Russian Federation

The movement of goods across the inner borders of the EurasEC countries requires no customs clearance or declarations. ©Ministry of Foreign Affairs of Kazakhstan

What does the EurasEC customs union give us?

On 1 July 2010, the Republic of Belarus, Kazakhstan, and the Russian Federation created a customs union within the framework of the Eurasian Economic Community (EurasEC). This was done on the basis of more than twenty international legal instruments previously signed by these countries. State borders within this territory are preserved, but customs borders are eliminated, so that customs borders move to the outer perimeter of the three states. From now on, the movement of goods across the inner borders of the three countries requires no customs clearance or declarations.

This will generate considerable savings for importers and exporters within the customs union. For example, in the past, companies engaging in import-export operations to and from the Russian Federation had to issue about 160 cargo customs manifests per year. These are no longer required. Since the costs of customs broker services for issuing a single cargo manifest were in the range of 10,000 to 22,000 tenge ($66-$146), considerable savings will result. In addition, it is no longer necessary to pay 3000 tenge ($20) per day (at least) for temporarily storing goods while awaiting customs clearance. Likewise, payment of customs duties—€50 and €20 for each additional page—for issuing a cargo manifest is no longer required.

Trade between these three countries had been restricted by such licenses, quotas, and other non-tariff barriers. Many of these restrictions, such as limitation on the export of foreign exchange, have now been removed. As a result, the movement of goods from Russia to Belarus today is now similar to the movement of goods and food products from one region of Kazakhstan to another. However, non-fiscal customs control will be temporally preserved at Kazakhstani-Russian border until 1 July 2011.

Licensing has always been one of the barriers in the development of external trade. With the customs union, most of these barriers have been removed. The significance of this is apparent in the fact that, prior to the customs union, some 115 warehouses, 56 duty-free warehouses, more than 200 temporary storage warehouses, and 10 duty-free stores were licensed. Revenues accruing from licensing fees were considerable, in the €5-20 thousand range. Licensing has been replaced by registration with the customs authorities. If a company meets the requirements, it is automatically registered without a license.

Although customs clearance does not exist within the customs union, the obligation to pay indirect taxes remains. For entrepreneurs from these countries, payment of these duties will be delayed for at least a month (compared with the situation before the customs union). VAT and excise tax must be paid not when imports cross the border, but instead by the 20th day of the next month. This reduces the costs of tax compliance and frees up working capital.

Prior to the customs union, shuttle traders crossed Kazakhstan’s borders under a simplified customs regime. From 1 July 2010 this is no longer the case; shuttle traders must now submit cargo customs manifests when crossing the border. At first glance, this looks like a violation of economic rights. But this is not true. Goods worth some $4 billion are annually imported into Kazakhstan by individuals; practically each time they had to issue a cargo customs manifest. According to statistics, the simplified customs regime allowed them to only import goods worth $100 million, less than 3 percent of total imports. The cargo customs manifest regime was the most popular framework for expediting shuttle imports through customs, and so it remains.

 

Marat Aldangorovich Sarsembaev is a professor of the Daneker Academy of International Law, Astana, Kazakhstan.

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A boy injured by a hand grenade sits on the front porch of his home in Nagorno-Karabakh, Azerbaijan. © UN Photo/Armineh Johannes

Losing the peace: The Armenian-Azerbaijani stalemate in Nagorno-Karabakh

“If the occupier, Armenia, does not liberate our lands, a great war in the South Caucasus is inevitable.”

(Azerbaijani Defence Minister Safar Abiyev, February 25, 2010)

The Armenian-Azerbaijani ceasefire agreement and the internationally mediated Minsk Group negotiations have maintained an unsteady peace in Nagorno-Karabakh for 16 years.1 This summer, the International Institute for Strategic Studies, the International Crisis Group and other respected observers highlighted the rising risk that the military stalemate between Armenia and Azerbaijan might degenerate into crisis or even renewed war.

