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Kyrgyzstan joins the Customs Union, and business finds itself in stand-by mode

For this state of small traders, entry into the Customs Union will bring both headaches and opportunities.

 

On 21 May, Kyrgyzstan signed a law ratifying treaties on its entrance into the Customs Union and the Eurasian Economic Union. Almazbek Atambayev’s government promises economic progress and the development of the country’s own industries. However, thousands of business owners remain uncertain what this new future will mean for them.

Kyrgyzstan, a member of the World Trade Organisation, has traditionally benefited from cross-border trade. Low taxes and customs duties, as well as a geographically advantageous position (historically, its territory was located on the Silk Road), have made this country a transit zone for goods heading from China to Europe. Following the break-up of the Soviet Union, the country began to develop its re-export potential  though with little trickle-down effect.

Export economy

Kyrgyzstans re-export sector, with goods coming from China, India, and Turkey, provides the country with the majority of its revenue. In 2014, Kyrgyzstan’s GDP was $7bn. According to China’s statistics, direct imports from China to Kyrgyzstan are worth $10bn.

Moreover, 95% of the goods of local traders are re-exported to countries in the Customs Union – Kazakhstan, Russia, and Belarus, and this trade feeds hundreds of thousands of families. 

Accession to the CU could affect many in this state of small traders. Thomas Depenbusch/Flickr. Some rights reserved.

At the same time, the fall of the Soviet Union left Kyrgyzstan with little homegrown industry: many people became small traders, and Kyrgyzstan exports hardly any goods made inside the country (save fruits, vegetables and dairy products in small quantities). Kyrgyz textiles do enjoy some demand, and numerous garment manufacturers produce goods for export to Belarus, Kazakhstan, and Russia.

The creation of the Customs Union has changed this situation. The rise in customs tariffs in neighbouring Kazakhstan cut the volume of imports from Kyrgyzstan to Customs Union countries. And so Kyrgyzstan was left with a choice: either continue re-exporting goods to Kazakhstan and Russia (in smaller quantities and with less profit) or join the economic alliance and try to increase domestic production. The government chose the second option. 

A confused business

Kyrgyzstan is known for Dordoi Bazaar, a sprawling market just outside of Bishkek. Founded in 1992, Dordoi – built out of double-stacked shipping containers – now stretches for more than a kilometre. Just as local residents and inhabitants of surrounding towns do business there, so do wholesalers from Kazakhstan and Russia.

Liberal laws combined with low tariffs have made Dordoi the trading hub for the whole region. And in the south of the republic, there’s a market just like it, Kara-Suu. But soon these markets may face fundamental changes.

Once renowned for its choice, Dordoi Bazaar is facing an uncertain future.

Many traders will have to adapt their businesses to the new conditions of the Customs Union, and numerous business owners don’t understand what sort of changes are in store for them.  

Tatyana Pavlova owns a few shops both at Dordoi and Orto-Sai, a large goods market in Bishkek. Pavlova imports shoes wholesale from Turkey, but she admits that she has no idea what she’ll have to pay now when importing goods. 

‘We still don’t know the rules for taking goods across the border or what the future tarrifs will be. We only know that excise duties are going to go up significantly and some sort of new documentation will be needed to bring in cargo, but what exactly that is, we don’t know. Aside from that, the process of shipping goods will get more complicated. After all, under the old system, you could entrust the whole process to a shipping agent from start to finish. Now, so I hear, the sellers themselves have to be there when a shipment goes through customs. I’d like the government to explain in detail how we’re supposed to work as importers,’ Pavlova says.

Pavlova can see that her profits are going to take a hit. After the tariffs go up, importing shoes is going to cost her more money. But she won’t be able to pass the cost on to the consumer: the buying power of the average citizen is already low and her goods would just stay on the shelves. 

And for the average citizen, some goods are going to get more expensive. For the last three years, Myrzayim, a young woman, has been making a living selling homeware at Kara-Suu, Kyrgyzstan’s second biggest market. She believes that the entry of Kyrgyzstan into the Eurasian Economic Union isn’t going to be easy for most people. 

‘We cut off relations with Uzbekistan after the tragedy back in 2010. Now all of our goods come from China. After we enter the Customs Union, all of these goods are going to get more expensive. Consequently, we’re going to raise the prices on them. If people want to continue buying, we’re going to get our markup,’ Myrzayim tells me.  

Civil servants have promised to re-orientate the economy away from re-exporting to local industry. However, they are yet to offer compensation to businesses or ordinary consumers, for whom costs are continuing to rise. They haven’t even explained the new rules for importing goods.

Azamat Dononbayev is worried about the impact of future tariff rises.

Azamat Dononbayev imports soap products from France and Turkey, distributing them at retailers around Bishkek. Dononbayev’s business has already suffered from the fall in value of the local currency, the som. Now he’s preparing for another blow.

