School of Economics and Management
Nanjing University of Science and Technology
By Nuriyeva Saltanat
Supervised by Prof. 孙芳Sun Fang
Abstract. The presented paper focuses on one of the problems of integration of the former Soviet Union country: Kazakhstan’s membership into the Customs Union. It covers the formation and historical developments of the Customs Union and agreements have taken within the Customs Union within the CIS and the Customs Union of Russia, Belarus and Kazakhstan. The paper discusses how membership to the Customs Union affects to Kazakhstan. Then the paper analyzes developments, challenges and policy implications from Kazakhstan’s perspectives and marks problems and impacts other members of the Customs Union (Russia and Belorussia) to Kazakhstan.
Keywords: Eurasian Customs Union (ECU); Developments; Challenges; Policy Implications
Kazakhstan always plays significant role in many integration projects and processes in Eurasian area. Kazakhstan has organized the World Traditional Religious Leaders Congresses, OSCE Summit in Astana; chaired in it in 2010, chaired Organization of Islamic cooperation, Organization of Shanghai Cooperation and CICA; held Turkic summits; and initiated the Customs Union, CIS, and Eurasian Economic Union. Even, the idea of creating of Eurasian Union undoubtedly belongs to the President of Kazakhstan.
Particular attention is paid to the problems, prospects and policy implication of Kazakhstan’s participation in the processes of regional economic integration, the modern trends of development of trade-economic and investment cooperation of the republic with the countries — participants of the global integration associations and their influence on the formation of the national foreign trade policy vectors.
- Historical developments of the Customs Union
The formation of the Customs Union (CU) of Belarus, Kazakhstan and the Russian Federation is probably the most important trade policy change in Central Asia in recent years. The economy of Kazakhstan is the largest economy of Central Asia, and Russia is an important trade and economic partner for Kazakhstan and Central Asian (CA) countries. Any regional trade agreement involving these two countries is capable of strongly affecting not only them, but also their neighbors.
In the early 1990’s, with the complete unraveling of the political and economic cohesion of the Soviet Union, Kazakhstan’s economy collapsed. Kazakhstani leaders were not eager for independence from Kazakhstan because they realized that Kazakhstan received much more as a member of the Soviet Union than it contributes. Supply chains completely integrated with Russia and controlled from Moscow. Under Soviet control Kazakhstan had develop as just a single part of a larger economy, but by 1992 it was taking steps to transition into an independent market economy. Although national borders between Soviet republics did not appeared overnight, a mechanism to sustain, regulate, and monitor cross-border trade. Before 1992, 90 percent of Kazakhstan’s trade happened within the Soviet Union. Factories received raw materials from Russia and shipped the finished products back. If any products exported to other Soviet republics, they often went through Russia first. Most industries were devastated when Kazakhstan became independent. The defense industry is a prime example. Over 50 military production factories closed in the early 1990’s (Rutland & Isataev, 1995) in Kazakhstan because the Soviet army no longer existed. Because Kazakhstan had not initially developed as an independent economy, it immediately began suggesting ideas for various levels of reintegration after the breakup of the Soviet Union. Many of the former Soviet Republics were cautious about giving up economic powers to Russia, which made achieving any level of integration difficult. As early as 1994, President Nursultan Nazarbayev suggested the idea of the Economic Union (Sarbaeva, 2012). Russian leaders also suggested the idea of a Eurasian Union modeled on the European Union. In March 1996 Kazakhstan, Russia, and Belarus signed a treaty forming the Customs Union (de Souza, 2011), however this treaty never fully implemented.
Table 1: Chronology of key ECU developments
|6 October 2007 Treaty setting up the Eurasian Customs Union between Russia,
Belarus and Kazakhstan signed.
1 January 2010 Common customs tariff launched. ECU Commission starts work.
1 July 2010 Common customs territory becomes effective. ECU Customs
(6 July for Belarus) Code enters into force.
1 July 2011 Internal physical border controls eliminated.
1 January 2012 Single Economic Space inaugurated. EEC Court is set up.
1 July 2012 Eurasian Economic Commission (replacing the ECU Commission)
1 January 2015 Planned start of the Eurasian Economic Union
Since the launch of the Customs Union, trade between the three countries has been growing rapidly. Since 2009 the overall trade among the three countries increased by over a quarter in the end of 2010 and by two-thirds by the end of 2011. Trade turnover with the partners in the Customs Union has increased for each country as well. For instance, Kazakhstan’s turnover (export plus import) with Russia and Belarus has grown by almost 80 per cent between 2009 and 2011. Most of this increase, however, reflected post-crisis recovery trends (trade turnover was only 12 per cent higher in 2011 than in 2008).
It is important to understand whether the increase in trade attributable to the CU is due to the emergence of new trade flows, which became possible due to liberalization of trade within the CU (trade creation), or due to the redirection of existing trade flows from countries outside the CU towards CU countries (trade diversion).
- Challenges of Kazakhstan’s membership into the Customs Union
From now on Kazakhstan’s accession to the Customs Union and the adoption of the Customs Code will have a huge impact on the economic cooperation of member countries of the Union. It seems that in these conditions, the process of achieving a balance in the functioning of national economies will be quite long and complex.
