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THE EURASIAN CUSTOMS UNION: WHAT’S IN IT FOR THE EU? OCTOBER 24, 2012 6:00 – 7:30 P.M. BRUSSELS, BELGIUM WELCOME/MODERATOR: Judy Dempsey Non-resident Senior Associate Carnegie Europe SPEAKERS: Peter Balas Deputy Director General for External Trade European Commission Vladimir Epaneshnikov Senior Counsellor of Commercial Affairs Permanent Mission of the Russian Federation to the European Union Sergey Kopyrkin Deputy Permanent Representative of Political and Administrative Affairs Permanent Mission of the Russian Federation to the European Union Olga Shumylo-Tapiola Visiting Scholar Carnegie Europe Transcript by Way With Words

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THE EURASIAN CUSTOMS UNION: WHAT’S

IN IT FOR THE EU?

OCTOBER 24, 2012

6:00 – 7:30 P.M.

BRUSSELS, BELGIUM

WELCOME/MODERATOR:

Judy Dempsey

Non-resident Senior Associate

Carnegie Europe

SPEAKERS:

Peter Balas

Deputy Director General for External Trade

European Commission

Vladimir Epaneshnikov

Senior Counsellor of Commercial Affairs

Permanent Mission of the Russian Federation to the European Union

Sergey Kopyrkin

Deputy Permanent Representative of Political and Administrative Affairs

Permanent Mission of the Russian Federation to the European Union

Olga Shumylo-Tapiola

Visiting Scholar

Carnegie Europe

Transcript by Way With Words

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OLGA SHUMYLO-TAPIOLA: It was more or less a voluntary choice. The project is obviously led by Russia, but if we look at the map, Russia is the biggest country in the word, by its territory, maybe not by population or by the economy, but it’s natural that it’s led by the biggest neighbour. However, the two others do have their say, maybe not on very little technical things, but if take, for example, the case when the Russian side was suggesting to go further and move towards Eurasian Union, further integration started, the two others blocked this decision. It is unlikely that we will see this step happening by 2015, as envisaged initially. The Customs Union, every economist will tell you, is not a classic customs union, because it does not meet all the technical criteria. There is a lot of mistrust, as I said, among the members; they have trade wars, they have exemptions between themselves; they also have different fights. We remember the fight between Moscow and Minsk over oil duties. However, we see that there is a very strong interest in eliminating the barriers between these three countries, and some steps were already taking place. The major criticism perhaps for me would be that the Customs Union members are trying to achieve in three, four or five years what the European Union, for instance, took 50 years to build, the harmonisation process that may take longer than just a few years. At the same time, the countries have common external tariff that is also now built on Russia’s WTO commitments. It still remains to be seen how much Russia will be implementing its WTO commitments, but also how much it will be able to convince the other members who are bound by the contract how they will implement these commitments. A lot is said about the Customs Union being built on European standards, but we see that, unfortunately, the base for the standards within the customs union space is still Soviet, Russian or Belarusian standards, with 62%, 24% and 14%. We don’t really see much European substance on the ground. Obviously, the big question that I’ll probably jump to is the widening of the customs union, a big question that we are asking ourselves. It’s still an open question, in my opinion. Obviously, all countries of the whole Soviet space received invitations, some of them are harder invitations, some of them are more loose invitations. Kyrgyzstan and Tajikistan are very likely to join; for them, economically it would be more beneficial. Others are actually free to decide whether they want to participate or not. I think I’ll stop here. JUDY DEMPSEY: Olga, terrific, thanks for keeping to the time. Since you’ve represented the paper, we should really get immediately EU response and the Russian response. Mr Balas, would you like to give an EU response: how does the EU see it? Should you recognise this? Thank you. PETER BALAS: Thanks very much. Let me just mention that I’m Deputy Director-General to the Director-General for Trade, dealing with activities [?] with Belarus [?], with Russia and the other members of the Customs Union, and now, increasingly, with the customs union on it, so I very much welcome this opportunity to be able to speak here, and very much welcome this study which really… it’s one of the few articles which has been prepared. I think that the study raises a number of valid points, sometimes questions. It also has some elements which, frankly, we do not fully agree with, but that I’ll come back to more on that today. First, our view from the European Commission, and I would say not just the Commission’s point of view, because we regularly discuss this issue also with our member states in the Pre-Policy Committee, as my colleagues are dealing with the political regulations in the Committee, dealing with the Eastern regulations request, so there is already at least some initial position.

