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31 March, 2013  ▪  Andriy Kovalenko

The Mythical Benefits of the Customs Union

The Customs Union is causing major economic problems not only for its “minority” members, Kazakhstan and Belarus, but even for the major stakeholder - Russia

Domestic political agents, associated with the Kremlin in one way or another, have lately intensified efforts to promote the idea of Ukraine’s membership in the Customs Union (CU). The most visible is Viktor Medvedchuk’s Ukrainian Choice project. It seems to have reached the final stage of “subliminal infusion” of the idea, as numerous billboards and lightboxes throughout Ukraine send a clear message: “The Customs Union – together to wealth and success” (the previous message was of “individual governance” through an “all-Ukrainian referendum”). This was after the Communist Party’s Oleksandr Holub announced plans to launch preparations for a referendum on Ukraine’s joining the Customs and Eurasian Unions in early spring. After these two attempts, yet another massive media campaign to persuade Ukrainians of their potential “success” through CU integration. All this in spite of the economic reality in Kazakhstan, Belarus and Russia; all CU members, all showing the opposite.

READ ALSO: In Whole or in Part?

KAZAKHSTAN: “AWAY FROM MOSCOW”?

After three years in the CU, the Kazakh economy and population faced previously unpredicted negative consequences. According to expert estimates, Kazakhstan is rapidly losing its position in international trade, even with its CU partners. Compared to a USD 3.4bn trade deficit with CU partners in 2011, the figure hit USD 4.7bn in the first six months of 2012, while the amount of trade with its CU partners shrank by 4%. CU protagonists advertise some indicators of Kazakh budget growth as the “successful outcome of the union”. However, the Chairman of the Kazakh Association of Customs Brokers, Gennadiy Shestakov, explains this as the consequence of increased customs duties. This has sent retail prices for many groups of goods on the domestic market soaring. In 2009, before Kazakhstan joined the CU, the weighted average of customs duties in Kazakhstan was slightly over 5% compared to the maximum 7% required by the WTO, and 18% in Russia or 12% in Belarus. Today, all CU member-states have virtually matched Russia’s average, hitting 16%. In Kazakhstan, customs duties on some goods grew three to four-fold and several times over for cars.

The hardest hit were local producers of importing raw materials for goods manufactured, using imported equipment and technologies. The situation has become absurd: for instance, laminate flooring made in Kazakhstan using Belgian equipment is more expensive than laminate flooring imported from Belgium. But the worst outcome of CU integration in Kazakhstan is the steep increase in the price of essential and fast-moving consumer goods, despite the fact that the government has already frozen prices and implemented price regulation. However, it failed to prevent the price for buckwheat from growing 2.5 times, beef by 40%, and mutton by 33%. Sugar and oil prices have doubled.

READ ALSO: Decision Time

The recent World Bank report indicates that as a result of common external tariff implementation in Kazakhstan, “the cost of imported goods to businesses and consumers has increased, and resources shifted to areas of inefficient production under the tariff “umbrella”. … the customs union has depressed real wages by 0.5% and the real return on capital by 0.6%. Kazakhstan trades less with the rest of the world and more with Russia, Belarus, and the rest of the CIS, resulting in less imported technology from the more technologically advanced European Union and other countries — leading to a loss of productivity in the long run… Kazakhstan will lose about 0.3% in real income per year as a result of the full implementation of the common external tariff… Real wages and return on capital will shrink even more”.

Clearly, these negative results will hit the low income population, and SMEs most, driving the domestic situation to an explosive situation.  Some are already calling on Nursultan Nazarbayev to renounce the deal and leave the Customs Union. Perhaps, this was why his Independence Day speech had a somewhat atypical title: “Strategy: Kazakhstan 2050” and had some unexpected and intriguing points that shocked Moscow. A number of experts hastily described the strategy as the “Marshall Plan” for Kazakhstan, especially given that it is based on the concept of Jeremy Rifkin’s Third Industrial Revolution. Nazarbayev made it clear that Astana would not only protect national identification, but revive the Kazakh language and focus on Western innovative technologies rather than limit its foreign policy to the CU project alone. Moscow is particularly concerned with Kazakhstan’s intent to focus on deeper relations with China and integration with Turkey and the new project of a Turkic Union, also known as the Great Silk Road. The Russian media immediately began to buzz with phobias, warning of “anti-integration threats” and that “Kazakhstan could bury both the Customs and the Eurasian Union”.

