Uzbekistan’s accession to the EAEU: to be or not to be

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The talks about Uzbekistan’s potential participation in the Eurasian Economic Union (EAEU), which was signed between Russia, Belarus and Kazakhstan, arose immediately after the Union Treaty came into force on January 1, 2015. On January 12, 2015, speaking to the Parliament of Uzbekistan, the first President Mr. Islam Karimov  outlined Uzbekistan’s position on supranational institutions. He  said that the country would not join the associations like the former USSR, as he imagined the EAEU.

Several years have passed and the issue of Uzbekistan’s accession to the EAEU has been raised again by the Chairman of the Federation Council of the Federal Assembly of Russia Ms. Valentina Matviyenko. It happened during her official three-day visit to Tashkent in early October 2019. It is also interesting how the news was announced. Matviyenko  said that the President of Uzbekistan has already decided to join the EAEU, which provoked heated discussions in the Uzbek segment of social networks, especially among the most popular bloggers to date. Despite subsequent statements by a number of high-ranked officials that the country is at the stage of working out the issue of accession, it is clear that Uzbekistan seriously considers membership in the EAEU as one of the options of further multilateral cooperation both in the Central Asian region and with Russia, whose influence in Uzbekistan has increased significantly in recent years, primarily in economic terms.

Uzbek Review gives exclusive opinions of a number of high-ranked experts and civil servants from the member states of the Eurasian Economic Union. As in any scenario, Uzbekistan’s participation in the EAEU has both pros and cons, but whatever decision the country ultimately makes, it will have significant implications for its further economic development. The Editorial Board’s opinion may not be the same as that of the experts in this review article.

Armenia

Membership in EAEU from  2nd of January 2015.

Mr. Tigran Khachatryan, Armenia’s acting Economy Minister, provided an analytical certificate for the Uzbek Review.

“The accession of the Republic of Armenia to the EAEU coincided with the beginning of the slowdown in international trade growth, the fall of the world commodity prices, devaluation processes in the economies of energy-exporting countries. However, joining the Union has helped to mitigate the effects of the unfavorable foreign economic paradigm on the national economy and already in 2016-2018  to grow positively in a number of sectors of the economy and in mutual trade, to expand the geography of trade and to diversify its export.

In particular, in 2018, the turnover of the Republic of Armenia with the EAEU countries compared to 2014 increased by 34.5%, including the export increased by 2.2 times.Thanks to the simplification of customs procedures, the establishment of a transport control mechanism and the liberalization of road freight transport, the number of goods transported by road has increased.

 In general, the “scale” effect for the member states with small economies was provided for both national producers and the country’s international positioning”.

The Prime Minister Mr. Nikola Pashinyan earlier this year cited the growth figures due to Armenia’s membership in the Union. According to the prime minister’s figures, Armenia’s GDP in dollar terms  decreased by 8[N1] % in the three years of membership in the Union (since 2015). In general, Mr. Pashinyan speaks more critically to Armenia’s participation in the EAEU.

“Unfortunately, we have more than 60 barriers in the EAEU space that do not allow integration processes to develop normally. This is due to the internal (regulation) of the EAEU countries. It will also be a priority for us – (to remove) these barriers, so that there is a real common economic space,” Mr. Pashinyan  said . After the current government came to power, a criminal case was opened against Russia’s Gazprom Armenia for tax evasion. The ZAO “South Caucasus Railway” (SCR) (private limited company) was also accused of tax violations. At the same time, the Armenian government recognizes that joining the EAEU was a necessary step in view of strong economic and political dependence on the Russian Federation.

Nevertheless, according to the analysts,  the Russian edition writes that in the near future Yerevan is unlikely to decide on radical steps to leave the organization. This became evident during the country’s presidency in the EAEU in 2019, which coincided with the most acute contradictions between Yerevan and Moscow.

Drawing the parallels with Uzbekistan, it is also worth noting the rapidly increasing role of Russian state corporations in the Uzbek market. In 2019, Uzbekistan and Rosatom have already agreed  to build the first nuclear power plant in Uzbekistan with an estimated cost of $11 billion. And the companies operating in Uzbekistan for many years, which include various structures of  Gazprom and Gazprombank, have tens of thousands of employees and take part in the implementation of most major infrastructure Projects. The issue of Uzbekistan’s economic independence from Russia will depend directly on the country’s ability to diversify its trading partners and agents. It is not only their legal addresses and well-documented jurisdictions, but the actual involvement of alternative players who do not have direct and indirect relations with Russian state corporations.

Kyrgyzstan

Membership in the EAEU since 12th of August 2015

Ms. Savia Khasanova, an economist from Kyrgyzstan and an expert of the “Investment Roundtable”.

