EEU impact on Kazakhstani economy

Idea of regional integration has become popular over the last decades in international economic and political relations. The best example of such integration is European Union. Obviously other regions are trying to follow EU example, and build their own integration with neighbors, in order to receive mutual benefits from close cooperation in economic relations. This idea has also become relevant for the new post-soviet countries. No long after USSR collapse in December 8, 1991 was created international organization of Commonwealth of Independent States, which consisted of almost all post-soviet states. Although the organization is still operating, it does not have much power and influence. One of the main reasons for this one was the different approach of the member states and their level of economic development in the following years after they became independent.

By 2000 there were three countries actively involved and interested in integration process. Those were Belarus, Kazakhstan and Russia. Even for these three countries it took time to negotiate cooperation basics in the new integration framework. In 2009 on 10^th of October Eurasian Economic Community (EAEC or EurAsEC) was established with such member states as: Belarus, Kazakhstan, Kyrgyzstan, Russia and Tajikistan. Armenia, Moldova and Ukraine joined as observer-states.

In 2007, Russia, Kazakhstan and Belarus declared their intention to create a customs union within the Eurasian Economic community – the Eurasian Customs Union (CU).

In October 2007, the presidents of Russia, Belarus, and Kazakhstan signed the Agreement on the establishment of the customs union (CU). They also approved a two-year implementation plan. The objective was to facilitate free movement of goods in mutual trade, create favorable conditions for trading with third countries, and expand economic integration.

In 2011, the CU was already working at full capacity, with economic agents operating within a common customs territory and using the Common Customs Tariff. On January 1, 2012, the CU was supplemented by a package of further seventeen agreements that constitute the regulatory basis for the Single Economic Space (SES). Those agreements address a number of key issues underpinning the process of economic convergence within the “Troika”, ranging from coordination of macroeconomic policies to labor migration. Finally, on January 1, 2015, the Eurasian Economic Union Treaty came into effect. Armenia acceded to the integration association on January 2, 2015, and Kyrgyzstan on May 8, 2015 (the decision was ratified and took effect in August 2015) [1].

The “family” of EAEU institutions is now complete. The Supreme Eurasian Economic Council, a body made up of the heads of member states, addresses critical matters affecting the Union and approves its strategy, key operating areas, and development prospects. The Eurasian Intergovernmental Council, which comprises the heads of the governments of the member states, exercises its powers in 10 areas, including enforcement and oversight of the EAEU Treaty and approval of a draft EAEU budget.4 Since 2012, there has also been a common supranational institution acting as the Union’s regulatory body and a motive force for integration - the Eurasian Economic Commission (EEC). Approximately 140 competencies have been elevated to the Commission’s supranational level. The EEC’s main executive body is the Board, comprising 10 members (ministers), with each member state represented by 2 such ministers. Such a representation scheme diminishes Russia’s role as the region’s leading state in Eurasian Economic Union affairs: despite being responsible for 87% of the Union’s total GDP, Russia has only 20% of its total voting power. This was intentional. Since February 2016, the Commission has been headed by Tigran Sarkisyan, former Prime Minister of Armenia. Other key EAEU bodies include the following: The Court of the Eurasian Economic Union is a specialized judicial body authorized to resolve disputes related to the implementation of international treaties concluded within the framework of the Union, and enforcement of the decisions of its governing bodies. Its rulings, for example, decisions on the Common Customs Tariff, have direct effect in the EAEU’s countries and are legally binding. As of today, the Court has primarily reviewed claims concerning setting the particular import quotas of the Union.

The progress of Eurasian integration depends on the success of “bottom-up integration”-growth of mutual trade, mutual investments, and civilized labor migration. This requires that the “rules of the game” be uniform within the EAEU economy. The ultimate goal in the long term (until 2025) must be to increase the common market as much as possible. The events of 2015–2016 suggest that this is a tall order. Elimination of exemptions in the single market is critical to the modernization and cooperation of EAEU economies. For example, the parties have agreed to create, as of January 1, 2016, a common market for pharmaceuticals and medicines. However, due to regulatory complexities and difficulties associated with unifying the procedures governing pharmaceutical operations through the entire EAEU, the corresponding decision has been delayed by one year. Moreover, in order to make the decision politically acceptable to all member states, the fundamental move to the truly common market has been postponed to 2020 and in some parts even to 2025. Additionally, negotiations regarding the EAEU Customs Code have been anything but easy. The code should have gone into effect on January 1, 2016, but its adoption was delayed. Member states’ economic agents are now operating without the code, relying on national laws and existing treaties and agreements. The EEC has received approximately 1,500 comments on the draft code from Belarus, Kazakhstan, and Russia. Armenia and Kyrgyzstan joined the work on the document later than the other EAEU members and are now also engaged in an active discussion of proposed amendments. In June 2016, 57 matters related to customs regulation within the EAEU remained unresolved. A discussion at the level of prime ministers of five states (Intergovernmental Council, November 16, 2016) was necessary to finally remove the last obstacles. The EAEU Customs Code will thus come into effect by mid-2017 [2].