‘First, we’ve seen sales fall 50%, if you compare them to previous years. They say that when we join the CU, production will get more expensive by 15-20% at a minimum. But we don’t know how much exactly. If I’m honest, I’m still waiting. We have still been making orders, but recently, after New Year, we’ve made less than before. In the last four months, we’ve only made one order. We did have plans to expand the range of goods we offer. But now, since we don’t know what’s going to happen with the Customs Union, we won’t be expanding. 

‘There are still big questions with VAT. For importers, increasing the cost of goods means we’ll have to pay more into the tax service. And if the customs duty goes up, certain goods just won’t be profitable. This is too high a price for our country and for our citizens. Maybe we’ll switch to Russian goods. But if I’m being honest, they’re significantly worse in quality,’ Dononbayev notes. 

At the same time, ordinary shoppers are trying to stock up on essential goods, especially clothes and consumer goods, worrying about price increases once the new customs regime comes into effect. 

Atai Ryskulov, stocking up in advance of his country's accession to the Customs Union.

At the Orto-Sai Bazaar, one of the shoppers, Atai Ryskulov, admits that he’s stocking up on clothing in advance. He expects prices will soon increase so much that he will be unable to buy anything. 

‘I heard that prices on consumer electronics and clothes will both increase. I want to buy as much as I can for me and my family while things are still not too expensive,’ he explains.

Unprepared

The Customs Union has introduced very high requirements for importing goods. According to experts, the norms are even more stringent than in the EU.

In order to import goods, traders will now require certification, which meets EEU standards. For this, the manufacturer is required to check the product in a laboratory against a series of criteria introduced by the CU. At the current time, Kyrgyzstan’s laboratories are unable to carry out these checks due to a lack of necessary equipment. 

This means when the border with Kazakhstan is opened, manufacturers will not be able to get their goods through hindrance-free. It also means that manufacturers aren’t interested in increasing their output for further re-export. At the same time, imports from other countries will become more expensive too. 

In order to solve this problem, Russia and Kazakhstan have given Kyrgyzstan grants of $300m to be spent on equipment for laboratories and border points. Russia and Kazakhstan have both promised to put their own equipment in place without tenders to speed up the process. However, this is still yet to happen in Kyrgyzstan. Russia and Kazakhstan have promised to train laboratory personnel, but this will take time and the laboratory workers can’t expect the complete launch of the new equipment for another six months.

For example, the laboratories of the Department of Preventative Medicine and Sanitary-Epidemiology Monitoring in Bishkek meet just over half of the technical regulations of the Customs Union. Aigul Zhumakanova, head of the department’s chemical research division, explained that the Customs Union’s technical regulation regime requires her laboratory to check products against 836 criteria. But currently, local testing bodies can only test 550 criteria due to a lack of sufficient equipment.

Moreover, Lyudmila Davydova, the deputy director of the department, notes that this figure is only for the central divisions of the department. Bringing the regional divisions up to code will be even more work. 

The assistant director predicts that full compliance with the technical regulations of the Customs Union will be achieved only by the end of 2015. And this means that until 2016, Kyrgyz traders will have problems either bringing things in or getting them out.

Optimism

Meanwhile, the Kyrgyz government and Customs Union officials promise more jobs for working people, new benefits for migrants, and an opening of markets for textile and agricultural goods.

Fyodor Chernitsyn, Secretary of the Working Group on the Admission of Kyrgyzstan to the EEC, believes that joining the EEU gives Kyrgyzstan a chance to rebuild its economy. ‘The admission to the EEU gives access to a market of 180 million consumers. In the first years, we anticipate a rise in trade thanks to the elimination of customs and administrative barriers. For example, trade between Belarus, Russia, and Kazakhstan has doubled within the past three years,’ Chernitsyn explains. 

In Chernitsyn’s opinion, Kyrgyzstan can expand in a number of industries at the expense of growth in its exports. Moreover, the country will become more competitive when facing up to China: unlike the People’s Republic, Kyrgyzstan won’t have to pay tariffs on trade within the EEU. 

Civil servants also list the arrival of foreign business to Kyrgyzstan as another possible benefit, thanks to its cheap labour costs  For investors, producing goods in Kyrgyzstan for export to the rest of the Customs Union could be profitable. Local businesses can thus link up with global companies to produce goods within the country. 

Local businesses are already considering these options. Tatyana Pavlova says she plans to sign a contract with a Chinese company to open a shoe factory in Kyrgyzstan.

‘I’m not planning to leave my business. But I think I’ll manage to find a way to continue. We’re currently in talks with a Chinese shoe manufacturer to set up a factory in Bishkek. We think it will be a lot cheaper and more profitable than bringing shoes in from abroad,’ Pavlova says. 

The results of small business’s ability to adapt to new conditions won’t be seen immediately. But both civil servants and business agree on one point: the initial stage is going to be far from easy.

All images courtesy of the author. 

About the author

Anna Yalovkina is a journalist from Kyrgyzstan and a former correspondent for Vecherny Bishkek. She has written for Lenta.ru, Coda.Story, 47news and OK-inform. She currently works for Online47.ru.


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