If we talk about the process of KR accession to the EAEU, there was a wide discussion in the country on this issue, studies were conducted, which tried to assess the possible consequences of the accession. Fears were expressed that joining the EAEU would lead to higher inflation, both by introducing a single customs tariff and by washing out cheaper goods due to the opening of the markets of member countries; a slowdown in economic growth and, consequently, a decline in employment and a loss of government budget; reduced competitiveness for a number of sectors, etc.

In 2017, the Deputy Prime Minister Mr. Pankratov (who was Economy Minister in 2015 during the accession procedure) said that at that time “it was necessary to choose from the two evils of the least and it was decided that it was necessary to join in an accelerated format to the Eurasian Union.

At the same time, the previous government, which actively lobbied  the accession to the Union, promised many benefits from integration – access to more capacious markets, the growth of foreign direct investments, the use of new technologies and the general increase in competition. It was said that stable economic ties would be created in industry, transport and energy, in the agricultural sector, which would lead to the creation of joint transnational corporations within the EAEU.

In fact, we simply had to join the EAEU for the following reasons: the first, significant share of trade turnover with Russia and with Kazakhstan. In 2014, about 40% of all our exports (and imports) were accounted for by these countries, and among the CIS countries they were our most important trading partners. Second, the huge flow of migrant workers, which is concentrated in Russia: about a third of our GDP is the remittances of migrant workers.

Most of the promised benefits have not yet arrived.

When it comes to foreign trade:

1. Immediately after joining the EAEU, the KR’s exports to Kazakhstan were reduced by more than half. The reasons for this were the crisis phenomena in Russia and Kazakhstan, the devaluation of their national currencies (Kyrgyz goods have become more expensive to buy in Kazakhstan) and the introduction of non-tariff barriers from the  Kazakhstan side (“it turned out” that the products of the KR (especially the products of livestock production) does not meet the standards of the EAEU, and we do not have enough laboratories).

2. Special integration into the EAEU market also failed – Kyrgyzstan’s share in the mutual trade of the EAEU countries barely exceeds 1%.

3. Investors didn’t come either. The reason is that in general, Kyrgyzstan has not the best investment climate (and this should have been thought of earlier), a lot of problems with the implementation of legislation, change of the government (only for 8 years its basic composition has changed 10 times), and hence the stability and predictability of legislation and the implementation of national programs.

As a result, in fact, only migrants benefited from joining the EAEU. Then they received simplified procedures for obtaining a work permit. And, indeed, Kyrgyzstan has become the only CA country where migrant remittances have increased since the 2015-2016 crisis.

Another joy for the government is that the RKDF (Russian-Kyrgyz Development Fund) came to the country, which began to issue preferential loans to businesses, including small ones. But in fact, this shifted the responsibility from the state to the external donor – under the law on state support for small business, the government should develop the annual programs to support SMBs (small and medium-sized businesses) and implement preferential funding programs, which it does not. But now it is undertaken by RKDF. We only must understand that the coverage of these concessional loans is extremely small. On average, they lend about 600 entrepreneurs annually, while we have about 400,000 of them.

In general, we had to join the EAEU and our government sincerely hoped for some “magic wand” but it turned out (however, as it often happens) unable to adequately assess all possible consequences and work out all the important strategic issues in advance”.

Speaking about the migrant worker factor, it is necessary to note that Uzbekistan ranks first in the number of Central Asian states. With the accession of the RU to the EAEU, about 2 million people will potentially take advantage of the simplified procedures for obtaining a work permit who travel to Russia  every year. This is almost 13% of the country’s  working population. It should also be assumed that the new rules of registration may be followed by an additional flow of migrant workers from Uzbekistan to Russia and Kazakhstan. This scenario will have to be taken into account by all parties when predicting Uzbekistan’s accession to the Union.

 According to the State Statistics Committee of the Republic of Uzbekistan, by 2019 Russia and Kazakhstan are the second and third largest foreign trade turnover of the country, respectively, and the total share of the EAEU countries was about 30% of the total turnover for 2018, with the projected increase of this figure in 2019.  

It should be noted that Uzbekistan still applies protectionist methods even with its closest neighbors, in particular Kazakhstan, and at times it sometimes faces a similar approach. In September of this year, Kazakhstan was forced  to impose a moratorium on the export of Kazakh cows, due to the mass export of livestock to Uzbekistan, which has been observed in the last year and a half or two. The result of mass exports was a decrease in supply on the Kazakhstan market, which was followed by a significant increase in the cost of meat in the south of the country. The integration process in any regional economy is difficult to control, especially when it comes not to bilateral but multilateral integration processes. The EAEU countries have yet to forecast and assess the impact of Uzbekistan’s entry  with a population of more than 33.8 million people. In the absence of political pressure, the process of predicting and evaluating all possible scenarios may take more than one year.

