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№1 (234) 14-27 January 2009

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Main theme:     The right to choice
At the informal summit of CIS member nations held in Borovoe. Kazakhstan Russia and Byelorussia agreed to form the Customs union. The agreement is due to come into force in early spring 2009. It is interesting to note that our country has also conducted talks that have been lasting for 6 years with the West, trying to ensure its membership in the WTO. Some skeptics opine that overlapping and contradicting principles of development both organization stick to, might prevent our country from pursuing its way of development. Authorities are sure that Kazakhstan should be fully integrated into the global economy. If it is really so, what is its place in the regional economy. Kazakhstan has a right to choice, but it is disputable if Kazakhstan can retain membership in both organization without infringing principles of cooperation in at least one of them. This is a matter of politics, not economics

Alexey Ikonnikov

Urgent integration?

For the last several years Moscow has made an attempt to speed up integration within CIS and gain back a terrain on the post soviet space. Mr Medvedev claimed that the Kremlin was going to focus primarily the CIS issues. Moscow 's vision of the CIS future is quite optimistic. Moscow regards this organization as an analog of the EU with highly integrated economic space and common currency. In this context ruble is believed to become euro for all member nations of CIS. The idea to model CIS on the EU can be dated back to early 90s. The prototype of close economic space that encompasses leading CIS countries already exists. It is the Eurasian Economic Community. The members of that organization have agreed to develop their creation in accordance with the principles that bear resemblance to the EU ones. This decision is due to be implemented in the early spring 2009.

In the mid 90s it was announced that Customs Union and the pro-euro economic zone were the main tenets of new integration strategy. In 1995 the Customs Union emerged. Then it turned out that not all its members were ready to follow such principles as transparency of borders and free flow of goods and services. Those days Kazakhstan engineered an interesting plan that was accepted by a majority: the future integration had to be carried out at different speed at the multiple levels, because after the USSR break up countries didn't have equal resources. Neighbors had to forge alliances when they were ready and apply diverse method of integration slowing down or speeding up the process whenever developments required. Country were free to chose whether they were ready to get closer. For a long time Customs Union existed as a rubber stamp. Strategies of development chosen by the CIS member nation and multi level model the Customs Union relied on had nothing in common. This divergence of interests became the main hindrance to closer integration. Thirteen years later it became clear that the differences that prevented countries to find a common ground on a variety of issues didn't disappear. Strategies of development of two leading economies Russian and Kazakh ones were practically similar only at first sight. As process of modernization deepened, two economies moved in the opposite directions. The key features that distinguish one economy from the other are not so common anymore. The differences in financial, currency, governing models export strategies are striking. Countries live on their own. Some Russian analysts are not inclined to believe in the bright future integration within CIS space. " Internal structure of economies differ in principle. That is why it difficult to elaborate any common policies let alone implement them. The RF has to develop bilateral ties and forget about close cooperation within Eurasian Economic Сommunity and CSTO (Collective Security Treaty Organization). Prospects of integration within CIS are as bleak as ever".

Despite all differences that impair integration within CIS, Moscow still hopes to accelerate this process. It sees more advantages of close alliance with its neighbors than in 1995. This is clear from the context of the speeches delivered by Russian leaders at the summit in Borovoe. Kazakhstan is almost certain to join the union. The participants of the summit confirmed that there shouldn't be any customs tariffs and barriers between neighbors. If we come to the agreement there won't be any boundaries between Kazkahstan and Russian all the barriers will be removed. There will be customs offices on the borders of Russia and Kazakhstan but we hope to create free economic and trade zone between these two states", says Karim Masimov, the Prime minister of RK. Russia Kazakhstan and Byelorussia are the potential partners within the future union.

V V Putin emphasized that it is necessary to create the supreme governing body within the union that will coordinate all projects of the future member nations. By Russia's reckoning such a structure should be formed by the mid April. It seems that Moscow seeks to set up common structures establish the rules obligatory for all nations of the union and make all the parties abide by the common law and respect regulations of the union chart . Kazakhstan is hesitating. It is salutary for our country to retain independence and consider all pros and cons of its future membership within the union. It is the best strategy since our country has to advance its interests within the framework of the Customs Union. Why our Northern neighbor wants to precipitate integration which has been slow in the course of 13 years. What party will get advantage of such haste?

