The euphoria of independence after the collapse of the Soviet Union destroyed economic relations between countries that shared before common market. Each independent country faced many difficulties in development their economies. The first step for economic integration was made in 1994 when Free Trade Zone Agreement was signed by 12 CIS countries (History of EurAsEC, n.d). It shaped basics for integration of the CIS countries economies but due differences in economies and political issues caused that some countries joined the Agreement on temporary basis. The second step was establishment of EurAsEC on October 10, 2000 in Astana by presidents of Belarus, Kazakhstan, Kyrgyzstan, Russia, and Tajikistan (History of EurAsEC, n.d).
The Customs Union of Belarus, Kazakhstan, and Russia is next step in integration process. The difference of the Customs Union from previous agreements is the formation of a supranational body - the Customs Union Commission which will decide on Common External Tariffs – CET and other integration related issues (Kazakhstan and Customs Union, n.d.). The current paper examines what would be effect of the Customs Union of Belarus, Kazakhstan, and Russia on Economy of Kazakhstan and especially on domestic producers and export opportunities.
The literature on Customs Union provides insights into effects of such forms of economic integration. Akkoyunlu-Wigley, Mihci, and Arslan (2006) indicated economies of scale effect that causes productivity gains in their research of Turkey EU Customs Union effect on Turkey’s Economy. Okello suggests that Uganda industries should be competitive enough comparing to more advanced Kenya industries before removal of tariffs in his study of Africa Community Customs Union (The Impact of EAC on Uganda, n.d.).
It is difficult to forecast future effects of the Customs Union of Belarus, Kazakhstan, and Russia on Kazakhstan Economy based on the Turkey – EU Customs Union, the East Africa Community Customs Union, and other Customs unions due to different economic conditions, political interests, and historical backgrounds. However, the information about situation in existing Customs unions helps in making more precise analysis of impact of the Customs Union between three CIS countries on Kazakhstan.
- Positive Effects of the Customs Union of Belarus, Kazakhstan, and Russia on Kazakhstan Economy
Greater Market Size for Exporting
Kazakhstan gains access to market of Russia and Belarus with more than 150 million population. It creates opportunities for domestic producers to export, will attract foreign direct investments, and will motivate establishment of joint ventures with Customs Union member countries’ companies and third countries’ firms. Russia takes advantage of access only to more 25 million population market of Kazakhstan and Belarus. Therefore, in terms of increasing market size Belarus and Kazakhstan gain more than Russia.
Lower Cost and Easier Transportation
Kazakhstan businesses will benefit from lower costs and easier transportation of goods through territory of Customs Union countries. Petrol from Kazakhstan can be transported to Belarus Refineries and sold to Europe (Kazakhstan may use Belarus refineries, n.d.). Transportation is one of the most important problems for Kazakhstan export potential. Customs Union in addition to increasing of market size for export, provides easier access to third countries, especially EU.
Attraction of Foreign Direct Investments – FDI and Joint Ventures in non-raw material sectors
Joining the Customs Union provides Kazakhstan with opportunity to attract Foreign Direct Investments in manufacturing sector. The Customs Union establishment motivates non-member countries to engage in FDI (Jaumotte and Florence, 2004). In case of Kazakhstan non-member countries companies prefer export entry mode because it is ineffective to build production facilities in Kazakhstan due its small market size. It is easier to open distribution channel with few people working and export to Kazakhstan and take advantage of low Customs tariffs.
After joining Customs Union Kazakhstan will use Common External Tariff – CET and increase import tariffs from non-member countries for more than four thousands goods. Import tariffs of goods to be used in production on territory of the Customs Union will be subject to lower or zero tariffs (Aitzhanova, 2009). Market size of Customs Union is about 170 million people and starting from July 1, 2010 Customs borders between member countries are eliminated. Therefore, above factors create incentives for non-member countries’ companies to use Direct Investment or Joint Venture entry modes in Kazakhstan market.
Why investors should choose Kazakhstan for Direct Investments and Joint Venture entry modes? One of the main reasons is light taxation in Kazakhstan and comparative ease of doing business among the Customs Onion member countries.
Table 1. Major taxes in member countries (Doing business, 2009)
|
Tax or mandatory contribution |
Belarus |
Kazakhstan |
Russia |
|
Social security contributions |
35.00% |
11% |
various rates (26%-2%) |
|
Corporate income tax |
24.00% |
20.00% |
20.00% |
|
Property tax |
1.00% |
1.00% |
2.20% |
|
VAT |
18% |
12% |
18% |
Table 2. Doing Business Ranking of member countries (Doing business, 2009)
| Doing Business Ranking 2009 | Belarus | Kazakhstan | Russia |
| Country Ranking | 82 | 64 | 118 |
| Starting a Business | 98 | 79 | 88 |
| Dealing with Construction Permits | 63 | 177 | 182 |
| Employing Workers | 40 | 33 | 104 |
| Registering Property | 13 | 26 | 49 |
| Getting Credit | 109 | 41 | 109 |
| Protecting Investors | 105 | 53 | 88 |
| Paying Taxes | 183 | 61 | 108 |
| Trading Across Borders | 134 | 182 | 160 |
| Enforcing Contracts | 14 | 37 | 19 |
| Closing a Business | 74 | 54 | 92 |
Kazakhstan regulation in protecting investors, paying taxes, and starting business is relatively better than in the Customs Union member countries. Construction permits and Trading across borders regulation create barriers for potential investors. In order to attract FDI and motivate Joint Ventures entry modes from non-member and member countries regulations and procedures need further improvement.
