EAEU as a New Economic Reality: Opportunities for Business and State Participants

The creation of the Eurasian Economic Union (EAEU) between Russia, Kazakhstan, Belarus, Armenia and Kyrgyzstan (thus covering 85 per cent of the former Soviet Union) has proved to be a major global geopolitical event, outlining a road map for the future of the Eurasian Economic Space. The EAEU represents a common market with a combined GDP of more than $4.5 trillion.

 

According to the EAEU’s founding treaties, the Union establishes the free movement of goods, services, capital and labour, as well as a coordinated, coherent and unified economic policy. In addition, linguistic unity remains a powerful foundation of Eurasian integration.  

 

Business will also benefit from Kyrgyzstan’s accession to the EAEU, as it will receive access to a large commodities market. It will stimulate the development of the national economy and create favourable conditions for Kyrgyzstan businesses to enter its traditional markets (those of the former USSR).      

 

First of all, it will provide the necessary conditions to revive production, create new jobs, revitalise certain sections of the economy and the financial sector and, as a result, help increase Kyrgyzstan’s budget revenues. This, in turn, will have a positive impact on the business climate, improve the country’s investment attractiveness and strengthen the entire social and political system in the Kyrgyz Republic.    

 

In becoming a full member of the EAEU, Kyrgyzstan has gained access to a large resource base on which it does not have to pay customs duties. What is more, it significantly expands the opportunities for economic and industrial cooperation. Removing customs barriers will lead to the free circulation of products between member countries and allow the links between the former Soviet republics that were broken in 1991 to be restored.

 

Such integration is beneficial for a small country such as Kyrgyzstan. This is because it is unadvisable, if not impossible, to develop a closed economy with a small market in the globalised world. The countries of the EAEU account for some 40 per cent of all Kyrgyzstan’s foreign trade, with its main trading partners being Russia (27.1 per cent of foreign trade) and Kazakhstan (11.9 per cent). Trade relations with Belarus remain underdeveloped (1.6 per cent). These performance indicators thus need to be worked on, as do integration processes. What is more, the EAEU economies are mutually dependent on one another, meaning that there is a need for a coordinated policy, particularly during a time of destabilisation of the rouble.            

 

Now Kyrgyzstan is no longer seen as an individual entity – a small country with a population of six million – but rather as part of the large single economic space that is the EAEU. On the other hand, large companies are unlikely to try and break into the Kyrgyzstan market. But we in Kyrgyzstan also want industrialisation to happen. We do have human resource potential. Granted, salaries are three to four times lower than in the other EAEU countries: the average salary in Russia for example, is over $900 per month; in Kazakhstan it is $700; while here it is just $230. The low income level means unsatisfactory healthcare, poor education and inferior productivity which, ultimately, gives rise to greater poverty. This is a disadvantage of our country.         

 

As part of the EAEU, Kyrgyzstan has set itself a number of goals: to ensure sustainable development, modernise the economy and close the gap in terms of development with other EAEU countries. It should be noted that Kyrgyzstan is well behind the other EAEU member states and is playing catch-up.   

 

The Eurasian Development Bank (EDB) is working to redress the situation.

 

Integration processes among the EAEU member states will help increase Kyrgyzstan’s low GDP per capita (currently more than $1200), which is 10 times lower than in Kazakhstan, and 20 times lower than in Russia.

 

This means that agricultural and industrial production, i.e. the real sectors of the economy, must be intensified as soon as possible. At present, the main structural component of Kyrgyzstan’s national economy is agriculture, at 25 per cent. Trade relations and services account for 43 per cent of the economy, while finance makes up 5–7 per cent, and 20 per cent goes towards the country’s development.    

 

This structural distribution of the national economy, coupled with the poor GDP, threatens to destroy the economic, social and political foundations of Kyrgyz statehood. This should be of grave concern for the powers that be, which must make a decision: the existing order of things needs to be changed, and these changes need to be made across the board at the grassroots level. 

 

Kyrgyzstan’s advantages include, above all, cheap energy and labour resources. The country’s legislative framework is rather liberal, and the financial system is strong. Income tax is only 10 per cent, and VAT is 12 per cent.        

 

Kyrgyzstan enters the EAEU “on very good terms”, according to the country’s President Almazbek Atambayev. In order to speed up its integration into the Union, including surface infrastructure development on the borders, Kyrgyzstan will be allocated $300 million. In addition, a $1-billion Kyrgyz–Russian development fund will be set up. Such assistance is essential. Kyrgyzstan is a country with a weak economy, with a fractured social strata, so the provision of aid during a transitional period is both reasonable and fair. 

