Wednesday, 24 June 2015

Kazakhstan Completes WTO Negotiations

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By Nurzhan Zhambekov (06/24/2015 issue of the CACI Analyst)

Kazakhstan completed its accession negotiations with the World Trade Organization (WTO) on June 10 and will join the WTO later in 2015. This is a milestone in Kazakhstan’s economic development. The WTO’s member states voted in favor of Kazakhstan’s accession at a meeting in Geneva on June 22, 2015. Whereas the economic impact is currently difficult to assess, the reduction in trade tariffs should in theory improve the competitiveness of Kazakhstan’s economy, leading to higher economic growth. In practice, Kazakhstan’s experience within the Eurasian Economic Union (EEU) has not been positive, as Kazakh producers have struggled to compete with larger Russian companies. Kazakh consumers are likely to benefit from Kazakhstan’s upcoming membership in the WTO, while Kazakh producers will face increasing international competition.

BACKGROUND: Kazakhstan’s President Nursultan Nazarbaev stated on June 22, 2015 that Kazakhstan completed its accession negotiations to join the WTO in Geneva. The Kazakh leader stated that membership in the WTO would provide Central Asia’s largest economy with new horizons by opening up access to a larger market for Kazakhstan’s firms and a wider selection of goods and services to Kazakh consumers. Kazakhstan will become the second Central Asian state to join the WTO following Kyrgyzstan’s accession over 10 years ago. Kazakhstan’s accession to the WTO will speed up the country’s integration into the global economy.

According to a statement from the WTO, Kazakhstan completed talks over the terms under which Kazakhstan would join the global trade organization at a working party meeting held on June 10, 2015. Kazakhstan originally submitted its application to join the WTO in 1996. According to the WTO, the accession negotiations were among the longest and most challenging in the WTO’s history. Kazakhstan’s application process has been complicated due to its simultaneous membership in the EEU, comprising Armenia, Belarus, Kazakhstan, Russia and Kyrgyzstan. Kazakhstan announced that it would join the Eurasian Customs Union in June 2009 and has been an EEU member since its foundation. As a result, Kazakhstan transformed large portions of its trade regime in accordance with EEU legal instruments, and adjusted amended most of its customs practices and tariffs to those of the Russian Federation.

The major stumbling block delaying the completion of negotiations was tariff adjustment, requiring the resolution of differences between bilateral market-access agreements that Kazakhstan has negotiated with WTO members and the common external tariff of the EEU. Kazakhstan worked bilaterally and multilaterally with the WTO members to complete its accession negotiations and resolve specific issues of bilateral and multilateral interest. In addition, the Kazakh government stated that the disagreements over agricultural subsidies were a major hurdle in the accession talks. The Kazakh government made clear that it intended to preserve the right to increase agricultural subsidies to ten percent of agricultural output, a level permitted for developing countries under the WTO rules and regulations. It is not yet known whether Kazakhstan has achieved that goal. Moreover, export subsidies, tax discrimination in favor of domestic agricultural goods, intellectual property protection, sanitary and phytosanitary measures, import licensing procedures, government procurement practices, local content requirements in investment contracts and purchases by state-owned enterprises were outstanding issues to be resolved in the accession negotiations process.

IMPLICATIONS: 

Local Kazakh experts do not foresee major changes due to Kazakhstan’s upcoming membership in the WTO. According to Kazakh economist Aidarkhan Khusainov, WTO membership is comparable to membership in the United Nations; it is mostly political and good for the country’s image. In Kusainov’s assessment, despite neighboring Kyrgyzstan’s membership in the WTO for the last 10 years, the Kyrgyz economy did not experience major growth. Mukhtar Taizhan, an activist and former economist, believes that Kazakhstan will benefit from the WTO membership, particularly through improved export opportunities for Kazakh businesses, increased competition in the domestic market, improvement in the quality of goods, and a decrease in prices for imported goods. In addition, Taizhan believes that WTO membership does not conflict with Kazakhstan’s current membership in the EEU because Armenia, Kyrgyzstan and Russia are already members of both the EEU and the WTO.

It is currently difficult to assess the likely implications of Kazakhstan’s WTO membership. The Kazakh government will make the details of the accession public later in 2015. In principle, a reduction of tariffs should improve the competitiveness of the Kazakh economy, leading to higher economic growth. The major concern among Kazakhstan’s producers is that the WTO membership will likely lead to higher imports and increase competition, which may have negative implications for Kazakh producers, who do not believe they can increase exports to equal the increase in potential imports. This risk is compounded in the short term by the relatively strong tenge (the Kazakh currency), and political uncertainty in the medium to long-term outlook, as there is no clear succession mechanism after Nazarbaev’s eventual departure from the political scene.

These two major factors will have a negative impact on domestic investment and production in Kazakhstan. Kazakhstan’s recent experience with the EEU has not been encouraging. Kazakh producers have struggled to compete against larger Russian firms and Kazakh firms will face even larger challenges from multinational firms with global business operations. It is yet uncertain how much and for how long the Kazakh government can subsidize its agricultural sector, which is a substantial source of employment providing over 20 percent of Kazakhstan’s jobs. The eventual reduction in subsidies to the agricultural sector can impact the labor market negatively by pushing up unemployment in the short to medium term.

In addition, Kazakhstan’s government currently limits foreign ownership in the telecom sector to a maximum of 49 percent. This restriction will have to be lifted as a precondition for Kazakhstan’s WTO membership. In addition, the current 49 percent restriction on foreign capital in joint ventures supplying architectural, urban planning, construction and engineering services will be eliminated, according to Kairat Umarov, Kazakhstan’s ambassador to the U.S. Legal entities in Kazakhstan with 100 percent foreign ownership will be allowed to provide services. The eventual removal of restrictions in major sectors will have far-reaching implications for the Kazakh economy. Balancing the implementation of Kazakhstan’s key economic priorities and the development of processing industries with the country’s commitment to the WTO will present a major challenge for Kazakhstan’s policymakers.

The major beneficiaries of Kazakhstan’s accession to the WTO will be Kazakhstan’s consumers, as the quality of goods and services will improve and the price of goods and services will likely decrease. In contrast, Kazakh businesses will face new challenges competing against foreign rivals, as Kazakhstan’s economy opens to all 161 members of the WTO, not just the EEU members. Finally, if oil prices increase in the near future, the Kazakh tenge may appreciate, thereby putting additional pressure on Kazakh producers in the form of higher labor costs and cheaper imports.

CONCLUSIONS: After almost 20 years of accession negotiations with the WTO, Kazakhstan has completed its talks and will join the global trade organization later this year. Although the details and conditions of its accession to the WTO are not yet public, it will have both negative and positive effects on Kazakhstan’s economy. In the near term, Kazakh producers will struggle in the more competitive business environment. In contrast, Kazakh consumers will enjoy a wider selection of cheaper and higher quality imported goods. Despite the potential challenges for the Kazakh economy in the near to medium term, the increased business competition will provide ample opportunities to improve Kazakhstan’s business climate in the long term and help the Kazakh government diversify its economy away from its dependence on oil. 

AUTHOR’S BIO: Nurzhan Zhambekov is an independent economic and political analyst. He holds a master’s degree from the Georgetown University School of Foreign Service. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. .

Image Attribution: Wikimedia Commons & Boris Ajeganov

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