Wednesday, 05 February 2014

Kyrgyzstan Wants to Keep Its Wholesale Markets in the Customs Union

Published in Analytical Articles

By Jamil Payaz (the 05/02/2014 issue of the CACI Analyst)

Kyrgyzstan has slowed down its accession to the Russia-led Customs Union after the Eurasian Economic Commission disregarded its request to include special preferences in Kyrgyzstan's roadmap. With an economy immensely benefiting from the transit of Chinese goods to the wider region, Kyrgyzstan is asking that its wholesale bazaars, Dordoi, Karasuu, and Madina, be granted free-trade-zone status and other support for the first years of its membership. However, it remains to be seen whether the Union members will eventually concede to Kyrgyzstan’s conditions, as free-trade-zones would undermine the Union’s very idea of protecting its market. 


BACKGROUND: Kyrgyzstan’s wholesale markets grew large thanks to low tariffs with China. Dordoi, located near Bishkek, primarily serves wholesale customers from Russia and Kazakhstan, whereas Karasuu, located near the Uzbek border in southern Kyrgyzstan, provides affordable goods to buyers from the Fergana valley across the Uzbek and Tajik borders. In Bishkek, the Madina bazaar where many ethnic Uyghurs run their sales outlets, sells textile and accessories for the country’s robust garment industry.   

The contributions of these bazaars to Kyrgyzstan's economy cannot be overestimated. Deputy Minister for Economy Danil Ibrayev says these markets provide direct and indirect employment to one fifth of Kyrgyzstan’s labor force. And according to the National Statistic Committee, goods imported from China amounted to almost a quarter of all Kyrgyzstan’s imports in 2012. It is worth mentioning that the official figures tend to underreport the actual figures due to cross-border smuggling and corruption. Nevertheless, a World Bank report suggests that up to 85 percent of goods in these bazaars are re-exported. The share of the Dordoi bazaar alone amounts to one third of the country’s GDP.  

In addition, the abundance of cheap Chinese materials has spawned thousands of sewing shops near these bazaars. These clothing manufacturers, providing employment to youth, especially young women, were able to boost demand for “Made in Kyrgyzstan” brand clothes in Russia and Kazakhstan, with the whole sector generating about 7 percent of the country’s tax revenues. Rough estimations suggest that 15 percent of Bishkek’s one-million-population is involved in the apparel production. It is obvious that this sector remains highly vulnerable to the Union’s high tariffs. Local economists fear the Union tariffs will render their products uncompetitive by increasing prime cost. Currently, the customs tariff averages 5.1 percent and the accession to the Union will at least double it, they warn.       

At the meeting of the Supreme Eurasian Economic Council (SEEC) on December 24, 2013, Kazakh President Nursultan Nazarbayev made it unequivocally clear that he is against special preferences for new members. He stated, “Kyrgyzstan’s position is clear; the Commission Council endorsed the draft roadmap without taking into account [Kyrgyzstan's] suggestions … Of course, if [Kyrgyzstan] has some issues, let us consider them later, if necessary, but we should not allow accession to the Customs Union with special regimes retained.” He stressed that there should be no one legged entry. Nazarbayev was widely quoted in local media as saying “Integration does not give free candies, as some think, and does not allot anything. We go there voluntarily in the interest of our countries.”  

IMPLICATIONS: These words can be understood as addressed to Kyrgyzstan's President Almazbek Atambayev, who while speaking to the domestic press, also appeared unwavering in his statements about the conditions for joining the Union. At a press conference held in Bishkek on the eve of the SEEC, President Atambayev rejected the existing roadmap, echoing the government’s vocal concerns that it was drafted without Kyrgyzstan’s participation even though the Kyrgyz side met with the commission eight times since the start of talks. “I am too toughened to succumb to pressure,” he stressed answering a journalist’s question as to whether accession to the Union is being imposed on Kyrgyzstan. However, he noted that unlike Ukraine, Kyrgyzstan has limited alternatives and “will choose the path that people of Kyrgyzstan agrees on.”

Even though Kyrgyzstan reaps significant benefits from the transit of Chinese goods, the government appears committed to join the Union in the long run. The government does not hide that its declaration of intent in 2011 to join the Customs Union was a political decision. However, the government is growing increasingly concerned with the economic risks its membership might bring and fully understands that a leap in prices and unemployment can easily trigger political disturbances. Indeed, Kyrgyzstan’s demands seem quite difficult for some of the Union members to accept, given Kyrgyzstan’s small market and weak purchasing power, as well as its porous and disputed borders especially with Tajikistan, and its need for large investments to address these problems. Indeed, the government is relying on the Union members to help improve its customs and border infrastructure, arguing that it will become the Union’s external border. Vice Prime Minister Otorbayev has admitted that the 2014 budget cannot afford any border strengthening projects.           

More importantly, Kyrgyzstan's government requests a development fund to cushion against possible economic downturns, stating a need for about US$ 200 million annually to boost new enterprises and create jobs for a period of up to five years until the economy is fully harmonized with that of the Union. Interestingly, the government insists that this package includes an agreement that Kyrgyz labor migrants are provided with preferential treatment in the Union. Frequent news of their mistreatment in Russia and Kazakhstan has raised demands from the Kyrgyz public for some sort of guarantees that Kyrgyz migrants will not be subject to deportations on whim. One fifth of Kyrgyzstan’s 5.5 million population is working abroad, primarily in Russia.

Whenever the Customs Union is discussed, many emphasize Kyrgyzstan’s susceptibility to Moscow's economic leverage. Currently, the Customs Union's share of Kyrgyzstan's overall trade turnover equals about 43 percent. Moreover, some essential goods are imported exclusively from Russia and Kazakhstan, including oil products, wheat, flour, and coal.  Kyrgyzstan recently handed over its aging and indebted gas supply system Kyrgyzgaz to Gazprom in order to secure an uninterrupted supply of gas to the country, according to President Atambayev. The authorities also expect Russia to help construct the country’s Kambar-Ata dam and hydropower plants, and equip the Kyrgyz military. In the event that Kyrgyzstan refuses to join the Union, observers warn that the current non-tariff policy on fuel that Russia exports to Kyrgyzstan will be the first to be lifted.

The next round of talks with the Eurasian Economic Commission will be held in March, but it is expected to be another futile effort to come to an agreement. The EEC head, Victor Hristenko, said the issues raised by the Kyrgyz side go beyond the commission’s mandate and must be dealt with at the presidential level.   

Another unclear issue is how Kyrgyzstan will handle the tariff differences as a member of both WTO and the Union. Economy Minister Temir Sariyev said, “We will have to negotiate with each WTO member and pay them compensation [for the increased tariffs]. The total sum [of compensation] is unknown.” He said that Kyrgyzstan is in no position to pay the compensation and that the Union members should be the ones to address the issue.

CONCLUSIONS: Atambayev, whose tenure has been marked by a strong pro-Russian rhetoric and Russia’s promises to invest in Kyrgyzstan’s large economic projects, understands that accession to the Union carries great risks for the country’s stability and that it does not need to be unduly expedited. Therefore, Kyrgyzstan will closely follow the process of Armenia's accession to the Union and the consequences of its membership. The Armenia case is appealing due to the country’s size and membership in the WTO. So far, no objective surveys have been conducted to analyze the Kyrgyz public’s attitude toward the prospect of joining the Customs Union. Yet, even if such a survey would be conducted, it might not reflect the long-term perception because the actual pros and cons of membership remain obscure to the public.

AUTHOR’S BIO: Jamil Payaz is a Bishkek-based freelance journalist who specializes in economic, political, and security issues in Kyrgyzstan.

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