February 11, 2015, by editor
Kyrgyzstan’s accession to the Eurasian Economic Union: Impact on cross-border trade with China
Written by Alex Calvo.
One of President Putin’s guiding principles is the reconstruction of a Russian sphere of influence over much of the former Soviet Union, whose fall he once described as “the greatest geopolitical catastrophe” of the 20th Century. This policy is driven by both economic and security considerations and does not seek a straight return to a glorified past but rather securing a sphere of influence and leadership in an economic area. The resulting confrontation with the West demands good relations with China, in order to avoid a war on two-fronts. But suspicions of Beijing run high and conflicting interests in a number of key regions cast a shadow over Sino-Russian relations. One such area is Central Asia.
One of the key turning points of the Cold War was the Sino-American rapprochement, graphically embodied by Nixon’s trip to China. The fall of the Soviet Union led to much better relations between Moscow and Beijing, including the demarcation of much of the border, and the establishment of the Shanghai Cooperation Organization (SCO). Under the SCO, the former Soviet republics of Central Asia have remained to some extent under the Russian security umbrella, while trade with China progressed at a healthy pace. This includes oil and natural gas pipelines flowing east, while cheap consumer goods travelled in the opposite direction. For Beijing, Central Asia is important on at least two counts. First of all as a source of energy not vulnerable to a potential sea blockade or quarantine. Second, to prevent the emergence of sanctuaries which may support insurgencies or simply political opposition movements in Xinjiang (Eastern Turkestan).
Within this panoramic, Kyrgyzstan has often been described as playing a key role as intermediary between China, on one hand, and Kazakhstan and Russia on the other. Over the last couple of decades, the country has served as a transit and re-export channel for Chinese manufactures, the resulting trade accounting for a significant portion of her GDP, with some sources claiming that “half of our economy is dependent on re-exports of goods coming from China”. This movement of goods has led to the emergence of giant informal markets, such as Dordoi and Kara-Suu. In parallel to this role as trade intermediary, Kyrgyzstan has often played a difficult balancing act in the region, being home for example to a US and a Russian air base a few miles apart, and experiencing regular revolts, thus standing in contrast with her much more stable/authoritarian (depending on one’s perspective) neighbours. Also very important is the very large number of migrant workers living in Russia, and to a lesser extent in Kazakhstan, whose remittances are a major source of income, amounting to up to 28.8 percent of her GDP according to the country’s central bank. In 2010 the research institute “Poekt buduschego” estimated the number of kyrgyz traders benefiting from re-exports to be 800,000 (out of a total population of 5.5 million).
Despite a number of revolts, and other obstacles such as poor physical connections between north and south, and a lack of funds to develop to the full her hydro power potential, Kyrgyzstan has managed to keep the country together and remain on good terms with most of her neighbours. However, Moscow’s drive for regional integration and in particular the Eurasian Economic Community (ECC), which came into force on 1 January, threaten to disturb this difficult balance.
It is not surprising that ever since the possibility of Kyrgyzstan joining the Russia-Belarus-Kazakhstan Customs Union, predecessor to the ECC, was first touted, there has been an intense public debate on its merits and drawbacks. Among the former, we may cite improving the status and protection of Kyrgyz workers in Russia, and cementing relations with key partners such as Moscow and Astana. The latter include rises in consumer prices (in particular food), loss in state revenue through tariffs, and the risk to the above mentioned triangular trade. It is to this aspect that we shall now turn our attention. The debate has not abated once Bishkek finally confirmed that the country would indeed be joining the EEU on 1 May, becoming its fifth member, after the original three partners and Armenia. On 6 February, after the first meeting of the Eurasian Intergovernmental Council, Chairman of the Board of the Eurasian Economic Commission Viktor Khristenko said that “all disagreements” had been overcome. At the time of the original announcement by then Prime Minister Almazbek Atambayev, Erika Marat wrote that the decision was “political rather than based on economic priorities”, stressing that the WTO offered more opportunities.
Already in 2012 some voices alerted about the risk to markets like Dordoi. At a panel discussion on “Social Consequences of Kyrgyzstan’s membership in Customs Union”, Svetlana Moldogazieva (Amazona.kg civic organization) warned about a “social explosion” if sellers were driven out of business as a result of Bishkek joining. Moldogazieva explained that “This is the largest market in Central Asia with 35 thousand people: 30 per cent of them are owners and 70 per cent are leasees”, adding that this included “many high-educated people” and the “most active part of youth”, with some ready to “commit crime in order to feed their families”.
Even proponents of the Customs Union admit that triangular trade is “the key issue”. Asked “How will the expected reduction or even cessation of commercial flows from China affect the economy”, Evgeny Vinokurov, Director of the Center for Integration Studies of the Eurasian Development Bank, conceded as much, while stressing that “it should not be linked with the proposed accession of Kyrgyzstan to the Customs Union” since “overtime, the re-exportregime is bound to transform one way”, being “impossible” to retain it in its current form “for a long time”. Vinokurov explained that “Now virtually duty-free merchandise is imported from China to Kyrgyzstan and across the Bishkek marketplace it is transshipped to Central Asia and Russia, also duty-free”, adding that “such a regime of customs transit is not acceptable for Kazakhstan and Russia”. Stressing that “there is no easy solution”, Vinokurov believed that “an effective customs control system” should be established “either on the Kyrgyz-Chinese border, or on the Kyrgyz-Kazakh border”. He considers that “within the Customs Union it will be dealt with in a more civilized way through restructuring the Kyrgyz economy, as well as by offering grace periods and concessions initiated by the Customs Union”. Recent reports confirm that the re-export trade has indeed suffered significantly after Kazakhstan not only raised tariffs but strengthened border security, placing concertina wire in some segments previously devoid of any physical obstacles. In June 2014 Damira Dootalieva, the head of Dordoi’s trade union, estimated at 60,000 the number of people currently employed in the market, explaining that “In the last five months trade has almost stopped completely” due to tougher controls at the Kazakh border since 2013.
A possible way forward would be for manufacturing to replace mere re-exports, with Kyrgyzstan attracting Chinese enterprises. Textile producers are actually hopeful that this could provide a way forward. However, a common complaint in Central Asia is that Chinese corporations are only interested in resources and contracts, going as far as bringing in their own workers to build roads, for example, while locals often emigrate to Russia to do the same exact work.
Thus, as Bishkek enters the Eurasian Economic Union, the fate of triangular trade will remain a key issue and source of potential economic and political instability. Unless a pragmatic solution can be found, or the country can gradually grow less dependent on this source of economic activity, there could be a backlash against the government. The challenge for Moscow is to go beyond hard security in order to preserve her regional influence. Beijing faces a corresponding challenge, proving that she can go beyond mere mercantilist policies and relocate manufacturing facilities to Central Asian countries.
Alex Calvo, a guest professor at Nagoya University (Japan), focuses on security and defence policy, international law, and military history, in the Indian-Pacific Ocean Region. In 2009 he spent a semester as teaching and research fellow at the OSCE Academy in Bishkek (Kyrgyzstan). He tweets at Alex__Calvo and his work can be found here. Image Credit: CC by neiljs/Flickr.
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