More incentives for local investors to start production
Kazakhstan followed very liberal trade policies towards imports. The Customs Union’s CET will be higher for imported products than existing ones. Higher prices of imported goods creates opportunities existing domestic producers to increase sales in Kazakhstan and access Russia and Belarus markets. Most of the Russia existing import tariffs are higher than CET and their domestic producers would not benefit a lot from CET for non-member countries. Aleksei Khramkov (2009) indicates that after joining the Customs Union Russian and Belarus goods will dominate Kazakhstan market. However, we already have zero tariff trade with each other for years and that does not caused Russia penetration of Kazakhstan market. We share common background and common problems of corruption, high cost of production, and low technology use.
Consumer will suffer from increase in prices to some extent for some goods, but in long run it will lead to development of domestic production and local content. There two main factors that will influence further development. (1) Government policies that will ease doing business in Kazakhstan and CET tariffs for raw materials that are not produced in Kazakhstan. (2) Exploring of opportunities provided by the Customs Union by potential local and foreign investors.
- Potential Drawbacks of joining the Customs union of Belarus, Kazakhstan, and Russia
Increase in prices of products imported from non-member countries
The Customs Union imposes CET for goods from non-member countries that will lead to increase in prices of goods imported from China, Germany, Turkey and other countries. Most of goods we consume are not produced in Kazakhstan. Therefore, the CET will affect living standards of citizens. Especially cars and medicines should be considered when making decision on CET by our policy makers to protect our consumers.
Dependence on Russia in international trade issues and domination of Russia companies in some industries
The Customs Union means unification of International Trade issues and Russia is leading political power among three member countries. It should be mentioned that CET tariffs are mostly unified with Russia import tariffs. Fluctuations in Russia economy will directly affect Kazakhstan. Especially high prices of petrol in Russia will increase the price of petrol in Kazakhstan immediately after Customs borders’ elimination.
In most industries Russian companies have more expertise and competitive advantage over Kazakhstan companies. In industries where Russia has competitive advantage their companies will dominate domestic Kazakhstan market and many domestic companies will have sales problems or will be bankrupt. However, as it was mentioned above we already have zero-tariff trade and do not use non-tariff barriers for most of the goods.
Problems in Tariffs income distribution
It’s not clear yet how CET incomes will be distributed among member countries. EU uses pool system when tariffs income goes to destination country. Russia will also prefer pool system that will decrease Kazakhstan Customs earnings. Regardless of what is the final decision this will be hot issue among member countries. Also monitoring of tariff income will be difficult task and further investment in Customs systems development will be needed by all member countries.
- Conclusion
Kazakhstan with its geographic position with no access to seas highly depends on its neighbors in international trade issues. China with its growing economy mostly imports raw materials from Kazakhstan and has competitive advantage in production due to low cost of labor and huge market size. Chinese content is growing through low import tariffs and lengthy border. Also China invests in development of its western region Xinjiang. Russia has political interest in the Customs Union that broadens its sphere of influence in Central Asia. For Kazakhstan companies it is easier to compete with Russian business than with Chinese because we face same challenges. The potential advantages of joining the Customs union stated above can be utilized through implementation of government policies that make doing business in Kazakhstan easier and through active role of local business. In case of synergy between government structures and local business the potential drawbacks’ effect will be minimized.
[1] Aitzhanova Zh. (2009) The Customs Union will attract investors in non-raw material sectors, interview to Kazakhstanskaya Pravda, November 30, 2009
[2] Akkoyunlu-Wigley A., Mihci S., and Arslan H. (2006) The Customs Union with EU and Its Impact on Turkey’s Economic Growth, 8th ETSG Annual Conference – Vienna
[3] Aleksei Khramkov (2009), Kazakhstan manufacturers are concerned about joining Customs Union, retrieved November 03, 2009 from http://www.zakon.kz/152821-kazakhstanskie-proizvoditeli.html
[4] Doing Business Ranking (2009) retrieved November 03, 2009 from http://www.doingbusiness.org
[5] History of EurAsEC, n.d , retrieved November 03, 2009 fromhttp://www.evrazes.com/about/history
[6] Jaumotte, Florence, 2004, “Foreign direct investment and regional trade agreements: The market size effect revisited”, International Monetary Fund Working Paper 04/206.
[7] Kazakhstan may use Belarus refineries, n.d. retrieved November 03, 2009 fromhttp://vesti.kz/economy/32293/
[8] Kazakhstan and Customs Union, n.d., retrieved November 03, 2009 fromhttp://new.ctpd.kz/
[9] The Impact of East Africa Community Customs Union on Uganda Economy: a Computable General Equilibrium(Cge) Analysis, retrieved November 03, 2009 fromhttp://www.trapca.org/pages.php?id=88
Working Paper, Horizon Research Center ©, December 2009, Almaty
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