Interview 180: Was the Eurasian Economic Union a Good Deal for Kazakhstan?
Dr. Nargis Kassenova discusses the Eurasian economic union and single-economic space consisting of Russia, Belarus, and Kazakhstan, the benefits and drawbacks to Kazakhstan joining the partnership.
Dr. Nargis Kassenova is an associate professor at the Department of International Relations and Regional Studies at KIMEP University in Almaty, Kazakhstan.
During an interview conducted in Almaty in November 2012, Kassenova discusses the Eurasian economic union and single-economic space consisting of Russia, Belarus, and Kazakhstan, the benefits and drawbacks to Kazakhstan joining the partnership, and the country's future with the WTO (World Trade Organization).
Below is the transcript of the video interview.
Eurasianet: What is the history of the Eurasian customs union and the single-economic space?
Nargis Kassenova: The history is sort of long and short at the same time, because the first attempt to create the customs union by Russia, Belarus, Kazakhstan, and Kyrgyzstan at the time, was made in the mid ‘90s. In 1995, in fact, the customs union was created but it didn’t work. Basically it existed on paper and it was apparent that it failed when Kyrgyzstan, a customs union member, decided to join the WTO without consulting other member states. It was clear that it wasn’t working and basically the member states decided to create a Eurasian economic community – a simpler version. The new attempt took place in the late 2000s, in 2009, and basically things were moving very, very fast. In January 2010 it was launched. In July 2010 the customs code was adopted; starting working. And then the next year, in the summer, the customs borders were moved to the external parameter of member states.
Eurasianet: It’s been a fast process, but would you say it’s been an effective process?
Nargis Kassenova: It was incredibly fast. If you compare how it was done with the European Union, it took almost 30 years to do the same thing – to move from free trade to customs union and then to the common market. Here it’s just two, three years basically. Now it will be more, it will be around five years if everything is done on schedule by 2015.
Eurasianet: Has it actually taken effect? Is it just on paper like the last time?
Nargis Kassenova: No. This time it was a real thing. And we do feel the effects. Both consumers and businesses, and I think politically as well.
Eurasianet: Do you think that the motivation is political or economic?
Nargis Kassenova: It’s hard to say. Generally we can try to categorize – political, economic, geopolitical. Officially the main reason for the creation of the customs union and further Eurasian integration was economic – that Kazakhstani businesses will acquire this large market of 170 million people. That it will create opportunities for other businesses outside to invest in Kazakhstan so that they can benefit from this big market. Another reason that was given – was provided by our authorities – was that the customs union will help our businesses to trade for WTO. In parallel with the customs union with Eurasian integration, we had WTO accession procedures going on. The main official reason was economic. But of course we can speculate about political reasons and geopolitical reasons. Speaking of political reasons, I would connect it with the expected crisis, that we might soon encounter the second crisis, which will be even worse than the first one and perhaps it’s better to stick to Russia, as our big partner for some guarantees. In terms of political succession in the country, that’s another issue that might be on the mind of our elites.
Eurasianet: You mean the succession to [Kazakhstani President Nursultan] Nazarbayev?
Nargis Kassenova: Yes. Because he’s in his 70s. It’s not clear what’s going to happen after that and there are no clear mechanisms. Of course in the constitution we have mechanisms, we have institutions. But everybody knows that it might not work like this. What’s going to happen? The elites are nervous. Especially with rumors that Nazarbayev had a serious disease. That created certain uncertainties.
Eurasianet: What would be the connection of the customs union, or the single economic space, to the uncertainty of the elites over the future?
Nargis Kassenova: I am speculating, because I don’t know what was happening in the head of President Nazarbayev. Maybe there was a period when with the Arab revolutions, with this fear of the upcoming crisis, there was a feeling of insecurity at the top. That led to the decision to get closer to Russia. But with time, we can say that it didn’t actually affect Kazakhstan’s multi-vector foreign policy that much. In general, it seems to me that there was no clear strategy from the beginning and it’s still in the process. There are no clear decisions made, whom to ally, what to do, what we can delegate to the supranational bodies, what not. We see that the process is going on and clearly there are some negotiations at the top – and not always these sides are happy. The recent speech of President Nazarbayev in Turkey shows that there is some dissatisfaction with Russia. When after a visit to Russia he went to Istanbul and there he called for the consolidation of Turkic people, that Turkic people can actually become a force in global politics, and that Kazakhs after 150 years under the Russian rule almost lost their traditions, language and so on – these comments definitely angered people in Russia. The multi-vector foreign policy will go on for some time. We’ll see what’s going to happen. There are calculations done over and over again. We need just to watch what’s going to happen.