Interested parties

It is as clear as daylight. Crisis badly hit all the nations, demand for basic goods and services is insufficient throughout the world. Markets are closing. Russian government is in a desperate search for the new markets for its leading producers. At worst, Moscow hopes to retain at least the existent regional ones. Russian machinery and high tech equipment suppliers have been losing ground on the post soviet space for nearly 13 years. It was slow but inevitable process. The Kremlin does its best to defend interests of Russian machinery and equipment producers in Kazakhstan. In autumn 2008 Autovaz acquired a share in Kazakhstani car producer Asia- Avto. Russian side immediately demanded a concession from the Kazakhs namely protectionist tariffs on import of the most popular brands of foreign vehicles to the domestic market. Fortunately Moscow failed to enforce its view on Kazakhs.. For 18 years Russian producers have been trying to manufacture a good car , but all their attempts to do so have run aground. Result: Russia had to set unpopular tariffs to protect the domestic markets from invasion of popular Western cars. Otherwise, Autovaz and Kamaz the biggest car producing work could have come to a halt. At least jobs cut could have been inevitable. Autovaz and Kamaz are very important for Moscow as they serve a guarantor of stability in the regions. Central Asia is the main market for the cheap outdated made in Russia vehicles.

Exports of machinery have declined considerably in GDP structure of Russia. According to data published by the Federal Customs Agency between 1995-1998 reported exports of machinery was 10.2-11%, later between 1998-1999 exports fell to 5.2%. Recent data issued in 2008 showed another drop in exports of machinery and high tech equipment to 4.5%. The demand for Russian machinery is moderate and this produce is still popular only on the developing markets while Western countries practically don't import Russian equipment. These Russian products fall short of international standards moreover it is out dated. The demand for Russian machinery and vehicles is still sufficient on the fledgling markets. In 2000 49% of developing countries bought Russian vehicles and machinery (mostly war machines). In 2007 these countries accounted for 78% of importers of Russian vehicles and machinery. In 2008 they became the main importers of Russian machinery. 82% of machines were acquired by the developing world. The EU and the US preferred to rely on their own produce. Their share in imports of Russian machinery reduced substantially. The thing is that after the year 2000 Europe and the US started to turn green. Energy saving technologies gained popularity. As a result the lion share of the equipment produced in Russia reached only markets of poor countries with($10000 GDP per capita). Western highly developed markets were inaccessible for Russian equipment since then. Russia lost 35% of importers of its machinery (mostly Europeans and Americans). Transition to greener technologies is slow but inevitable. Russia is lagging behind as far as modern technologies are concerned. Russia is still unable to deliver to the market the equipment and machinery that comply with Euro -5 standard , such as say hybrid engines. In the developing countries the demand for cheap Russian but not so quality machinery was stable. Industrial and construction boom in Ukraine Egypt and Middle East contributed to popularity of Russian produce. For the last 3 years Russia exports of machinery to CIS countries has grown dramatically. The share of Ukraine in exports structure (only machinery and equipment) increased by 8%, that of Kazakhstan grew by 8.3%. In 2006 СIS countries emerged as the biggest trade partners of Russia. They bought the lion of share of machinery and equipment produced in Russia. Between January - May 2007 there was a growth in exports of Russian equipment. Russia's contracts with neighbors were estimated at $5.9 billion. According to figures of 2008 Russian exports of machinery to CIS countries reached 67%. Unfortunately there are bad signs. Russian producers of machinery and equipment are losing even CIS markets. For the last 2 years it has become clear. How it could come?

First, crisis has begun to take its toll on the emerging markets. Azia avto- the joint stock Russian Kazakh company scaled back its sales forecast by 32%. Reality was even worse than that. The factory has to cut production by 40%. Spending is sluggish. The marketing survey conducted by Toyota Tsusho Kazakhstan showed that in 2008 the number of Kazakh households that can afford a new car fell to 3.4% if compared to 5% in 2007. Firms and companies have to economize on transportation costs and basic investments. In 2008 the demand for luxury premium class automobiles shrank by 50% . That for middle class models fell by 30%. People are reluctant to pay money for cheap cars. For example official dealer of Autovaz Bipek Avto offers 40% discount for Kalina or Zhiguly cars and trucks. Meanwhile, there is no free space within a company's warehouses.

Second, Russian producers of machinery have to engage in intense rivalry with Chinese ones. No wonder, Chinese companies are eager to enter CIS markets and win a niche in the cheap segment. In 2008 the trade turnover of Xinjiang factories reached $22 billion. The lion share of the exported goods ($11 billion) was acquired by Kazakh consumers. Chinese producers are able to ensure regular supplies of cheap machinery, electronics, and automobile spare parts. Kazakhstan buys all necessary cheap analogs of Russian machinery in China at reasonable price even now. The number of Chinese trucks that flood domestic market is steadily growing. Since 2005 the share of these trucks on the local market has increased from 4.8% to 31%.

