“The permanent tension between Kyrgyzstan and Kazakhstan over border closure is deeply rooted and goes beyond non-compliance of the EEU rules by each side,” researcher and analyst Konstantin Larionov notes in his article for CABAR.asia.
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The world today is facing new economic shocks. The unwillingness of the world economy to respond to new challenges leads to the slowing growth of world GDP. The utmost coordination of economies would help to solve part of the problems and address the global risks of the impending crisis. According to the financier Nuriel Roubini, the situation is aggravated by tensions and trade disputes that enable the growth of interest rates[1]. Unprecedentedly large world debt of 253 trillion US dollars, or 322% of global GDP, symptomize an impending crisis, especially since GDP growth in 2019 was the lowest since 2008. The fears of some economists are triggered by the growing debts of China and the United States, which accounted for about 60% of the increase in world debt. PRC’s difficult situation brought the world to the pre-recession stage and slowed down production in China.[2]
The unfolding situation will contribute to the decline in the economies of the EEU member countries. For instance, a weakened cargo flow from China amid Kyrgyzstan and Kazakhstan is expected to prompt cooling of trade and economic relations and launch undesirable disintegration mechanisms in the EEU, hence reducing its export/import and another economic potential.
The shocks of the EEU are extremely unprofitable for the Kyrgyz Republic, as this will inevitably affect the socio-economic and political situation. Kyrgyzstan in its logistics and transport relations with the EEU is heavily dependent on Nur-Sultan’s political mood since the routes oriented to Russia, Belarus and Armenia lie through its territory. At the same time, Kazakh entrepreneurs also depend on the supply of various products from Kyrgyzstan. There are four international and four bilateral border checkpoints between the two countries. They all operate 24 hours a day. About 30 thousand people cross them daily. About 12 thousand people and 500-600 vehicles pass daily through the largest point Ak-Zhol. More than half of the trucks transit through Kazakhstan. The greatest activity of transporting goods from Kyrgyzstan to Kazakhstan and beyond is scheduled for spring. Moreover, there are railways in Kyrgyzstan that have access to the EEU countries and Uzbekistan. The cargo turnover of railways is about 3% of the total freight traffic.
More than half of Kyrgyzstan’s export goes to Russia (55.3%). About 43.5% of exports go to Kazakhstan and 1.2% to Belarus[3]. The Made in Kyrgyzstan brand is comprised of clothing, shoes, cotton, vegetables and fruits, meat and dairy products, as well as waste and scrap of copper, precious metals and aluminum, precious metal ores and concentrates, cosmetics and more. That said, export-import interaction between Kyrgyzstan and the EEU countries has been depleting due to the recent decline in the EEU economies. Kyrgyz entrepreneurs incur losses as a result of movement restrictions systematically introduced by Kazakhstan.
Four planes of tension in Kyrgyz-Kazakh customs
Closure of the Kyrgyz-Kazakh border is not a new phenomenon. It has various foundations and lies in at least four areas: conceptual & political, managerial, legal and economic[4]. The permanent tension between Kyrgyzstan and Kazakhstan over border closure is deeply rooted and goes beyond the non-compliance of the EEU rules by each side.
Kazakhstan has unilaterally closed borders on several occasions since the 1990s. The most significant ones are the closure of borders in 2005 and 2010 after the revolutions and their aftermath in Kyrgyzstan. Observations suggest that in certain cases border closure is nothing more than a form of political and economic pressure. You can recall a remarkable event of 2017 when a conflict arose between presidents Almazbek Atambayev and Nursultan Nazarbayev. For unbiased analysis, we should note violations from the Kyrgyz side in some instances.
Perceiving Akorda’s actions as political pressure, an official representative from Kyrgyzstan at a meeting of the UN General Assembly’s Second Committee in November 2017 made a statement that Kazakhstan was arranging an “economic and transport blockade to cause economic damage to the Kyrgyz Republic and undermine the investment and tourist attractiveness of the country”[5].
