November 4, 2011
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Home / Issue Archive / 2011 / September #9 / Eyes to the Strong. Kazakhstan is Becoming More Attractive to Business Although Consumer Prices are Spiraling

№ 9 (September 2011)

Eyes to the Strong. Kazakhstan is Becoming More Attractive to Business Although Consumer Prices are Spiraling

   The improvement of national economies of Russia, Kazakhstan and Belarus by establishing a free trade zone similar to the EU has always been the main goal of the Customs Union, formed in August 2006 at the informal EurAsEC summit. In October the following year, the leaders of the three countries signed the Treaty forming a single customs territory, a Customs Union (CU), and Customs Union Commission, a single supra-national regulatory body.

By Aider Kurtmulayev

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Cancel Boundaries, Remove Barriers

   The Customs Union introduced a common customs tariff (1 January 2010), as well as common customs territory and customs regulations. From 1 January 2012 the cosignatories will establish a single economic space, initiating free circulation of capital, services and labor. The already working EurAsEC Court will take on the authority to judge business complaints about the actions of institutions in the participating countries and the CU’s own bodies. Currently the sides are ratifying a package of CES agreements, which would result in a common market for services on top of a common market for goods. All companies of the member countries will find themselves on equal competitive ground. This means equality for industry and agriculture subsidies, as well as anti-monopoly regulation and the public procurement mechanism. The financial sector will get a new agreement on investments and on common financial markets that will involve the interstate CIS Bank and the Eurasian Development Bank.

   On 1 July 2011 customs control of the CU member countries moved to the external borders (Russian observers will be present at Kazakhstan customs points). Talking about border control, for the time being Russia and Kazakhstan decided to retain their customs points as the two states need to harmonize their immigration and other national laws; for Russia and Belarus (as a Union State) this process is already over.

   Almost all Kazakhstan problems on import duties for 400 products, or rather on their compliance to a common tariff, have been removed; questions remain on medicines and medical equipment – their routes will be monitored via certification and the so-called “post-audit”. Customs have to exchange information on each shipment of goods crossing the external borders of the Customs Union. The sides have also set up a Joint CU Board, which puts the heads of the three national customs under one roof.

   Today the Customs Code includes over 1,000 references to national laws, which will be removed where possible; Russian law on customs regulations also needs a brush-over. All this is being done via different routes of communication with the business community; the work has already engulfed Russia’s Chamber of Commerce, “Delovaya Rossia” public organization, Russian Union of Industrialists and Entrepreneurs, public organization of small and medium business “OPORA Rossii”.

More Than Meets the Eye

   But this is only the tip of the iceberg. The unseen part is a revolutionary process that includes some 165 million people spread over vast Eurasian territories. The changes concern more than 60 percent of the population of the former Soviet Union. The combined industrial potential of the Customs Union countries is about $600 billion, which is 85 percent of combined GDP of post-Soviet states and more than $2 trillion.

   As there are millions of people involved, it comes as no surprise that there is a gap dividing “pros and cons” of the CU among the citizens of its member states. Although hard painstaking work has been done on syncing the documents – only 40 percent of customs import duties were the same “at the starting gate”, the rest had to be negotiated and conflict proved impossible to avoid.

   In Belarus, the process of forming the CU coincided with the presidential elections and the ensuing economic and political crises. The intrigue of the country’s accession to the CU centered on the main issue – energy prices. Some experts consider energy price the “Achilles heel” of energy-intensive Belarus economy. Belarus wanted to get duty-free oil and gas, Russia opposed this, arguing that Belarus often exported excess fuel volumes. For the time being, the issue has been resolved as follows: the sides calculated the vital resource quota that will not be taxed; for resources over the quota the country will have to pay tax. Under the CU terms, the customs rates of all member states were levelled at the Russian level, which is higher than in neighboring countries. This is due to the dominant position of Russian economy. This also led to higher prices in some sectors linked to foreign trade, such as the import of used cars by individuals (Russia protects its car industry; Belarus and Kazakhstan have no car-making business). Here, too, for the time being the sides reached a compromise that takes into account the age of imported car. The sharp spike of consumer goods prices in Belarus is mainly blamed on mistakes and miscalculations of the government. But, according to many experts, the situation is not critical and will improve.

   Kazakhstan had to work hardest to harmonize all items of the Treaty (being allied states, Russia and Belarus have already inked many documents). So what is the bottom line?