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First, on the EU itself is, to the point of your big WTO, it’s a customs union, so they have no problem seeing another customs union being established in our neighbourhood, we stepped beyond the rollout of customs union, the rollout of integration. Among others, from a policy of point of view, we are a customs union and we welcome another customs union being established, as long as this customs union is WTO consistent, as long as this customs union contributes to more and better trade, economic and trade regulations, and conditions for investment, to improve the conditions for business, and as long as the issues which have mentioned by Olga are met, basically that there is a proper economic basis and economic justification, although, clearly, there are those still of political considerations, also when this was established. Let me just tell you some, and perhaps it’s just a [inaudible] and we thought that it’s a true story about the way the customs union decision has been taken, and the unexpected lesson [inaudible] of... In early June 2009, during the [inaudible] as World Economic Forum, myself, as the chief negotiator for the EU, for Russia’s WTO accession, had been negotiating with my counterpart, Mr Medev [?] of [inaudible] for the steps for completing Russia’s WTO accession which was foreseen at that point to take maybe a few months. This was about 4th or 5th June, also the high-level [inaudible] of the Prime Minister [inaudible] and the Commissioner actually met, and they agreed that after this project these ideas for the coming weeks. Four days later there was the planning of a meeting in Moscow, and suddenly a decision was taken that the customs union would be promptly established and this customs union would join the WTO as a customs union. It completely undermined our question, WTO’s project. The basic idea of joining the WTO as a customs union, as a group, was unfortunately not that [inaudible]. It took quite a number of months until it had turned out, and it took almost a year for Russia to get back to the original idea of joining the WTO. This is just one of the elements which show that the decisions are, in our view, sometimes taken rather suddenly, based more upon political than economic considerations. Also, the idea to have a fully functioning internal market by 2015 is all that we would expect. We wish all the best for our colleagues in the customs union, but we have doubts that it’s doable. Finally, to complete, from the EU point of view, that being said, we are ready to work with the customs union, and here we have some differences of view with the conclusions of the paper. We do not have any political perceptions or fears of the customs union. The issue is much simpler. We want to work with a customs union which is based in and respects also in practice the WTO obligations. The first test case is how Russia implements its WTO obligations; I have to mention that the first experience at least. We would like to be sure that every kind of relationship within the European Union and the customs union be based on material products for this. Once the conditions will be… all members of the customs union will join the WTO. I don’t see that anybody would have to leave aside any kind of political problems with good help in this relationship. JUDY DEMPSEY: Thank you very much, Mr Balas. That was a very clear EU view of the whole situation. Could I move now to the Deputy Representative of the Russian Federation, please? Mr Kopyrkin, you’ve got five or six minutes. SERGEY KOPYRKIN: First of all, I would like to thank Olga for her study. In my opinion, it’s a very interesting and useful attempt to understand what is going on with the Eurasian integration now, and one

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of maybe not so frequent attempts of unbiased analysis of the processes which are going on in the Eastern part of Europe, in Eurasia, with the participation of Russia. Just a few remarks; first of all, I must say that the ideal of the customs union is not something new. From the very beginning, after the Soviet Union was dismantled, the idea of integration was floating, and there have been different integration organisations and so the member countries were going along the way of finding new ways of cooperation which are compatible with the new realities. Never was the question raised whether to re-establish the Soviet Union or not re-establish, so, from the very beginning, it was absolutely clear that in no way can the old system be re-established. From the very beginning, there was an attempt to find new ways which are compatible with the new realities, political and economic. We had different groups of states, some of them were more willing to go ahead in the direction of integration, some of them were more wary of these endeavours. All the time, the idea of customs union as the main bloc of the economic integration was floating. If you remember, in 2000, when the Eurasian Economic Community was set up, the creation of the customs union was the main objective fixed in the treaty on the creation of the Eurasian Economic Community. Now we have this idea being realised, and the idea, for example, of Eurasian Union is not something which Russia invented; it was an idea which was for the first time mentioned by President Nazarbayev in the 90s, in ’94, if I’m not mistaken. It’s something which is not new and which was in the mainstream of our political and economic thinking. One of the main reasons was that we saw that the process of regional integration is one of the basic features of the modern international relations, and, surely, the main example was the European Union; it’s the most successful. Maybe some experts consider this to be uniquely successful so far in regional integration projects. One more point; from the very beginning the project of the customs union was conceived as an open one, open, first, for other willing countries to join. On the other hand, open for cooperation for establishing links with other TEOS [?] countries and organisations. In one of the first declarations of the leaders of the countries of the customs unions, the main objective of this endeavour was fixed as promotion of the links of the cooperation with the European Union. Then I see that we have been raising this issue for quite a long time. I should remind you that in 2005, when we agreed on the roadmaps on common spaces with the European Union, on our initiative we fixed in the roadmap on the common space on external security, with a thesis on mutual profitable character of the regional integration processes. Now we see that this idea of harmonising what we are doing in the field of integration is becoming more and more important. The last idea and my last point is that we also consider these projects in the context of the new realities of the load [?] economics, so the global economy, appearance of new centres of economic power, shift to Asia-Pacific. It is very important to find ways to be competitive in this world. In this direction goes also this idea of President Putin of creation of the common economic and humanitarian space from Lisbon to Vladivostok. We should also consider the project of European Union, of Eurasian integration in this context. Thank you very much.

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JUDY DEMPSEY: Thank you very much. I hope we have a chance to bring this Asia-Pacific pivot in axis as well later on in the discussion. Our last speaker is Mr Epaneshnikov. Thank you very much; I’m sure you’ll be giving the [overtalking]. VLADIMIR EPANESHNIKOV: Thank you, yes, I find myself in a difficult situation, because I have to retort both to the author of the paper and to Peter, to his response [?], but I will be very brief. First of all, this is an excellent paper, I think, because it treats the subject not from the conventional point of view but poses very interesting questions. Sometimes some words are bitter for me to read, but they are true. Some things I do not agree with, but that’s always like that. It’s good that you have a reaction to this paper. I like everything in the paper except its title, because I do not understand why it should be treated like a friend or a foe. You can ask the same question about NAFTA, about Andean Pact, about South African Customs Union, about any economic union in the world, but why should it be treated like a friend or foe? I think that you’ve never heard about any of Russia’s, or Kazakhstan’s, or Belarus’ leaders saying that this is against somebody. The customs union or the common economic space is against somebody, that we want to muscle up economically and then to press everybody - no, of course not. This is about us, this is about our own integration, first of all. The Eurasian Economic Union which is not working is fed up like this in the interior matters, in pushing the integration process. They have so many things to do, they have 100 agreements which they should put together and have one code which should start work from January 2015. Nobody has pencilled this in. It is still there. It is not easy, but it has to be done. Just today I read the… I went to the site of the customs union and got the confirmation of this from Tatiana Valovaya, who is the Minister and member of the collegium responsible for the integration process. She writes very plainly that 1st January 2015 is there, and it should be done. We have a number of things to do, and nobody is thinking, in political terms, in the Eurasian Economic Committee. Maybe somebody somewhere has something at the back of his mind, but it’s not the something that you have to practically cope with or deal with. The whole tendency is for the statute and the meaning of the customs union and the common economic space to grow and grow quite rapidly. Just look at what has been done – that before we had the customs union of five countries, but in the end, after how many years, what happened? 30% of the tariff was aligned between the five countries, only 30%. Now, during one or two years, we have the common tariff; it’s really a big achievement, to my mind. Now, in the field of technical regulation, yes, there are drawbacks, there are things which we have to make better and so on and so on, but there are already a number of technical regulations and there is a sign - it says EAC, which is a stamp for all three countries which says that these goods are - like the EC stamp, EU stamp which says that these goods are technically in conformity with the requirements in all three countries. Of course, it’s at the beginning of the process where there are problems, but I would like to say that, for example, of course, the EU understands that harmonisation has accessions to EU standards. Well, that’s like this; we do not take it as this, although we tend to come closer to the common standards, to the EU standards as well, because the 31 technical regulations that are already in place are very close to EU directives in this field. They even have the same names. For example, the low voltage or the machinery

