Posted September 11, 2016
Author Ivan Zuenko
It’s not surprising that the members of the EAEU are struggling to adopt a Customs Code. In many ways, the problem stems from Kyrgyzstan’s accession to the EAEU, which mostly benefits Chinese exporters to Russia, who now have less red tape to deal with and more contraband routes available. The Russian budget, which may miss out on about $340 million a year, is the biggest loser.
Last year, two more countries—Armenia and Kyrgyzstan—became members of the Eurasian Economic Union (EAEU), joining Russia, Belarus, and Kazakhstan. But the success of the organization is purely nominal. In reality, it is in a serious crisis as local bureaucratic elites seek to restore control over import regulation and access to revenues.
It came as no surprise, therefore, that the member states failed to adopt the EAEU’s Customs Code on October 27. The relaxing of customs regulations within the EAEU has already brought about major changes in cargo shipment routes that have not left all members happy.
The problems date back to August 12, 2015, when Kyrgyzstan joined the EAEU, and customs control at the Kyrgyzstan-Kazakhstan border was lifted. China now shares over 6,000 km of its border with EAEU member states.
This means that goods going to the Russian market face no other customs barriers after the Chinese border is crossed, while exports to Europe will have only one other check when entering the EU customs zone at the Belarus-Poland border. The appearance of a new window into that zone has attracted Asian exporters to Europe, triggering the redistribution of cargo flows that may have serious consequences.
The pros and cons of Kyrgyzstan’s accession to the EAEU were widely discussed in that country. Price increases for consumer goods resulting from higher customs tariffs were identified as a possible negative consequence. As for the advantages, joining the EAEU would allow Kyrgyz products to enter the EAEU market of 160 million people; reinvigorate Dordoy Bazaar, a giant market just outside the Kyrgyz capital, Bishkek; and make life easier for Kyrgyz labor migrants working in Russia and Kazakhstan.
No such public discussion took place in Russia, which generally values the geopolitical dimension of post-Soviet integration above all. Other EAEU members had a different take on the matter. Kazakhstan primarily saw it as a threat, fearing an influx of low-cost Chinese goods re-exported through Kyrgyzstan, as well as imports of cheaper Kyrgyz agricultural and textile products.
The first few months after the customs control was lifted confirmed the worst fears of both Bishkek and Astana. Higher import tariffs inflated the prices of imported goods in Kyrgyzstan—primarily Chinese clothes and fabric for local sewing businesses. Meanwhile, the number of customers at the Dordoy Bazaar failed to increase due to the economic crisis in Russia and Kazakhstan. After Kazakhstan’s currency was devalued, residents of Kyrgyzstan’s border regions flocked to the neighboring country to buy food and gas, but the Kyrgyz treasury received none of the customs payments it would formerly have collected.
For its part, Kazakhstan lost a substantial volume of Chinese goods (primarily clothes and footwear) that previously passed through its border but are now transported through Kyrgyzstan. Forbes.kz reports a 52-fold increase in Chinese cargo traffic through Kyrgyzstan (40,500 tons in the first half of 2016, compared with 780 tons in the first half of 2015).
Before the creation in 2011 of the Eurasian Customs Union, Kyrgyzstan was the main transit hub for the export of Chinese consumer goods into the CIS. Now as then, the main reason that the transit flows through Kyrgyzstan is the high level of corruption among local government and law enforcement officials, which allows for the widespread contraband of goods. The only difference is that now contraband from China faces no customs barriers once it enters EAEU territory.
These changes also have significance for the Russian market. Kazakhstan is actively developing its railroad network, becoming the key link in the transcontinental logistics chain in Eurasia. Beijing is increasing its railroad transit along the Silk Road Economic Belt routes, even though it’s a money-losing venture. So Kazakhstan will keep its share of Chinese import transit in any event. But it is Russia’s western regions that eventually become transit points for the Chinese cargo. These regions also receive most of the goods imported through Kazakhstan and Kyrgyzstan.
To put the figures into perspective, the volume of Chinese clothing and footwear imports into the two Central Asian republics with a total population of 23.5 million people is comparable to the amounts being imported to Russia, whose population is six times higher. Chinese customs statistics indicate that in the first half of 2016, Kazakhstan and Kyrgyzstan imported $2.58 billion of Chinese clothing and footwear.
Imports to Russia amounted to $2.73 billion during the same period. The lion’s share of Central Asian imports is clearly destined for the Russian market, but enters through Kazakhstan and Kyrgyzstan primarily because it’s much easier to avoid customs checks and other regulations in these countries than on the Russia-China border.
Most of the time, no custom tariffs are paid on the imports, as the difference between the customs statistics in China and the importer states suggests. Hence, the joint budget of the EAEU member states may lose at least $400 million in 2016 alone. Most of the money could have gone into Russia’s budget ($341 million, or 85.32 percent). While this amount may not have looked all that significant in the years of plenty, it would certainly have come in handy at this time.
Russia’s problems at the Belarusian border are well known: Belarus is a member of the EAEU, but isn’t bound by Russian counter-sanctions against European goods, prompting concern that banned EU food imports are entering the country via Belarus. The disagreements that have emerged at the Kazakhstan-Kyrgyzstan border in the first year after Kyrgyzstan’s accession to the EAEU are no less important.
To minimize losses from the free flow of goods into each other’s markets, both countries are adopting additional regulations and strengthening control over the cargo that is crossing their borders. In essence, Kazakhstan and Kyrgyzstan are now involved in a trade war against one another under protectionist slogans. They have imposed limits on transporting goods by individuals, instituted additional customs paperwork, and started assembling truck caravans whose movement within Kazakhstan is monitored from the Kyrgyz border to the Russian one. All these steps make sense from a local perspective, but they undermine the very idea of the free flow of goods and cast doubt on the further development of the EAEU.
Although the EAEU partners keep talking about Eurasian integration, they are actually trying to preserve their regulatory powers in various spheres—primarily in trade—and resist giving them up to a supra-national body. One of the reasons for the delay in the adoption of the Customs Code is Kazakhstan’s demand that member countries be allowed to set their own requirements concerning imports. Such a customs code would run counter to the goals of integration and could lead to the effective return of barriers to the free flow of goods and services between countries.
Kyrgyzstan’s EAEU experience demonstrates that as long as there is a gap in member countries’ levels of economic development and quality of government, it will be hard to achieve multilateral integration and avoid risks. Bilateral agreements appear to be a realistic alternative, and Moscow and Beijing have already embarked on that path, but even there political expediency seems to prevail over the pragmatic economic approach.