In becoming a member of the EAEU, Kyrgyzstan gains access to EAEU capital on the local market, which will lead to more and more joint ventures being set up. The possibility of creating a viable industrial and agricultural complex is an important step for a country which has up until now primarily been a re-exporter of Chinese products.    

 

Kyrgyzstan’s accession to the EAEU makes it possible to restore traditionally competitive industries: Merino wool production, Dubek scented tobacco, cotton, dried fruits, vegetables, melons and watermelons, honey, nuts and meat and dairy products, as well as new export-oriented products, including beans – in other words, restoring the export potential that existed during Soviet period. Work also needs to be done to revive seed farming, particularly vegetable seed plants, alfalfa and sugar beet. And Kyrgyzstan has the right soil and climatic conditions to do this.          

 

As a member of the EAEU, our government should initiate dramatic changes to its agricultural policy, so as to ensure sufficient funding for the agricultural industry and gain access to the markets of other member countries. We also need to purchase new agricultural equipment and technologies.    

 

The export opportunities available to our country mentioned above are even more relevant given the sanctions on food products entering the Russian Federation from EU countries and requires the mobilisation of Kyrgyzstan’s internal resources, capabilities and potentials.  

 

EAEU membership allows the country to create an economy that is based on the service, manufacturing and agricultural sectors. To this end, the Eurasian Development Bank intends to allocate funds to subsidise the economy and ensure that the necessary goods reach the EAEU member countries. The problem facing the Kyrgyz side is how to develop these resources effectively. Corruption, unauthorised spending and red tape are traditional obstacles in Kyrgyzstan. The EAEU opens up major opportunities for the country, but we need to know how to take advantage of these opportunities. Kyrgyzstan needs to see trends and develop within the framework of Eurasian realities.       

 

The prospects for the development of the manufacturing sector as part of the EAEU are great. Those industries that already have tried-and-tested potential will be developed first, however: light industry and the agro-industrial complex. It is here that exports to Russia and Kazakhstan can be increased.     

 

Kyrgyzstan’s manufacturing sector will not be revived overnight, of course. We will need to develop projects and secure investments well in advance. Nevertheless, there are promising sectors that can be incorporated into the EAEU production chain, primarily the sewing and food-manufacturing industries, but also mining (note that we are talking here about the mining of rare earth metals, rather than gold), metallurgy and the energy industry (including, but not limited to hydro-electricity).      

The main problem in restoring the broken ties between our companies is the small scale of production facilities, as well as the emerging system of informal payments (bribes). It could have proven profitable to sell Kyrgyz beans in Russia. To be sure, in certain Russian regions, this product sells at twice the normal price. 

 

It is crucial for us to ensure centralised procurement in Kyrgyzstan. In this regard, using capital that has been freed up from the re-export sector to create joint stock companies that could manufacture, store and sell agricultural products is a very real issue.    

 

But we must not forget that Kyrgyzstan, with its small-scale and technically inferior production nevertheless has a chance in the form of the four freedoms of the Eurasian Economic Union: the free movement of goods, labour resources, capital and services. We need to understand that we are entering a sphere of competition, albeit with friendly nations. We need to work, to sweat… and our eyes need to burn!    

 

Kyrgyzstan’s flawed model of economic development, based on the transit and re-export of Chinese products and precious metals mining, is coming to an end. Over 80 per cent of goods imported from China to Kyrgyzstan were re-exported to EAEU member countries. But this is now a closed issue for Kyrgyzstan, particularly because part of this flow now runs through Kazakhstan.      

 

Another plus is the free movement of migrant workers across the EAEU. This will allow Kyrgyz nationals to work in EAEU countries on a more constructive basis, creating, from both the psychological and legal points of view, the necessary conditions for them to become fully functioning members of society through the provision of employment, decent wages and social security. University degrees will be universally accepted by all members of the EAEU. Kyrgyz nationals will be able to obtain EAEU resident status: they will only need to register themselves in the place they decide to take up residence, much like Russian citizens must register with the authorities when they move cities. There are also plans to increase investment in mining, the energy industry, mechanical engineering and light industry in Kyrgyzstan.         

 

Major EAEU financial institutions could enter the Kyrgyz market. This will mean the introduction of lower interest rates on loans, as well as longer repayment periods. As a result, private individuals and the corporate sector will have access to financial products with more reasonable terms (business loans, consumer loans, mortgages, etc.).   

 

The revived economy and more attractive investment climate will give a long-needed boost to the tourist industry, especially in the Issyk Kul Region and the walnut forests (hotels and logistics hubs). This, coupled with signs of political stability in the country, will help create an influx of tourist from EAEU member states so as to create a favourable Price-Quality ratio.  

As a new economic reality, the EAEU thus creates a great opportunity, both for Kyrgyz businesses and the country’s real economy.