FREE TRADE AREA DOOMED.

The prime ministers of CIS member countries held a regular meeting on October 8 in Yalta, Ukraine. The stated goal of creating by January 2000 a CIS-wide free trade area topped the meeting’s agenda. Yet the meeting turned into a funeral of that project after Russia’s Prime Minister Vladimir Putin officially rejected the first precondition to its fulfillment–namely, levying excise and value-added taxes (VAT) in intra-CIS trade according to the country of destination, rather than the country of origin. The Russian premier likewise turned down the proposed agreements on a mutual, gradual reduction of customs duties, of quantitative import quotas and of transit tariffs in the intra-CIS trade. In justifying Moscow’s position, Putin informed his counterparts that Russia is determined to “act within the CIS on the basis of its own national interests. All the countries of the CIS act exactly in this way.”

Those remarks imply, however, that Russia’s national interests require a beggar-thy-neighbor policy toward the CIS partners and an attempt to delay their admission to the World Trade Organization (WTO). Most CIS countries favor the WTO’s country-of-destination rule for excise and VAT-levying and want to join the WTO. Russia’s policy, in effect, forces the CIS partners to choose between the two conflicting sets of rules. Countries that heavily depend on Russia for export markets and transit–such as Ukraine, Moldova and Kazakhstan–are the hardest hit.

Just ahead of the Yalta meeting, Ukrainian President Leonid Kuchma had hosted his Kazakh, Georgian and Uzbek counterparts–Nursultan Nazarbaev, Eduard Shevardnadze and Islam Karimov–in a quick succession of official visits, during which the four presidents agreed on common steps in pressing for free trade. Yet their effort did not bear fruit at the meeting at the prime ministers’ conference.

Putin’s stance and the resulting demise of the free trade area were hardly surprising. Last month, Ukraine had learned and complained that the Russian government’s draft budget for 2000 envisages taxing CIS countries’ goods according to the country-of-origin principle, in effect subjecting them to double taxation. Last week in Astana, the meeting of prime ministers of the CIS Customs Union member countries–Russia, Belarus, Kazakhstan, Kyrgyzstan and Tajikistan–witnessed a last-ditch attempt at establishing a free trade area by 2000 at least on the Customs Union’s territory. That attempt, too, shattered against Putin’s defense of Russian protectionism. Moscow’s strategy is generating a flight from the CIS economic system. The Astana and Yalta meetings were to some extent overshadowed by the WTO’s Geneva session which admitted Georgia as a member–the second CIS country after Kyrgyzstan to join the organization–and registered progress in Moldova’s and Armenia’s negotiations for accession to the WTO. Uzbekistan, for its part, achieved further strides in its economic cooperation with Far Eastern countries just ahead of the CIS meeting–a coincidence which only underscored the organization’s irrelevance to the economic development of its member countries (see the Monitor, September 27 and Fortnight in Review, October 8).

Ukrainian Prime Minister Valery Pustovoytenko, host of the meeting and chairman in office of the CIS Council of Heads of Government, announced that aggregate intra-CIS trade decreased by more than one-third in the first half of 1999–from just over US$30 billion to US$20.5 billion–compared to the same period of 1998. According to Moldovan and Uzbek officials, there was a near consensus at the meeting in tracing the trade shrinkage to Russian protectionism and onerous transit tariffs. Moldovan Prime Minister Ion Sturza publicly warned that Russian trade practices constitute “the acid test of the viability of the CIS.” “The political survival of the CIS will be problematic unless free trade is fully implemented by 2000,” Sturza concluded. And in Tbilisi, President Eduard Shevardnadze’s adviser for CIS affairs, Teimur Sanadze, pointed to “a certain syndrome of political mistrust among some CIS countries” as partly responsible for the failure to create a free trade area (Itar-Tass, NTV, ORT, UNIAN, Dow Jones, October 7-10; Flux, Basapress, October 8-9; Nezavisimaya gazeta, October 8).

ORGANIZATIONAL REFORM MARKS TIME.