When Renault Trucks opened a Russian plant last year, a big challenge was selling its vehicles to the neighbours. Customs barriers that divided the once- monolithic Soviet economy made it easier to ship the same products from France.

Now, however, selling trucks to Belarus and Kazakhstan is not a problem. On 1 July, Russia and the two smaller states did away with customs formalities, enabling products that foreign companies assemble in one member country to move around the customs union duty-free. “It’s of course more profitable,” says Alexei Sharapanyuk, the auto-maker’s business development director in Russia. “It makes the costs lower and the profit margin larger.” Shipping trucks to Kazakhstan and Belarus from France results in a 25% customs duty, while making them in Russia involves an average duty of 7% for the import of their components, he explains.

Prime Minister Vladimir Putin lauds the customs union as the most remarkable attempt to rebuild economic ties severed by the Soviet break-up. Indeed, the axis of Russia, Belarus and Kazakhstan has quickly earned the label Soviet Union Lite.

Of course, there’s an element of wishful thinking here. Belarus and Kazakhstan represent just a fraction of Russia’s potential in terms of sales: the two junior members account for 25 million people. The union numbers 165 million, about 60% of the population of the Soviet Union. The countries are also diverse economically: Russia and Kazakhstan have dabbled with capitalist reforms and enjoy windfall revenues from oil exports, and Belarus has maintained a largely Soviet-style economy that recently collapsed. The only other former Soviet republics that expressed interest in joining were the impoverished Kyrgyzstan and Tajikistan in Central Asia. Moscow has pushed hard for Ukraine to sign up, but the country remained steadfast in trying to gain EU membership instead.

Progress depends on the authoritarian rulers of existing member countries, not on institutions. But it’s the economic benefits for members, rather than Russia’s efforts to bolster its geopolitical hand, that hold the bloc together, says analyst Jenia Ustinova at the Washington-based think tank Eurasia Group. Despite the bloc’s superficial resemblance to the Soviet Union, Russia rather seeks to replicate the EU, she says, but the underlying groundwork is completely different.“Should there be change at the top in any of the three states, commitment to further integration may well be scrapped,” she adds.

Nevertheless, many Western businesses like the idea. For German conglomerate Bosch, the union is a boon because it makes some of its equipment more affordable in Russia, says Lutz Marschall, a Bosch sales director for the former USSR. Member countries agreed on a unified foreign trade policy, which caused Russia to slash import duties on power tools from 15% to 10% as of January 2010. “It has a major effect,” he says. “It has an impact on the price.” Belarus cut the duty similarly, while Kazakhstan – where Bosch’s sales are only about 1.5% of those in Russia – raised the duty to 10% from zero.

The cheaper entry to the Russian market means more business for Bosch, which imports at least three-quarters of the tools it sells there; the rest are produced locally. The lower import duty is partly why its Russian sales rose 36% last year.

Some compromises on duties were harder won than others. Russia had to persuade Belarus and Kazakhstan to match its prohibitive duties for motor vehicles, almost certainly dampening imports into those countries from the rest of the world. While the likes of Renault can offset any damage with sales of vehicles made in Russia – Europe’s second largest auto market – some exporters winced.

Zentis, the German producer of jams and desserts, identifies the biggest effect of the union as the transition to paperless clearance by the Federal Customs Service of Russia. As of January, companies no longer have to provide paper documents to back up their electronic customs declarations. Zentis’s Russian chief Johannes Peter Schönhuber attributes this to the imminent competition between member states for customs-related business, saying it was a powerful spur for Moscow to clean up its act.

In another improvement, companies will need only one safety and one quality certificate – valid in all three countries – instead of three for each market. This could expand the selection of imports in Kazakhstan and Belarus, where certification used to be hardly worth the effort, given the small numbers sold.

When it comes to imports, there is one pitfall that prevents businesses from treating the customs union as a single market: the differences in VAT. Many foreign importers would love to use Russia as a base for deliveries across the entire union – but the prospect has fallen by the wayside because there are no clear rules regarding VAT refunds. The VAT rate is 18% in Russia and 12% in Kazakhstan. “It’s not profitable as yet,” Schönhuber says of shipping Russian imports from Zentis’s warehouse near Moscow to Kazakhstan, adding that exports to Kazakhstan still come directly from Germany.

Belarus, which has a 20% VAT rate, also remains a separate destination for many exporters because it is sandwiched between the EU and Russia. Once the three governments iron out the wrinkle, vistas will open up for many companies.

It takes four weeks for a power drill to reach a dealer in Kazakhstan from Germany. From Russia, it could arrive in less than a week. “Customers, dealers and users would get better service,” says Bosch’s Marschall. “Happy customers buy more.”

Radoslav Vojnovic, chief of operations in Russia and Belarus at Swedish industrial group Atlas Copco, says the new union makes it possible for compressors and mining and construction equipment to reach their Belarusian distributor overnight from a central warehouse outside Moscow. Before, internal customs offices held up the effort for as long as 10 days.

Atlas Copco still views Kazakhstan as part of a different group of countries. Its office there gained independence from the Russian regional HQ to oversee Central Asia and, as Vojnovic says: “We don’t see a big benefit in reorganising again.”

The union didn’t come about without concerns being raised. For Bosch, one downside could be the need to compete with the counterfeits that flood Central Asia. “There are more fakes in Kazakhstan than Russia,” Marschall says. “My concern is that this will spill over into Russia now.” Loosely regulated open-air markets here may well experience an influx of phony tools. “I don’t see sufficient initiatives to control these markets,” Marschall says. The world’s longest continuous land border separates Russia and Kazakhstan.

The governments of the union have to deal with ongoing regulatory gaps beyond customs procedures. Renault says the need to obtain type approval (a certificate for trucks) separately in every customs union member remains a problem.

Legal lacunas have also thwarted the logistical benefits. “We often have to contact the highest customs authorities and wait for clarifications and instructions,” says Mikhail Kozlov, customs services chief at Swiss logistics company AsstrA.

This confusion is likely a side-effect of the breakneck speed of the integration – the union came into force just three years after first being mooted in 2007. Still, many regard the rapid progress as a pleasant surprise. Says Zentis’s Schönhuber: “We are more used to things getting started and never being completed.”