How Russia Pulled Armenia into the Customs Union

Luke Rodeheffer

The European Union’s Eastern Partnership was dealt a major blow as Armenia’s President Serzh Sargsyan made a surprise announcement that his republic will join Russia’s Customs Union during a visit to Moscow in early September. E.U. leaders expressed shock and dismay at the surprise about-face, while members of the Armenian opposition protested the decision outside the presidential palace in Yerevan.

The announcement was all the more surprising given that Armenia’s leadership had appeared genuinely cold to Moscow only a few months prior. President Sargsyan had snubbed the most recent meeting of the Russia-led Collective Security Treaty Organization in Kyrgyzstan in late May, as well as the subsequent Eurasian Economic Community conference in Kazakhstan. Proponents of European integration had been delighted with the news when it was announced at the beginning of the summer that Armenia had completed the sixth round of negotiations on a Deep and Comprehensive Trade Agreement with the European Union.

Yet Moscow played its cards well in the poker game between the European Union and Russia for the former Soviet states of Eastern Europe and the South Caucasus. Following the announcement of the trade negotiation results, Russia threatened to raise Armenia’s gas prices by 60%. Armenia was forced enter into negotiations on a 18% raise in exchange for allowing Gazprom to take the remaining shares of ArmRusGazprom that belong to the Armenian government. Détente between Moscow and Baku, manifested in the $1 billion worth of Russian weapons sold to Azerbaijan since July and Putin’s visit to Baku in August, served as further warnings to Yerevan about the consequences of its disobedience.

The energy crisis provoked by Russia’s threats is a sign of how deeply dependent Armenia has become on Moscow. Although the European Union was Armenia’s number one trade partner in 2012, much of Armenia’s economy has been sold off to Russian business interests since the end of the Soviet Union. In addition to dominating the nation’s gas market, Russian companies own almost all of Armenia’s power plants and many of its mining operations. The Russian state also plays a heavy hand in the Armenian economy, investing hundreds of millions into Armenia’s national railways. This fact was alluded to by Putin’s announcement of another $ 450 million into the network during his meeting with President Sargsyan.

Furthermore, Armenia’s economy remains in very weak shape following the global economic crisis. In 2011, Forbes granted Armenia the ignoble title of the world’s second-worst economy as a result of its GDP plunging by 15% during the global economic crisis. Russia further increased control over Armenia by granting the South Caucasus republic a $500 million loan in the wake of the crisis. With such a fragile and Russia-dominated economy, Armenia is in no position to leave Moscow’s Collective Security Treaty Organization or demand the end to Russia’s military base in Gyumri, Armenia’s second largest city.

Despite Russia’s already heavy hand in the state and economy of Armenia, even Russian experts admit that joining the Customs Union will likely not provide the post-Soviet state with any real benefits. Alexander Knyazev, an expert at the Russian Academy of Sciences, recently noted that Armenia does not even share common borders with Russia, Belarus, or Kazakhstan, the current Customs Union member states. The Customs Union is built around the idea of a common economic space with no customs controls at the border, but trade between Armenia and the other member states must first move through Georgia. The only benefit that Armenia stands to gain from entering the Russia-dominated trade zone, according to Knyazev, is the simplification of the migration process, making migration out of Armenia and into Russia easier.

It is ironic that the major benefit for Armenia will be access to Russia’s labor market, as the Sargsyan’s government has previously viewed emigration of Armenians into the Russian Federation with deep concern. Yet beyond lodging complaints, there is little that the Armenian state can do, as remittances from Armenian guest workers in Russia constitute a sizable portion of the Armenian GDP.

But what can Armenia’s post-Soviet generation hope to get out of the Customs Union, beyond an easier path from their homeland into Russia? Sargysan’s government has stated that corruption remains Armenia’s number one obstacle to reform, but choosing to join a Customs Union dominated by highly corrupt post-Soviet states, as opposed to continuing on a path to European integration that encourages transparency and anti-corruption efforts, is certainly no way to make inroads against the problem. Russia’s increasingly stagnant economy, with low levels of human capital, a terrible climate for small business, capital outflows of $350 billion since the onset of the crisis, and a heavy dependence on raw materials exports is certainly no model to emulate and closer economic integration with Russia will only hinder the modernization that Armenia and other former Soviet economies so desperately need. Armenia’s choice will bring a few short-term benefits but will do little to improve the country’s standing in the long term. With the failure of European integration efforts in Armenia, the pressure on other former Soviet states, particularly Ukraine, to choose between Brussels and Moscow is higher than ever before.

"EurasiaReview," September 6, 2013