KYRGYZSTAN’S FACES BLEAK PROSPECTS IN THE CUSTOMS UNION
In early April 2011, the Kyrgyz Government unveiled plans to join the Customs Union (CU) under the auspices of the Eurasian Economic Community (EURASEC) led by Russia, Kazakhstan and Belarus. This has sparked heated debate in Kyrgyzstan on the pros and cons of the move, which has received mixed reactions from the expert community. While the CU’s economic rationality is questionable, its character as an institution designed to boost Russian influence over the CIS implies that Kyrgyzstan’s membership will come at the price of reducing its political and economic sovereignty.
BACKGROUND: Kyrgyzstan is a WTO member since 1998 but may opt for suspending its membership in favour of the Customs Union. However, entering the CU will increase tariff rates for other WTO partners in conflict with WTO tariff regulations. Kyrgyzstan will be required to spell out new customs and tariff regulations with each WTO member and refund compensation costs for changing tariff rates. According to current estimates, compensation costs may reach US$ 1 billion. This will put greater strains on the chronically underfinanced Kyrgyz budget. Further, should this scenario materialise, Kyrgyzstan will be stripped of its Most Favoured Nation (MFN) trade status and other trade preferences with 153 WTO members.
Joining the CU is fraught with other risks as well. The grand total trade turnover between Kyrgyzstan and the WTO amounted to 48 percent in 2010, whereas CU members account for 1.9 percent. This may disproportionately affect the distribution of customs revenues between the CU and Kyrgyzstan. Additionally, the current average rate of the common external customs tariff levied by the CU is 10.6 percent. As a WTO member, Kyrgyzstan enjoys 5.1 percent of the average customs tariff.
The repercussions of the possible entry are still far from clear. Economically, joining the CU will inevitably result in price hikes in the domestic market for a majority of goods and commodities imported from CU members. Re-export transactions from China to Russia and Kazakhstan make up 60 percent of Kyrgyzstan’s GDP, according to the Kyrgyz Government. The CU customs tariffs are estimated to be three times higher for a cheap Kyrgyz re-export if the country chooses not to join the CU.
It is also feared that the competitiveness of local manufacturers will be severely hamstrung if the market is flooded with Russian products. Further, EURASEC countries differ disproportionately on a wide range of macroeconomic indicators, resource base and competitive advantages. As of 2008, Kyrgyzstan’s GDP stood at US$ 5 billion whereas Russia’s GDP reached US$ 1676.6 billion, with Kazakhstan at US$ 135.6 and Belarus at US$ 60.3 respectively. Given its growing budget deficit, its total reliance on re-export operations and virtually non-existent industry, Kyrgyzstan is one of the poorest Central Asian countries and lags far behind the CU states, which provide a grand total 83 percent of the Eurasian Economic Space (EES) economic output. On this negative backdrop, the economic viability of Kyrgyzstan’s entry to the CU now seems uncertain.
IMPLICATIONS: From a political standpoint, Kyrgyzstan runs a risk of falling under tighter Russian control if it joins the CU. Decision-making power in the CU is based on the level of economic power of its members and not on consensus. Thus, the overwhelming decision-making power rests with Russia as a leading economy and energy provider in the post Soviet area. In particular, Russia may be tempted to make use of its dominant position in the CU and increase its pressure on the Kyrgyz leadership to close the U.S. air base at Manas airport or demand 48 percent of the shares in the Dastan torpedo making plant.
Russia’s ban on Georgian goods and attempts to cajole Ukraine from entering the EU Free Trade Zone in favour of the CU using gas and tariff manipulations indicates that Russia will not allow Kyrgyzstan a free ride. Russia’s hard line policies of economic nationalism towards Ukraine, Georgia and Belarus leave little leeway for manoeuvre. Kyrgyzstan is highly dependent on fuel imports from Russia, which provides the Kremlin with ample opportunities to exert economic and political pressure on the country. In 2010, Russia doubled fuel export duties for Kyrgyzstan when former President Kurmanbek Bakiev, in breach of earlier promises to Moscow, extended the leasing terms for the U.S. air base at Manas. Soaring fuel prices exacerbated economic woes at home and sparked protests that played a prominent part in Bakiev’s fall. Given its continuous macroeconomic and political uncertainty, Kyrgyzstan is easy prey for pressure and influence from other CU members. In a desperate attempt to alleviate its severe budget deficit, Kyrgyzstan has applied for a US$ 106.7 million loan from the EURASEC Anti-Crisis Fund. With Russia as a key donor, a disbursement of the requested loan now appears to be a clear cut political conditionality including quotas for Kyrgyz labour migrants, along with military and technical assistance.
At the same time, the CU itself faces a number of formidable problems that may thwart its integration efforts and subvert the foundations of the EES and EURASEC. Ironically, Russia and Kazakhstan aspire to enter the WTO, making integration within the CU all but pointless. Interpersonal relations between the leaders of Russia, Kazakhstan and Belarus play a paramount role and may ultimately decide the CU’s success or failure. In this sense, it is a major problem for the CU that the relations between Russia and Belarus have deteriorated as demonstrated by the “tariff wars” over dairy and oil imports in the past year. Belarus will announce its final decision on the target dates of joining the CU only by mid-July this year. Minsk opposes certain conditions of the free trade regime under the CU, particularly tariff rates. Belarussian President Lukashenko’s highly unpredictable governing style was clearly demonstrated in his recent remarks where he blasted the Russian leadership for its criticism of the presidential elections and crackdown on opposition in Belarus. In particular, he was quoted as saying that his country expects to have access to “all energy pipelines” as a member of the EES. “Otherwise, the Eurasian Economic Space is hardly needed”, he warned. This means that Belarus wants to reduce its dependence on Russian oil and seek alternative and less costly energy routes bypassing Russia. Russia recently doubled the oil prices and export duties for Belarus in what many see as a way of pressuring Minsk to curtail its rapprochement with the West.
Likewise, Kazakhstan eyes lucrative energy infrastructure investments in Georgia which are met with growing exasperation from Moscow. Although Russia has no objections to Tajikistan entering the CU, Moscow nonetheless has recently increased the fuel export tariffs to the country by 44 percent, causing an energy deficit and sharp price hikes in Tajikistan.
CONCLUSIONS: These developments demonstrate that the CU is a fluid political union of actors with conflicting interests, grievances and priorities rather than a sustainable economic organization. It remains to be seen whether the CU proves a viable institution for economic integration and not merely a Russian tool for pressuring Belarus, which displays little enthusiasm to join the Russia-backed Union State, as well as Georgia and Ukraine who seek economic integration with the EU. The aforementioned considerations imply that the CU is a politically motivated rather than economically justified institution. For Kyrgyzstan, joining the CU may imply a high cost in terms of its political and economic sovereignty.
AUTHOR’S BIO: Bakyt Baimatov holds an MA in International Relations from Reading University (UK) and a PhD in Political Science from the Institut für Politikwissenschaft, University of Vienna, Austria. Currently, he is lecturing at the Institute of Development Studies in Geneva, Switzerland and provides consulting for a number of UN agencies.