By all accounts, the status quo greatly disadvantages Azerbaijan, which has in effect lost control of some 20 percent of its internationally recognized territory. However, both sides have steadily ratcheted up their rhetoric regarding renewed conflict. Much of this has to do with appealing to or appeasing domestic political constituencies who might favour a military resolution to the Nagorno-Karabakh stalemate. Yet in Baku, the militarist discourse has been accompanied by a dramatic increase in defence procurement spending. From 2003 to 2009, the Azerbaijani authorities increased armaments expenditure by nearly 500 percent;2 in mid-October, the Finance Minister announced that 2011 defence spending would be almost 90 percent higher than in 2010.3 With Baku planning to spend 3 billion dollars next year on its armed forces, the risk of recidivism appears to be rising.

While an increase in military capabilities is not predictive of state intentions, it is safe to assume that the risk of war initiation is higher for Baku than for Yerevan. In an ideal world, Armenian officials would like an internationally legitimized settlement that partitions Nagorno-Karabakh from Azerbaijan, and Karabakhi leaders—perhaps cheered by the International Court of Justice’s ruling on the secession of Kosovo4 from Serbia—aspire to international recognition of their region’s independent status. However, these aspirations are deeply unrealistic, and in comparison with Azerbaijan, Armenia is relatively satisfied with the status quo.

For Azerbaijan, the fundamental concern is the inviolability of its territorial integrity. As long as Nagorno-Karabakh exists as a de facto autonomous statelet, and as long as Armenian forces continue to occupy seven other regions of Azerbaijan, its territorial integrity and unity as a state remain deeply undermined. However, the use of military force to reintegrate Nagorno-Karabakh with the rest of Azerbaijan is neither the only nor the most likely resolution. On the contrary, the ideal solution for the Azerbaijani authorities would be the peaceful reintegration of a semi-autonomous Nagorno-Karabakh under Baku’s authority. This would buoy the tremendously solid popular support for President Ilham Aliyev, while potentially facilitating a solution for the nearly 1 million Azerbaijanis directly or indirectly displaced by the 1992-94 conflict. Yet even as Azerbaijan’s global profile rises thanks to its relative macroeconomic stability and centrality to Caspian energy exports, confidence in the probability of a favourable negotiated settlement may be waning—understandably, given that talks have yielded little progress since their inception.

Russia and the military balance

Russia is the one outside state actor with sufficient leverage to help prevent a military escalation, as well as sufficient national interests in the South Caucasus to motivate this kind of intervention. Moscow regards the maintenance of its wide-ranging political and economic initiatives in the region as essential to the security of the former Soviet space, and is highly anxious about the impact of a hypothetical conflict in Nagorno-Karabakh on its own national security. With an estimated 3,000 troops stationed in Armenia on a near-permanent basis, the Russian authorities are well aware that in the event of a new Nagorno-Karabakh war, they would face international pressure to deploy a peace-keeping force to quell the conflict—and heightened international scrutiny as to whether these forces might be used to assist actively the Armenian side.

Aside from direct security interests, Russia’s commercial ties with both Azerbaijan and Armenia are robust: Russia is Yerevan’s single-largest foreign trade partner in value terms, and among Baku’s largest. With public and private energy giants including Gazprom, Rosatom, Inter RAO UES and Lukoil heavily invested in Armenia and Azerbaijan—not to mention growing trade and investment in agriculture, manufacturing, telecommunications—Russia also has compelling reasons for ensuring that commerce is not disrupted by renewed violence.

