The prospects of Kazakhstan’s EAEU membership
Introduction
Politics makes Kazakhstan’s withdrawal from the EAEU unlikely, in spite of the shortcomings of the Union.
Political prospects for Kazakhstan
A Eurasian integration initiator, the 76 year old President Nazarbayev is likely to remain loyal to the EAEU. In a November 2016 interview with Bloomberg, Nazarbayev said he plans to work until 2020 and will not hand power to his children to succeed him, report Nariman Gizitdinov and Torrey Clark, of Bloomberg. Nazarbayev’s old age creates uncertainty, but his “Nur Otan” party dominates the Parliament. The Parliament became more powerful under the constitutional reform, but this is unlikely to cause withdrawal from Russian-led organizations.
Moscow has strong reasons to keep a close eye on Astana. The Russian-Kazakhstani border is the second largest land border in the world, after the American-Canadian border. The 7,598.6 km long border includes 5,936.1 km of land alone, reports the Russian-based “Encyclopedia” Publishers. Kazakhs and Russians live on both sides of the border. Destabilizing Kazakhstan, under the Syrian or Ukrainian scenario, is dangerous, since it will make Russia more vulnerable to Islamic extremists. However, if NATO or some other power placed its troops on the border, it would be perceived as a threat in Russia. Fear of such a conflict may prevent a color revolution in Kazakhstan, until a more pro-western government comes to power in Russia or the current geopolitical struggle soothes otherwise. Also, with a rating of 42 of the 2017 Heritage Foundation index of economic freedom, Kazakhstan is much freer economically than many of its neighbors. The new government may be less business-friendly, so its relations with the West may be worse. Nazarbayev’s successor may also implement more radical reforms, so the West has fewer reasons to support the opposition in Kazakhstan than in other CIS countries.
The benefits of a customs union
Most economists would not recommend barriers against imports. Countries should specialize in goods, in which they have a comparative advantage. Crude oil and other raw materials do not create value added, but this is a reason not to restrict oil product and other imports, but to diversify the economy. Intra-industry trade increases competition, lowering prices. Businesses gain from larger markets, leading to scale economies.
Trade barriers, such as tariffs and import quotas, are inefficient. They increase the price of the good in the importing country, making its consumers worse off. There is also a production effect, due to shifting to more expensive home production. Domestic producers become better off, and, in case of tariffs, the government also collects revenues, but the loss to customers exceeds both gains. Kazakhstan is not large enough to affect world prices, so tariffs do not affect terms of trade.
A free trade area is less prone to political pressures, but more administratively burdensome. In a free trade area, unlike a customs union, the members do not set common tariffs against outsiders, so rules to prevent re-exporting must be designed.
The EAEU still does not function as a proper customs union, with the same trading conditions between each member state. On paper, EAEU members have gone past a mere customs union, as they have agreed on free migration and the establishment of supranational bodies. Nevertheless, the Russian embargo, in which other EAEU members do not participate, since they are not under sanctions, narrows the gap between the EAEU and the CIS free trade area. Smuggling of embargoed goods led to various prohibitions, such as banning beef imports from the Minsk oblast of Belarus into Russia, and tensions within the EAEU.
Limitations of the EAEU
The benefits from EAEU membership for Kazakhstan are limited, because raw materials account for most exports of both Russia and Kazakhstan. Each could benefit more from trade, if final goods producers joined the union. However, because most of these countries prefer not to conflict with the West, their EAEU accession is unlikely. Furthermore, the Russian recession induced Kazakh exporters to find new markets. As of 2016, exports of Kazakhstan into Russia decreased 22.8%, though Russia remains the third largest export partner of Kazakhstan, after China and Italy, reports Alexei Nikonorov, of 365info.kz. Trade picked up during the first four months of this year, returning to the year 2014 levels, reports Finprom.kz. The new package of sanctions against Russia, which Donald Trump had signed on August 2, will aggravate the Russian recession. Trade between the two countries will decrease again.
Trade between Kazakhstan and other EAEU countries is small, compared to trade with Russia. Over January-April of the current year, exports into Russia amounted to $1.4 billion; imports from Russia amounted to $3.3 billion. The volume of trade with Kyrgyzstan, the second largest partner, and another close neighbor of Kazakhstan, is much smaller: imports for the same period amounted to $70.4 million, while exports amounted to $36.6 million, also reports Finprom.kz. Armenia and Belarus are located further from Kazakhstan than Russia and Kyrgyzstan are, and their markets are relatively small for Kazakh exporters. Armenian and Belarussian exporters take advantage of the larger Russian market.
Currency exchange rate issues
Many analysts have linked the tenge exchange rate fluctuations after 2014 to those of the Russian rouble. Yet restricting trade between the two countries would not have helped prevent the current tenge depreciation. Both countries depend on oil exports, and monthly Brent crude oil prices have decreased 11.6% between April and June, reports IndexMundi. Imposing tariffs on both sides would create a one-time decrease in Kazakhstan’s imports and exports. If Kazakhstan’s net exports increase as a result, the tenge will appreciate; if they decrease, the tenge will depreciate, relative to the dollar, since both countries trade in dollars. In the long run, however, the tenge exchange rate to the dollar would still depend on world oil prices, unless Kazakhstan diversifies its economy, since the country is too small to affect them.
Conclusion
It is wishful thinking to believe that economic interests always prevail over political interests in forming regional agreements, such as the Eurasian Economic Union. Though its economic benefits are limited, political factors secure Kazakhstan’s position in the EAEU.
References
Encyclopedia Publishers. General information. Russia: Electronic encyclopedic dictionary. http://www.novrosen.ru/Russia/general.htm. 2017.
Finprom.kz. Trade of the RK with the EAEU is undergoing revival - over 4 months of the current year, exports of Kazakhstani goods increased 38%, imports increased 41%. http://finprom.kz/ru/article/torgovlya-rk-s-eaes-ozhivaet-za-4-mesyaca-tekushego-goda-eksport-kazahstanskih-tovarov-vyros-na-38-import-uvelichilsya-na-41.
Gizitdinov, N. Clark, T. Kazakh President Nazarbayev says power won’t be family business. https://www.bloomberg.com/news/articles/2016-11-23/kazakh-president-nazarbayev-says-power-won-t-be-family-business. 2016.
IndexMundi. Crude Oil (petroleum); Dated Brent Monthly Price - US Dollars per Barrel. http://www.indexmundi.com/commodities/?commodity=crude-oil-brent. 2017.
Nikonorov, A. Kazakhstan is losing its main partner - Russia. 365info.kz. https://365info.kz/2017/02/kazahstan-teryaet-glavnogo-partnera-2/. 2017.
