Formed in January 2010, the Customs Union of Belarus, Kazakhstan, and Russia (the CU) has proven the most successful post-Soviet integration initiative to date. The union has already implemented its Common External Tariff (CET) and is developing steps toward further integration that include a shared monetary policy, migration policy, and a common system of standards and technical regulations. Attention has also turned to bringing in new members, most prominently Kyrgyzstan, Tajikistan, and Ukraine. But while Russian and Kyrgyz leaders speculate that Kyrgyzstan will join the union by the end of 2013, the push for rapid expansion threatens to jeopardize both the Kyrgyz economy and the CU’s relationship to the world’s largest trade organization, the WTO.
From 2010 to 2011, trade between the three member states has increased by almost one-third. At the center of this increase are the union’s two major economies, Kazakhstan and Russia. Kazakhstan’s imports from Russia grew by over two-thirds from 2009 to 2011 and its exports more than doubled during the same period. And while much of this growth can be attributed to recovery from the 2008 global economic crisis, growth of intra-CU trade has significantly outstripped growth of trade between union and non-union states.
Given the strength of the CU’s two central economies, the union’s interest in Kyrgyzstan is primarily non-economic. Kyrgyzstan’s GDP is a mere one-fifth of that of Belarus, currently the union’s smallest economy, and less than half of one percent of Russia’s. However, the republic presents an opportunity for the union to expand both its membership and its territory. The Kyrgyz accession would also pave the way for Tajikistan to join the union, providing it a border to Afghanistan and access to the large economies of the Indian subcontinent. Expansion across the region is integral to Russian President Vladimir Putin’s vision for the eventual formation of a Eurasian Union that will link Europe to the Asia-Pacific region. In a speech in 2011, President Putin framed his vision for the future of the initiative, citing large regional institutions and agreements such as the European Union and the Association of Southeast Asian Nations as the sort of “bricks” needed to build a more stable world economy.
While opinions within the CU largely support expansion, the Kyrgyz perspective on the union is more complicated. Accession will raise Kyrgyz tariffs—and potentially non-tariff barriers—on non-CU imports. This would almost certainly hurt Kyrgyzstan’s trade relations with China, which provided 21.7 percent of the Kyrgyz republic’s official imports in 2011. CU tariff policy could lead to a consumer price jump on Chinese goods and damage Kyrgyzstan’s thriving industry of re-exporting Chinese imports to other markets in the Commonwealth of Independent States (CIS). This industry accounted for an estimated 13 percent of Kyrgyzstan’s GDP in 2009-2010.
Kyrgyz President Almazbek Atambayev may, however, see long-term benefits in joining a strengthening regional project and increasing access to the country’s largest export partner, Russia. President Atambayev has often expressed hope that inclusion in the CU will provide stimulus for the Kyrgyz garment business, turning the country into the “sewing machine” for the rest of the union. No less important, membership in the CU would remove restrictions on Kyrgyz migrant laborers in Russia, such as Russian language exam requirements recently institute for all migrant service workers.
While both sides have expressed interest in Kyrgyzstan’s accession to the CU, Kyrgyzstan faces the obstacle of working within its obligations to the WTO, which it joined in 1998. Of greatest concern is implementation of the common external tariff within the bounds of these obligations. Currently, the average, un-weighted CU tariff duty stands at 11.5 percent. This will decrease over the coming years as CET tariff lines are harmonized to Russia’s WTO obligations, expected to drop to an average of 7.9 percent by 2020. The lines may again be adjusted following Kazakhstan’s anticipated WTO accession in 2013. Even following the WTO mandated adjustments, Kyrgyzstan would need to nearly double its current average applied rate of 4.6 percent.
Like all WTO members, Kyrgyzstan maintains the right to adjust its tariffs within its “bound rates”—the maximum duty a country agrees it will apply to a good upon its accession to the WTO. But while Kyrgyz applied rates are significantly lower than its ceilings, the republic’s average bound rate is 7.5 percent, lower than even the projected 2020 CET average. Adopting it now could potentially open Kyrgyzstan to claims from non-CU trading partners under the WTO’s dispute settlement mechanism.
How, then, can Kyrgyzstan join the CU without risking disagreements between the union and the world’s largest trade organization? Kyrgyzstan is unlikely to be able to formally renegotiate its tariff bounds through the WTO. A similar request by Ukraine in late 2012 was condemned by scores of WTO members. More realistically, Kyrgyzstan’s CU accession could be negotiated to include a number of exceptions to the CET. But how this could be done effectively given the current gap in tariff rates remains to be seen.
The realities of the situation suggest that the best option may be patience. While expansion will strengthen the CU as an institution, the union should pursue its goals within the framework of the WTO. Waiting for the CET to harmonize to Russia’s—and presumably Kazakhstan’s—WTO obligations would be beneficial to Kyrgyzstan, allowing for easier integration with the union whilst fulfilling its WTO commitments. Likewise, allowing for gradual tariff rate adjustment could mitigate anticipated damage to Kyrgyzstan’s trade with China. But even more importantly, delaying expansion until the CU has harmonized its tariff policy to its members’ WTO commitments would allow the union itself to send the message that it is a modern trade bloc that supports, rather than opposes the mission of the World Trade Organization.