Hidden pitfalls to friendship. The problems to be anticipated within the Customs Union.


Vladimir Tchikine, Partner, Goltsblat BLP; Sergey Kurochkin, Associate, Goltsblat BLP   

Forbes Russia

From the New Year, the agreement on creation of a unified customs area for Russia, Belarus and Kazakhstan comes into force. Will it prove effective? This depends on how well past lessons have been learned.

The first Customs Union was formed back in the mid-1990s. It was agreed on 6 January 1995 by Belarus and Russia. Fourteen days later it was joined by Kazakhstan and, in March 1996, by Kyrgyzia. Yet, although all the participants recognised the need for integration, the Customs Union never actually took off properly. What were the mistakes making it impossible to manage effectively? 

Let us recall that a Customs Union means a unified customs territory within which goods manufactured or released into free circulation in one member country automatically enter into free circulation throughout the territory of the Union.

During the last decade, only Russia and Belarus managed to achieve this level of integration. A sort of culmination of their relations was order of the President of Russia No. 525 of 25 May 1995 and resolution of the Russian Government No. 583 of 23 June 1995 abolishing customs control over goods imported from or manufactured on the territory of Belarus. The process then began of abolishing access points on the Russia-Belarus frontier. Many people will undoubtedly still remember the bravura of the TV reports on the prospects for integration of the two fraternal nations.

The unified state immediately came up against a mass of problems, however. According to the State Customs Committee of Russia, in 1995-1997 there were substantial differences between the customs duties charged by the two countries. In March 1997, the import customs duties for goods were higher in Belarus in 5 cases and higher in Russia in 17 cases. Russian excise duties exceeded Belorussian ones in 72 cases. This made customs clearance of goods in Belarus much more beneficial. The State Customs Committee estimates that, in 1997, the Russian budget lost $80 million in revenues as a result of the differences in rates.
The members of the new Customs Union have taken this experience into account and have established unified customs tariffs. Consequently, there should be no lost budget revenues owing to customs duty rate differences.  Yet it should not be forgotten that value added tax (VAT) and excise duties are added to the customs payments made when goods are imported. There is a difference in these tax rates, so this might obviously be a reason for potential budget revenue losses for one member of the Union or another. For instance, the excise on a litre of natural wine in Russia is 2.9 roubles, while in Kazakhstan it is 35 tenge (6.84 roubles). The VAT charged on most goods imported into Kazakhstan is 12%, against  the 18% charged in Russia and Belarus. There are exceptions, however: for example, 24% VAT is charged on white sugar in Belarus.

Another source of budget revenue losses previously consisted in under-deliveries of goods from third countries in transit across the territory of Belarus and Russia. The State Customs Committee estimates that, in 1997, the Russian budget authorities lost 1.2 trillion undenominated roubles a quarter in revenues as a consequence of the Belorussian customs not exercising proper control over the sum of customs transit payments due for payment.   Control over movement of goods in transit remains a pressing issue within the scope of the new Customs Union.

By virtue of these and other circumstances, over the 18 months following abolition of customs control between Russia and Belarus, the total amount of lost budget revenues in the form of customs payments amounted to over 5.5 trillion undenominated roubles (about $1 trillion).

Although the Customs Union between the two countries was based on the principle that the borders between its members should be conditional, the situation in the 1990s dictated the need to adopt additional measures of protection. Only operational measures on the roads in Russia’s frontier regions managed, to a certain degree, to combat unlawful import of goods from Belarus into Russia. Customs units were deployed by the Smolensk Customs to exercise control over goods transported by road. Yet these measures were hardly effective. The growing issues and financial losses ultimately led to the member countries breaking off their relations in this important matter.

Today, it seems that the members of the Union have reached a compromise on the most important issues. From 1 January 2010, for instance, unified customs tariffs come into effect and, from 1 July 2010, a Customs Code - on the condition, of course, of its ratification and performance of specific procedures within each member state. In any case, however, more detailed work needs to be carried out on matters that have already once thrown the integration process back to square one.

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