Kazakhstan

Membership in EAEU from  the 1st of January 2015.

Mr. Muslim Hasenov, the lead researcher at the Institute of Law and Legal Information of the Republic of Kazakhstan:

“The general labour market is governed by the EAEU Treaty (Section 26). Migrant workers within the EAEU are, in fact, granted national treatment, i.e. they enjoy almost all the rights that citizens of the employment state, including the ownership, use and disposal of their property; property protection; unhindered transfer of funds; social security (social insurance) (except pension) on the same terms and in the same manner as citizens of the state of employment; the right to receive emergency medical care (in emergency and undelayed forms) and other medical care; the right to join trade unions.

There are problematic issues of providing medical care (except emergency medical care) under compulsory health insurance (CHI) to Workers of the EAEU states and their families in the Republic of Kazakhstan and the Russian Federation, as well as providing health care to workers and their families in those EAEU countries where there is no CHI system, taking into account the provision of equal guarantees to the workers and their families with citizenship of the employment state.

The problem remains in the lack of systemic control of the single work and pension space, accounting for seniority and pension contributions, effective communication between pension funds and statistical accounting. This problem should be solved by the entry into force of the Agreement on the Pension Of Workers of the EAEU Member States, according to which each state will pay for periods of work on its territory. The worker will be able to apply either to the pension authorities of the state of the residence or to the employment state.

In addition, there is no harmonized regulation of the licensing and permitting system in Member States.; different approaches and procedures in supervisory and administrative-procedural activities; problems in harmonizing the taxation system in the service sector; the low level of administrative cooperation of the competent bodies of member states; a different understanding and interpretation of restrictive measures is also a serious challenge to the single market of services.”

Belarus

Membership in the EAEU: 1st of January  2015 

Ms. Irina Tochitskaya, scientific director of the IPM Research Center. Belarusian economist, analyst. Ph.D. in Economics.

I do not think that the experience of Belarus can be used in the analysis of the problems of accession to the EAEU, especially in the context of Uzbekistan. First, Kazakhstan, Russia and Belarus first formed the Customs Union, which then transformed into the EEA and the EAEU. Secondly, even before joining the Customs Union we had a very high degree of harmonization with the Russian customs tariff (at 97%), which was adopted as the basis of a single tariff. For this reason, there were no serious problems with tariffs, unlike the same Kazakhstan. Some problems arose when Russia joined the WCO and the single customs tariff was brought in line with its obligations, but this is a different story.

Within the EAEU, there are no real mechanisms of influence on the countries in making economic decisions. All the decisions of the Eurasian Economic Commission are only advisory.

The main economic consequence for Belarus after joining the EAEU was the preservation of preferential energy prices. Now after the Russian  tax maneuver they disappear on oil. It was also important to facilitate the access of goods and services to the market of the partner countries. This problem has not been fully addressed, as the countries are actively using non-tariff measures to protect their markets. 

Ms. Valeria Kostyugova, a political scientist, political technologist. Head of the Political Examination Agency at BISS.

– In bilateral and multilateral relations with Russia, Belarus always has the same complexity: fundamental issues for Belarus, including energy tariffs and the cost of their delivery across Russia to Belarus, are conditioned by Russia of Belarus’s preliminary fulfillment of the Kremlin’s expectations. In particular, energy issues at the signing of the EAEU treaty were a promise from Russia, the implementation of which was postponed until after the signing of the Agreement. As it is not the first time Belarus has faced such a question, and Russian promises have never been fulfilled after the fulfillment of its requirements/expectations, the Belarusian leadership delayed the signing of the EAEU Treaty. The agreement has been exchanged for short-term concessions to Russia on oil and gas, while the promise of tariff alignment within the EAEU, given by Russia, has been repeatedly postponed – now it is 2025, but it seems that by this time the common gas and oil markets won’t be created.

– From the foregoing it follows that the main mechanism of influence is not to sign the agreement until at least some part of the conditions of the candidate country for accession will not be fulfilled by Russia. For the member state (MS) of the EAEU, the leverage is reduced many times, but the possibilities of action through the Eurasian Commission remain, and this requires the high qualification of MS officials, who will closely monitor the documents adopted by the EEC, in specifics the technical regulations and other universal rules for manufacturers of goods and services, and be ready for constant consultations with national industries (for which it is desirable that industry unions be capable). Consultation and coordination with other MSs with similar interests in the areas affected by rule-making the EEC are also very useful for this purpose.

