Customs Union a mixed blessing for Kyrgyzstan

By bne IntelliNews July 26, 2011

Izabella Mier-Jędrzejowicz in Osh -

The Kyrgyz government plans to rush into the Eurasian Customs Union regardless of the crippling effect this could have on its economy. This act of loyalty is not only a reflection of the recent strength of Russia's influence in the region, but also of Russia's economic struggle with China.

The Customs Union of Belarus, Kazakhstan and Russia was launched in 2010 partly in response to the EU's Eastern Partnership programme that aimed to draw Ukraine, Georgia and Belarus closer to the EU; partly because Moscow, recovering from the global economic crisis, wants to protect its domestic market by regaining influence over the Commonwealth of Independent States. Inviting Kyrgyzstan and Tajikistan into the Customs Union is necessary, it believes, to control and seal the porous borders with China.

On July 16, Kyrgyz President Roza Otunbayeva declared her country "willing but not yet ready" to join the Customs Union, rowing back from Prime Minister Almazbek Atambayev's hasty April declaration to join from January 2012.

Atambayev argues that preferential access to the 170m consumer market would open up a huge market for Kyrgyz industry and agriculture, which will create jobs and attract investment. "It will strengthen the Republic's borders and improve the living and working conditions of about half a million Kyrgyz nationals working in Russia and Kazakhstan today," said Atambayev, referring to incentives including quotas for Kyrgyz labour migrants, military and technical assistance, and a $106.7m loan from the EurAsEC anti-crisis fund.

Uchkunbek Tashbaev, minister of economic regulation, warns that staying out of the Customs Union could mean that Kyrgyzstan loses its Most Favoured Nation status. This would cut duty-free supplies of oil and raw-materials from Russia and Kazakhstan, on which the state heavily relies, and limit exports to the Customs Union states, which today account for 44.9% of Kyrgyzstan's foreign trade, according to official statistics. Closing the markets borders would cut emigration considerably, increasing unemployment and instability.

In the long run, government officials argue that accession makes a lot of sense for a country in desperate need of support and stability. And after recent political upheaval, these arguments appeal to many Kyrgyz citizens nostalgic for fondly-remembered Soviet comforts. "The common conviction is that the Russians will know how to make things better," says Anar Musubayeva, expert of the Institute for Public Policy.

But the rushed and unprepared accession suggested by Atambayev carries its own dangers.


According to the Asian Development Bank (ADB), the European Bank for Reconstruction and Development, and United States Agency for International Development, joining the Customs Union means elimination of the re-export trade, which would have a major effect on the state budget by decreasing revenues from customs duty. Imposing high tariffs with World Trade Organization states (a change from the average 5.1% in Kyrgyzstan to the Customs Union average 10.6%) would also cause consumer prices to rise sharply, especially on medicine and technology. There will be membership costs too (around 58 million soms) with comparably low withdrawal benefits (3% of Customs Union revenues.)

Today, Kyrgyzstan is a leader in re-exports to other countries of Central Asia and Russia. The World Bank estimates 75% of Chinese goods entering Kyrgyzstan are re-exported, creating livelihoods for 350,000 people and amounting to 33% of Kyrgyzstan's GDP. The Customs Union would eliminate profits on this trade. "It's already a lot worse than it was," says Ulan who works at the Dordoi bazar, the largest market in Central Asia.

Since July 2010 when Customs Union tariffs were introduced, re-export activity has slowed. "There are a lot fewer traders than two year ago, many haven't made a profit, but there are just as many goods," says Ulan, who sells wholesale from his transport container stacked high with clothes marked Hugo Moss, Kate Boss and Golden Hores - all Made in China.

"Trade with China is the basis of Kyrgyzstan's economy, our country is a trade hub of goods from China. What's more, tariffs on goods from China aren't paid on the actual goods, but on the weight of the transport, regardless of its value," says Roman Mogilevskii, director of the Centre for Social and Economic Research.

These simplified trade procedures mean foreign trade is at least four times higher than official government statistics and Chinese goods make up 70% of imports. "Everything comes from China, we don't manufacture anything. The prime minister argues the Customs Union will increase domestic production, but in reality it will just make us dependent on Russian products, which our small and medium entrepreneurs can't compete with," says Mogilevskii.

In consequence Kyrgyzstan would become a source for cheap raw materials and agriculture, processed in the other Customs Union states then imported back into the country. Adjusting prices to the common market will bring inflation, halting the development of domestic business. This would cripple the economy of this already frail state, rapidly raising unemployment, discontent and political instability. "The Customs Union protects the Russian and Kazakh market from China," says Mogilevskii, "the Customs Union states don't belong to the WTO and have imposed high tariffs, mostly dictated by Russia."

According to the ADB, the Customs Union inherited 92% of Russia's external tariffs which for Kazakhstan, with its undiversified economy based on oil exports, has meant a sharp rise in consumer prices, while Kazakh producers complain of the difficulties in obtaining Russian licences that would allow, for example, Kazakh alcohol to be sold in Russia, reports

"Whatever the cons, not entering the Customs Union would be the worst thing to do," argues Atambayev, stressing that Kyrgyzstan's economy needs the help and support of its neighbours.

But many argue that Kyrgyzstan should postpone accession for at least six or seven years, by which time the Chinese re-export market will have naturally shrunk. A few more years could also see the Customs Union of Russia, Kazakhstan and Belarus enter the WTO, eliminating the dilemma Kyrgyzstan now faces: should it leave the WTO or pay compensatory adjustment to all other WTO states to ensure the situation is "no less favourable to trade.

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