It now becomes clear that deep-routed problems lie in the conceptual and political plane. Therefore, customs tension cannot be settled only through inconsistent discussion and signing of various agreements and Road Maps. Kazakhstan, in my opinion, does not consider Kyrgyzstan as an equal partner because of the difference in economies and political weight in the region. The situation is reinforced by haphazard actions of the Kyrgyz side in advocating for its interests within the EEU. The point is that the Kyrgyz side has not yet developed an efficient policy in dealing with customs interaction with its Kazakh counterparts. Bishkek’s unpreparedness for Astana’s (Nur-Sultan- editor’s note) actions emphasize the nature of the situation. As a result, the Kazakh side can make important regional political and economic decisions without Kyrgyzstan’s partner interests.
Stumbling blocks
The official stumbling block for restricting the truck movement from Kyrgyzstan is the country’s non-compliance with phytosanitary and veterinary standards. Barriers were justified by the non-conformity of goods before they enter the market of the EEU countries.
Kyrgyzstan was in no hurry to bring products in line with the requirements of the EEU and did not prepare the infrastructure for that, thereby benefitting the competitors. For instance, phytosanitary barriers with Kazakhstan were abolished in October 2016, that is, a year after joining the EEU, while veterinary restrictions were taken only in 2019. Today the launch of laboratories to assess the quality and eligibility of goods is quite problematic. The country has only two laboratories located in Bishkek and Osh that are included in the register of EEU laboratories[6]. The department responsible for disease prevention and sanitary-epidemiological surveillance under the Ministry of Health lacks qualified personnel. Meanwhile, Kyrgyzstan returns the favor and comes back with a ban on the import of Kazakh agricultural products.
Another obstacle is the supply and storage of agricultural products. Farmers, as a rule, are not informed of long-term trends in demand for agricultural products and proceed from their price understanding. Hence, supplies become unstable, and most farmers cannot supply large quantities of goods by prior arrangement with customers at certain times. There is a shortage of warehouses and logistics centers providing wholesale export. This greatly complicates the storage and competition of Kyrgyz products[7]. Some Kyrgyz entrepreneurs complain that the requirements for their products are more stringent than for the products of other EEU members[8].
Besides, Kazakhstan blames the Kyrgyz customs for the existence of a shadow economy in re-exporting Chinese goods. Experts agree that today it is difficult to estimate the volumes of shadow re-export through Kyrgyzstan[9]. According to various expert opinions, smuggling from China varies within four billion US dollars. As indicated by the Kazakh side, part of the goods coming from Kyrgyzstan either does not have a label, or the product itself does not correspond to the submitted documents (invoices). Kyrgyzstan’s customs points on the border with China are not equipped with the necessary equipment to track all types of goods arriving by re-export from China. Half of the blame is on the Russian company Crocus International, which did not supply the required equipment to customs points at the end of November 2019.However, after the introduction of the “Transit” system at the customs points of Kazakhstan, the country’s authorities argued that the budget was missing several million dollars because of smuggling. Experts note that all reciprocal complaints of Kazakhstan and Kyrgyzstan should be subject to non-tariff barriers (that is, requirements for the presentation of quality certificates and other documents indicating compliance with technical regulations in the manufacture of certain products) but should not concern foreign trade with third countries. For the record, while pointing to the difference in data on imports of Chinese goods across its border, Kazakhstan, however, is silent about its own discrepancies with World Bank data[10]. Moreover, the contradictions between Kyrgyzstan and Kazakhstan, worsened in 2017, have contributed to the unilateral closure of the border for goods from Kyrgyzstan. The issue was resolved under the new President of Kyrgyzstan, Sooronbay Jeenbekov, who signed a roadmap with President Nazarbayev. However, the signing of this document does not comply with the principles and standards of the EEU. Some experts also argue that by building non-tariff barriers, the Kazakh side is trying to protect its entrepreneurs from cheaper agricultural products of Kyrgyzstan and products supplied through re-exports from China[11].