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technical regulations which should come into place in the beginning of 2013, they are based on EU directives. That’s it, I’ve finished. JUDY DEMPSEY: I find actually… thank you very much, you’ve given us a lot of food for thought. It’s interesting, you’re placing a lot of store on credibility of the EU directives; it’s interesting. I was going to ask you one thing about the tariffs and other issues; are they WTO standards or a mixture of EU directives? In any case, we can discuss this later. Thank you, it was very, very interesting. Now, the idea is I’m going to take four questions at a time. I think that’s enough, so that we can deal with them. Please identify yourselves; please make the questions, if you want them directed to one of the panellists, fine, or general questions… and try to be as specific as possible. I think it’s fair to have one question at a time; you can have a second round. Let’s kick off with the first round of questions. Please… SVITLANA KOBZAR: Hello, thank you for the presentation from the paper. My name is Svitlana Kobzar from RAND Corporation. I have a question particularly to the Russian representatives. I’m curious – what is your view, perhaps a personal view, what implication will the customs union have on the governance structures of its members? For instance, to have high technical standards for certain products there needs to be a certain level of good governance and lack of corruption. Do you think it will have a spill-over effect if you are of EU terminology on the governance structures of its members, and can it exist if the governance structures are very weak? JUDY DEMPSEY: Thank you very much. YULIA SELIVANOVA: My name is Yulia Selivanova. I work for Energy Charter Secretariat in Brussels. If you will allow it, the questions are short, first [overtalking]… JUDY DEMPSEY: No, I’m sorry, we’ll come around again. Is that fair? Do you mind? YULIA SELIVANOVA: Okay. What is the impact of the formation of a customs union and Kazakhstan’s accession to WTO, because there were lots of problems that basically slowed down the process? Thanks. JUDY DEMPSEY: Thank you very much. MARVIN SPILLER: My name is Marvin Spiller [?] from the Permanent Representation of Ireland to the European Union. Edmund Burke, one of the greatest minds of the 18th century, warned against paying too much attention to sophisters, economists and calculators. By that he meant that economics was not the only way to judge the developments of history. What I want to ask the panel is, is it mere coincidence that the customs union, a new venture, is directed purely at the moment at former member states of the Soviet Union? Indeed, when the author of the learned paper did ask the question, is it friend or foe, and the Russian colleague objects to the appellation, would that appellation not be more acceptable if she had said, is this a positive or a negative development for the European Union? Thank you. JUDY DEMPSEY: Thank you. I think Edmund Burke would have been proud of your question. We have the fourth question here. OLGA BURLYUK: Olga Burlyuk of the University of Kent at Brussels. I have a very simple question: why hurry? Why 2015? How was this date established or discovered? All sides admit that there is a lot of

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work to be done and that hurrying would probably damage the effectiveness and the quality, so why 2015? Thank you. JUDY DEMPSEY: Great. Four quick questions: governance issue; Kazakhstan, WTO; positive instead of foe or friend; and why hurry? I think we should deal with the nice question of governance first. Please, Mr Kopyrkin… SERGEY KOPYRKIN: It’s my personal opinion – I don’t know whether there is any expert analysis on how the customs union might affect the culture of governance, but, surely, I think that customs union is not the phenomenon which will define the prospect of the practice of administration, wrong practices, in our countries. I think that, first of all, the fact that there is a supernational body is something new to our experience, administrative, political experience. At least it makes people think about how to work together, how to find compromises, how to deal with their national administrations, and not be in the path of this national administration. I think that it’s already something new which will give new experience. Also, a lot will depend upon the real role of these supernational bodies in the decision-making in the member countries. It certainly depends upon the political will of national governance. However, even the fact that the Eurasian Economic Commission has been set up is evidence that certain political will is here, and it’s very important. One more issue is the standards of working of the Eurasian Economic Commission and maybe future supernational bodies themselves, and I think that here it is very important that the idea of the customs union is based, for an important extent, on the world experience, on the best world experience, especially on the experience of the European Union. I am sure that in developing their practices, people in this commission will look at the experience of the European Union. That’s why I think it might be useful for them to have formal contacts with the people from the European Commission, from other European agencies and structures, because I think that it’s valuable, from the point of acquiring new experience and new mentality. Let’s see what… JUDY DEMPSEY: I just wondered whether Peter like to pop in there with context of the new commission. What’s the Commission’s attitude towards having contacts with the customs union, since this is an issue? It would bring up the whole idea of accountability and transparency which you want to discuss, and the whole idea of governance. Just briefly, there are other questions. PETER BALAS: About this particular issue, only about the governance issue, it’s clear that the customs union is more directed [?], and this is admitted on the European Union. As they say, imitation is the highest form of flattery, so I think it’s, with all the present problems, it’s certainly good to know, but what is not very important is that we have the same names, the same structures, having a council, having an image that is in the spirit as the EU works is being taken over. This is something to be seen here. We would like to see the customs union also configured, although I agree with this, only the defining facts, so it will be more the internal developments in these three member states so that the customs union also contributes to the rule of law, to building a tolerant and democratic society, to building that function in a market economy where the influence and intervention of the government is limited. These are the two tests.

