Russia’s Eurasian Economic Union moves south: the case of Kyrgyzstan

Russia’s Eurasian Economic Union moves south: the case of Kyrgyzstan

By Fabio Belafatti

For some former Soviet countries, the decision to align with Russia is not a matter of competing geopolitical strategies: it’s a necessity dictated by economic reasons and by Moscow’s massive blackmailing power. One such case is Kyrgyzstan, in Central Asia. This however does not mean that joining the Russia-led Eurasian Economic Union is necessarily bad. For some states, including Kyrgyzstan itself, the risks of being “left behind” are just too big to be ignored.

 

Background

 

The Custom Union of Russia, Belarus and Kazakhstan exists as a common market area with facilitated trade and movement regimes between three of the closest ex-Soviet allies. Allegedly promoted by Russia to reinforce its control over the former Soviet space, from 2015 the union will evolve into a closer economic one, the Eurasian Economic Union (EAEU), on the economic model of the European Union. The EAEU would, in Putin’s mind, act as an opponent to the European Union, no less. Moscow has long been striving to bring as many FSU countries as possible inside the future EAEU.

 

For Kyrgyzstan, a slowly democratizing country ruled by a pro-Russian élite, the choice to join the EAEU would just sound inevitable, as failing to join would result in the imposition of significant custom duties on products circulating betweenKyrgyzstan and the EAEU states. One of the poorest countries in the former Soviet Union and one of the most heavily dependent on Moscow, Kyrgyzstan would probably be compelled to join even if its ruling élite was not pro-Russian. The situation, however, is more complex.

 

The debate within Kyrgyzstan

 

The topic has recently sparked fierce debate (and protests) all around Kyrgyzstan, with local authorities complaining that the roadmap for accession is not taking their needs into account. According to Reid Standish, EAEU membership is necessary to ensure continuous Kyrgyz exports to Russia and Kazakhstan. However, there is hardly any area in which benefits come without significant disadvantages. The population seems to be aware of this and as a result, the percentage of people in favour of joining the EAEU is now less than 50%, in constant decline compared to early 2014.

 

Gold and FDI: potential victims of the EAEU

 

Gold extraction is crucial for Kyrgyz economy, providing $ 3bln in revenues and taxes. Western companies extract most of it; joining the EAEU would increase the cost of exporting gold to non-EAEU states, making this important sector far less appealing. Moreover, 70% of FDI in Kyrgyzstan come from Canada and China, a percentage that would decrease as a result of EAEU membership because of the preferential treatment that will be granted to EAEU companies, and corresponding obstacles being placed on non-EAEU ones. It remains to be seen whether preferential conditions will push Russian and Kazakh companies to invest enough in Kyrgyzstan to compensate the likely decrease in Chinese and Canadian investments.

 

The problem of Chinese goods: will Kyrgyzstan lose its preferential position?

 

Standish also argues (and he’s not alone in this) that the main problem related to EAEU membership may affect Kyrgyzstan’s position in international trade. Over the last few years, Kyrgyzstan has become a re-seller of Chinese goods imported from Xinjiang and re-exported to Kazakhstan, Uzbekistan and Tajikistan through the bazars of northern and south-westernKyrgyzstan. These bazars provide employment to 1/5 of the working population and the activities of the largest one correspond to 1/3 of the country’s GPD. Cheap Chinese goods are also a useful way for impoverished Kyrgyz to get access to a surrogate of Western prosperity.

 

Joining the EAEU would force Kyrgyzstan to impose custom duties on such goods and undermine the country’s position as “regional supermarket”. Kyrgyzstan is very concerned about this and is asking to give free trade zone status to its bazars, something that Kazakhstan strongly opposes. There is also a risk that more expensive Russian goods will flood a local market deprived of preferential access to Chinese products, causing inflation and a decline in living standards.

 

According to Kairat Moldashev, though, it’s in the interest of all members of the Union to limit the amount of Chinese goods in their markets to protect local industries. Moreover, as David Levy argues, the increase in cost of Chinese goods will be offset by a decrease in the cost of EAEU goods, which the Kyrgyz prefer because of their better quality. Others argue that bazars themselves would benefit: it has already become clear that Kazakhstan and Russia have been limiting imports fromKyrgyzstan since 2011, when they united their markets in a Custom Union, the predecessor of the EAEU. Therefore, the country doesn’t really have a choice if it wants to maintain access to these markets: even if Chinese products will become more expensive, the lack of an internal custom would allow Kyrgyzstan to re-sell them more easily to Kazakhstan and Russia.