For these reasons, Russian President Dmitry Medvedev has stepped up attempts to mediate between the Armenian and Azerbaijani heads of state, hosting trilateral talks seven times since he took office in May 2008. In what may have reflected Russia’s perception that these negotiations did not yield the desired results, Medvedev shifted strategies in late summer 2010. Moscow’s new approach has focused not on economic ties and ‘soft’ power, but instead on maintaining a military balance between Armenia and Azerbaijan. Its strategy for reducing the risk of conflict is simple but potentially powerful: by maintaining a balance of military capabilities between the Armenian and Azerbaijani armed forces, the costs of prospective war will (in theory) rise to a level sufficient to deter either side from provoking or launching offensive operations:

  • Armenia’s defence agreement. In August 2010, Medvedev signed a new defence agreement with Yerevan that (among other things) pledges support for Armenia’s ‘territorial integrity’ and guarantees the presence of Russia’s 102nd Military Base near Gyumri until 2044. Allies of Armenian President Serzh Sargsyan have claimed that the new accord obliges Russia to support Armenia in the event of a second Nagorno-Karabakh war. The crucial question is not whether they are correct. To deter a hypothetical Azerbaijani offensive, decision makers in Baku must be convinced that Russian military involvement in such a conflict is a realistic and highly undesirable possibility. The signature of such a far-reaching defence accord with Russia was also facilitated by the breakdown in the Turkish-Armenian diplomatic rapprochement in late 2009. Moscow had been anxious that the once much-vaunted normalization of ties between Turkey and Armenia would diminish the importance of the latter’s alliance with Russia. Now that this normalization is off the table, the case for Russian-Armenian defence cooperation has only been strengthened.
  • Azerbaijan’s air defence systems. Less than a month after the signature of the Russian-Armenian defence accord, respected Moscow media outlets reported the sale of two batteries of Russian S-300 air defence systems to Azerbaijan. The aim of the apparent sale is to send a warning signal to Armenia, which has little interest in restarting a war. However, in a hypothetical conflict, Armenian forces could try to expand the theatre of operations beyond Nagorno-Karabakh and the other territories they currently occupy. For international interlocutors and investors in the South Caucasus, the ‘nightmare scenario’ is that an Armenia in danger of losing control of Nagorno-Karabakh would retaliate via ballistic missile strikes on critical civilian infrastructure—for example, pipeline pumping or compressor stations, or the Mingacevir reservoir—in Azerbaijan proper. The transfer of highly capable S-300 systems to Azerbaijan would significantly complicate any Armenian contingency plans for strikes on these targets.

Is military balancing enough?

Are efforts to maintain the military balance in the South Caucasus sufficient to prevent a new war, and is this the right approach to convince both sides to maintain the status quo? The answer requires an inquiry into why states start wars in general, and what Azerbaijan’s longer-term interests might be in restarting this particular war.

One argument often deployed against conflict re-initiation is the potential for such a war to hinder long-term economic development prospects. The logic is that, in addition to the direct financial, material and human costs of war, a new Nagorno-Karabakh conflict would seriously reduce foreign direct investment (FDI) inflows to Azerbaijan, divert state resources away from infrastructure and other long-term investments, and thus hinder the country’s long-term development prospects. Regarding FDI, the assumption is that international investors in the hydrocarbons sector and elsewhere would be deterred from expanding existing projects or launching new ones if war is raging on Azerbaijani territory. With inward FDI reaching 7.4 percent of GDP in 2008, these calculations would suggest that the economic consequences of a renewed Nagorno-Karabakh conflict are a significant deterrent to such a conflict actually transpiring.

The costs of civil and inter-state wars

Yet the calculations are not as simple as they may appear. In addition to the difficulty of assessing foreign investors’ aversion to an open versus a ‘frozen’ conflict—that is, a prospective war versus the already politically uncomfortable status quo—there is reason to question the conventional assumption that a new Nagorno-Karabakh war would dent Azerbaijan’s development prospects. Paul Collier’s seminal study of civil wars indicated that while conflict itself reduces GDP by an average of 2.2 percent per capita (compared to a counterfactual model in which such a war had never happened), there is a substantial ‘peace dividend’ in the years following a protracted war, wherein ‘war-vulnerable activities experience very rapid growth’.5 Of course, it is far from clear that a future conflict in Nagorno-Karabakh could be best classed as a civil war—even though the region has never been recognized as a sovereign entity by any state (including Armenia), and even though the 1992-94 war appears to meet the Geneva Conventions’ four criteria for ‘conflict not of an international character.’

