Kazakh expert suggests reintroducing customs border with Russia

After the conflict in Ukraine started, Russia was hit by political and economic sanctions. Capital flight from the post-soviet country doubled. The decline in the global oil prices deprived the country of tens of billions of dollars in revenues. And on top of all this, by the end of 2014 the ruble began its dramatic fall exacerbated by the unexpected introduction of a free-floating regime in Russia. The devaluation made around 80% compared to the dollar-ruble exchange rate of mid-2014.

A Kazakh financial analyst Olzhas Khudaibergnov, Director at Center for Macroeconomic Research, said the situation was "pushing Kazakhstan to reintroduce customs checkpoints at the Russian border". The customs border was removed when Russia, Kazakhstan and Belarus formed an economic alliance - the Customs Union - in 2010.  

Russia is Kazakhstan’s top trade partner and co-member in the Eurasian Economic Union, an economic successor of the Customs Union. They share a huge common border of 6,846 kilometres and their mutual trade made $23.5 billion in 2013. Trade with Russia constitutes 36% of Kazakhstan's overall trade turnover. The geographic and economic closeness of the two countries has resulted in the worsening of economic situation in Kazakhstan amid the problems experienced by Russia.

There have been losses in all the areas of trade with Russia. Due to the exchange rate differences, there is a substantial difference in prices of similar goods in Russia and Kazakhstan. There are streams of people from Kazakhstan traveling to Russia to buy cheaper products disrupting the official channels of imports.

The problem also works the other way around. There has been a sharp drop in Kazakh exports to Russia, after Russian goods suddenly became 80% cheaper rendering the Kazakh ones noncompetitive. The rising prices in Russia driven by the inflation rate of nearly 20% is gradually closing the gap, but the inflation rate is still far behind the rate of the devaluation.

For example, Kazakhstanis bought about 40,000 cars from Russia in November and December of 2014. This is 20,000 cars per month whereas the normal average made 6,000-7,000 cars per month. This practically nullified the demand for cars and sale by official dealers in Kazakhstan are expected to be close to zero in the first half of 2015.

Khudaibergenov said that the problems caused by the sliding ruble and cheap Russian goods could be resolved, but not through a landslide devaluation of the tenge - Kazakhstan's currency - that many had been offering as a countermeasure.

Simply devaluing the Kazakh currency will not help, he said. "80% devaluation would make both the real sector of Kazakhstan's economy go bankrupt, because it holds foreign currency-denominated loans totally worth $16.9 billion, and the population become broke because non-tenge household loans are worth $2.5 billion," Khudaibergenov explained.

"Affecting an 80% devaluation would actually mean pegging the tenge to the ruble, which is a faulty decision if only because the ruble has broken old patterns and the like hood of it continuing to slide is high. Whereas a devaluation of 20% could solve the problem with the ruble," he said, adding that the latter would nevertheless create an unwanted pattern in Kazakhstan - "a pattern of annual devaluation" - since there was a nearly 20% devaluation of the tenge in February 2014 in Kazakhstan.

The Kazakh expert suggested reintroducing customs checkpoints and customs duties together with them to protect the domestic market instead. Since 2010, Kazakhstan has been a member of the Customs Union, which has now morphed into the Eurasian Economic Union. Therefore, the country does not have effective mechanisms like custom duties to defend itself at the moment, save for exceptional cases.

But customs borders is something that has to be done, Khudaibergenov said. The instability of the ruble is likely to persist for at least another two years, it makes sense to restore the customs checkpoints on the borders with Russia and Kyrgyzstan. Kazakh-Kyrgyz border is 1113 km long and it needs customs checkpoints to prevent Russian goods from being reexported to Kazakhstan via Kyrgyzstan.

"The reintroduction of the customs checkpoints would not mean a disintegration of the Eurasian Economic Union or Kazakhstan’s refusal to integrate," Khudaibergenov said. The current situation is an exceptional case where other tools have failed.

While initiating the reintroduction of the customs border Kazakhstan should maintain adherence to the integration, and Russia should also make it clear, explicitly or implicitly, that it does not object to the protective measures. All this should be done in a "friendly" format, the Kazakh financial analyst said.

This format involves restoration of the customs checkpoints with the following three conditions:
- the measure is temporary - for two years with an option to extend for another year;
- the measure applies only to the goods competing with those of Kazakh origin, while all the other goods can move without duties, allowing Russia to drive out more expensive imports originating in third countries;
- competing goods shall be imported only according to quotas, not exceeding their imports of 2013. And the duties on the goods should be calculated according to the formula "devaluation minus inflation” with starting values taken from July 1, 2014. This means that Russia will retain the same volume of deliveries on competitive goods as it used to have before the ruble crisis.

Even before the ruble crisis Russia was exporting $10-12 billion worth more goods to Kazakhstan than it was importing from Kazakhstan, he said. 

All of this will solve the problem with the Russian imports. Besides, it will serve to demonstrate the partnership nature of the integration if Russia does not object to the introduction of the customs border. This will improve the attitude of the countries' population and foreign observers to the integration union the is often viewed as an attempt by Russia to reintroduce a soviet-style integration. 

At the same time lack of objections from Russia will underline the status of the measure as that of a step called to enhance efficiency of the countries' interaction rather then a sign of disintegration of the Eurasian Economic Union. The sooner this decision is made, the better, Khudaibergenov concluded.

For all external players such a decision will be taken as effective interaction of countries in critical situations. The measure should signify an effective and mutually beneficial cooperation between the countries, and not the disintegration of the EEU, Khudaibergenov contends.

Olzhas Khudaibergenov is a well-known Kazakh economist and financial analyst, director of the Centre of Macroeconomic Studies, member of the Economic Expert Council of the National Chamber of Entrepreneurs, executive director of the Association of Economists of Kazakhstan, and former (2014) advisor to the Governor of the National Bank of Kazakhstan Kairat Kelimbetov.

By Dinara Urazova and Tatyana Kuzmina (based on op-ed by Olzhas Khudaibergnov)