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We wish all the best to our colleagues. From this point of view, just from the quarter of the [unclear] relationship, the EU has [?] plenty of technical contacts with the customs union. There are technical negotiations, meetings; there are also regulars [?] to deliver and meet in this technical context. There we have, at this point still, we see that the conditions are not there. I do recall a format recognition because customs union is not a concrete to be recognised. Establishing a legally binding relationship between the European Union and the customs union – for that, the conditions are not yet in place. We hope that this can be created in the possible future. JUDY DEMPSEY: Thanks very much for this. I don’t know who would answer the Kazakhstan issue, if… PETER BALAS: That I would handle, if you allow me, because I was dealing with it. JUDY DEMPSEY: Yes. PETER BALAS: I’m sorry if I have to be a little bit technical. First of all, I think that the customs union and Russia’s accession can speed up Kazakhstan’s accession, because a lot of elements which have been already negotiated and clarified by Russia can be simply used for others, for Kazakhstan’s WTO accession. There is, however, a big issue, and this may be a big issue also for the further enlargement of the customs union. There are some concepts here, and this big issue that Kazakhstan negotiated, what used to be under [inaudible] a much more regional [?] economic than it is today and moved to its accession onto the customs union, where Kazakh duties have been actually doubled. Kazakhstan’s partners have lost a lot on the access to the Kazakhstan market that they now view. Also, Kazakhstan lost a lot because Kazakhstan has now higher duties for a large number of products which are not produced in Kazakhstan but which are produced in Russia, so took over the Russian protective case. Kazakhstan normally had this, the EU, and almost certainly had the WTO commanders while they negotiated much more rigour of commitments for planning accession in the [inaudible]. If Kazakhstan wants to join, a new customs union case has to be negotiated, because Kazakhstan’s exceptional understanding of it [?] should not lead to the breaking up of the customs union to the common tariff. Russia has a higher tariff while Kazakhstan a lower tariff. In order for Kazakhstan to [inaudible], these two have to be brought closer and a common new customs union tariff has to be [inaudible]. And [inaudible] and possibly a full process, stemming from the rather strong direction of many Russian producers [inaudible] already have decreased [inaudible]. JUDY DEMPSEY: It’s very interesting, actually, that so many tariff levels are cited in Olga’s study. [Unclear] question, not friend of foe but how positive, or how do you see…? Olga, I think I may have to leave you with the title. I don’t know if you invented the title for it, if you can… OLGA SHUMYLO-TAPIOLA: I will probably not go into details of the semantics of this title, but I would say that even if you replaced it with the question positive or negative, the question is, for whom? If we put the EU aside and we look at the existing members of the customs union, I have big questions about the positive effect of the overall project at the moment for all three members. Mr Balas already mentioned Kazakhstan and the losses that the membership with the customs union caused were caused by the adoption of much higher tariffs, standards are the other issue. I’m not sure - if we take Belarus aside, which is clearly benefiting in the short-term from this project - if we take Russia itself, I’m not sure how much Russia really benefits from this project in mid- and long-term, especially if

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we look at the public opinion in Russia, which actually is supporting the expansion of the customs union, but on the other side it is saying, we are no longer interested in subsidising other countries. If we look at this from the countries’ perspective, I’m not sure how much it is positive now, but the EU is obviously the other question, and I think that it raises even more questions on the future of relations. JUDY DEMPSEY: That’s a really interesting answer in the, not the dying days of Comico, but certainly in 1984, 1985, an economist Jan Vanous wrote a long essay on how the Soviet Union was tired of subsiding the energy and oil prices of Eastern Europe. It, as Olga says, sort of chimes a little bit with this; if you want to join this club you have to pay your way into it and prove it, in some ways. The fourth question we have is: why hurry? They don’t have their own money for processing, but I wonder who would like to deal with this question: should it hurry? Should this customs union have a spurt? VLADIMIR EPANESHNIKOV: I think it’s quite easy. You can look at it from romantic and from a pessimistic point of view; if I were 20 years old I would look at it as a romantic. I want to be young in my mind, so I think that it’s better to do things quickly. We have already… I said, in two years, when we had a common tariff, we need a lot of things - why not do it? There are 1,000 people in the Eurasian Economic Commission, so it’s possible to do that. It’s not something quite unmentionable; it’s possible to do that. You have to have the will. The three countries should have the will to do that. If there is a common will, it’s possible. SERGEY KOPYRKIN: Yes, and as experience shows, also the experience of the European Union, if you trade, if you do something, you try to resolve all the difficult issues. You will never start doing something. It will be resolved in these issues, and you have more and more issues. Surely, it is presumed to be in a hurry, but I agree with my colleague that you have to have certain political will to do the things. On this basis, try to find solutions to the problems which inevitably must… JUDY DEMPSEY: Hurry is probably not in the dictionary of the EU here in Brussels. Now, I promised the lady at the back –with just a second round of questions – the lady at the back, number one. Number one, yes, please. Thank you. ANNA KILAN-LIPKA: My name is Anna Kilan-Lipka and I’m from the Polish Delegation. My question is to the last speaker and probably Olga as well about this issue of Eurasian Custom Union being a friend or a foe. When the Eurasian Economic Union is established in 2015, my understanding is that it’s going to be even looking for deeper integration, not just… well, deeper integration. As you said, the interest is about the area, reintegrating a post-Soviet area. Apparently, it happens, if you take Ukraine and you draw a line and you also draw a line of European Union Eastern neighbourhood countries, then you’ve got a region where the two unions overlap. I hope there is a place for two unions there. My question is, how do you envisage the possible cooperation, if it’s possible? That’s one thing. The other thing is that I hope there is a place for two unions, and I also wish you to be the next on the list for the Nobel Prize for Unions. JUDY DEMPSEY: The second question, yes, please. ANTHONY LIVANIOS: My name is Anthony Livanios; I’m from Energy Stream GmbH, it’s an oil and gas advisory firm based in Frankfurt, Germany. My question is, what is the impact of the Eurasian Customs