BELARUS: AN EXPORT BUBBLE

Direct investment into the Belarusian economy dropped fourfold in 2012 compared to 2011, although it should have grown, given the logic of the CU benefits widely advertised by Russia. Over January-November 2012, its current account deficit was USD 1.1bn. According to the Belarusian Institute for Strategic Research, Belarusian exports to Russia and Kazakhstan have increased by nearly 36% since it joined the CU in 2010. However, its trade deficit with Russia has grown by more than USD 3bn. A slight trade surplus with Kazakhstan is more the result of shrinking imports from Kazakhstan to Belarus than of Belarus’ skyrocketing exports in that direction. In fact, the positive dynamics of selling “good quality and inexpensive” goods made in Belarus on the markets of its CU partners is mostly a result of dumping, the devaluation of the Belarusian currency, cheap fuel and direct subsidies from Russia, which cannot last forever. This export “communism” poses the threat of rapid depletion, if Russia is forced to cut the “brotherly” subsidies to Belarus’ economy during a crisis. Similar consequences, i.e. restriction of Belarus’ exports at dumped prices, are likely after Russia and Kazakhstan predictably enter the WTO. Belarusians could then face a very likely economic collapse similar to that in spring 2011. Notably, Alyaksandr Lukashenka said recently that his country did not benefit in any way from joining the CU and called this Eurasian entity “useless”.

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RUSSIA: SMUGGLING IN FULL SWING

Paradoxically, even Russia faced major hurdles caused by CU practices despite its lion’s share of the financial and customs benefits, given its “majority stake” in the entity. Thus, 87.87% of all customs duties go to the Russian budget, leaving 7.33% and 4.7% for Kazakhstan and Belarus respectively. Based on a recent study by the Higher School of Economics, conducted for Russia’s Ministry of Economic Development, the anticipated “growth” of trade among CU partners didn’t happen. “In the two years since the CU was created, total trade among the member-states has not changed. Moreover, the figures remain unchanged since 2005… In 2011, the share of regional trade in the total foreign trade of Russia, Belarus and Kazakhstan did not exceed the average indicators of the five years prior to CU Agreement enactment (2005-2009). The indicator has long fluctuated between 10% and 12%. Meanwhile, trade, with the exception of fuel, is clearly shrinking.”

At the same time, Russia is facing another problem. After the opening of its economic borders, many (if not most) goods are imported unofficially. As a result, relevant budget revenues are critically below what was initially expected. According to the Russian Customs Service, 50% of trade within the CU is grey. More relaxed customs controls have led to an increase in smuggling, which has now reached a scale that is dangerous for Russia’s economy. Moreover, experts assume that Kazakhstan and Belarus customs services distort official trade statistics. According to Russia’s Ministry of Economy Development, in 2012, the abolition of the mandatory customs declaration of goods resulted in a USD 9bn underestimation in the import volume of goods. This is the approximate value of smuggled goods. Some sources claim that the Russian Ministry of Industry and Trade is overwhelmed with complaints from Russian manufacturers about the inflow of goods smuggled from China and Europe. They sell at half the price of those made in Russia, and range from shoes to home appliances, flowers and plastic packaging.

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In October 2012, Russia demanded compensation from Belarus in the amount of USD 1.5bn, for estimated Russian budget revenue losses, caused by the export of Belarusian petroleum, which is reported as solvents and lubricants that are duty-free. Russian authorities also discovered that Belarus was re-exporting oil products made from Russian oil, reporting them as solvents. The scam allows dealers to evade significant duties for exporting fuel outside the CU. This is just one of the many telling examples of the “brotherly civilized” relations within the CU. Some Russian economists have even described the CU’s customs policy as “government-authorized smuggling”.