These two reasons explain quite why Russia insists on intensive integration within Customs union. Russia wants to trigger production and retain old consumer markets. For this purpose it sets up new factories on the territory of Kazakhstan. This approach helps to reduce final price of Russian goods. Kazakhstani market has great potential according to Russian economists as Kazakh farmers might import Russian vehicles, trucks, combines and agricultural machinery. This list can include other Russian products. Russian exports are steadily declining not only in machinery and equipment sector. Some warning figures were published on the internet site of In November, 2008 Exports of steel pipes shrank by newly one third. In December exports of this produce was in steep decline as well. In short, Russia tries to establish control over consumer markets of its CIS neighbors.

Cuddlier approach towards Russia and close regional integration may be useful for some key Kazakh market players analogs of Russian Autovaz in the local context. In the first half of 2008 Kazakh companies managed to increase sales of ferrous alloys by 32.2%.The material is critical for some Russian industries. The lion share of the material was produced and sold to Russia by Aksu factory of ferrous alloys (the affiliate of Kazakhchrome, the member of ENRC group). Between January and June, 2008 this factory alone exported 75 000 tons of ferrous alloys to Russia. Demand for ferrous alloys was estimated at 580 000 tonns. One Kazakh factory can saturate the market of Russia and provide 1/7 of the material required. Aksu ferrous alloy factory is rated by independent agencies as the main importer if this produce to Russia. Some optimists even reckon that Aksu factory has 85% on the Russian market of ferrous alloys. Magnitogorsk, Nijniy Tagil West Siberian Novokuznezk metallurgic factories emerged as main trade partners of Kazakh producers of ferrous alloys. Unfortunately these very companies as well as many others were not secured against economic turmoil. As some sources say, Russian imports plummeted seven times. Kazakh influential analyst media pointed out that the removal of all customs barriers might give more advantages to Kazakh producers which will qualify for the same benefits as their Russian counterparts. There are some industries where Kazakh companies may outdo Russian ones such as oil refinery, fossils, food (spirits). In one word, Kazakhstan should consider all pluses of the Customs union with its neighbor. Meanwhile our country should stipulate for certain concessions. If the Customs Union defends only Russian interests (story with Autovaz vividly illustrates how such pro-Russian policies might be implemented), Kazakhstan should think twice before signing any papers. When parties negotiate the agreement they are looking for compromise. That is why certain problems might arise as Russia attempts even now to exert its influence on its future partners and get certain benefits within the Customs Union others are not supposed to pretend for. We tried to answer the question who will benefit from the future union. The answer is clear Kazakhstan should carefully weigh all the fors and the against of the future union with Russia. Our country has a right to choice and we have decided to place our national interests above anything else. Kazakh legislators have developed the draft laws that put a light on our vision regarding regional integration. First is called 'the protocol on system of tariff preferences within the Customs Union'. Second is issued under a title: Protocol on tariffication of imported goods using lowest and highest rate after introduction of flat customs tariff. Judging by enumerated facts Kazakhstan wants to secure a field for maneuver in the future customs union not to be involved in the Russia's orbit of influence. For now it seems increasingly clear that it will be hard for both countries to agree on future customs tariffs and conditions of future partnership and membership in other large economic organizations such as WTO.

Customs Union and WTO.

In early December between 8 and 11th Gen?ve negotiations were held. Kazakh delegates did their best to win certain concessions for their motherland. Consultations and bilateral talks have lasted for nearly six years. Eventually, our country won a right to ward off the competitors and protect its market by imposing protectionist tariffs on import of meat and dairy products. This privilege is critical for our agricultural sphere. Tariff on import of agricultural produce was set at 12.2%. Today it is one of the lowest in the world. Representatives of Kazakhstan also pushed forward certain ideas that can protect key markets(meat, dairy, grains, oil, metals and mining construction blue-chips) and defend interests of Kazakh companies. The problem of labor agreements for foreigners and locals hired by international companies was also discussed. Kazakhs entry to WTO is at hand.

