NEWS

From Customs Union to an Economic One

By Nurtay Abykayev, First Deputy Minister of Foreign Affairs of the Republic of Kazakhstan

Kazakhstanskaya Pravda National Daily Newspaper,

16 February 2010, issue 35

The earliest days of the year 2010 and of a new decade were marked by the event, which launched formation of a new configuration of the economic and political environment within the Eurasian Economic Community (EurAsEC) and the Commonwealth of Independent States (CIS), as well as a few other integration groupings in this region. Starting on January 1, 2010, the Customs Union of three Eurasian countries - Belarus, Kazakhstan, and Russia has become functional.

The new union is the result of implementing an initiative by President Nursultan Nazarbayev of Kazakhstan to build a unified Eurasian space with appropriate institutional structures, the idea that was voiced in his speech at the Moscow State University back in March 1994.

Like several other innovations of the Kazakh president, this one was based on a detailed study of a related international experience and thorough analysis of its economic feasibility. Indeed, there are dozens of integration associations in Europe, South America, Southern and Central Africa, so there were a lot of examples to look at.

Depending on political situation they were formed on different principles, but have always been profitable and useful. Even in the 13^th century there was the Hanseatic League (also known as the Hansa). In the 19^th century, Chancellor Bismarck by means of the Customs Union in fact founded the modern Germany.

We all remember that the process of creating the European customs union began with the signing of the Treaty on European Union in 1957, and progressed from the gradual abolition of customs duties and equivalent charges. After 1968, the process of gradual abolition of customs controls at the borders between EU member states began. It was completed by 1993, and later we witnessed introduction of the single European currency, which replaced ECU. All in all, constructing the present union in Europe took almost 40 years.

Formation of our Customs Union took place in an extremely short period of time. It took Belarus, Kazakhstan and Russia fifteen years to join in a customs union, and it took two years only to develop a legal basis for that. This proved the skeptics were wrong who, referring to the European experience, predicted that a similar process in Eurasia would take several decades at least. In many respects, the projected turned into reality only thanks to the political will of the Heads of our States and the practical activities of our Governments.

Even within the EurAsEC, there were important steps aimed at establishment of a free trade regime, which increased the volume of mutual trade and mutual investments in the member countries of the Community. Practical mechanisms of financial integration were created, such as the Eurasian Development Bank, the Crisis Fund, and the Center for High Technologies.

It should be noted that an unusual, albeit extreme, stimulus for acceleration in addressing the integration tasks was given by the global economic downturn, whose consequences impacted the vast majority of economies around the world. One can confidently state that that the mere fact of forming the Customs Union is a powerful anti-crisis measure. Undoubtedly, the next two years are going to be the time of a massive breakthrough.

Experts estimate the total effect from the creation of the Customs Union by more than US$ 400 billion for Russia, and US$ 16-18 billion each for Belarus and Kazakhstan. In essence, this step, as noted in one of the President Nazarbayev’ works, has initiated the formation of a common market with population of about 180 million people, in other words, 60 percent of the population of the CIS countries. The combined industrial potential of our countries is currently estimated at US$ 600 billion, oil reserves equal 90 billion barrels, and the volume of agricultural production reaches US$ 112 billion. The Customs Union nations produce more than 85 percent of combined GDP of all post-Soviet space. The total GDP of the three countries exceeds two trillion dollars, and the growth for 2015 is projected to be within 15-18 percent.

All this allows the Customs Union claim a place among the leading integration associations in global economy.

The most important goal of our efforts, however, which in fact is an aim of any strong economic and political projects, is an increase in welfare, living standards, and comfortable conditions for the peoples of our countries, which share much of their history and mentality, while preserving their sincere good-neighborly ties.

Presidents of Belarus, Kazakhstan and Russia recognized this phase of integration as a true breakthrough in their Joint Statement adopted at an informal meeting in Almaty on 19-20 December 2009.

“The main thing we want to achieve is a high quality of life for our peoples and sustainable economic and social development of our countries. The Customs Union will promote the growth of mutual trade, improving competitiveness of our products, open new prospects for investment,” the statement read.

These ideas resonate with the provisions of the latest State-of-the-Nation speech by President Nazarbayev. “Kazakhstan is an active participant of integration processes in the CIS. The establishment of the Customs Union with Russia and Belarus, which came into force on January 1, 2010, is a breakthrough for all of Kazakhstan’s integration initiatives. Creating a Single Economic Space to be operational from January 1, 2012, is a goal of the next stage in integration of the three countries. It will mean a higher level of integration when free movement of capital and workforce will be secured”.

And this is true, because one thing here stems from another. Simplification and elimination of many of the customs procedures ensures the systemic acceleration of the economic development, creation of new businesses and industries, and, respectively, broadening the range of goods and services, as well as creating a significant number of jobs. This means employment, wages, funds for implementation of many social programs, stabilization and even decline in prices of food and commodities by eliminating unnecessary fees and charges at the boundaries. Finally, this simply means the freedom of movement for people within the common economic and humanitarian space.