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Union in the oil and gas industry, especially these days in which the European Union is trying to unify the natural gas industry, trying to create a spot market to relieve the gas supply countries from the oil-linked prices. There is lots going on in EU. What is the impact of the Eurasian Customs Union in natural gas and oil industry? Thank you. JUDY DEMPSEY: A good question. A third question here, please. MARIA MARTESUTE: I’m Maria Martesute [?], University of Oxford. When I think about the Eurasian Union, and when I try to put it in context, particularly in relation to the UN Eastern Partnership, the first thing that comes to my mind is Ukraine, not least because of territorial and functional proximity between the Eurasian Union and the EU. I was just wondering, in terms of the membership, potentially, what could the Eurasian Union offer to the Ukraine that the EU can’t? Thank you. JUDY DEMPSEY: I was wondering when Ukraine would come into this. The fourth and last question of this round – there are many more rounds to come – yes, please. ELŻBIETA KACA: Elżbieta Kaca, Polish Institute of International Relations. I have a question to speakers from Russia; from your point of view, what are the prospects for enlarging the customs union? Who is willing to join, and why, because Olga has made her assessment in relation to Eastern partnership countries? I’m wondering if you shared her diagnosis. The second question is… JUDY DEMPSEY: I’m sorry – you only have one. I’m terribly sorry, I tried to be strict, nicely strict. This is getting very interesting, this overlap in all these questions. I was wondering, can we go backwards in the enlargement, because the enlargement feeds into Ukraine, and then over [?]. Who would deal with the Ukraine…? OLGA SHUMYLO-TAPIOLA: I think the Russian guys will [overtalking]. JUDY DEMPSEY: Mr Epaneshnikov, would you like to deal with Ukraine? Ukraine is the western side of Russia. VLADIMIR EPANESHNIKOV: Exactly! About Ukraine, yes, this is a very important issue. For the customs union and the idea behind this integration project is to have as many countries, of course, as possible, but the countries which really fit into the picture, which would comply with all the agreements, would be willing to cooperate and so on and so forth. When speaking about Ukraine, we do not want to… we are saying that we want Ukraine, but we are not saying that we are pressing Ukraine to do something, to join or not to join. This is their sovereign decision. We want to make the case clear, but this is their sovereign decision. The question is also to the European Union: do they see the possibility of Ukraine joining the customs union if the Ukraine signs the Free Trade Agreement with the EU? Would they agree to that? That is… For Russia, this is not a problem; to solve our practical things, we have… I don’t think we have been talking about that. I feel some kind of uneasiness on the part of the EU, talking about whether it’s possible to have together the free trade with the EU and the membership of Ukraine in the customs union.

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One more thing which is important, that the cooperation between the customs union the Ukraine has started, because there are two memoranda now between the Eurasian Economic Commission and Ukraine government which are about technical regulation standards – the one thing. The other thing is cooperation and trade matters; they even signed the establishment of a special working group and special dialogue which should take place every six months, exchange of opinion on how the trade policy is developing and what obstacles to trade are between Ukraine and the customs union. We see that there is a kind of practical cooperation, but how it will evolve, that’s a sovereign thing. JUDY DEMPSEY: Yes, and then I’ve got a quick question as the moderator; I’m going to exploit my position. SERGEY KOPYRKIN: It’s not [overtalking]. Surely, we might put the question in terms of who gives more and who will win in this struggle for Ukraine, but I think that we do not see it in this way. Surely, Russia’s interested in Ukraine joining the customs unions. For one thing, the Ukraine economy and the Russian economy are most linked to each other among all the post-Soviet states. Really, there are very close links between our industries – I am not speaking about people, families and so on – so it’s quite natural that we raise this question. My colleague would be right, it is a matter of sovereign choice of the Ukraine government, which, unfortunately, also has very deep, very acute political implications. It’s not Russia who is the first who could put these political implications before the Ukrainian government. I think that it’s also part of the answer to this question. OLGA SHUMYLO-TAPIOLA: I think, if I may add on Ukraine, it’s obvious that both can offer a lot. We, from the customs union perspective, where we see two situations, one on the Kazakhstan example, the customs union can offer more protection to them. If Ukrainians are willing to be more protected from the rest of the world, they can go into the customs union as it is now. The Belarusian experience suggests that Ukraine may, I wouldn’t say would, but I would say may, get cheap [?] with us for a certain period of time at the expense of joining the customs union. It may get a long wait of European and international standards if we assume that the customs union is converging or planning on converging with the European standards. The question is, of course, whether these are two compatible offers, because the EU is more asking to do a lot within the Association Agreement in the CFT Framework. This is what Russia is offering to them. JUDY DEMPSEY: I’m sure… Yes, Peter, do you want to say something? PETER BALAS: Yes, I think because the question was asked, I think which I would like to answer those first: what would be the EU’s reaction to Ukraine’s customs union accession? Those were, I think, the first [inaudible], possibly we do overlap. I think it has to be seen that the customs union and the trade agreement are two rather different things. They are the same in a sense, but there is a [inaudible] in the trade, among the members. In the case of the [inaudible], we can’t escape their sovereignty, concerning the trade policy, the tariffs and everything that has to [inaudible]. This is not the case for a customs union.