Eurasianet: You mentioned that in Kazakhstan the authorities talked about having this giant market, and that was the justification. On the level of the whole union, was that the reason for Russia and Belarus as well? What economic arguments were advanced at the tripartite level?
Nargis Kassenova: For Russia it made more sense economically, because Russian industries are more competitive compared to our businesses. For them that was a good market to capture. But we had a free trade agreement so no major barriers were removed. But the customs union helped. We do see a considerable increase of Russian imports to Kazakhstan. With Belarus, yes there was an increase, but there was a very slow start and now it sort of stabilized. The main gain was made by Russia - the main economic gain for Russian businesses. Our businesses complained that on paper it looks like they are free to go to Russia and do business, sell their goods. But in fact what happens is that they go there but the local authorities use all kinds of excuses to block that. For Russian goods it’s fairly easy to come here. For Kazakhstani goods it’s not so easy to trade in Russian markets. It’s becoming easier, it’s coming slowly, slowly. Probably if there is enough political will these issues will be somehow resolved. But at the moment we are the losers. Also, some Kazakhstani producers that were producing higher end products were very negatively affected by the customs union because they were using Western, Chinese equipment, material, and the tariffs on those went up considerably. Their products become not competitive. At the moment if you listen to our business representatives, in public their pronouncements are a bit softer. They say, ‘Yeah, we appreciate this opportunity. But actually we have a lot of problems. There is a lot of room for improvement in terms of documentation. Really removing barriers and so on. Having access to Russian railway, transportation system.’ But if you talk to them in private then they’re much stronger. They give strong opinions. They say that the economy was surrendered. Basically it’s a disaster, especially for small and medium enterprises.
Eurasianet: Given that this was all in the public domain, why did Kazakhstan push ahead with it?
Nargis Kassenova: The public discussion was very short. You mentioned yourself that it was very, very fast; done incredibly fast. We didn’t even have time to have a proper discussion. It wasn’t really encouraged. Now we have these multiple conferences on Eurasian integration. But it’s post post-factum. By comparison, WTO accession was much more seriously prepared. Businesses were consulted since the early ‘90s: what to do, how we’re going to do it. So they were engaged in the process. It seems in the last stage they’re not engaged again. With the customs union there was no process like that. Everything was done in a rush.
Eurasianet: In other words, it was decided at a very high level and then implemented quickly.
Nargis Kassenova: Yes. Actually it seems like the decision was done really, really fast. There was a very interesting Wikileaks cable about the conversation that took place between Prime Minister Karim Masimov and the U.S. ambassador, at the time [Richard E.] Hoagland. [Masimov] was telling the U.S. ambassador that we need a clear sign from Washington that we are welcome in the WTO. If we receive this signal we can suspend the customs union accession process. Even in, I think it was in February 2009 if I’m not mistaken, our authorities thought there was still some room for maneuvering it seems from that.
Eurasianet: Is it possible it was a negotiating tool over the WTO membership and then simply took off?
Nargis Kassenova: Relations with Russia had a priority. It was a complex game. Then a decision was made that we are moving in this direction.
Eurasianet: [Russian President] Vladimir Putin sprang a bit of a surprise on everybody and said that Russia, Kazakhstan, and Belarus would join [WTO] together. Which in the end didn’t happen. But they described it as a coordinated position. What was that all about?
Nargis Kassenova: Very fast after Putin announced that, very fast [Russian Prime Minister Dmitry] Medvedev said something else, that actually ‘we will be negotiating separately.’ That’s what happened. Which kind of – Putin makes this argument about customs union being the training ground for local businesses before we join WTO – strange. It does show that there was a bit of confusion and things were done in a rush. They decided to push it. Maybe Russia was using it more as a negotiation with the WTO. Every player had its own agenda. For Russia it made sense to go with the customs union and then join WTO, because that gives this market – the Eurasian market – some saving grace to Russian businesses that are not competitive globally, internationally. They can sell their goods here and it’s more or less protected – this area. For Russia it made more sense. For Kazakhstan, economically, really, I don’t see big gains. President Nazarbayev said that Eurasian integration is inevitable in one of his interviews. Maybe that’s how he sees the situation. But it doesn’t explain the rush.