   Prices grew for practically all consumer goods, especially food and FMGG, however, this growth did not affect the trade flow volume. The average customs tariff increased almost 4 percent, for industrial goods – by almost 6 percent. Some aspects of trade flows have changed, too. For example, while earlier building materials and furniture were imported from Asian countries such as China, now businessmen are starting to switch to Russia and other European countries. Supply routes for vegetables, fruit and meat, usually shipped from CIS countries (Belarus, Russia, Ukraine), have not changed. The exception is US poultry imports. There is a trend of edging up prices for home appliances and consumer durables. The bulk of imports come from China. A serious blow was dealt to “shuttle traders” – border-crossing costs have increased. There is the same problem as in Belarus, and it is linked to higher rates on imported secondhand cars. Media have already reported on the emergence of black market car dealers.

Kazakhstan Develops Cooperation with Russia

   Meanwhile Russian experts are scratching their heads. On the one hand, prices grew at a pace in line with the population. On the other hand, several experts noted that Kazakhstan has become a more attractive country to do business in compared to the Russian Federation. Last year, Kazakhstan per capita investments were more than 80 times over the Russia’s figures. The matter is several-fold, including, first of all, the figures. In Russia the social tax is 34 percent compared to 11 percent in Kazakhstan, the Russia’s VAT is 18 percent compared to 11 percent in Kazakhstan, Russia’s profit tax is 20 percent (in Kazakhstan is 5 percent less) and personal income tax in Russia is 13 percent and in Kazakhstan – 10 percent. The attractive Kazakhstan business conditions are also due to the fact that the Russian language is used here in parallel to Kazakh language, while “Soviet mentality” grants a little extra comfort in doing business.

   Experts identify such common problems as informational vacuum on urgent issues related to a number of everyday activities, such as new procedures and changes in customs legislation. Various inconsistencies in the government work still remain. Costs of doing foreign trade have risen.

   Kazakhstan and Russia are engaged in intense cross-border trade which hasn’t been hampered in the slightest by the Customs Union and which involves over 20 million people. Kazakhstan cooperates with 76 Russian regions; the undisputed leaders are Astrakhan, Volgograd, Kurgan, Novosibirsk, Omsk, Orenburg, Samara, Sverdlovsk, Tyumen regions, Chelyabinsk region, Altai Territory, Tatarstan and Bashkortostan. Over 200 agreements in total are signed with these regions. Some 2,100 joint ventures operate in Kazakhstan, including 1,700 with Russian capital.

   Questions of the Customs Union will be covered at the 19th International Conference and Exhibition KIOGE, to be held in Almaty in October this year. The exhibition is organized by Iteca (Kazakhstan), ITE LLC Moscow and GiMA International Exhibition Group. KIOGE is one of the most competent, informational, analytical and presentation-rich events of oil and gas industry in Eurasia.

Commentary by Alexander Osin, the leading economist at Finam Management Ltd.:

What prospects of cooperation in the oil and gas sector are there for the CU member states?
Within the framework of the CU, there are still contradictions that have not been resolved. According to the agreement, Russia is to ship 6.3 million tons of oil tax free. Another 15 million tons used by Belarus’ refineries to manufacture oil products for export, will be delivered with 100-percent customs duty. Belarus’ representatives insist on tax free shipments for the CU members. And here consolidation of energy sector and transport infrastructure may play the major part in resolving the problem. Currently, Gazprom is negotiating this option with Belarus’ government and Beltransgaz.

What is the impact of introduction of the unified customs tariff on the economy of the CU member states? What advantages did the CU creation bring to them with regard to oil and gas industry?
Kazakhstan estimates benefits gained from the CU membership as nearly $1 billion added to the state budget. However, payments are expected to increase mainly due to the increase of almost one third of all import duties. It is expected that the price of gasoline imported from Russia will drop by 5 percent.  Still, the amount of oil and gas products traded between the two countries is not significant, e.g. the last year Russia delivered to Kazakhstan only 3.77 million  tons of oil while Kazakhstan itself produced nearly 100 million tons.
Belarus was able to convince Russia to zero out export duty on oil shipped to the country. However, Belarus will have to pay tax to the RF budget on all oil products it is to export in accordance with the Russian rates. It cost Belarus’ treasury several billion dollars, yet in the end the country did receive a certain benefit as the oil products export duty was significantly lower than CED.
The increase of export duties for heavy petroleum products introduced in the RF may affect Belarus’ struggling economy significantly, depriving it of one of the major income sources. Still, the new tax policy will not have any effect on the cost efficiency of refining of Russian oil, which is higher than that of Venezuelan oil. Most likely, Belarus and Russia will continue negotiations on the economic relations in the oil and gas sector. Given the situation, Russia insists on acquisition of Belarus’ energy facilities by Russian companies as the major step towards resolving the problem.

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