– In the case of Belarus, it is difficult to separate the consequences caused by Belarus’s excessive orientation to trade with Russia from the consequences of its accession to the EAEU. However, some are obvious: 1. Actual loss of control over the customs policy and, accordingly, operational control over the part of the budget revenues, 2. Adoption of regulations for manufacturers, convenient for Russians, and confirmation of compliance can be issued only by Russian state agencies and the associated commercial structures, which leads to an increase in non-productive costs for entry to the Russian market. 3. Overall, reducing the tools to support national producers. Among the positive consequences are the continued supply opportunities to the Russian market, the restrictions on access to which are constantly growing for non-MS of the EAEU.

Undoubtedly, of all the countries of the EAEU member states, drawing the parallels between Belarus and Uzbekistan is the most difficult. This is due to not only economic and geographical factors, but also to the current level of mutual trade with the EAEU countries.   According to the National Statistical Committee of the Republic of Belarus, in 2014 (a year before the EAEU agreement came into force), the Russian Federation accounted for 42.1% of total exports and 54.8% of total imports of the goods. Also, at the time of the creation of the EAEU, the Russian Federation, Belarus and Kazakhstan were already combined by the agreements on the Single Economic Space (SES), the Customs Union (CU) and the Eurasian Economic Community (EurAsEC). This provided the economics a particular level of integration which consequently transformed into the EAEU of the present form.

Discussions on Uzbekistan’s possible accession to the EAEU

A well-known Kazakh expert, Dosim Satpayev, talking about Uzbekistan’s possible accession to the Union, noted: “If Uzbekistan becomes a member of the Eurasian Union, then, like Kazakhstan, this republic will have to constantly reflect Informational inputs from Russia, where statements are often made that call into question the sovereignty of other members of the EAEU, whether it is the calls to introduce a single currency or create a supranational parliament.” The expert also emphasizes the “constant mutual skirmishes between the members of the EAEU”, accusations of non-tariff methods of regulation and protectionism.

Satpayev refers to the rather tense trade relations between the two members of the Union – Kazakhstan and Kyrgyzstan. Long-running disputes arise because of Astana’s tightening of border control for the imported agricultural products by the Kyrgyz side, despite the abolition of phytosanitary control between the members of the EAEU. Some regional experts  believe that the main reason is the economic competition between the neighbors.

An American expert on Central Asia, Fred Starr in his interview with Behzod Hoshimov for Uzbek Review expressed his opinion on the possible membership of Uzbekistan in the Union. “The union is needed for Moscow to export its goods to the protected markets. This is the main economic goal. This organization [EAEU] is under absolute domination, size and power, of one empire. There can be no other options,” Starr said. 

Asked about the possible risk of Uzbekistan being dragged into its orbit by Moscow, Former EBRD economist Mr. Sergey Guriev told the Uzbek Review in May of this year: “It is unlikely that such fears are justified. Uzbekistan already has a galaxy of relatively young leaders who will not be dependent on Moscow. They have different values, other education – Uzbekistan or Kazakhstan is unlikely to agree to participate in the foundations like the Soviet Union.”

Former Hungarian Finance Minister and World Bank specialist Mr. Lajos Bokrosh, who visited Uzbekistan as part of the ReformStepUp project, also answered a question about Uzbekistan’s potential participation in the EAEU: “For Uzbekistan it would be a much better alternative to unite within the Central Asian region. This path will help the entire region integrate into the world trade with the least risks.”

“Uzbekistan is working on the projects that are aimed at solving the main problems of the region – lack of access to the warm seas, remoteness from world trade, environmental problems. Through Uzbekistan, you will be able to enter the market throughout Central Asia, including Afghanistan. It’s more than 100 million market”. It is noteworthy that Safoyev also said that negotiations on Uzbekistan’s accession to the WCO did not stop, and accession to the EAEU is under the study.

Today Uzbekistan is positioning itself as an open country with a proactive policy towards cooperation. The government declared The Central Asian region as the priority in foreign policy.  “Our goal is to turn CA into a single, roomy market, which will become attractive for foreign investors. The region is not only a cheap labor force, but a source of stability, a growing market with a developed transport infrastructure,” the Senator Mr. Sodik Safoyev said during the Uzbek-American forum. 

The openness and positioning of Uzbekistan as a regional center of trade and cultural exchange are qualitatively new promises of Tashkent today, which are already being implemented in practice. Tashkent has become close to its neighbors in the region over the past three years and is open to the most difficult tasks, including the water and energy issues and access to warm seas. However, the equidistance from all the centers of power, which the leadership in the person of Mr. Safoev declares, is in fact not something new – this was the motto of the former leader of the country, Islam Karimov, despite all the unpredictability of foreign policies. Another question remains to be open, how the joining the Eurasian Economic Union, which is undeniably an organization with a political agenda, will preserve the declared equidistance and the opportunity to become a regional hub, attracting effective foreign investment into the regional projects.


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