Azernews.Az

By Arthur Bayhan

The importance of the regional economic integration within the globalized world is recognized for a more economic growth and job creation. Indeed, free trade is the cornerstone of the regional economic integration which contribute to a more competitive, innovative and productive economic development.

The Eurasian Customs Union (ECU) has been formed by Russia, Belarus and Kazakhstan in 2010. The transition of the ECU into a Eurasian Economic Union (EEU) is being launched on January, 2015. The EEU aims at free movement of goods, capital, and people between the member states. Armenia has signed the accession treaty to join the EEU in January 2015, and Kyrgyzstan has signed the accession in December, 2014 to join the EEU in May 2015.

Azerbaijan which the most competitive economy and wealthiest country in the Caucasus, and Uzbekistan, with the largest population in Central Asia seem to keep their distance from Russia. Georgia remains alienated from Moscow, while Turkmenistan has increasingly linked its economic ties with China, supplying about half of China’s imported gas. For now, only Tajikistan, with another weak national economy and precarious security situation, might join the EEU anytime soon.

Indeed, free movement of goods, labor, services and capital will be liberalized among the EEU member states which is an important economic advantage. However, more important is the long term impact of the EEU on the economic development within the member states. This could be analyzed on the membership of the Kyrgyz republic in the EEU.

Kyrgyzstan with its5.5millioninhabitants is one of the most open economies in the world. Kyrgyzstan has commodities such as gold, coal and uranium, as well as a small textile industry, agriculture and tourism. By joining the Moscow-led Economic Club that removes all customs duties for the goods of the member states looks like to be an advantage for the Kyrgyz economy.

Like to the other members of the EEU, Russia has increased pressure on and made promises to the Kyrgyz government to join the EEU. Russia promised to rid of a debt more than US$490 million of Kyrgyzstan and invest over a billion dollar in a joint Development Fund. The membership of the Kyrgyz Republic in the EEU is strategically quite important for Moscow. Russia will maintain a long term extension of its military presence in Kyrgyzstan which currently maintains four military bases in Kyrgyz Republic. Currently, Kyrgyzstanis shaken by an energy crisis. Only 25 percent of house holds and businesses in Kyrgyzstan have a fully gas connection. In April 2014, Gazprom has obtained the ownership of the Kyrgyz gas network with a price of one dollar by taking over more than 40 million dollars in debt and promised to invest the equivalent of US$ 610 million in five years in the Kyrgyz gas network. The Russian energy companies Inter-Rao and Rus Hydro are also very active in the country.

Around one million Kyrgyz work as migrant workers mainly in Russia, and remittances became an important part of the Kyrgyz economy. From time to time Moscow has been indicating to aggravate of the entry requirements. Kyrgyzstan may expect that its labor migrants are due to profit from much easier employment rules, as enforced by the union’s free movement of labor provisions. Yet, due to the weakening of ruble, a number of the Russian businesses have already started to lay off and remittances of the Kyrgyz labor force are expected to decrease in the coming years.

First, member states of ECU will apply higher customs tariffs on the products they buy from third countries in order to increase the trade volume among them. Kyrgyzstan is an important trading center, especially for there-export of the Chinese products. The Chinese goods are sold Kyrgyzstan to the EEU member states and the other former Soviet republics. Secondly, the cost of imports for the Kyrgyz consumers will go up. Kyrgyzstan’s membership in the ECU will have an impact on the Kyrgyz economy not only on losing the trade with China but also it will have an impact on rising unemployment, and increasing inflation in the country. Furthermore, the prices for most basic products in Kyrgyz republic will increase due to the market-driven price readjustments within the Eurasian Customs Union.

Member states of ECU will not be able to enter into agreements with third countries as they wish, and they may look for the approval of other members. Russia is expected to reject any bilateral agreement of any EEU member which would conflict with Russia geo-political interests. Customs Union allows for “a coordinated trade-related response against third countries attempting to put pressure on one of its members. This has been the case as Russia has proposed that Belarus and Kazakhstan should impose their own bans on EU imports.

The citizens of the EEU will not have the freedom to much chooses on the product selections as the products bought from third countries at lower prices will become more expensive. Ultimately in the long run, the region of the EEU will be less competitive, less innovative and less productive vis-a-vis the countries outside of the EEU.

This process of isolation will have an impact on the already alienating enterprises of the member countries operating in the EEU to compete, so that, they are forced to innovate themselves. The economy and its players of the EEU member states do not have the right endowments to be competitive with new products and in new markets.

Not diversified Russia’s economy depends mostly on the energy export including oil and gas. Russia’s economy is currently suffering from the sanctions imposed by the West and the falling oil prices and it is expected to shrink further around four per cent in the current year. To avoid increasing the new debt Russia has reduced enormously the imports. Foreign exchange reserves ranged just to service the debt for two years, and export surpluses could no longer be maintained due to the falling oil price and the oil price slide brings the energy and raw material suppliers in Russia under pressure.

Russia’s economy is much more closely tied to the European Union (EU), which is its larger trading partner. The area of EEU has indeed a limited economic importance for the Russian economy. However, the EEU creates an opportunity for Russia to expand its exports and its presence in Central Asia at the expense of exports from other countries, such as China, European Union and Turkey.

Arthur Bayhan is senior advisor on economic growth and competitiveness with more than 25 years of project implementation experience in the areas of investment and trade facilitation, sector competitiveness, governance and public-private partnership development. He worked as chief of party for USAID, head of private sector development at OECD, and as advisor at the EU Commission. He is engaged in the highest levels of governments, the private sector to improve framework conditions for business enabling environments, developed sustainable economic development institutions in South- and Southeast Asia, Central Asia as well as in the Middle East. He is German national and can be reached at:[email protected]

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