The union offers a number of benefits as well as challenges for the economy. Since Kazakhstan is a land-locked country, the issue of economic integration is particularly important in improving the country’s role in international trade.
However, it is important to mention that in the first three years of the CU, Kazakhstan benefited less than both Belarus and Russia from membership. For example, according to the research results of the European Bank for Reconstruction and Development (EBRD), as a result of membership in the CU, Kazakhstan experienced significant upward changes to tariff lines on products from other Central Asian states, with tariffs sometimes levied by 50 per cent. Moreover, membership entailed an increase in non-tariff barriers, too. Specifically, clearance time for trucks from Central Asian countries outside the CU has increased by 47 per cent.
Graph-1, Distribution of changes in tariffs on Customs Union’s introduction – Kazakhstan
% of affected tariff lines
Source: “Regional Trade Integration and Eurasian Economic Union”, European Bank for Reconstruction and Development, accessed November 4, 2014,
The importance of trade to the economy of Kazakhstan is clear; trade constitutes 31 per cent of the services sector, whereas in countries with a more developed domestic market it comprises 15-20 per cent on average. A large part of the population in Kazakhstan gets income from trading goods and services, therefore in social terms and based on the experience of the CU, the integration process may harm vulnerable layers of society because of deteriorating trade conditions with important partners which did not join the EAEU.
Kazakhstan along with Belarus adopted the Russian import tariffs as the common external tariff of the Eurasian Customs Union and thus raised 47.7% of its tariffs to the Russian level. The tariffs of Kazakhstan shoot up from an average of 6.2% to 10.6%, an increase of about 70%. Implementing higher customs tariffs on the products Kazakhstan purchases from third countries results in higher prices for goods from third countries, which is a great drawback for consumers and producers in Kazakhstan. In this situation, consumers will buy products from third countries at higher prices. In addition, higher prices for goods such as vehicles, electric appliances, textile and food from third countries will increase production costs for producers. As a result, they will have to produce less to be able sell a product at a given price or they will have to produce the same amount of products at a higher price, which will cause a squeeze on consumer income and reduce exporters’ capability to sell their products abroad.
Russia dominates the Eurasian Economic Commission (EEC), the executive body of the bloc. Russia has 57% of the votes, while Kazakhstan and Belarus holds 21.5% each. Considering the fact that the EEC adopts its decisions by a two-third qualified majority, it is clear that Russia effectively holds a veto on any measure and Kazakhstan can never block Russian initiatives in case of disagreement with Russia.
Russian authorities have tried to hamper in practice the free flow of Kazakhstani goods through various non-tariff barriers despite the formal removal of the duty barriers within the CU Russian authorities. In contrast, Russian goods have full access to the Kazakhstan market.
III. Policy implications of Kazakhstan’s membership into the Customs Union
It should be noted that the benefits associated with the entry of Kazakhstan into the EAEU are mainly oriented towards consumers. Firstly, due to inclusion of certain countries which were not part of the CU (Armenia, Kyrgyzstan, possibly Tajikistan and others), the possibility of a wider selection of goods will grow. Secondly, the expansion of the market will increase competition between companies, which should lead to better quality products at reasonable prices. Thirdly, the formation of a common labor market and the creation of joint ventures with partners within the EAEU will reduce unemployment and is expected to increase welfare. Also, according to the Minister of Healthcare and Social Development, since Russia and Belarus have higher salary standards than in Kazakhstan, experts expect that local salaries will also grow in order to prevent brain drain from Kazakhstan.
The negative economic effects will be reduced as Russia implements its WTO accession commitments, effectively lowering the customs union’s common external tariff and liberalizing Russia’s domestic market. When Russia joined the WTO in 2012, its commitments included substantial tariff reductions (to an average tariff of 8 percent by 2020), elimination of some non-tariff barriers to trade, and written clarification of other non-tariff measures that affect trade.
All of these policies will be implemented de facto as changes in the Customs Union’s common external commercial policy. With the 2020 external trade policies, the customs union is likely to be less harmful to Kazakhstan than what has been suggested by estimates made before Russia’s WTO accession. If the net outcome is of market integration with lower transactions costs and external tariffs that do not discriminate greatly against non-members, then the net welfare effect could be positive.
Beyond debates about the economic impact, the customs union is clearly part of a geopolitical struggle in which Russia is trying to re-establish hegemony over at least part of the old Soviet Union. For Kazakhstan, and future CES members, the scenarios are either an economic-welfare-reducing closed regionalism or a more open regionalism.
Uniting in the CU, countries — participants were guided not only by mercantile interests and economic considerations, of course, they play a very important role, but the base of the Eurasian Union were: a common history, culture, language, values and former international friendship among peoples, uniting them for decades. One of the most effective incentives to unite is the individual’s position in society, his role in the integration process. Governments should pay attention to the needs of individual. It requires the systematic work of many agencies to explain the benefits of Eurasian integration. Eurasian integration should not be a matter of national leaders involved in the process but become a project of peoples of Eurasian countries.
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