As we know, Kazakhstan is completing the construction of Western Europe – Western China transport highway, a significant part of which (more than 3,000 kilometers) will pass through Kazakhstan (St. Petersburg – Moscow – Orenburg – Aktobe – Almaty – Khorgos – Urumqi – Lanzhou – Zhengzhou – Lianyungang). Kyrgyzstan is not part of this transport corridor, which demonstrates the lack of Kyrgyz government’s strategic vision to develop its economic relations.
Legal clashes
The Kyrgyz side consistently appeals to the competent EEU authorities requesting the abolition of barriers from Kazakhstan. The actions of the Kazakh side alleged to be contrary to Article 25 of the EEU Treaty on the control at checkpoints. In February 2020, Kyrgyzstan appealed to the WTO pointing out the violations by Kazakhstan of borders closure. The delegation stated that Kazakhstan violates certain provisions of the WTO General Agreement on Tariffs and Trade and the WTO Trade Facilitation Agreement[12].
Kazakhstan responded in the same way, pointing out to the inconsistency of the Kyrgyz side’s actions with the unified tax legislation. It was suggested that the EEU agreement provided for the VAT collection in the mutual trade of goods between the Member States to be no less favorable than taxation of similar goods originating from the territory of other EEU countries. According to the Kazakh side, Kyrgyzstan’s current tax legislation contradicts the principle of “national treatment”[13]. When submitting a complaint to the EEC, the Ministry of Trade and Integration of Kazakhstan asserted that by using the minimum control prices for goods from Kazakhstan and other EEU countries, the Kyrgyz authorities establish additional taxation. For example, if a Kazakh producer sends flour to Kyrgyzstan at an average price of 17 soms / kg, with additional taxation, the price rises to 22 soms per kilogram. The same applies to other products[14].
Also, the Kazakh side reported that “during 2019, the authorized state body of Kazakhstan revealed more than 2,600 cases of imported goods from Kyrgyzstan to fictitious recipients. It has also revealed more than 4,800 cases of false transit of Kyrgyz goods when the goods were declared as transit to the Russian territory but in fact, were sold on Kazakh markets without payment of indirect taxes (VAT) ”[15]. The point is that if Kyrgyz goods are sold in Kazakhstan, they are subject to additional taxation (VAT). However, if the goods are declared for sale in Russia or other countries of the EEU but settle in Kazakhstan, the country loses revenue, according to the official Nur-Sultan.
In 2019, there were 72 thousand motor vehicles registered that were not subject to the payment of VAT on imports from the EEU. The WTO promised to consider the complaint of Kazakhstan shortly. The Kyrgyz side responded to these allegations. According to Appendix No. 18 to the EEU Treaty (“Protocol on the procedure for levying indirect taxes and the mechanism for monitoring their payment when exporting and importing goods, executing work, providing services”), the EEU member state has the right to apply pricing mechanisms to complete the payment of VAT.
The issue has been already considered by the EEC and the Kyrgyz side was criticized for the discriminatory approach in applying this mechanism. The national norms were recommended to be brought into line with the EEU provisions. As a result, Kyrgyzstan’s Economy Ministry drafted a law on amendments to the Tax Code of the Kyrgyz Republic, which underlined that mechanism will apply to domestic manufacturers. The draft law now is under consideration of the Jogorku Kenesh.
Conclusion
Based on the above analysis, there are several trouble spots in relations between Kyrgyzstan and Kazakhstan:
- The current relations between Kyrgyzstan and Kazakhstan remind of competition rather than partnership. Kyrgyzstan is yet to learn the consistency in advocating for its interests in the EEU, which creates vulnerability. Therefore, the country is forced to integrate into the interests of the Union states. The Kyrgyz trade and transport economy are lacking flexibility, as a result.
- Both in Kyrgyzstan and Kazakhstan, there is a persistence of shadow economy and corruption uncontrollable per norms and legislation.