One of the most important matters on the EAEU agenda in the immediate future is the gradual unification and elimination of non-tariff barriers (NTBs) in mutual trade in goods and services. Non-tariff barriers place a significant burden on mutual flows of goods and services between EAEU countries, reducing the overall efficiency of the common market. They have a particularly pronounced crippling effect on the development and cooperation of hi-tech industries, particularly mechanical and chemical engineering. The EDB Center for Integration Studies completed a large-scale research project and, for the first time, gave an extended assessment of the impact that NTBs have on mutual trade within the EAEU and developed recommendations on how to eliminate such barriers. A massive survey involving enterprises from Belarus, Kazakhstan, and Russia found that NTBs account for 15% to 30% of total export value. In other words, each dollar’s worth of export goods traded between EAEU countries still includes 15 to 30 cents of NTB-related costs as of 2014. NTBs can be conveniently divided into two groups. The first group includes such non-tariff barriers as sanitary and phytosanitary measures, technical barriers to trade, quotas, bans, and quantitative control measures. The second group comprises price control measures and measures that affect competition (special importers, restrictions on marketing and public procurement, subsidies). Barriers in the second group are often described as “sand in the wheels”, as they hinder the movement of goods and, in theory, can be completely eliminated. These nontariff barriers have the most negative impact on trade. In the medium term, Belarus will benefit the most from the reduction of NTBs: its real GDP may increase by 2.8%, and its wealth could rise by 7.3% on a cumulative basis. In Kazakhstan, wealth would rise by 1.3%, while real GDP may increase by 0.7%. The effects on Russia may be less impressive: wealth would rise by 0.5% on a cumulative basis, while real GDP would rise by 0.2%. This is attributable both to the large size of the Russian economy and to the fact that Russia relies on trade within the EAEU less than it does on trade with the rest of the world. The largest beneficiaries of NTB reduction will be manufacturers of machines and equipment. This can be explained by the fact that NTB-related costs in that sector are the highest [3].

As a member of the EAEU, the economy of Kazakhstan remains the most globally integrated country in Central Asia. The union offers a number of benefits as well as challenges for the economy. Since Kazakhstan is a land-locked country, the issue of economic integration is particularly important in improving the country’s role in international trade. Joining the EAEU will grant more favorable conditions in terms of accessing the Russian and European transport infrastructure for Kazakhstani business, and thus will reduce the transport costs of foreign trade. Moreover, Kazakhstan will enhance its negotiating position with third countries on the world market as a member of an economic bloc. For instance, a series of talks have already been conducted by the CU with major economic blocs such as the European Union and the OECD, along with India, Vietnam and other countries.

It should be noted that the benefits associated with the entry of Kazakhstan into the EAEU are mainly oriented towards consumers. Firstly, due to inclusion of certain countries which were not part of the CU (Armenia, Kyrgyzstan, possibly Tajikistan and others), the possibility of a wider selection of goods will grow. Secondly, the expansion of the market will increase competition between companies, which should lead to better quality products at reasonable prices. Thirdly, the formation of a common labor market and the creation of joint ventures with partners within the EAEU will reduce unemployment and is expected to increase welfare. Also, according to the Minister of Healthcare and Social Development, since Russia and Belarus have higher salary standards than in Kazakhstan, experts expect that local salaries will also grow in order to prevent brain drain from Kazakhstan [4].

However, it is important to mention that in the first three years of the CU, Kazakhstan benefited less than both Belarus and Russia from membership. For example, according to the research results of the European Bank for Reconstruction and Development (EBRD), as a result of membership in the CU, Kazakhstan experienced significant upward changes to tariff lines on products from other Central Asian states, with tariffs sometimes levied by 50 per cent. Moreover, membership entailed an increase in non-tariff barriers, too. Specifically, clearance time for trucks from Central Asian countries outside the CU has increased by 47 per cent.

