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Joining Russia's Customs Union Would Be A Disaster For Kyrgyzstan

The Turatali market in Kara-Suu, the biggest bazaar in Central Asia, is popular with Chinese traders, making Kyrgyzstan a main re-export hub for Chinese goods.
The Turatali market in Kara-Suu, the biggest bazaar in Central Asia, is popular with Chinese traders, making Kyrgyzstan a main re-export hub for Chinese goods.
Russia has been fighting for World Trade Organization (WTO) membership for 17 years, longer than anyone else in the world, and 2010 has been a disappointing year for Moscow. Frustrated by the lack of progress (Moscow expected to join the WTO by January 2011), the Kremlin this year created a customs union that would emphasize its regional dominance. That structure was designed to bring Kazakhstan and Belarus firmly under Russia's umbrella.

Now, as Russia's involvement in Kyrgyz domestic politics has increased since the April revolution, Bishkek seems to be heading toward membership in this Moscow-centered trade bloc. The customs union is one part of the "great game" that Russian leader Vladimir Putin is implementing to further Russia's domination over its former Soviet neighbors. Many in Moscow blame the United States for Russia's failure to gain admission to the WTO, and they have pushed to develop other avenues for bolstering Russia's floundering economy.

But whether participation in the customs union will benefit the other members is far less certain. As for Kyrgyzstan, it is already suffering from unfair trade competition, inflation, the loss of re-export opportunities, and the flooding of local markets with imported goods (undermining the position of domestic producers).

In 1998, Kyrgyzstan became the first post-Soviet country to join the WTO. And for more than a decade now, membership in the global trade bloc has proven a boon for the little Central Asian state. It is unfathomable why, with this experience, Kyrgyz leaders seem to have failed properly to weigh the pros and cons of Russia's proposed customs union.

Much To Lose

The customs union envisions a common customs territory and a common customs tariff policy (CCT) for goods imported from outside the bloc. If the CCT is introduced in Kyrgyzstan, prices for many products would definitely go up.

Medicines, for instance, currently enter Kyrgyzstan duty-free. But under the customs union rules, they would be subject to a 10 percent duty. Tariffs on sugar and confectionary products would double. Rates for fats and goods made of flour and milk would see tariffs boosted by 50 percent. Clothing duties would rise from 5 percent to 20 percent. Prices for computers and other electronics could rise by 30 percent, while the price of imported automobiles could double.

Why would the Kyrgyz people need such a customs union?

Moreover, joining the customs union would violate WTO rules. As the only WTO member in the customs union, Kyrgyzstan would not be allowed to impose tariff rates higher than those stipulated by the WTO. Kyrgyz duty rates have generally been lower than WTO norms. Kyrgyzstan agreed to cap tariffs at an average of 5.1 percent and agreed to zero tariffs in important sectors like civil aviation and information technology.

If Kyrgyzstan proceeds to adopt the much higher common external tariff of the Russian customs union, it will (according to GATT Article XXVIII) have to offer a "compensatory adjustment" to WTO members so that on balance their trade situation will "not be less favorable" than the existing situation. How Kyrgyzstan can manage this is far from clear.

Kyrgyzstan's domestic producers also stand to lose from joining the customs union. The selective elimination of customs barriers for fellow union members may lead to a further flooding of the local market with imported goods. Kyrgyz manufacturers simply can't withstand unrestricted competition from Russian and Kazakh goods, on top of the torrent of cheap Chinese goods that the country is already facing.

Crippling Development

As a result, Kyrgyzstan would be in demand only as a source of raw materials and agricultural goods. However, the country would clearly be the loser when its sees its fruits and vegetables shipped off to Kazakhstan for processing, with expensive processed products being imported back.

When the unified customs duty was implemented on January 1, the situation in Russia hardly changed at all. Almost 80 percent of imports into Russia continued with the same duties. The CCT maintained Russia's existing high tariffs on aircraft and automobiles that are intended to protect domestic producers. Kyrgyzstan's chances of increasing sales to Russia are minimal.

In addition, Kyrgyzstan stands to lose many of its current trade partners if the customs union tariffs take effect. The country has become a major regional center for the re-export of Chinese goods to Central Asian countries and Russia.

The World Bank has estimated that 75 percent of Kyrgyz imports from China are subsequently re-exported. According to the World Bank, Kyrgyz traders have a significant competitive advantage over traders in other Central Asian countries because they can procure Chinese goods at the best prices. The bank estimates some 70,000 Kyrgyz are directly employed in the re-export business and perhaps five times as many are indirectly dependent on it. Just the two major markets at Dordoi and Kara-Suu account for about 33 percent of Kyrgyzstan's GDP.

The markets also host a thriving business of traders from Kazakhstan, Uzbekistan, and Tajikistan. Goods passing through Kyrgyzstan are then sold at markets in all of these countries or are exported to Russia.

The customs union is already crippling this trade and threatening Kyrgyzstan with economic disaster. According to the administration of the Dordoi bazaar, trade turnover has collapsed by 70 percent since the union was created. Kazakhstan is trying to reinvigorate its own markets by attracting traders from Kyrgyzstan. Kazakhstan intends to block the re-export of Chinese goods via Kyrgyzstan in order to boost its own direct trade with China.

In short, the customs union would make Kyrgyzstan's economic development increasingly dependent on Russia and Kazakhstan. And this is exactly what Moscow wants.

For Kyrgyzstan, it would be better if Russia and Kazakhstan joined the WTO as quickly as possible. But Moscow is stopping its national-level accession talks and to begin talks in 2011 as a bloc with Belarus and Kazakhstan. That would delay Russia's membership by an estimate six or seven years in the best case. WTO rules do not provide for countries joining as a bloc, and there is no precedent for such a move.

Cholpon Orozobekova is a Kyrgyz journalist based in Geneva. She has worked at BBC radio, RFE/RL, IWPR, and as editor in chief of independent newspaper "De Facto." The views expressed in this commentary are the author's own and do not necessarily reflect those of RFE/RL