- Representatives of the Kyrgyz Republic are not active in the development of EEU laws, regulatory legal acts and the analysis of the regulatory impact of EEU bills.
- The Government of the Kyrgyz Republic does not use presented economic opportunities, thus consistently misses economic benefits.
What to expect and what to do?
Kyrgyzstan, I presume, should be more enthusiastic in advocating for its trade and economic relations with Kazakhstan and other EEU countries. We need to understand that the era of the transit Kyrgyz economy is ending.
The Kyrgyz Republic needs to diversify its trade and transport economy in a way that could mitigate possible impacts of the risks posed by the Kazakh side. The recommendations should be comprehensive and in the framework of Kyrgyzstan-Kazakhstan-EEU relations. Kyrgyzstan might consider the following:
- With the prevailing global economic situation and the impending global recession, Kyrgyzstan has to develop an effective anti-crisis package to reduce or eliminate risks from possible threats within the EEU.
- Kyrgyzstan needs to develop a conceptual transport, economic and logistics strategy that will enable trade relations with different countries through alternatives to trade routes. Depending on the vision of the country’s development, it is essential to determine whether it is worth developing a re-export economy so that it forms as one of the pillars of the economy, or should it become a transitional stage (the growth element of the country’s economy)?
- Kyrgyzstan needs to bring the legislative framework in line with the EEU provisions. Meanwhile, tax and other legislation should acknowledge the interests of Kyrgyz entrepreneurs and be finalized with their participation.
- To reduce the painful shift from a transit economy, Kyrgyzstan needs to draft efficient industrial policy along with developing modern production as an alternative. Tax and other mechanisms should incentivize foreign investors and domestic entrepreneurs interested in developing innovative and heavy industries.
- Kyrgyzstan needs to diversify transportation by increasing the load on the railway system and air transport. In the long term, it needs to develop the infrastructure of rail freight transportation on various routes to reduce dependence on road transport.
- Consider the possibility of processing agricultural products and selling them on the territory of the EEU and in third countries.
- Bring customs infrastructure in line with the EEU requirements on the accounting of goods imported from third countries. In a judicial or another lawful way, to help bring to justice actors who disrupt suppliance of customs with the essential equipment.
- Training of highly qualified personnel oriented to the management of trade and economic processes, as well as design and conceptual solutions to transport and economic difficulties.
- Together with the Ministry of Economy, the EEU countries and interested business communities, Kyrgyzstan is recommended to develop a mobile application for farmers and agricultural producers, which would allow them to orientate themselves in the medium and long-term market needs. On this platform, create the possibility of communication between potential customers and reliable freight forwarders, the possibility of obtaining free legal advice and so on.
Thus, a way out of this situation should be a conceptual, transparent and effective policy that would reduce risks and threats from the negative manifestations between Kazakhstan and Kyrgyzstan.
This material has been prepared as part of the Giving Voice, Driving Change – from the Borderland to the Steppes Project project. The opinions expressed in the article do not reflect the position of the editorial board or donor.