On the other hand, it is evident that the primary combatants in any realistic future conflict would be the armed forces of Armenia and Azerbaijan.6 Though the next war would be fought within Azerbaijan’s internationally recognized territory and would centre on the fundamental question of Nagorno-Karabakh’s status, combat operations and any post-war settlement talks would be inter-state in nature. Yet as with civil wars, cross-border conflicts also appear not to dent economic prosperity over the long term. Indeed, most scholars of the relationship between economic growth and inter-state war suggest that such conflicts actually bolster per capita GDP expansion in the post-war years, thanks mostly to the need to rebuild infrastructure and other resources, technological innovation and an increase in corporate and personal savings rates.7 The so-called ‘phoenix effect’ is particularly pronounced for the losing side.

While it is difficult to disentangle effects directly attributable to the cessation of the 1992-94 war from the remarkable increase in output and exports from Azerbaijan’s oil and gas fields, the country’s reported per-capita GDP increased more than ten-fold between 1998 and 2008. This suggests—at a minimum—that the conflict did not do lasting damage to prospects for economic prosperity. For neighbouring Georgia, international pledges of 4.55 billion dollars in aid have undoubtedly mitigated the damage from the August 2008 war with Russia; GDP in 2010 is expected to grow by 5 percent—a higher growth rate than what is projected for Armenia, Azerbaijan, or Russia.

Outlook

From 2004 to 2009, Azerbaijan underwent one of the world’s most dramatic economic expansions. Oil wealth did not resolve entrenched problems of rural poverty, income inequality or inadequate fixed investment, but it did provide the basis for the emergence of a small middle class in the public sector, and served as a bulwark for the continued popularity of President Aliyev. Rapid growth has come to an end: the economy is expected to expand by a modest 1.8 percent in 2011, and it is not likely to return to double-digit growth until the second phase of the Shah Deniz Caspian gas field comes on stream in 2017.

This suggests that the risk of Nagorno-Karabakh reigniting is particularly acute in the next several years—when defence expenditure in Azerbaijan is at record levels (thanks in part to robust fiscal capacity), but overall GDP growth remains moderate or non-existent. Russian-led efforts to balance between Armenia and Azerbaijan’s military forces may have staved off a crisis this autumn, but Moscow’s ability to mediate between the two sides will always be hampered by its support for Yerevan during the 1992-1994 war—and understandable perceptions in Baku that Russia is far from a neutral arbiter. Multilateral talks are one helpful approach, but a longer-term strategy must focus on the need for Azerbaijan to diversify economically and to find a new, non-hydrocarbon-based engine for growth. Absent such reforms, the risk is that the authorities in Baku will bank on the ‘phoenix effect’—the expected revival of Azerbaijan’s economic development trajectory following a renewed conflict in the South Caucasus.

Sarah Michaels is the Senior Editor, Russia/CIS at Oxford Analytica and a PhD candidate in the War Studies Department, King’s College London. The views expressed herein are the author’s alone, and do not reflect those of Oxford Analytica.


1 In addition to the Minsk Process, which is conducted under auspices of the Organization for Security and Cooperation in Europe, Nagorno-Karabakh has been the subject of numerous resolutions of the United Nations General Assembly (most recently UNGA resolution 62/243 of 2008), as well as of the UN Security Council (e.g., UNSC resolutions 822, 853, 874, and 884, of 1993).

2 Stockholm International Peace Research Institute, SIPRI Yearbook 2009: Armaments, Disarmament and International Security, Oxford: Oxford University Press, 2009. pp. 193, 227.

3  TREND News Agency, ‘Azerbaijan to double defence expenditure in 2011 – state budget’, October 12, 2010.  Accessed on 15 October 2010.