The importance of trade to the economy of Kazakhstan is clear; trade constitutes 31 per cent of the services sector, whereas in countries with a more developed domestic market it comprises 15-20 per cent on average. A large part of the population in Kazakhstan gets income from trading goods and services, therefore in social terms and based on the experience of the CU, the integration process may harm vulnerable layers of society because of deteriorating trade conditions with important partners which did not join the EAEU.

The EAEU was expected to be a possibility for Kazakhstan to attract foreign investors from member states into Kazakhstan. Harmonization of laws, elimination of barriers to market access may have a positive contribution to growth of foreign direct investment (FDI) within the EAEU. However, if one looks back in the trends during the period of the CU, the share of Belarus and Russia in total FDI in Kazakhstan remains less than 5 per cent, whereas Belarus, in contrast, gains about 70 per cent of its FDI from Russia. Moreover, significant growth in investment in Kazakhstan from other members of the CU has not been observed in recent years. Because the integration process has not contributed to investment attraction in Kazakhstan, the need to stimulate investment is pressing.

Another equally important and positive factor relating to entry into the EAEU is the potential for gradual improvement of state institutions. As a rule, close cooperation of governmental institutions between two or more countries leads to a gradual improvement in human resources and the quality of work state institutions produce. For example, the integration of 15 Caribbean countries in 1973 led to significant advances in terms of the effectiveness of institutions rather than in trade.6 There is a possibility that such institutional improvements will take place in Kazakhstan, Russia and Belarus. Currently, as the World Bank’s Governance Indicators demonstrate, Russia shows the lowest control of corruption (16 from 100); whereas Belarus indicates the worst regulatory quality among EAEU member states (18 from 100) [5].

Finally, situation in Eastern Ukraine may unfavorably influence the economy of Kazakhstan as a member of the EAEU. The economic stagnation of Russia, devaluation of the Russian Ruble since March 2014 as well as the Russian Central Bank’s gradual turn towards a floating exchange rate policy has already reflected on the political and economic image of Russia. The World Bank and the International Monetary Fund (IMF) have already stated that economic sanctions against Russia will have a negative effect on economic growth, which will consequently impact Kazakhstan’s economy.

From the very beginning, Kazakhstan wanted the Eurasian Union to be purely economic, without any political dimension. On Astana’s initiative, the EEU’s basic principles contain a point on respecting each member state’s political system, which means that members do not have to make political changes as a result of closer integration.

Kazakhstan sees the creation of the EEU as a way to strengthen its position in an increasingly competitive global environment. The EEU is officially seen as a way of achieving important economic goals. Kazakh businesses are to have access to the EEU market, with a population of 170 million, and cross-border trade is to be increased with the 12 Russian regions bordering Kazakhstan, which have a population of 27 million. Kazakhstan should be more attractive to investors who also want to operate in the Russian and Belarusian markets. The Russian and Belarusian state procurement markets, valued at $198 billion a year, will be opened to Kazakh businesses. Transport routes linking up European and Asian trade flows through Kazakhstan are to be created and landlocked Kazakhstan’s high transport costs should be lowered through equal access to the Russian and Belarusian railway networks. A single space will be created for the free flow of capital, services, and labour, and a single financial market is to be instated by 2025. And Kazakhstan will gain access to energy infrastructure by 2025 on the basis of the EEU’s single market for oil and gas.

But there will be real problems in achieving these official goals. It is impossible to create an equal union between strong and weak players. And it is even more difficult to create a working union between uncompetitive players if their economies are based primarily on the export of natural resources. All the members of the Customs Union have high levels of corruption and state interference in the economy, bloated bureaucracies, and no proper market economy. And it will be interesting to find out whether authoritarian regimes are able to integrate in an effective way [6].

Rather than economic integration with other states, the best foreign policy for Kazakhstan would be diversified cooperation in water, energy, agriculture, and other spheres with various countries (other Central Asian countries, China, Russia, the European Union, and the United States).

The creation of the Customs Union and its transformation into the EEU caused serious divisions in Kazakh society. In early 2014, an anti-Eurasian movement was set up, which sees the EEU as a threat to Kazakhstan’s national sovereignty. Back in 2012, the opposition even proposed a referendum on Kazakhstan’s membership of the precursors of the EEU, the Customs Union and the Single Economic Space.

