EEU two years later: expansion and unbalance. The case of Kyrgyzstan

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LONDON (TCA) — It is almost two years now that Belarus, Kazakhstan, and Russia proceeded with the formation of the Russian-led Eurasian Economic Union (EEU), a step forward from their Customs Union. Armenia and Kyrgyzstan afterwards joined the Union, and as things stand today the EEU is consolidating and trying to transform the principles that hold it together from just good will into a well-regulated system.

Future expansion of EEU

So far, EEU member states have put a brake on other entries. In Central Asia, only the poor Tajikistan is eager to join. Uzbekistan, Turkmenistan, and Azerbaijan keep their distance and probably will never join due to political and economic differences with Russia. If Tajikistan has to wait: apparently the EEU states do not seem eager to have new members bordering Afghanistan. Even more important: security, military and paramilitary affairs have been stacked away under the umbrella of the CSTO (Collective Security Treaty Organization) consisting the five EEU members plus Tajikistan. This may show that certain political meddling and adventurism have been kept out so far, but it is not clear for how long.

A quarter of the earth’s dry land

According to figures provided by the Interstate Statistics Committee of the Commonwealth of Independent States which includes the mentioned states, over the full year 2015, the EEU’s gross domestic product amounted to the equivalent of close to 1.3 trillion US dollar according to end-2015 exchange rates. Exports to destinations outside the former USSR (minus Georgia and the Baltic states) to that date were worth in the order of $68 billion and imports close to $55.6 billion. It is going without saying that the major part of those transactions was conducted by Russia with a great imbalance of benefits.
 
The EEU guarantees member states’ populations the freedom of movement of goods, services, capital and jobs throughout its combined territory, while maintaining common duties and other conditions on external trade and cash flows. Its five member states account for close to 200 million inhabitants living on about a quarter of the earth’s dry land.

Today all EEU members have a trade deficit, making up for about half of Russia’s trade surplus of $24 billion.

Collective external trade

The main idea is to lift other EEU states’ deficits to future surpluses collectively where individual attempts to do so have failed. Internally, it seems to work so far though the final objective remains yet to be achieved. Thus, in the first two months of this year Kazakhstan’s exports to other EEU countries decreased by 24 per cent on-year to the equivalent of $508.6 million, and imports by 37.9 per cent to $1.1 billion, statistics read. It means fears initially existing in Kazakhstan of a massive influx of Russian goods to the detriment of domestic suppliers have not materialized. That in turn means that collective external trade, not mutual internal trade, is on top of the agenda.

For Kyrgyzstan’s embattled economy, similar trends have been observed of late. It means that original expectations expressed by interested parties, namely the opening-up of the EEU common market, are only part of the effect of its membership. A better entrance to markets within the EEU and outside requires an industrialization reform of the Central Asia members which does not take place now. This applies to both Kazakhstan and Kyrgyzstan, not to mention Armenia. It is not a secret that all Central Asian countries are not ready to produce manufactured products for export since they require foreign investments and the necessary means and infrastructure. To turn from an economy that was largely based on trade and re-export of Chinese goods to Central Asia and Russia into an industrial and manufacturing base, Kyrgyzstan will need internal reforms, as well as time, money and know-how which may not be coming from the EEU member states.  

Learning from EU achievements and mistakes

When the EEU’s initial tripartite accord’s preparations were in full swing, Kazakhstan’s Prime Minister Karim Masimov, one of the treaty’s architects on the ground, during a forum in Astana stated that “… the EU is our great example – we are learning from its achievements but also from its mistakes.” It seems that so far he has by and large kept his word – especially where the EEU’s executive management is concerned.

The EEU’s Eurasian Economic Commission can be compared with the European Commission, but so far the EEC has strictly limited itself to the role of subordinate coordination team and none of its members have started to misbehave as some of their EC counterparts.

Economic misbalance

Today there is clear economic unbalance in the economies of the EEU’s poorest countries, Kyrgyzstan and Armenia. This situation needs to be solved through a proper consensus and external support by Russia. Theoretically no action can be taken within the EEU without advanced full consent of all member states’ governments on each and every issue, and cash flows involved will remain under strict control of member states’ governments. But each member can act outside the EEU as far as it concerns bilateral arrangements.

However, the recent withdrawal of Russia from the confirmed investment commitment taken toward Kyrgyzstan’s hydroelectric projects of Kambarata and Naryn has cast doubts on the political will of Russia to support a priority project where billions have already been committed. What happened to Kyrgyzstan in the hydroelectric sector may also happen in other areas and toward all the other EEU member states’ economies as well.

EEU interstate support

Kyrgyzstan received financial aid on its entry not from the EEC but from Russia. For the EEU allows interstate support between its member states but not supra-state financial injections – thereby avoiding the risk of Grexits, Brexits and other exits.

While the Russian-Kyrgyz Development Fund has been created in order to facilitate the development of an industrial structure that is missing in the country, the allocation of 1.5 billion dollars is far too small to satisfy the requirements of the country. Not to mention to make up the loss of potential income from the Russia-abandoned hydroelectric project and the need to find alternative investors outside the EEU. The problem today is very clear and as far as it concerns Central Asia and Armenia is represented by the economic unbalance of the production capacity between the member states of the EEU and the need to rectify the same as soon as possible if unrest and a Kyrgyz exit should be avoided.

If Russia wants to prevent this from happening, the time is limited and larger efforts should be taken to introduce reforms and attract investors also from outside of the EEU. Only in this way the much-needed industrialization of the EEU poorer members may be achieved, which will justify their EEU membership.