tax maneuver makes EEU less attractive

The EEU member states trade duty-free between each other. Selling crude oil at a price below, by the amount of duty, the global price, the exporting country makes transfer for the benefit of its EEU partners in the amount equal the unpaid export duties. The same mechanism is applied to natural gas and oil products. Since crude oil and natural gas are basically not traded between Armenia, Belarus and Kazakhstan, transfers to the EEU are directed from Russia to other Union member states.

Based on our calculations, Russia transferred $11,8bn to EEU partners in 2012, and $6,4bn less in 2014 because of the decline in exports of oil products to Belarus, growth in purchases of Belarus-made gasoline, and the transition to swap supplies of crude oil with Kazakhstan. Today, in exchange for Russia's crude oil Kazakhstan gives the same amount of its own crude oil which Russia sells to China at near to global prices, whereas until 2014 Russia sold to Kazakhstan, net-exporter of energy resources, 7-8 million tons of crude oil annually at some 50 percent below global prices. Although Russia has cancelled since 2015 Belarus's compensation for export duty on crude oil and oil products which the latter exported to third countries ($3-4bn annually), the transfer will be reduced because of the decline in global prices of crude oil. The amount of transfer will subsequently decline because of the tax maneuver which provides for higher mineral extraction tax, lower export duties on crude oil and oil products.

It turns out that the decline in global prices of crude oil and Russia's tax maneuver reduce redistribution of resources within the EEU. This, indeed, creates risks of lowering the attractiveness of integration/union – above all, for Belarus and Armenia, however it may also facilitate to shift the integration emphasis from redistribution towards creativeness. Given the new circumstances (especially if the tax maneuver is going to see a logical outcome: zero export duties coupled with higher mineral extraction tax), easing of non-tariff barriers for trading of goods and services will become the key source of enhancing the competitive power of both the integration/union as a whole and its members in particular. It is essential to think how to make the creativity motive a key pillar of the EEU. This particular aspect will determine a further development pathway of this integration/union.

Aleksandr Knobel, Ph.D. in Economics, Head of Foreign Trade Department

The comments are based on Aleksandr Knobel's article to Vedomosti newspaper: "Integration: A test for the EEU"