It appears that the “success for every Ukrainian” on entry into the CU promised by Viktor Medvedchuk and the Communists is a cynical and dangerous manipulation. In fact, the Yanukovych regime should think twice before naively buying Putin’s promises of a USD 9bn annual income and a staggering 10% GDP growth – what Ukraine will gain once in the CU, based on Moscow’s estimates. The real experience of CU member-states shows that the price of joining it could be much higher than just zero economic effect – the new member-state could plunge into long-term decay in the technologically obsolete Soviet space and face a threat to its national independence. 

READ ALSO: Andriy Pyshnyi:The further Ukraine is from the Customs Union, the better

THE CUSTOMS UNION: A BAD MARRIAGE?

While Russia is forcing the issue of Ukraine joining the CU, advertising the “all or nothing” policy, but internal conflicts are brewing under the surface

 

July 2010

The CU is established

Massive rallies against joining the CU take place in Kazakhstan while opposition leaders, including the Communist Party, are calling on the government to denounce the agreement to found the CU as an act that “restricts Kazakhstan’s sovereignty”. Veterans of the 1986 December revolt described Kazakhstan’s entrance into the CU as “the beginning of the territorial, economic and political colonization of Kazakhstan” in their letter.

Alyaksandr Lukashenka describes the outcome of Belarus’ entrance into the CU as follows: “We are not losing anything yet, but are not gaining anything, either”.

 

April 2011

It becomes known that Russia has 57% of votes in the CU and receives 87.87% of the customs duties, which causes even greater resentment among the people of Belarus and Kazakhstan

 

September 2011

Representatives of the Belarusian government admit to massive exports of foodstuffs to Russia and the rapid dilution of FX in the country. Monitoring shows that Belarusian meat and dairy products account for 70% of near-border trade in Russia, with “the country’s budget being exported as well, because meat and dairy production in Belarus is government subsidized”.

 

January 2012

The Common Economic Space is set up for the free cross-border flow of goods, services and income between Russia, Belarus and Kazakhstan.  

 

October 2012

Nursultan Nazarbayev condemns the Russian colonization of Kazakhstan and offers an initiative to create the Turkic Union at the World Economic Forum in Istanbul. “We live in the motherland of the entire Turkic people,” he said. “After the last Kazakh khan was killed in 1861, we have been the colony of the Russian Empire and later, the Soviet Union. Over 150 years, Kazakhs have almost lost their national traditions, customs, language and religion.” Potential members of the Turkic Union are Kazakhstan, Uzbekistan, Azerbaijan, Kyrgyzstan, Turkmenistan, Turkey and the Turkish Republic of Northern Cyprus.

 

January 2013

Russia’s Ministry of Foreign Affairs sends an official notice of protest to Kazakhstan regarding Astana’s attempts to restrict the exploitation of the Baikonur Cosmodrome leased to Russia.

Alyaksandr Lukashenka describes Russia’s initiatives to intensify cooperation within the CU: “Perhaps, Russia would like to take some swifter, more radical steps. But neither Kazakhstan, nor Belarus will go for it willy-nilly… Belarus has its own interests.”

Nursultan Nazarbayev admits that Kazakhstan could leave the CU if its sovereignty is threatened: “The issue of the country’s political sovereignty is not debatable. We will leave the union if any of its actions threaten our independence.”

 

March 2013

Kazakhstan’s Oil and Gas Minister Sauat Mynbayev threatens to suspend gas supplies to Russia from its biggest field, Karashaganak: “If we do not agree on the price right now, all this gas may be redirected southward from 2015 and possibly to China after the construction of the Beineu-Bozoi-Shymkent gas pipeline is completed.”

The Da Vinci think tank states that the removal of customs borders within the CU has boosted drug trafficking to Russia from Kazakhstan and Afghanistan.

Lukashenka expresses his dissatisfaction with the CU because Russia continues to levy high duties on Belarusian goods. 


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