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On the EU, the [inaudible] of the Eastern Partnership idea of 2009 and [inaudible] did and [inaudible] to the Eastern partners, because exactly then it was a FT [inaudible] that they meant another customs union, because we wanted to maintain the possibility of free choice and multidimensional trade agreements. [Inaudible] doesn’t make it possible. Why? Because the customs union requires a uniform external leadership [?]. If Ukraine signed a free trade agreement which is not…. has been negotiated and it’s on a technical preparatory phase with the EU, and which we understand is a strong wish of the Ukrainian government, cannot join the trade union, customs union, but that means that a [overtalking] agreement with the customs union. The true mechanics can override [?] only once the EU will see it as possible, and they see if it’s for some time, first of all, for economic reasons, besides a free trade agreement with the EU and the customs [inaudible]. Then these two projects can override [?], but not after. To that point, this is not political, but it seems a legal and technical issue. That’s the image that is coming into President Putin’s idea of having a big free trade area from Lisbon to Vladivostok. This is a very good [?] idea and I think that it will be achieved, but at some point. Otherwise there is some doubt about the timing; it’s exactly what we have seen on Russian’s WTO accession. Russia has reduced its average values from 10% to 8%. It was not [unclear] to do that, but for a number of sectors it meant [inaudible]. What we see during the ratification process, and as I see it, there is such a very strong resistance from the Russian government that we have doubts whether in the foreseeable future the Russian economy and the Russian producers will be able and willing to accept non-tariff protection vis-à-vis the EU, due to simple [inaudible] investment. A free trade agreement actually would possibly require for Russia to give up its export [inaudible] on energy, which will give 60% of its Kazakhstan [inaudible]. There are a number of other issues, [inaudible] technical issues, so the whole is really then effective and [inaudible] the conditions an opportunity [inaudible]. JUDY DEMPSEY: It’s a very interesting answer you’ve given. It goes into the… it really shows that the Commission is taking the whole idea seriously, not from an ideological point of view, but the technicalities of the whole issue. I promise I haven’t forgotten the energy question; I just want to bring over the overlap of the European neighbourhood policy, the Eastern… Where’s our Polish diplomat? We’re going to touch on your question now, just to let you know. It has already been sort of answered; as to the Eastern partnership – what happens to the Eastern partnership now, the relationship between the…? This is a very complex question, the issue between the EU and the Eastern Partnership, the customs union and the Eastern Partnership? I’m not quite sure that Russia was in the early stages very keen on the Eastern Partnership. Is there a competition here, or has this been factored into the whole idea of the customs union or how you deal with this other swathe of countries, Azerbaijan, Armenia, Georgia, Moldova – you know who they are? SERGEY KOPYRKIN: Maybe in terms of the [inaudible], as to this problem of developing structures and now European Union calls it our common neighbourhood. In principle, I think that we as a mission to the European Union see that there are certain ideas and principles which have already been fixed in our common documents. I mentioned roadmaps to common spaces. It’s still on course then; we see it as a plan for our actions.

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Here, if I’m not mistaken, in the economic roadmap, there is… the idea of a free trade area between Russia and the European Union is mentioned. Surely, it’s not easy, and Mr Karlos [?] gave his expert consideration for them. However, the idea is here, the idea, also, of this common space. I think that a lot will… surely, it’s not easy, so there are conflicting [?] economic interests, producers of different stages of societies, also political implications for all these things. However, I think a lot will depend upon the political will on both sides. If there is this understanding that we have to cooperate here and we have added value for both of us with this cooperation, and within that we have a [inaudible], I think that the problems might be resolved and we… We might have competition but it doesn’t mean that we have to be fools. There is real added value in our cooperation in this common space of our common interest. JUDY DEMPSEY: Thank you. The natural gas - implications or problems – this is a huge issue. The question you were actually asking, the whole issue of the natural gas issue, this is quite a complex issue for Russia, not just the whole transit issue. If you have Belarus now in the customs union, of course, that’s one of the transit problems. Got rid of… and Gazprom has already, putting it mildly, looked after the transit and the grid in Belarus and Belatrans [?] or Belagas [?]. The gas is an issue, the energy is an issue; strategically, does this play into the customs union agenda, energy security or natural gas, or…? VLADIMIR EPANESHNIKOV: Yes, of course, because there is a special agreement, basic agreement, about the cooperation in the natural resources area. It is not only about gas, it is about the cooperation in the natural resources area. It means that there will be harmonisation of policies, of tax policies, of all kinds of policies, in terms of management of the natural resources of three countries. It means that there will be a more integrated market for natural resources inside the customs union, which is really the first thing which comes to mind, to answer your question, because when we talk about the Russian exports of gas and oil and so on, this is still in much… as far as I understand it, has not been touched very deeply by the customs union, because the long-term contracts are going on and the relations are as they were, I think, between Russia and the European Union in this field. There are a number of new projects; there are a number of new ideas, in terms of having agreement on some principles of operation in the energy field, also in the context of the new basic agreement. I do not see really big repercussions for the external deliveries of the gas in terms of customs union. It’s more, I think, between the countries, because the export duties, I think, between the countries are less or they are not at all there. I’m not quite sure, but I think that they have been abolished between the countries, or maybe you can tell even better. I understand you know this problem well. The prices are less for the members, but it’s inside the wrong market so it’s only logical. JUDY DEMPSEY: Do you want to pick up on this? UNIDENTIFIED MALE SPEAKER: Yes. JUDY DEMPSEY: Yes, please, absolutely, it’s very interesting. UNIDENTIFIED MALE SPEAKER: The biggest challenge right now for Europe is the opening of the oil and gas corridor, and the cornerstone of the European Union security of supply is to diversify roads and

