Kyrgyzstan marches, stumbles into Eurasian Economic Union

Kyrgyzstan announced in 2014 that it would join the Eurasian Economic Union, betting on integration with the Russian-led bloc rather than balancing its policy between China and Russia. The Eurasian Economic Union is a regional project led by Russia to rival the power of the European Union in the West and China in the East. Its current inductees are Russia, Kazakhstan, Belarus, and Armenia;  Kyrgyzstan is bound to accede to the union in May. The body will provide financing and advice to member countries to help their economies conform to the rules of the EEU, including the elevation of tariffs on non-member goods and structural reforms to increase trade. Kyrgyzstan, in particular, is facing tough trade challenges as a result of its integration policy. These challenges have caused concern in the country and confusion over the future of its business ties with China and the EEU.

Since independence, Kyrgyzstan has developed a lucrative practice of re-exporting goods from China into Russia, taking advantage of favorable trade policies that encourage post-Soviet economic cooperation. For Chinese businesses, Kyrgyzstan is a bridge into the Russian market where they can develop finished goods cheaply and cut costs on tariffs and regulations. However, this arrangement will come under scrutiny once Kyrgyzstan adapts to Eurasian rules. The trade bloc seeks to protect the wider Eurasian economy by raising tariffs on foreign merchandise, which will target a large part of Kyrgyzstan’s Chinese imports. Kyrgyzstan’s Prime Minister insists that China will still want access to the Russian market, and that EEU integration would prompt Beijing to abandon intermediary Kyrgyz investment in favor of direct engagement with Russia. A notable Chinese businessman in Kyrgyzstan, however, begs to differ. He insists that Eurasian integration will make doing business in Kyrgyzstan much harder and less profitable.

Nonetheless, integration bodes well for Kyrgyzstan. The country’s terms of membership include delays for certain rules to give it time to acclimate to the new regime. Furthermore, Bishkek has received pledges from Russia and Kazakhstan for $200 and $100 million, respectively, to help cover the initial costs of integration. Russia and Kyrgyzstan also established a $1 billion joint-investment fund; Bishkek is betting that its lower Value-Added Tax will encourage investors and businesses from the rest of the Union to establish hubs in Kyrgyzstan. Membership in the Union will also increase Kyrgyzstan’s international reach. In a recent visit to Egypt, Russian President Vladimir Putin secured the creation of a free-trade zone with Egypt on behalf of the Eurasian Economic Union, increasing the trade bloc’s international presence. India has floated interest in forming a free-trade pact with the Eurasian Economic Union and China is talking about a free-trade zone with the bloc as well. These statements in particular will assuage Kyrgyz fears over fraying Sino-Kyrgyz economic ties.

It is too early to tell how Kyrgyzstan will benefit in the short-term. Its economy contracted significantly in 2014 due largely to Russia’s own economic downturn. The tariff policies of the Eurasian bloc will harm Kyrgyz businesses and it is not known when Russia’s economy will recover. Kyrgyzstan is making a long-term bet in joining the Eurasian Economic Union--one that it hopes will pay off as structural reforms and greater international clout. The bloc will tie Kyrgyzstan’s future closely to Russia and its fellow member states. Yet the geopolitical prospects of the Union are unknown since much of the political activity in the organization is under the control of national governments. Kyrgyzstan’s next parliamentary elections will be held in 2017, and that will serve as a measure of popular satisfaction with the direction the country is taking and whether it should continue integration or not.