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Eurasian Economic Union policies and practice in Kyrgyzstan

Farmer in Kyrgyzstan
Cotton farmer in Kyrgyzstan. Agriculture exports from Kyrgyzstan to Russia and Kazakhstan have decreased recently as a result of agriculture bans on the grounds of food quality and safety. Photo: Commons / Helvetas
Dr Damir Esenaliev and Gulzhan Asylbek kyzy

 

Kyrgyzstan’s experience as a member of Eurasian Economic Union (EAEU) from mid-2015 to late 2016 has been largely frustrating. While favourable employment conditions have been created for Kyrgyz labour migrants, the anticipated increased access to the markets of the EAEU member states and large-scale capital investments are yet to materialize. The prospects for Kyrgyzstan’s membership of the EAEU may become more favourable in the short term, but this depends on whether the EAEU functions as envisaged. Kyrgyzstan’s membership of the EAEU will serve as a testing ground to explore the grouping’s effectiveness and scope for future expansion, as well as the capacity of the Kyrgyz Government to navigate this multilateral structure.

While facing EAEU inefficiencies, China has become the primary creditor of Kyrgyzstan in recent years. Even though imports and subsequent re-export opportunities have diminished, China’s role in funding large-scale infrastructure projects through direct lending to the Kyrgyz Government, as well as foreign direct investment (FDI) and regional initiatives, is expected to increase in importance.

 

Kyrgyzstan before and after joining the EAEU

After becoming a member of the World Trade Organization (WTO) in 1998, Kyrgyzstan adopted a liberal trade regime. This gave it the ability to benefit from massive re-exports of Chinese goods to neighbouring countries and Russia. Within this framework, the trade sector became a driver of economic growth and a source of employment for about 15 per cent of the Kyrgyz labour force. Following its decision to join the EAEU, however, it became clear that this re-export activity would cease, given the anticipated end of the differential in import tariffs.

Initially, there was some opposition to joining the EAEU within Kyrgyzstan, particularly from some officials, business organizations and non-governmental organizations (NGOs). They argued that membership would make Kyrgyzstan dependent on Russia not only economically, but also politically. Despite these misgivings, President Almazbek Atambaev and the Kyrgyz Government signed the EAEU membership agreement in May 2015. Kyrgyz officials argued that joining the EAEU was not only the only viable option, but also a highly promising avenue for development. In this way, they raised public expectations too high. On accession to the EAEU, Kyrgyzstan became the fifth member along with Armenia, Belarus, Kazakhstan and Russia. However, this coincided with a sharp decline in oil prices and the imposition of economic sanctions on Russia, which contributed to the depreciation of the Kyrgyz currency and the contraction of its economy. These events affected Kyrgyzstan’s trade, remittances and investment inflows.

Map of the EAEU member states as of June 2017: Armenia, Belarus, Kazakhstan, Kyrgyzstan and Russia
The 5 member states of the Eurasian Economic Union (EAEU) as of June 2017 are Armenia, Belarus, Kazakhstan, Kyrgyzstan and Russia.

 

Currency appreciation and depreciation

The less discussed feature of this period is the appreciation of the Kyrgyz Som against both the Russian Rouble and the Kazakh Tenge, which induced an increase in imports of goods from EAEU member states. Kazakhstan’s Central Bank depreciated the Tenge to maintain its previous parity with the Rouble, but the Kyrgyz National Bank did not follow suit. It intervened heavily to keep the national currency strong for fear of harming its highly dollarized economy.

Therefore, instead of exporting its agricultural products, Kyrgyz producers suddenly faced competition from Kazakh, Russian and Belorussian companies in its domestic market. This created public disillusionment with the Kyrgyzstan Government’s decision to join the EAEU, even though the exchange rate developments were not directly connected to integration efforts. These negative sentiments have intensified with the continued struggles of agricultural exporters, whose exports have been banned by both Kazakh and Russian regulatory bodies on the grounds of food quality and safety. A further frustration is Russia’s inability to continue with the construction of a hydroelectric station, which resulted in the termination of the agreement. In all these cases, the reality has not lived up to the expectations.

Among the more positive developments, labour migration statistics show that as of 2016, more than 25 per cent of Kyrgyzstan’s total workforce was employed in Russia. Remittances account for 30 per cent of Kyrgyzstan’s total gross domestic product, and over 90 per cent come from Russia. Between 2015 and 2016, the inflow of remittances increased by 22 per cent to USD $1.6 billion. These figures contrast with Uzbekistan and Tajikistan, which have witnessed a reduction in the number of labour migrants in Russia combined with an ongoing decline in remittances. It may be assumed that Kyrgyz labour migrants also possess more formal rights and fewer restrictions on employment in EAEU countries, although there is no evidence to confirm this assertion.

Another advantageous trend is visible in the Kyrgyz–Russian Development Fund, established in November 2014 with USD $500 million, which aims to boost investment in Kyrgyzstan. The fund increased its level of activity in 2016 by crediting the private sector and promoting import-substitution sectors of the economy, such as agriculture, food processing, construction and textiles. By the end of 2016, the fund had extended loans of USD $175 million, but the total effect of these loans and investments is yet to be fully evaluated.

 

The increasing role of China

Russia has a strong footprint in Kyrgyzstan, but China’s role as a development actor and investor in Kyrgyzstan has been growing exponentially in recent years. China became a major donor by funding large infrastructure and energy projects and providing budget support. Prominent projects funded by China include USD $389 million for the Datka-Kemin energy transmission line, USD $386 million for reconstruction of a Bishkek energy company and USD $400 million for construction of the Bishkek-Torugart road, as well as construction of an alternative route linking the north and south of the country.

The extent of such projects is only likely to grow. The Export-Import Bank of China became Kyrgyzstan’s largest creditor in 2016. It has outstanding credits of USD $1.3 billion, which accounts for almost 40 per cent of external public debt. There is also growing interest from public and private Chinese companies in FDI in the energy, airline and construction sectors to access the EAEU market. Given the expansive nature of these, albeit nascent, trends, China is poised to rewrite the rules and alter domestic attitudes to FDI and infrastructure development in Kyrgyzstan.

Overall, it is difficult to assess the benefits of Kyrgyzstan’s accession to the EAEU, as its membership has coincided with regional economic and political shocks. The economic prospects for Kyrgyzstan as an EAEU member may be favourable, but it must fulfil the outstanding requirements of EAEU membership. In the meantime, China is clearly increasing its strategic and economic interests in Kyrgyzstan, leading to questions over how the latter will balance its longer-term cooperation with Russia.

ABOUT THE AUTHOR(S)

Dr Damir Esenaliev is a Senior Researcher in the Peace and Development Programme.
Gulzhan Asylbek kyzy is a Research Assistant in the Peace and Development Programme.