4 Hereafter referred to in the context of the UN Security Council Resolution 1244 (1999).

5 Paul Collier, ‘On the economic consequences of civil war,’ Oxford Economic Papers 51 (1999), pp. 168-183.

6 The Nagorno-Karabakh Self-Defence Forces would certainly participate, but the Armenian armed forces are numerically larger, possess more sophisticated equipment and have superior training.

7 The best empirical study is Vally Koubi, ‘War and Economic Performance,’ Journal of Peace Research 41:1 (2005), pp. 67-82.

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Kyrgyzstan’s economic situation would worsen considerably if the country loses access to its current duty-free supply of oil products and other raw materials from Russia and Kazakhstan. © OSCE/Roel Janssens

The possible impact of the EurasEC customs union on Kyrgyzstan

The potential impact of the Eurasia Economic Community’s (EurasEC) customs union, the customs code for which formally came into effect for Belarus, Kazakhstan, and the Russian Federation on 5 July 2010, has been widely discussed in Kyrgyzstan. Before drawing conclusions about the advantages and disadvantages of Kyrgyzstan’s possible accession, two issues should be emphasized. First, this topic should be addressed from a purely pragmatic point of view, to draw analytical conclusions on the basis of specific economic indicators. Second, one should thoroughly examine the actual operation of the customs union. At this point, I agree with Muktar Djumaliev (deputy head of Kyrgyzstan’s presidential administration) that at present the government of Kyrgyzstan cannot even negotiate with the customs union, because we do not know enough about it.

Kyrgyzstan’s foreign trade policy is quite liberal in terms of customs duties; in 2009, the average import tariff was slightly over 5 percent. Practically no export duties are applied whatsoever. According to official statistics, Kyrgyzstan’s foreign trade volume in 2009 was $4.4 billion, of which imports constituted around $3 billion (68 percent) and exports $1.4 billion (32 percent). Customs union countries were responsible for 41 percent of Kyrgyzstan’s trade volume (50 percent of imports and 23 percent of exports). Whereas the share of imports from these countries has been relatively stable, the share of exports purchased by customs union countries shows a noticeable downward trend. It should be emphasized, however, that official statistics do not give a full view of Kyrgyzstan’s foreign trade situation, because significant volumes of goods are imported under a simplified customs clearance scheme, which distorts reported import prices.

Customs union: Implications for members and non-members

What does the creation of the customs union mean for member countries? The supranational Customs Union Commission was created in order to coordinate the activity of member countries. Decisions are made according to a simple majority of votes. These are distributed as follows: Russia—57 percent, Kazakhstan—21.5 percent, and Belarus—21.5 percent. Customs union revenues are to be divided as follows: Russia—87.7 percent, Kazakhstan—7 percent, and Belarus—5.3 percent. The single value added tax rate (which has not yet come into force) is set at 17 percent. This suggests that Russia has a preemptive position within the customs union. This may be because the size of these three economies are quite different: Kazakhstan’s GDP in 2008 was only 8 percent of Russia’s, while Belarus’s was only 4 percent. This suggests that Russia’s interests may prevail in the customs union’s trade policies: some 92 percent of the common external tariff rates are based on Russia’s tariff rates. In addition to protecting Russian producers from imports, this regime will give consumers in other customs union countries incentives to switch to Russian products.\

Analyses conducted by the Asian Development Bank, the European Bank for Reconstruction and Development, and USAID indicate that, because of significant differences in economic structures, tariff rates in Kyrgyzstan and the customs union countries vary greatly. As the below table shows, Kyrgyzstan’s tariff rates are concentrated in groups at which lower duties are applied. Moreover, in addition to these ad valorem rates, the customs union’s common external tariff applies specific rates for 5.3 percent and combined rates for 2 percent of total imports. By contrast, Kyrgyzstan applies specific tariff rates for only 1 percent of total imports, and combined rates for 1.3 percent of imports.