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resources. The number one priority over the next, hopefully, 12 months will be the final investment decision of the Shah Deniz Consortium in Azerbaijan, that will open the Shah Deniz… the Southern Gas Corridor. Number two is the trans-Caspian pipeline – huge, challenging project that the EU has devoted a special group right now to deal with the issue. Third, Kazakhstan – Kazakhstan is expecting to produce from Karachaganak and Kashagan – oil. The production of gas will be reinjected in order to have more oil. As far as the gas is concerned, Kazakhstan is exporting its entire gas supply to Russia. A Eurasian customs union, based on the free market principles and a unified market, means that Kazakhstan could export its gas via the Southern Corridor, via Azerbaijan, let’s say. This is my question: do you see this hugely important issue as the past [?], and what is the impact of the Eurasian Customs Union, because here in Europe there’s a huge impact on the natural gas right now? I don’t want to go into detail - what is the agenda for the Eurasian Customs Union on this hugely important topic? Thank you. VLADIMIR EPANESHNIKOV: I don’t think I can really enlighten you on that subject because what I’ve been reading and what I hear from my colleagues in the Eurasian Economic Commission is that these subjects are, to a large extent, still treated on the national level, because this is still… I said that there is an agreement – of course, there are consultations, there are exchanges of opinions or anything, but I’m not aware that this is, in practical terms, some agreement between the member countries or some document which has been signed which says that it also should go this or that or that way or out the theatre [?]. Of course, because they are partners in trade, they should consult about very important things like that. I think it’s like that. JUDY DEMPSEY: I’d love to hear the answer from the Azeri diplomat here, just given the negotiations going on with BP. Now, we’re into a third set; please, a question from this side. ROBERT VANDEMEULEBROUCKE: My name is Robert Vandemeulebroucke; I’m a retired Belgian ambassador. A general question: there are only two years left in order to have a fully-fledged customs union, according to the schedule – my question is: which major questions are still to be tackled between the members? Do you foresee any problems in tackling these questions, if any? JUDY DEMPSEY: Thank you. Please… MICHAEL EMERSON: Michael Emerson, Centre for the European Policy Studies down the road. I think some things are being overrated and oversold here, and some things are being undersold and underrated, and the first is customs union and the second is Lisbon to Vladivostok. I have a question on the latter, just a quick comment on the first one: the customs union is basically a political deal between Nazarbayev and Putin, which economically is already imposing severe costs on Kazakhstan by forcing them to register import duties. Now, Peter Balas already began to open up the Lisbon to Vladivostok question; that would be something of outstanding strategic importance. The question to the two Russians here present is: is Putin serious on this, or is this just something in a speech? To Peter Balas: while I’m encouraged by your remarks, but should not the European Union have said immediately, yes, let’s put this at the top of the agenda and get the real strategic focus on this extraordinarily important proposition?

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JUDY DEMPSEY: Thank you. Is Putin serious… Lisbon to Vladivostok, or the customs union? MICHAEL EMERSON: No, Lisbon to Vladivostok will be a free trade area, of course, no. JUDY DEMPSEY: I thought that was the security architecture, so, thank you. UNIDENTIFIED FEMALE SPEAKER: I’m May Getsok [?], Deputy Head of Ukrainian Mission to the EU and a very good friend of some people on the panel. I couldn’t get over the temptation to say a few remarks after this discussion about choice of Ukraine – what is better, what is not very good; who to join? Just, first of all, I would like to confirm, yes, Ukraine would like to get good cooperation with the customs union, but Ukraine wants to join the European Union. The Free trade area, etc, etc, this is just a step to implementation of our primary foreign policy objective. This is a strategic choice and it was done a long, long time again. Again, I would like to emphasise, of course, we want to cooperate with this big structure which reaches beyond our borders, but cooperation is not exactly joining, so, please, a distinction the [inaudible]. My question, if to say it in Russian, [Russian phrase], maybe some people understand; it’s leading to a certain answer. I’d like to ask, first of all, Olga and maybe some others, how do they see political culture for these implications for the development of the customs union and their own integration? Is it reintegration of the former Soviet Union? What is the ideal and form of this process? JUDY DEMPSEY: Thank you very much. Our last question of this set, maybe we can squeeze in another set out of this; it depends how quick the answers are [overtalking]. UNIDENTIFIED FEMALE SPEAKER: Thank you very much to the panel. My name is [unclear], I’m the senior advisor to the Eurasia Programme of the International [unclear], International Case-Building NGO. I personally have no doubts that customs unions is a political project, both for internal reasons, external reasons. My question is about the external political identity of the customs union, mainly the geopolitical aspect of it. We all know that Russia has problematic neighbours from all sides and in particular themselves as problematic neighbours in the Soviet space [?]. I have a question – what would be the policy of the customs union towards these three? There was a proposition made to Armenia that actually counters the charter of the customs union that countries have to have land border between them. Well, so far, Armenia and Russia do not have a border, and I don’t even want to go into speculating… My question is: are there any ideas on how to proceed in a southerly direction? JUDY DEMPSEY: Well, these are cracking questions. I think we should we should deal with Michael Emerson’s question: does the EU have the whole issue of Lisbon to.,.. is it serious, this political agenda of the CU, and Lisbon to Vladivostok? I actually had… No, I’m not allowed to give an opinion. I would like the whole issue that was raised about essentially Putin’s agenda for the customs union and how this plays into Lisbon to Vladivostok, this very old idea that has never disappeared. I see everybody’s rushing to answer – please? PETER BALAS: I would like to again answer from the EU’s point of view, before I get a bit further into the discussion. First of all, as I mentioned, I suppose the [inaudible] objective would be welcome, but the EU being, I think, a practical organisation, that they try to look at the economic, legal and also political conditions, what we can do in the medium- and short-term.