Eurasianet: There was a World Bank report in spring 2011 where they said Kazakhstan had been losing in real income 0.2 percent every year, which really indicates that it’s not beneficial for Kazakhstan. They also spoke of increased tariffs, increased costs of imports to both consumers and businesses. Could this be a short-term phenomenon and could Kazakhstan start to reap the benefits later perhaps?
Nargis Kassenova: There was a conference on WTO accession and there was a speech by a World Bank representative and that’s the message he was conveying, that if things go really well in the customs union and in the single economic space then potentially there can be some gains. But, in the future. Many people are skeptical whether this progress is possible, considering the condition of the Russian economy, considering the condition of the Kazakhstani economy.
Eurasianet: There was a different report, just out by the EBRD (European Bank for Reconstruction and Development), where they describe the union as the first example of successful post-Soviet economic integration. How far would you agree with that?
Nargis Kassenova: It is successful in a sense that finally it happened. We do see real changes, real working agreements. But how good is it for all the participants, I have serious doubts. Russian businesses, they gained from the creation of this customs union. But these are short-term gains. In terms of long-term benefits, is it a good project for Russia? Basically Russia is prolonging the existence of its noncompetitive industry. With the WTO accession, once again, how long it can last. We will see. Generally it’s not very good for all the participants.
Eurasianet: According to analysts, in relation to the union, Belarus was going to get the largest relative gains, Russia was going to get the largest absolute gains, but that left Kazakhstan. What advantages can Kazakhstan expect to gain or what disadvantages can it expect to face from the Eurasian Economic Union?
Nargis Kassenova: We all have problems in our economies. Our problems were lighter and the economy smaller, more dynamic. It’s easier to change it. We could have moved ahead faster compared to Russia, and especially Belarus. We had a fairly liberal trade regime. We were improving our indices for doing business and so on. Slowly, slowly. But things were improving. Now with the creation of the customs union, the single economic space, we are going backwards. Not even going. Basically we jumped backwards. All the gains that we managed to make, they were canceled. In terms of regulations and openness of the economy. Perhaps we can say that Kazakhstan is the biggest loser in this whole project.
Eurasianet: Would it be fair to say that the customs union slowed down Kazakhstan’s accession process to the WTO?
Nargis Kassenova: Definitely it slowed it down. In 2008 Zhanar Aitzhanova, our minister for economic integration, she said that Kazakhstan would complete the negotiations on WTO accession in 2009. And then this whole customs union affair started and we are just completing now. When we join, I don’t think we would join on the condition we would have joined back then, because now we are bounded by Russia’s agreement with WTO. Russia has pretty high protective tariffs, at least compared to what we had. We will be joining mostly on Russia’s conditions. It’s still not clear what exactly the results of the negotiation are, but I don’t think that we can change much from what Russia negotiated. If in 2009 we had this AV (ad valorem) tariff around 5-point-something percent. Now with Russia, we negotiated 7-point-something percent. Basically we will have a more closed economy. Plus, it’s very important that we would need to negotiate with Russia further after we access the WTO of these matters on regulating these four freedoms; movement of capital, labor, and so on – trade matters and the economic matters. We’ll be doing together if things go as they were announced.
Eurasianet: Effectively, it’s turned out that Russia is going to dictate the terms of Kazakhstan’s WTO membership.
Nargis Kassenova: To a large extent it did it already. We have an agreement that whoever joins WTO first among members of the customs union everybody else has to comply. Whatever we negotiate we need to agree with Russia and Belarus – well Russia, not Belarus at the moment.
Eurasianet: Do you think Kazakhstan’s WTO accession process is finally coming to an end?
Nargis Kassenova: It seems we’re almost completed. The only partner we need to finish negotiations with is the European Union. There are some difficult matters left, like local content and some other matters. It’s quite possible that we will finish and maybe join next year (2013).
