The Illusion of Choice: Kyrgyzstan and the Customs Union

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by Reid Standish on 1/29/2014 · 1 comment

Kyrgyzstan’s accession into the Customs Union is being hotly debated as the “Accession to the Customs Union: advantages and disadvantages” business forum convened in Bishkek on January 29. At the moment, three states are members of the union: Russia, Belarus and Kazakhstan. The goal of the Customs Union is to create a common market that will have no customs barriers where membership will open the vast markets of those three states. Something much needed for Kyrgyzstani producers. Currently, negotiations are still underway, but Kyrgyzstan’s accession to the Russian-led bloc comes with many question marks, especially in regards to Kyrgyzstan’s economy.

Kyrgyzstan’s current economic performance is mostly reliant on foreign donations and the exploitation of its natural resources. The gem in the crown of the Kyrgyz economy, The Kumtor gold mine, to which a new ownership deal was recently agreed upon, is estimated to account for approximately $3 billion in revenue and taxes, according to Kylychbek Shakirov, Deputy Chairman of Kyrgyzaltyn.  Looking at Foreign Direct Investment, China and Canada account for nearly 70 percent in Kyrgyzstan. Moreover, inexpensive Chinese goods with low to non-existent tariffs form a large part of domestic consumption. Should Kyrgyzstan join the Customs Union, prices for Chinese goods would drastically increase, putting added financial strain on average Kyrgyz consumers.

Yet, despite the possibility of price increases on Chinese goods, joining the Customs Union seems to be inevitable. “We haven’t another choice. What can we do with a small, undeveloped economy? There weren’t any other integration offers,” said former Prime Minister, Igor Chudinov, referring to Kyrgyzstan’s lack of alternatives in an interview with 24.kg. Moreover, support for the Customs Union remains surprisingly strong. According to a recent Gallup poll, 70 percent of Kyrgyzstanis are in favor of accession. While this figure might seem oddly high to some Western observers, a reason for this strong show of support is in large part related to one issue: labor migration.

On January 24, the Russian Federal Migration Service announced that starting in 2015 Russia will require citizens of CIS countries to enter the country on international passports. The new entry rules, of course, will not apply to countries in the Customs Union. This is incredibly vital for a country like Kyrgyzstan, but also Ukraine and Tajikistan, whose economies depend on remittances from labor migrants working in Russia. On this note, this tightening of borders is most likely a push to place more pressure on stalwarts for Russian integration.

Labor migration forms an important backbone of the Kyrgyz economy. According to the most recent data from the World Bank and the National Bank of the Kyrgyz Republic, the net inflow of remittances to Kyrgyzstan amounted to approximately $1.9 billion last year. Moreover, Kyrgyzstan ranks amongst the world’s top recipients of remittances with 31 percent of GDP made up of money sent from abroad. In terms of numbers, the OSCE estimates that in total there are anywhere between 800 000 to 1 million labor migrants from Kyrgyzstan. This number is even more startling when you consider that Russia, the destination for approximately 80 percent of Kyrgyz labor migrants, only granted 133, 500 work permits in 2013.

Labour migration has been a double-edged sword for Kyrgyzstan. First, it presents major problems for desperate laborers to be exploited abroad. According to a 2013 study by the Eurasian Development Bank, labor migrants are particularly susceptible to having their wages withheld or suppressed, poor working and living conditions, police corruption and overt discrimination—and that is only referring to legal labor migrants. These conditions are all severely worsened when it comes to the reported hundreds of thousands of Kyrgyz who work in Russia as illegal laborers, with some cases of indentured servitude being reported. Second, this leaves the Kyrgyz economy largely dependent on the economic performance of Russia and Kazakhstan, making it not only economically unstable, but also politically volatile in the long run.

However, labor migration also brings with it several positives. According to the same study, more than 40 percent of migrant laborers send home half of their earnings, approximately $200 to $500 per month. But the study also noted that 44 percent of Kyrgyz laborers have long-term plans for employment in Russia, with 33 percent having long-term plans in Kazakhstan. Yet, amongst those surveyed, only 6 and 9 percent, respectively, wish to reside abroad permanently. Meaning that many workers, the majority of which are under the age of 35, will be returning to Kyrgyzstan with new work skills and relative wealth to spend and put towards starting their own business. This leaves labor migration as both a boon and a bust for Kyrgyzstan.

Ultimately, Kyrgyzstan’s massive labor exodus is the result of an inefficient and weakening labor market at home. The country’s dependence on labor migrants is not something that can be changed overnight, but if a push to join the Customs Union means that Kyrgyzstan can finally kick start the structural changes that its economy has needed for the last 20 years, then perhaps Kyrgyzstan joining the Customs Union is beneficial for all parties involved; especially if it opens the door for large investors beyond the extractive industries. It’s hard to argue that the Customs Union won’t be a mixed bag: Russia could use it to dump its products in Kyrgyz markets, while driving up the price of local goods. To get an idea of how this could play out, one needs to only look to what the Customs Union is modeled on—the European Union. Yet, despite the EU’s failures of integration, there have been major successes. Kyrgyzstan is just as likely to be the Customs Union’s Estonia as it is its Greece.

The Customs Union, still in its infancy, could develop two ways. One is the route of Russian dominance, which would most likely entail tough economic times and a continued outpour of labor migrants from Kyrgyzstan. However, if done as advertised, the Customs Union could also spur much needed growth, while decreasing volatility in Kyrgyzstan. Although, perhaps it all sounds too good to be true. Moreover, at the end of the day does Kyrgyzstan really have a choice?

Follow Reid on Twitter: @ReidStan


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This post was written by...

– author of 7 posts on Registan.net.

Reid Standish is a freelance journalist and grad student at the University of Glasgow in the Erasmus Mundus International Master's in Russian, Central and Eastern European Studies programme. Reid has travelled extensively throughout Central Asia and is a longtime student of the region's politics. Currently, he is researching his thesis on counternarcotics and foreign assistance in Kyrgyzstan and is a visiting student at Kazakhstan's KIMEP University. Reid currently lives in Almaty, Kazakhstan.

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{ 1 comment }

Kuda January 31, 2014 at 1:57 pm

Thank you for the article Reid.

I have to say, I can’t really see the benefits of Kyrgyzstan joining (maybe like you, given the penultimate sentence). The positives that were outlined sound very much like rhetoric and jargon… And with the World Cup coming, Russia needs migrant labour to build its stadiums, so that won’t halt.

But what choice is there? Isn’t the truth much more simple, Moscow will turn the screw, the quid pro quo for the KG Gov bods will be that they’ll have a say in how the “Russian funded road building/ hyrdo dam construction/ utility restructure etc.” – tick off which one this time – will be tendered. They’ll squirrel away their cash and sod the rest.

Putting cynicism aside, can Kyrgyzstan say no? Interested in people’s opinion.

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