 

EAEU membership and access to other markets

 

Protectionist EAEU taxes may also make Kyrgyz agricultural products more competitive, which may boost Kyrgyz exports but also leave the internal market with limited access to homegrown food, forcing ordinary Kyrgyz to buy lower-quality Chinese replacements. The picture in this field is therefore rather conflicting. Equally difficult is to establish whether the EAEU would make it easier to Kyrgyz people to buy from other favourite suppliers such as Korea, Turkey and Iran: on the one hand, products coming from those countries would have to cross only one external border instead of two or three, resulting in fewer transactions and taxes. It is not clear, though, if this will be enough to offset the increased custom tariffs imposed overall on non- EAEU imports.

 

As Emin Akhundzada warns, it is actually far from sure if custom costs as a whole would decrease or increase: according to the Turkish Embassy in Moscow, since the establishment of a Custom Union between Russia, Kazakhstan and Belarus, “for Russia, 82% of tariffs remained the same, 14% were decreased, and 4% increased. For Belarus, 75% of tariffs remained the same, 7% were decreased, and 18% increased. For Kazakhstan, 45% of tariffs remained the same, 10% were decreased, and 45% increased.” The picture seems to be one in which Russia gets most of the advantages while other states actually remain in a subordinate position.

 

Kyrgyz manufacturers: beneficiaries or victims of the EAEU?

 

A powerful argument among EAEU supporters is that Kyrgyz manufacturers would greatly benefit from the simplified access to the Russian and Kazakh market. There is a whole number of small producers and manufacturers in agriculture, textiles, clothes and related sectors that provide a lot of livelihood and job places to the population of the Kyrgyz countryside. This is a booming sector and access to EAEU markets is crucially important for them. 

 

Equally powerful counter-argumentswarn, however, against the risk of increase in the cost of raw materials used by Kyrgyz manufacturers, which mostly come from outside the EAEU (e.g., China). Observers warn that free access to the Russian and Kazakh market may be counterbalanced by an increase in price of raw materials serious enough to undermine the competitiveness of Kyrgyz products. A conclusive agreement on the topic is yet to be found, which leaves Kyrgyz producers in a condition of uncertainty.

 

Migration: Moscow’s most powerful bargaining chip

 

The only area in which virtually everyone agrees about the benefits of EAEU membership is migration. Kyrgyzstan must remain as politically and economically close to Russia as possible if it wants to maintain free access to the Russian job market. Around1/3 of Kyrgyzstan’s economy depends on remittances from migrants working in Russia, mostly in menial jobs in constructions or retail. The country’s economy and social fabric would probably collapse if deprived of this source of income. The very idea of hundreds of thousands of young Kyrgyz migrants coming back from Russia to almost-certain unemployment is something that terrifies Kyrgyz politicians.

 

This scenario would not be unlikely if Kyrgyzstan refused to join the EAEU. As Putin already made clear in several occasions, the creation of the EAEU would trigger a reconsideration of Russia’s visa-free travel regime with CIS countries, includingKyrgyzstan. In the best-case scenario, Kyrgyz workers would need passports instead of simple ID cards to travel, but further restrictions may be later put in place. This fear is probably more than enough to cast aside any doubt and push Kyrgyzstan to join the EAEU, with or without reassurances on other contentious issues.

 

Conclusions

 

Although the balance of costs and benefits of joining the Union is still unclear, Kyrgyzstan is not in the condition to refuse. At the moment, the decision is between a significant amount of risks in joining, and the almost-complete certainty of economic decline and social tensions in case it decides to remain outside the Union and its workers lose facilitated access to the Russian job market.

 

Russia however should make sure to put in place measures to offset the negative consequences of EAEU membership forKyrgyzstan, as these would result in more emigration from the Union’s poorest member and, in the long-term, increase social and political tensions already present in the country. This would have a far more damaging impact on the EAEU than letting a couple of bazars operate in a regime of free-exchange zone and would eventually protect Russia’s EAEU from tensions in its future southern flank.

 

In conclusion, whether Kyrgyzstan will join the EAEU is not much under discussion. What is open to reconsideration are the conditions in which the small Central Asian country will join, but this is something that is likely to be decided in Moscow more than in Bishkek. If Russia is interested in creating a serious alternative to the EU, it will take Kyrgyzstan’s concerns into account; if the EAEU is just about Russia’s reassertion of its imperial power, then there is no likelihood that the concerns of its smaller members will be considered.

 

Fabio Belafatti, Coordinator of the Centre of Contemporary Central Asian Studies (Vilnius University, Oriental Studies Centre) and lecturer of Central Asian Politics.

 

 

geopolitika.lt

 

 

23.06.2014

 

 

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