Eurasianet: How would you say the single economic space, the customs union, has affected Kazakhstan’s trade with China?
Nargis Kassenova: If you look at the numbers, the numbers are good. It’s more the European Union that was affected, the trade with the European Union. It’s share decreased a little bit. But it’s still our biggest trade partner. Fifty-three percent of Kazakhstani exports go to Europe. With China the numbers are good and it will be growing. China initially got concerned with what is going on here with the customs union. They were watching very attentively. But by now they realized that actually it’s not a major constraint. We have this big project – Horgos free economic zone, the so-called land port on the border between Kazakhstan and China – it’s already open for tourists and investors, from what I understand, and it should be fully opened in 2018. That will definitely further increase the investments, trade of China. It’s inevitable. The Chinese economy is just way too dynamic. It’s next door. There are opportunities there that cannot be missed and should not be missed. I don’t think there will be really a major impact, especially if we join WTO. China is a WTO member; can benefit from that. With the European Union, once again, it created some problems for trade, and for investments. But still it’s our biggest market and a very attractive market. We are selling there the goods that we cannot sell to Russia – oil, gas, metals, and so on. Europe and China will remain our major trade partners, in the top three, for some time.
Eurasianet: Oil and energy exports make up a very large proportion of Kazakhstan’s exports, and yet Kazakhstan has a stated policy of diversification in order to avoid Dutch Disease. Would you say the customs union is a help or a hindrance to that?
Nargis Kassenova: The energy industry would be one of the few industries that could benefit from the creation of the customs union and the single economic space. Especially the single economic space, because it was agreed that our energy industries will have domestic tariffs on transport. This still hasn’t happened. But maybe in the near future it will actually happen and this will help our energy industry to be even more competitive. It’s not really diversifying anything. We’ll see what happens.
Eurasianet: Some of Kazakhstan’s neighbors, some of the members of the Commonwealth of Independent States, have expressed an interest in joining a single economic space. What’s its potential for expansion?
Nargis Kassenova: You mean Kyrgyzstan and Tajikistan. It depends what will be driving the decision makers. Because if they see Eurasian integration as a political project then they would want them in, especially Kyrgyzstan, because it’s more possible, feasible at the moment. As fast as possible. If they want to have a viable, strong Eurasian economic union, then they would wait. Accepting the Kyrgyz – the Kyrgyz economy is very weak – accepting it would create problems. You would need to sponsor it, put in investments and so on. And the second big problem is the border, because the border is porous. Kyrgyz customs services are very weak and the level of corruption is high. Russian business is already suffering from the removal of the border customs checks, between Russia and Kazakhstan. The number of counterfeit products went up. If Kyrgyzstan joins, the problem will multiply the scale of the problem.
Eurasianet: If it wants to be a really strong economic bloc, it will just remain the three of them for the moment?
Nargis Kassenova: Yes. It would make more sense than just attaching another partner, a very weak partner.
Eurasianet: Will the single economic space actually exist in a decade?
Nargis Kassenova: I’m skeptical about the sustainability of this project. Mainly, because, economically it doesn’t make too much sense. Politically as well. At the moment it is driven by the political wills of the presidents. There is no consensus in the society in the usefulness of this union, although we hear some numbers that 80 percent of Kazakhstani citizens support the customs union. I don’t know how they get these numbers. If you listen to people, if you read the comments, they are quite negative and we have this budding nationalist movement very strongly against integration. I would think there is no consensus in Kazakhstan and I don’t think there is a consensus in Russia as well about the usefulness of this. Russia is quite divided at the moment. There are people who want to have Russia as a great power controlling its sphere of influence and this can be useful. The Eurasian integration union is kind of the most important part of it, of this project. But there are people who see it as something that will keep Russia back from integration with the West. I don’t what is going to happen past Putin, past Nazarbayev, past [Belarusian President Alexandr] Lukashenko.
'Interview 180' features one-on-one, Q&A sessions with decisions makers, politicians and analysts who provide focused insight on EurasiaNet's coverage region. Dean C.K. Cox is the photo editor for Eurasianet and Joanna Lillis is a freelance writer who specializes in Central Asia.
Joanna Lillis is a journalist based in Almaty and author of Dark Shadows: Inside the Secret World of Kazakhstan.