Kyrgyzstan Debates Customs Union Entry

Obvious benefits to good trading terms with Russia and Kazakstan, but economists see pitfalls as well.

Kyrgyzstan Debates Customs Union Entry

Obvious benefits to good trading terms with Russia and Kazakstan, but economists see pitfalls as well.

Tuesday, 21 September, 2010

As Kyrgyzstan’s government seriously considers joining a customs bloc with neighbouring Kazakstan as well as Russia and Belarus, some economic experts have voiced doubts over the wisdom of doing so, at least in the near future. 

Kyrgyzstan’s president Roza Otunbaeva announced that her country wanted to join the customs union during a July meeting of the Eurasian Economic Community, EurAsEC, a wider grouping of former Soviet states.

Otunbaeva ordered a working group to look into the economic implications of joining the customs bloc, which is moving towards the eventual creation of a common market encompassing a population of some 170 million people by the end of 2012.

For the weak Kyrgyz economy, harmonising customs arrangements with Russia and Kazakstan is seen as essential if it is to continue trading with them on anything like equal terms. Last year, these two states accounted for over 28 and ten per cent of Kyrgyzstan’s foreign trade, respectively.

The introduction of common customs rules for Russia, Belarus and Kazakstan at the beginning of July was a step towards a new divide that will set members of the customs union apart from non-members. (See Customs Deal Brings Kazaks Closer to Russia.)

Previously, all EurAsEC members enjoyed a duty-free trading relationship with one another. Now outsiders will have to pay whatever import duties the customs union applies, so Kyrgyzstan’s leaders are calculating that they would be better off on the inside.

More broadly, Kyrgyzstan has wider economic and political reasons to stay close to Russia and Kazakstan, as both are major investors, while Moscow also provides significant aid and loans. Both countries play host to large numbers of labour migrants from Kyrgyzstan.

Anarkhan Rahmanova, who heads the international trade department at the Kyrgyz Ministry for Economic Regulation, has been appointed to lead the working group on customs union entry, and says the value of trade with Russia and Kazakstan is a key consideration.

“More than 41 per cent of our trade is with customs union countries, so joining would enable to increase our exports to them,” she said.

According to Pavel Dyatlenko, a political analyst with the Polis Asia think-tank, Russia and Kazakstan are actively helping Kyrgyzstan recover from the ethnic violence that rocked the southern towns of Osh and Jalalabad in June and left a trail of devastation.

Dyatlenko says the Kyrgyz economy, and government finances in particular, are in such poor shape that it cannot afford to go it alone. With a yawning budget deficit for the current year, he said, “a great deal of money is needed to rebuild Osh and Jalalabad and to compensate for the decline in [foreign] trade revenues, investment, remittances from labour migrants and tourist industry income”.

He added that “Kyrgyzstan’s economy survives because it export raw materials to these countries, and re-exports large amounts of Chinese goods to them”.

Government representative Mukhtar Jumaliev told the news agency in July that the customs union would not apply import duties to items produced within Kyrgyzstan, only to goods originally imported from elsewhere and then re-exported.

This will affect Kyrgyzstan’s position as Central Asia’s main retail point for Chinese-made consumer goods, which are exported all over the region.

China is Kyrgyzstan’s second-largest trading partner after Russia, accounting for 14 per cent of trade last year. If Kyrgyzstan does not join the customs union, it will find it much harder to export Chinese goods to Kazakstan at a profit – but if it does join, it will end up taxing imports from China at a higher rate.

China and Kyrgyzstan currently grant one another favourable terms within the framework of the World Trade Organisation, WTO, of which they are both members. Neither Russia nor Kazakstan is in the WTO, however, a fact which lead some Kyrgyz analysts to worry that their country would lose out by switching from one set of rules to another. Kyrgyzstan could end up having to apply import duties double the five per cent it applies to goods from WTO members.

“If we have to make a choice, it would be better to give priority to the WTO, which is a considerably bigger market than the customs union,” Uluk Kydyrbekov, acting director of the Bishkek Business Club, said.

But Jumakadyr Akeneev, an economist who was formerly Kyrgyz agriculture minister, believes the country does not face an either-or choice, since the terms of its WTO membership allow it to join regional economic associations. Nor is the difference in customs tariffs a major problem, as the WTO system is flexible and should allow an accommodation to be made, he said.

Other economists, while not dismissing the benefits of customs union membership, argue that Kyrgyzstan should hold off until Russia and Kazakstan fulfil their own long-held ambitions to join the WTO. Both countries are still in negotiations with the world trade body. At one point they were considering a joint application as a customs bloc, but they appear to have shifted back to negotiating entry on an individual basis.

“Kyrgyzstan has time to make its final decision on joining the new organisation [in the period] before the three customs members enter the WTO,” Dyatlenko said.

Asyl Osmonalieva is an IWPR-trained journalist in Kyrgyzstan.

This article was produced jointly under two IWPR projects: Building Central Asian Human Rights Protection & Education Through the Media, funded by the European Commission; and the Human Rights Reporting, Confidence Building and Conflict Information Programme, funded by the Foreign Ministry of Norway.

The contents of this article are the sole responsibility of IWPR and can in no way be taken to reflect the views of either the European Union or the Foreign Ministry of Norway.

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