Integration into world trade is just a matter of time. Membership in WTO will help Kazakhstan to realize the most ambitious projects and achieve its main goals in economic sphere. WTO is global organization that incorporates leading counties scattered around the globe. Customs Union is also meaningful for Central Asian region. Kazakhstan is unlikely to get advantage of its membership in WTO as an exporter. Today our country supplies only raw materials (fossils oil gas and metals) fortunately at world prices. This produce accounts for 88.5% of Kazakh exports. Sooner or later structure of export will become more diversified. Agricultural sphere is due to metamorphose into modern one. Kazakh farmers will get certain preferences on the world market. Our country may benefit from WTO membership as an importer even now. Advantages are numerous: a considerable decline in prices for basic commodities, an impetus to consumer spending and not so rampant inflation.

Admission to WTO might somehow weaken local farmers and undermine their positions on the domestic market. Agriculture is constantly under pressure of cheap imports even now given outdated technologies which are still employed by locals. Membership in WTO might give an impetus to the farmers to revise their principle of organization and modernize their businesses. Weak players will for certain quit the market as only the strongest survive in conditions of pure market economy. The government also offered its mite to modernization. It is able to support the most ambitious and rapidly developing businesses. It fits nicely with the concept of modernization.

So, it is worth to mention that Kazakhstan may get advantage of the membership in both organizations namely in the Customs Union and WTO. Meanwhile, to be fair, there is a ground for future clashes. Kazakhstan and Russia still can't iron out all the differences. Their views on their economic future within the Customs union and supposed behavior of its member nations differ dramatically. Leading mass media give a good example of how it is unfolding in Russia. Some analysts accused Astana of double dealing. One of the articles reads:" Nursultan Nazyrbaev is balancing between Russia and the US in the region. He is talented in striking deals behind the scenes". Russian analysts decided that Kazakhstan faces a challenge: it is to choose between the WTO and integration into global economy road to the West or tight regional integration. Astana has its own ideas about its future. We are ready to develop close regional ties in all spheres including economy and trade, but it doesn't mean that we have to erect a virtual fence between the CIS region and global economy and stay in isolation from global developments. Russian and Byelorussian union is an organization of the closed type, that stays away from global integration. Kazakhstan is reluctant to stay in the confined space of the former USSR republics. It has a clear system of preferences: WTO and global economy. The Customs Union also has its pluses but we should ponder over our future prospects within this very organization. At what cost we can join CIS economic space? Customs Union shouldn't exclude our participation in the world trade.

Clash of interests when it comes to bilateral Russian Kazakh relations carries certain risks for Kazakhstan. Kazakhstan has its strengths. Russia can even acknowledge that in some respects Kazakh economic model is even superior in comparison with the Russian one. Meanwhile the Kremlin is recovering political ground in the region. Russia stance on key issues such as transit of oil and metals via its territory, is very important for our republic. We have to find a best solution to the problem of the intergovernmental conflict and elaborate a concept that will satisfy both parties involved in it. We have to maneuver, balancing between interests of both states, look for compromise etc.

Decision to create a heavy tanker fleet in the Caspian can serve a sound example, of what result we can achieve if we employ intricate governing techniques. The project emerged after Russians criticized and finally rejected the idea of construction of Eurasia channels, that was put forward by Nursulan Abishevic in the winter of 2007.When Moscow turned down the proposal of Astana aimed at construction of channels called Eurasia, our country had to chose an alternative: pipeline Baku- Tbilisi- Ceyhan and a fleet comprised of heavy tankers. Kazakhstan didn't want to depend totally on Russia when it came to transportation of oil. In the years prior to construction of big vessels Kazakhstan wanted to use Russian routes of transportation. Kazakhs had a clear vision on bilateral cooperation: crude oil extracted from our land had to be poured into small tankers that could carry only 25 000 tons. These vessels had to reach the world markets by the system of channels Eurasia. Eventually, when long negotiations with Russia petered out, Kazakhstan decided to transport its oil via heavy tankers (their capacity is estimated at 60 000 tons). These vessels will cross Caspian Sea and will be put on anchor in Baku port. Then crude oil will be transported via BTC pipeline to Europe This project raised few eyebrows in the Kremlin. The result of talks was predictable. In addition to traditional Russian route of transportation Kazakhstan and BTC Kazakhstan can also use Chinese pipeline. Only in autumn 2008 Moscow agreed to increase the CPC (Caspian Pipeline Consortium) capacity twofold. The shareholders and main participants repeatedly made attempts to draw attention of Moscow to their problems and begged the Kremlin to allow them to transport more oil via pipeline. One of the Russian authors put this rather bluntly. "May be the Kremlin changed its mind because Russia suddenly realized that it could lose Kazakhstan".

In closing, it is clear that economic interests of Kazakhstan depend on the good will of its neighbor. What path our republic will choose? Everything depends on us as we enjoy a right to choice.

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