The influence of the opposition on domestic politics should not be overestimated. But the government needs to be careful, because the EEU is becoming more unpopular with the ethnic Kazakh part of the population, including the influential Kazakh-speaking intelligentsia on whose support the government depends. Moreover, the war in Ukraine and the West’s sanctions on Russia has hardened the sceptics’ position that it is dangerous for Kazakhstan to be in a union with a Russia that is becoming an international outcast.

It is also unclear whether Kazakhstan and Belarus will remain members of the EEU after the regimes in both countries change. In Kazakhstan, both domestic and foreign policy are highly personalized – the EEU is a part of Nazarbayev’s personal political ambitions. Will the next president have the same aims? Most importantly, how will Russia react? Will it try to put pressure on the Kazakh leadership as it has at times done in Belarus? Russia made a tactical mistake and set a precedent when it declared that the change of regime in Kyiv meant that Russia did not have to recognize the Budapest Memorandum on Security Assurances for Ukraine. This leaves the door open to other countries in the future to leave the EEU if they consider that it is no longer in their interest.

The EEU may develop in several different directions, depending on economic and geopolitical factors.

The bureaucratization of the integration project may serve to hamper the development of the EEU’s members. In the ongoing trade dispute between Belarus and Russia, economic tensions between Moscow and Minsk have led to a public spat in spite of the supranational structures of the Eurasian Economic Commission and its Council, which is made up of the deputy prime ministers of the three member countries. These structures seem to be more for show than of any practical use [6].

Kazakhstan and Belarus did not agree with Moscow’s introduction of import sanctions against Western goods, so the move led to a cooling of relations within the Customs Union. Moscow accused Minsk of re-exporting banned goods to the Russian market. Moreover, Russia introduced limits on the transit of goods across its territory, including those destined for Kazakhstan. This was in violation of the basic principles of the Customs Union and Belarus retaliated by restoring its own customs controls. All this means that as the EEU starts out in 2015, these internal conflicts will continue, since the sanctions war, along with Moscow’s war against re-exports, shows no sign of ending.

The three current EEU members will likely retain their different views on the future of the project. This may lead to an increase in economic and political tension and to conflict within the organization. Moreover, the EEU’s enlargement to include underdeveloped and uncompetitive countries (Armenia, Kyrgyzstan, and Tajikistan) may delay its development because funding will be required to help their economies catch up.

The coming into being of the EEU may lead to the disintegration of the post-Soviet space into several groups: Eurasians (Russia, Kazakhstan, Belarus, Armenia, Kyrgyzstan, Tajikistan), anti-Eurasians (Azerbaijan, Uzbekistan, Moldova, Ukraine, Georgia), and neutral countries (Turkmenistan).

Russia will continue to push for more political integration through the EEU, especially after the regime in Kazakhstan changes. This means that Kazakhstan’s continued membership of the EEU will undoubtedly carry serious political risks.

REFERENCES

1. Dragneva, R., & Wolczuk, K. (Eds.) (2013). Eurasian economic integration: Law, policy and politics. Cheltenham, UK, and Northhampton, MA: Edward Elgar.

2. Alpysbaeva, S., Kenzhebulat, M., Kamzin, A., & Kaskeev, S. (2015). Structural changes in mutual trade between Kazakhstan and Russia against the background of external shocks and monetary policy differences. Evraziiskaya Ekonomicheskaya Integratsiya, 2 (27), 41–51

3. Vinokurov E. (Ed.) (2010). Eurasian integration indicators system. Almaty: Eurasian Development Bank (In Russian)

4. Launch of Eurasian Economic Union may trigger growth of salaries in Kazakhstan, Tengri News, accessed July 22, 2014, http: // en. tengrinews. kz/ markets/ Launch - of-Eurasian –Economic - Union- may- trigger- growth- ofsalaries- in- Kazakhstan- 256881

5. “Regional Trade Integration and Eurasian Economic Union”, European Bank for Reconstruction and Development, accessed November 4, 2014

6. Satpayev D. (2015). Kazakhstan and the Eurasian Economic Union: The view from Astana, accessed November 4, 2014 http: // www.ecfr.eu/ article/ commentary_ kazakhstan_ and_ the_ eurasian_ economic_ union_ view_ from_ astana395