Russia's Inevitable Customs Union in Central Asia

D. Medvedev (R) with Kyrgyz President A. Atambayev in Moscow

Summary

Kyrgyzstan has officially applied to become the next member of the Russia-led Customs Union, an institution designed to entrench Russia's economic and political influence in its former Soviet territory. Although joining the union will harm the Kyrgyz economy in many respects, not joining could motivate Russia any of the several levers it has in Kyrgyzstan. Other Central Asian countries are watching Kyrgyzstan carefully, as its membership in the Customs Union likely will lead to their eventual membership.

Analysis

Kyrgyzstan has applied for membership in the Customs Union, an economic and geopolitical entity Russia is using to expand its influence in its former Soviet territory (current members are Russia, Belarus and Kazakhstan). In some ways, Customs Union membership will hurt the Kyrgyz economy -- higher tariffs will be imposed, and Kyrgyzstan will lose some autonomy in making foreign trade decisions. However, abstaining from the Customs Union would be riskier than joining because Moscow already has a great deal of leverage over Bishkek. More important, Kyrgyzstan's membership will enable Russia to more easily pressure other Central Asian countries -- Tajikistan, Turkmenistan and Uzbekistan -- into joining the union.

Effects on the Kyrgyz Economy

Unlike the other Customs Union members with robust exporting economies, Kyrgyzstan is reliant on imports. Kyrgyzstan is not economically self-sufficient; it depends on Russia, China and its Central Asian neighbors to fulfill its basic needs. Russia provides almost 34 percent of Kyrgyzstan's imports -- and nearly 70 percent of its petroleum -- and as Kyrgyzstan's main export recipient, purchases 17.3 percent of Kyrgyz exports. China is another major trade partner. Kyrgyzstan imports electronics, meats, clothing and produce, and exports 75 percent of these inexpensive Chinese goods to other Central Asian countries and to Russia. Uzbekistan sends natural gas to Kyrgyzstan's cities and its northern and southern regions, and Kazakhstan provides 5-7 percent of Kyrgyzstan's petroleum supplies.

Joining the Customs Union will affect the import-oriented Kyrgyz economy in several ways. As a member, Kyrgyzstan will have to use the union's average tariff rate of 10.6 percent -- more than twice Kyrgyzstan's current 5.1 percent tariff. Value-added tax (VAT) will also increase with Customs Union membership; Kyrgyzstan's current VAT rate is 12 percent, but the union's is 17 percent. These higher tariffs are meant to facilitate trade within the union and make it more difficult to trade outside the bloc. However, higher import fees mean higher prices for consumer goods, including automobiles, medicines, computers and clothing, imported from non-Customs Union member countries. This will diminish Kyrgyzstan's ability to import and re-export inexpensive Chinese goods. (The price increase for Chinese imports likely will even affect Kyrgyzstan's black market.) China sees Kyrgyzstan as an important market because its role as a re-exporter creates a trade corridor in Central Asia, but Kyrgyz participation in the Customs Union would undermine the corridor's importance.

Customs Union membership will also affect Kyrgyzstan's freedom to control its own foreign trade policies. Members of the bloc's governing body, the Customs Union Commission, do not have an equal say in making decisions. Currently, Russia has 57 percent of the votes, while Kazakhstan and Belarus each have 21.5 percent. Kyrgyzstan will have to check with other union members and get Russia's approval before making policy decisions on foreign trade.

Kyrgyzstan's membership in the Customs Union could also jeopardize its relationship with the World Trade Organization (WTO). Kyrgyzstan is the only Central Asian country with WTO membership, but joining the Customs Union would conflict with its responsibilities as a WTO member. The Kyrgyz government knows that even if it joins the union in 2012 its membership will not activate for another two to three years, so it has time to sort through the details and come up with a solution to the dilemma. Bishkek could withdraw from the WTO or ask for an adjustment of WTO rules (Russia was able to join the WTO despite being in the Customs Union, though Kyrgyzstan's circumstances are different since it was in the WTO first).

Kyrgyzstan's Perspective on Membership

Bishkek knows that Customs Union membership will create problems, but it also knows that not joining the bloc will come with a price. Kyrgyzstan likely would face pressure from Customs Union member countries, particularly Russia, which has numerous levers in Kyrgyzstan. Not only do the countries share strong economic ties, but Russia also guarantees Kyrgyzstan's security. Kyrgyzstan is a member of the Russia-led Collective Security Treaty Organization, and Russia has several military installations on Kyrgyz soil -- including an airbase at Kant for which Russia pays rent. Furthermore, many Kyrgyz workers in Russia send home remittances, and Russia provides Kyrgyzstan with loans and grants.

Perhaps the most obvious lever Russia has in Kyrgyzstan is energy. In 2010, Russia increased tariffs for its fuel exports to Kyrgyzstan, which put pressure on then-leader Kurmanbek Bakiyev, who was ousted in a Russia-supported revolution. Current Kyrgyz President Almazbek Atambayev persuaded Moscow to drop the tariffs, but there is nothing preventing Russia from imposing tariffs again. As it has done with other countries, such as Ukraine, Russia could even sever energy supplies retributively. However, if Bishkek complies with Moscow's wishes and joins the Customs Union, Russia could offer concessions instead, such as increased financial aid or lowered energy prices.

Atambayev understands the risks of resisting Russia, but there are other factors to consider. The Kyrgyz opposition is suspicious of the Customs Union, and its leaders have spoken out against rushing into membership. Given Kyrgyzstan's political and social volatility, Atambayev will have to maneuver carefully. Kyrgyzstan's domestic political and security situation in 2012 will certainly be a factor in the pace at which membership proceeds.

Central Asia's Likely Course

After Kyrgyzstan, the country most likely to join the Customs Union is Tajikistan. Dushanbe already has expressed interest in the union, and its economic and security dependence on Moscow makes it easy for Russia to persuade. However, Tajikistan has not yet started any official processes to join the bloc, and Moscow has made it clear that Kyrgyzstan must join first. Once it joins, Tajikistan will feel many of the same economic effects of membership that Kyrgyzstan will experience, since both countries have import-heavy economies.

When Kyrgyzstan and Tajikistan join the Customs Union, Uzbekistan will find itself almost entirely surrounded by Customs Union members. Uzbekistan thus far has shown no interest in joining the bloc; in fact, it has criticized the union, calling it a method of politically motivated integration. Uzbekistan's neighbor, Turkmenistan, has remained quiet on the issue and previously has endured economic hardship just to preserve its isolation and independence. While Kyrgyzstan and Tajikistan go through the membership process, Turkmenistan and Uzbekistan will have time to resist the union. But once the union closes in on them geographically, the last two holdouts in Central Asia could become easier for Russia to pressure into membership.

It is unclear how long Turkmenistan and Uzbekistan will be able to resist joining the Customs Union, but resistance most likely will be short-lived. If most of the Central Asian countries are in the union, it will be difficult economically and politically to remain outside the institution.

The Customs Union is one phase of Russia's plan to exert its influence in its near abroad; the next phases are the creation of a Common Economic Space and the Eurasian Union. Moscow does not want to re-create the Soviet Union, as that entity proved infeasible. Rather, it wants to build a system in which it can influence its former Soviet republics without being responsible for the day-to-day domestic workings of each state. Though Moscow will encounter some resistance, its resurgence into Central Asia will move forward, and Kyrgyzstan's membership in the Customs Union is a crucial step.

Source - Stratfor