[1] Graham Vanbergen, of The Predicted 2020 Global Recession, The World Financial Review, December 1, 2018 https://worldfinancialreview.com/the-predicted-2020-global-recession/?__cf_chl_jschl_tk__=415b1a5740c538f6f55a36285de265678d189c13-1584252164-0-AZtOUMRYwNAZVZ9kJ9qMKkPqbvYhJOkR1mv5hCmiHSOMXq-rpDP6S -eBi8iw2wNWjWnzN0PoOWiqOdcYSSsd0GPe32wg8afaNJWX1Z4_11oWuEQc5o2Arr-MBNy739Gs4pw5ieEfWPPfZPHOtcTO-8zKXeuZkk4KKhladeKq9OUmF3xZ4Bu4XPtLAVxdjE6iV2nyxGUJ9LWj7BkAtR_K9REkeG62J7EJxELwXGa_wDwuVXNb_TYaqRctnVxHJQQqKpHyXsndf_l1-bFB6nVkgE0qcdRQr0Wzx2__DX9U5X9VxOtYeV7k2wJ7UCPcDhEIWw
[2] Yuwa Hedrick-Wong, A China-Centric Global Recession? Forbes, 10 March 2020 https://www.forbes.com/sites/yuwahedrickwong/2020/03/10/a-china-centric-global-recession/#13e904a771ad
[3] Source: National Statistical Committee
[4] We talked about this in the article: Sezim Zhamalova, Konstantin Larionov, Problems on the Kyrgyz-Kazakh border within the framework of the EAEU: a view from Kyrgyzstan, Center for Political and Legal Research, November 27, 2017, https://center.kg/article / 105
[5] Kyrgyzstan complains to the UN of a blockade by Kazakhstan, IA Regnum, November 21, 2017, https://regnum.ru/news/polit/2347677.html
[6] Information on the activities of the Center for Veterinary Diagnostics and Expertise, which can give an opinion on products delivered to the EAEU countries, can be found on the website: https://vd.kg/
[7] Ann-Sophie Gast, Kyrgyzstan and the Eurasian Economic Union: PARTNERSHIP WITH OBSTACLES, Policy Brief, OSCE, # 45, April 2018, http://www.osce-academy.net/upload/file/PB45_Rus.pdf
[8] This was stated by economist Azamat Akeneev at a round table discussing the topic of improving the competitiveness of Kyrgyz products in the EAEU markets in 2020 (see: Artyom Petrov, Place on the shelves. What prevents Kyrgyz producers from occupying their niche in the EAEU markets. Russian Newspaper , Kyrgyzstan No. 23 (8077), https://rg.ru/2020/02/06/v-bishkeke-obsudili-konkurentosposobnost-kirgizskih-tovarov-v-eaes.html
[9] Evgeny Pogrebnyak, Why it’s impossible to eradicate shadow imports from China to Kyrgyzstan? The rhythm of Eurasia, November 4, 2019, https://www.ritmeurasia.org/news–2019-11-04–pochemu-nikak-ne-udaetsja-iskorenit-seryj-import-iz-kitaja-v-kyrgyzstan-45749
[10] Alexander Shabalin, How Kyrgyz Customs Underestimates Trade with China. Shocking figures, Kaktakto, July 6, 2017, https://kaktakto.com/analitika/kak-kyrgyzskaya-tamozhnya-zanizhaet-tovarooborot-s-kitaem-shokiruyushhie-cifry/
[11] Ann-Sophie Gast, Kyrgyzstan and the Eurasian Economic Union: PARTNERSHIP WITH OBSTACLES, Policy Brief, OSCE, # 45, April 2018 http://www.osce-academy.net/upload/file/PB45_Rus.pdf
[12] Kyrgyzstan’s claims to the WTO are groundless – the representative of Kazakhstan to the UN, Zakon.kz, March 5, 2020, https://www.zakon.kz/5010369-pretenzii-kyrgyzstana-v-vto.html
[13] Kazakhstan accused Kyrgyzstan of violating the rights of the EAEU and WTO, IA Total Kazakhstan, February 27, 2020, https://total.kz/ru/news/vneshnyaya_politika/kazahstan_obvinil_kirgizstan_v_narushenii_prav_eaes_i_vto_date_20_14_20_14_20_14_20_13
[14] Kazakhstan complaints on Kyrgyzstan to the WTO and the EAEU, Tengrinews, February 29, 2020, https://tengrinews.kz/kazakhstan_news/kazahstan-predyyavil-pretenzii-kyirgyizstanu-v-vto-i-eaes-393188/
[15] Kyrgyzstan’s claims to the WTO are groundless – the representative of Kazakhstan to the UN, Zakon.kz, March 5, 2020, https://www.zakon.kz/5010369-pretenzii-kyrgyzstana-v-vto.html