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I think that despite the positive objective, we don’t see that the conditions are what they could look like. First of all, each region has to do of the [inaudible]. Kazakhstan has come down in the [inaudible], very advanced. Belarus is unfortunate; we still have this [inaudible]. We would like to see Belarus speeding up and not just a support, as an international creating the conditions in the changes of the Belarusian economy to the [inaudible] for WTO accession. Secondly, the members of the customs union should be ready to accept that everyone else [inaudible] relationship with one of the most developed nations of the [inaudible], recreate [?] needs not product. This is I mentioned: we do not see at this stage even the Russian economy - it is the most advanced, the most competitive of the three countries - to be able and ready. We hope that Russia in the coming period, through the full and peaceful implementation of the WTO common tariff, we hope that it will be able to lead up to those more relatively [inaudible] organisations and which could serve as the basis and to step in for that. There is, I think, actually everybody that is still thinking about the, first of all, EU-Russia [inaudible] and also from the EU-Customs Union relationship, and this is the basis of outcomes analysis, especially. If I may, my time is [inaudible] [overtalking]. JUDY DEMPSEY: Thanks, Peter. Yes, please do. I wonder whether we can bring in the Ukraine question and the last question, the idea of the political implications of the customs union and this idea of a political project? Is it a political project? SERGEY KOPYRKIN: It’s also a political project. JUDY DEMPSEY: If it’s a political project, then it feeds into the rallied question, because politics will bring in the whole idea also of structures of accountability, of good governance, of transparency, of decision-making, of very different mechanisms as well. When you say, if it is a political project, is this a political ideological project, is it Putin’s pet project – all he makes clear: this is not a New Deal Two, this is not the reinvention of a Soviet Union, and the ambassador said this in Germany yesterday: oh, no, heavens forbid; but then he doesn’t want it to be at the EU either. Politically, what is it? I think it’s… Geopolitically, what is it, please? SERGEY KOPYRKIN: I tried to answer this is in my opening remarks, because, surely, you can’t ignore the political side of the project of such a scale. Surely, it is based on economic calculations, but there are certainly political implications. Initially, we saw this project as a part of this global strategy to adapt ourselves and member countries to the new realities of the world economics and world politics, because the experience shows that regional integration is something which is essential in the modern world in order to make countries and regions competitive in these new conditions. Also, we were still very interlinked, and, surely, if there are important economic links, social links, family links – when we have a lot of people who work in Russia from the other countries of the former Soviet Union, it also has implications for the security issues. When we speak about southern neighbourhood of the customs union – Central Asia, the Caucasus – it’s something which is essential for Russian security, not only Russian security, but for Kazakhstan security also. Surely, we’ll also consider these things, but it doesn’t mean that it is something based upon the willingness to recreate a superstate empire. It’s really not possible. Even in the study for that, it was

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mentioned that the two countries which are the Russian, the customs union, made their choice on their own. You can’t make a country join something if it doesn’t want to. It’s not a question of forcing somebody. We have no wish, we have no political will to do that, and we have no leverage to do that. Finally, yes, we don’t have leverage to force other countries to make strategic decisions which go against their vision of national interest. JUDY DEMPSEY: That’s very interesting, the… SERGEY KOPYRKIN: It doesn’t mean that we have no influence; it’s normal, but we have no leverage to force decisions upon countries [?]. JUDY DEMPSEY: I’m very interested in the idea of leverage, especially the role of energy, but that’s a different issue. The last question was: two years later, what’s the biggest nightmare you have every time you think about the customs union? The next two years – what’s your biggest question, the biggest problem you are facing? VLADIMIR EPANESHNIKOV: This is to come to an agreement between the three countries as to what level of integration we would be willing to have, and where we can stop we should stop, because that is the question. That alone, the technical question is to codify the 100 agreements that we have now in one agreement; it is more technical. Many of the agreements that we have now as the basis for the common economic space are not really establishing the integration level. They say that we are striving to have more integration in this, this and this, and the work has just begun to practically implement these agreements. In the course of implementation, the member countries will understand how long they want to go and where they would like to stop. Certainly, they will have to draw a line before 2015 and say that this is possible, and this we’ll fix in the agreement as the established fact, and this we put as an established goal. Of course, we have in mind also the European Union and what the European Union has achieved; we want to copy good examples, in terms of integration and in terms of technical ways to achieve that. I would see that as a practical task. JUDY DEMPSEY: The time has come to end this, and I would suggest before we started the discussion… this is actually quite fascinating, because is this a mutually exclusive club: if you join can you leave, if you join the EU can you leave, will there be a treaty, what sort of treaty, who will contribute to this treaty…? There are all sorts of very, very complex answers, and I think we’ve started the debate. I want to thank a terrific panel; I never thought I would learn so much in an hour-and-a-half’s time. Thank you very much for all the participants. I hope we come back again to revisit this issue. Thank you very much.