Table 1: The share of  imports falling under different tariff rates in the Kyrgyz Republic and the EurasEC customs union

* Under the customs union’s common external tariff

These differences reflect inter alia Kyrgyzstan’s membership in the World Trade Organization: upon its WTO accession Kyrgyzstan committed itself to maintain its average tariff rate at a reference level of about 7.7 percent. Moreover, were Kyrgyzstan to consider joining the customs union and adopting its (higher) common external tariff, it would have to coordinate this decision with other WTO members. [Editors note: none of the customs union member countries have acceded to the WTO.] However, the value added tax rate on imports under the custom union’s customs code will be 17 percent—which will also apply to imports from Kyrgyzstan (where the VAT rate is 12 percent).

Kyrgyzstan’s accession to the customs union would imply the adoption of its common external tariff—the average value of which is 10.6 percent, compared to Kyrgyzstan’s average customs tariff rate of 5.1 percent in 2009. Such a hike would significantly reduce Kyrgyzstan’s trade with other countries, while increasing trade with Russia and other customs union members. In addition, Kyrgyzstan’s average tariff rate does not reflect the considerable volume of imports from China carried out based on simplified customs clearance procedures with a very low rate.

Kyrgyzstan’s Ministry of Economic Regulation has calculated that 34 percent of total imports face duties that coincide with those under the common external tariff. Some 21 percent of imports face duties that are roughly comparable to the common external tariff rates, while 43 percent do not coincide at all. Changes in these duties would need to be negotiated with the WTO, which could entail significant technical difficulties. Accession to the customs union could also reduce Kyrgyzstan’s budget revenues and increase inflation. More generally, Kyrgyzstan would have to revise the basic directions of its trade policy to reflect the interests of bigger countries, primarily Russia. Favourable conditions for imports, including from China, would likewise be revised, significantly reducing the reexport of Chinese goods.

On the other hand, Kyrgyzstan’s accession to the customs union could have a number of positive implications. These reflect the fact that Kyrgyzstani producers would obtain preferential access to the large regional market of the custom union countries, providing scale advantages for local companies. It would also make Kyrgyzstan more attractive for foreign investments, from Russia and Kazakhstan and from non-customs union countries.

What happens if Kyrgyzstan does not join the customs union? This would depend in part on whether pre-existing bilateral and multilateral free trade agreements with these countries, which provide for most favoured nation (MFN) treatment for Kyrgyzstan’s exports, will continue to be honoured. The possible revision of bilateral MFN agreements and of the 15 April 1994 agreement among member countries of the Commonwealth of Independent States (as amended as of 2 April 1999) could be quite serious in this regard. Moreover, Kyrgyzstan’s economic situation would worsen considerably if the country loses access to its current duty-free supply of oil products and other raw materials from Russia and Kazakhstan. Non-accession could also slow Kyrgyzstan’s integration into post-Soviet regional entities, such as EurasEC and the CIS. Much therefore depends on the government’s negotiations with its main trade partners, Russia and Kazakhstan.

Possible recommendations

WTO membership does not automatically preclude membership in various customs unions, because the WTO’s main goal is to reduce barriers to international trade. As such the issues discussed here would become the subject of negotiations and consultations for the government of Kyrgyzstan. The country’s most favourable option could therefore be in pursuit of a gradual, step-by-step accession in the customs union, as certain conditions would be met. One of these would be the eventual accession of Russia, Kazakhstan and Belarus to the WTO—which, most probably, is a matter of time. These countries’ WTO accession would facilitate the joint resolution of a number of issues associated with Kyrgyzstan’s prospective customs union membership, such as compensation for increases in customs tariffs. Prior to the possible WTO accession of Russia, Kazakhstan, and Belarus, Kyrgyzstan could reasonably request observer status in the customs union. This would demonstrate good faith on the part of the Kyrgyz Republic, and minimize the risks (for Kyrgyzstan) associated with the customs union’s creation. During this time, Kyrgyzstan should seek to boost investment from WTO countries, including from China in order to make good use of its comparative trade advantages.

Talaibek Koichumanov is Head of the Secretariat of the Business Development and Investments Council under the Government of the Kyrgyz Republic.

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