The Customs Union will promote expansion of the regional market and enhancing exports of the three states, making it one of the most attractive markets in the world. For example, Kazakhstan, being the owner of large stocks of mineral and energy resources, raw materials, intends to diversify its economy by stimulating production and export of final goods. Kazakhstan is also the world’s largest landlocked country. Our membership in the Customs Union will help us in resolving these problems by fixing acceptable transit tariffs. Improvements in the flow of goods and elimination of barriers at the borders will bring acceleration of business processes and progressive dynamics in innovations.

Of course, the formation of the Customs Union, and then the Single Economic Space, is a complex and multifaceted process that requires greater coordination and collaboration between governments, especially the customs, taxation, transport and other bodies of the participating countries.

To address these issues, the Commission of the Customs Union (CCU) was established. With the status of a supranational authority, the Commission adopts decisions that are binding for all participants. In other words, the state bodies of three countries delegated some of their powers to this new institution. Therefore, the Prime Minister precariously filed the case to the Constitutional Council of the Republic of Kazakhstan to determine whether the new arrangement was compatible with the basic law of the country. On November 2009, the Constitutional Council confirmed the binding character of the Commission’s decisions inside the country, except for the cases violating constitutional provisions on sovereignty, the unitary structure, form of governance and the territorial integrity of the state, as well as the rights and freedoms of the citizens.

Provisions of the international agreements between Belarus, Kazakhstan and Russia stipulate the merger of three customs territories into one, establishing a single customs territory. This will happen, in practice, on July 1, 2010. Within this territory, there would be no customs and economic restrictions (with the exception of special protective, antidumping and compensatory measures) in mutual trade of goods produced within the Customs Union, as well as goods from the third countries but released into free circulation in our common area. With external partners, all three states have already been using a single customs tariff and other common measures of regulating trade in goods.

The Common Customs Tariff is the Union’s key document and a very important element of a common trade policy. It is a set of rates of customs duties applied to goods imported into the single customs territory from the third countries, classified in accordance with the Single Commodity Nomenclature of External Economic Activity. One must emphasize that it applies to goods supplied from the third countries, but does not affect the goods imported from the CIS countries (there is already a free trade zone within the CIS). The total number of items in the Common Customs Tariff is 11,214 units.

Regarding the goods, which were planned to be produced in line with the existing investment projects, Kazakhstan has saved itself the opportunity to apply lower rates during the transitional period before reaching the production capacity of the plants being constructed. For example, they would apply to aluminum and petrochemical products, various types of construction materials, fertilizers, textiles, etc. There is also a possibility to import technological equipment, components, and spare parts without paying customs duties under the investment contracts.

With the Customs Code of the Union entering into force on July 1, 2010, the customs clearance of goods originating from the member countries of the Customs Union is going to be canceled. Furthermore, the customs clearance between Russia and Belarus of goods originating from the third countries and released into free circulation inside those two members of the Customs Union will be also canceled from the same date. Similar conditions on goods from third countries between Russia and Kazakhstan will apply a year later, on July 1, 2011.

One of the pressing issues in the issues of economic integration is the process of accession of the Customs Union member states into the World Trade Organization. In accordance with the existing agreements, accession to the WTO is expected to be done in a synchronized manner, with agreeing the common stance with other members of the union. To this end, a unified negotiating team representing all three countries has already been established. In general, I would like to note that formation of the Customs Union and Kazakhstan’s accession to the WTO are the two parallel processes with impact not only on the external trade regime of the state, but also on the economy as a whole.

In a word, the work in this direction is being continued.

Currently, within the Customs Union we have identified strategic directions in our international activities, agreed social policies, shaping a single transport space and a common energy market.

Today, there is an ambivalent economic situation in the world. On the one hand, anti-crisis measures taken by individual states helped to avert a global financial catastrophe, and to mitigate the negative consequences for the economies. Nevertheless, in evaluating the significant negative impact of the downturn, we must recognize that the final stabilization of the economy has not yet been reached.

There is a lot of huge and complex work needed to overcome the existing problems and to make a successful transition to a fundamentally new level of organization of economic, financial, industrial, and management systems. This is the leitmotif of the state-of-the nation speech by President Nazarbayev, which clearly stated the need to prepare the economy for the post-crisis phase of development. He also stressed in his appeal that “now it is important for our entrepreneurs to evaluate the emergence of new possibilities, seriously engage in elaboration of effective strategies for entering new markets, and increasing our competitive advantages.”

In conclusion, I would like to recall the words of President Nazarbayev who once said that “in the long term there is no alternative to the Eurasian integration”.

And, this is absolutely correct. The Customs Union is the fundament for developing a Single Economic Space, and the prospects are clear. This is confirmed by the following facts.

First, all three countries have a vast resource base, including a sufficient amount of the skilled labor force. Secondly, there is a large market here. Belarus, Kazakhstan, and Russia have a high degree of self-sufficiency of their economies. And most importantly, the countries of the Customs Union can form a monetary alliance based on a common currency.

One must note that the union’s original documents imply the possibility of accepting new members.

Today, we can definitely say that the process of forming the Customs Union is irreversible.

Date of issue: 2010-03-04