Kyrgyzstanis to find benefits of EEU membership elusive

By bne IntelliNews July 28, 2014

Naubet Bisenov in Almaty -


Kyrgyzstan enjoys one of the lowest rates of customs duties on imports due to its membership of the World Trade Organization. This has spurred development of light industries and boosted trade, turning Kyrgyzstan into a regional hub that serves customers from faraway places like western Kazakhstan and Russia by re-exporting cheap Chinese products. However, this situation is set to change when Kyrgyzstan joins the Russia-led Eurasian Economic Union (EEU) next year.

The Kyrgyz government reckons the enlarged market of the current Customs Union - which comprises Russia, Belarus and Kazakhstan, and will be transformed into the EEU next year - will lead to the development of new industries in Kyrgyzstan, while barrier-free trade means duty-free imports of petroleum products, gas, chemicals, timber and metals.

The government also tells a sceptical public that the country needs to join the EEU in order to improve the working conditions of hundreds of thousands of Kyrgyz migrant workers in Russia and Kazakhstan, where, the government believes, they will be able to compete for jobs on an equal footing with Russian and Kazakh citizens and enjoy social security perks available to locals. According to the Russian Federal Migration Service, around 526,000 Kyrgyz citizens were officially registered in Russia as of March. Kyrgyz migrant workers sent $2.1bn in remittances from Russia alone in 2013, which accounted for nearly 30% of annual GDP.

The government also cites the possibility of supplies of cheap energy as a benefit of EEU membership. In April, Kyrgyzstan sold its gas distribution networks to Russia's Gazprom for a token $1, but this has so far had an adverse effect on gas supply in the country's south because Uzbekistan has cut off gas exports, absolving itself from previous obligations following the Gazprom takeover.

At the same time, in order to ease Kyrgyzstan's integration into the EEU, the Customs Union members have offered some sweeteners. On May 29, Kyrgyz President Almazbek Atambayev agreed a final road map at a Customs Union summit in the Kazak capital of Astana, which includes a grant of $377m to help Kyrgyzstan implement the necessary changes in legislation to comply with Customs Union regulations, harmonise rules on the movement of goods and vehicles, train customs officers and strengthen border controls. Russia has agreed to contribute $200m of this, and Kazakstan will cover the rest. Russia and Kyrgyzstan also signed an agreement to set up a Development Fund worth $1bn, which will be managed jointly and will work to ease Customs Union integration.

Stitched up

While the benefits yet have to materialise, ordinary Kyrgyz citizens face the prospect of losing the advantages they enjoy at the moment outside the Customs Union. This is something some are clearly aware of; on May 20, police in Bishkek detained at least seven activists protesting the country's plans to join the bloc.

Since joining the WTO in 1998, Kyrgyzstan has developed vibrant textile and garment industries thanks to low customs duties and cheap labour: Kyrgyz garment producers import textile materials from China and produce clothing tailored to former Soviet consumers' tastes.

This, in turn, has helped the Dordoy market in the capital and the Kara-Suu market on the border with Uzbekistan to thrive, attracting traders from neighbouring countries. The two markets are estimated to employ about 10% of Kyrgyzstan's workforce between them. However, since the establishment of the Customs Union in 2010, Kazakhstan has tightened controls on the border with non-member states and customs duties have gone up significantly. "Kazakhstan has toughened requirements and has fenced off the border with barbed wire. There is no trade. This is another reason that we should join the Customs Union," Economy Minister Temir Sariyev said in May.

Taking advantage of low customs duties, Kyrgyz traders have also learnt to import cheap Chinese goods to re-export them as Kyrgyz products, using simplified customs regulations adopted within the Commonwealth of Independent States (CIS). According to the Kyrgyz Statistics Agency, the country's imports from China totalled $1.2bn in 2013, while China's National Bureau of Statistics puts the figure at $5.1bn. In addition to poor customs administration, experts attribute the discrepancy to Kyrgyz re-exports to CIS countries. In view of this, Russia has said it will spend $55m of the $200m grant it is allocating to Bishkek on building and re-equipping border checkpoints. This will eventually hurt Kyrgyz businesses involved in re-exporting goods, leaving thousands jobless. The average rate of Kyrgyz customs duties is around 5% at the moment. This is expected to grow to about 8% after the country joins the bloc. As a result, the Kyrgyz garment industry may become less competitive.

One of the spheres where ordinary Kyrgyz citizens stand to lose greatly from EEU membership is car sales. Kyrgyzstan now has duties on imported cars that are several times lower than those in Customs Union member states. Bishkek imposes duties on imported cars at $0.3 to $1.95 per cc of engine, depending on the age of the car and size of the engine (cars aged over 12 years are levied a customs duty at $1.5 and $2.25, depending on the engine size). Duties on imported cars in the Customs Union range from €1.2 to €5.8 per cc of engine. Should Kyrgyzstan bring the rate of duties on cars to Customs Union levels, the price of imported cars will at least double in Kyrgyzstan.

Currently, Kyrgyz importers pay about $750 in customs duties for a 2,500 cc Toyota Camry, produced in 2003, while Kazakhs pay $14,207 in customs duties for the same car – on top of the cost of the car. The same car produced in 2014 will have $3,250 added to the price of the car in customs duties in Kyrgyzstan and $7,636 in Kazakhstan. The asking price for a 2003 Toyota Camry starts at $12,500 on the online car market, while the same car is listed for as little as $5,000 on the website. This situation has led to many Kazakhs buying cars in Kyrgyzstan, but driving them in Kazakhstan using a document proving that they have the right to drive it, to avoid paying prohibitive duties in Kazakhstan. However, the Kazakh Customs Code bans Kazakh citizens from driving foreign-registered cars without paying the customs duties. As a result, the traffic police target cars with Kyrgyz number plates in Kazakhstan, setting Kazakh motorists against the Customs Union.

Like the authorities in Kazakhstan, Kyrgyz officials have tried hard to sell the EEU as a purely economic, not political, bloc. Yet if Kyrgyzstan's membership proves detrimental to the interests of citizens, joining the Russian-led bloc could prove a dangerous game in a country that has overthrown two presidents in popular revolutions in the past decade.


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