Lisbon 2 Vladivostok

_ Yuri Kofner, non-residential research fellow, Skolkovo Institute for Emerging Market Studies, editor-in-chief analytical media “Eurasian Studies”. Munich, 11 June 2020.

The problem

Serious problems arose in trade and economic relations between Kyrgyzstan and Kazakhstan. At the end of May 2020, huge lines of heavy trucks formed on the Kyrgyz-Kazakh border. Truckers stand in a multi-kilometer traffic jam and cannot get into Kazakhstan. The discontent of the Kyrgyz side was caused by the fact that the neighbors introduced additional requirements for crossing the border for heavy vehicles. Since the end of February 2020, the Kazakh side has been checking and scanning the following documents: CMR (international waybills), TTN (waybills), invoices, vehicle registration certificates, border crossing coupons.

KGZ called such actions a hidden customs control, which fundamentally contradicts the provisions of the Treaty on the EAEU in terms of ensuring the freedom of movement of goods on the domestic market of the integration bloc. Biskhek threatened to sabotage the work of the Eurasian Economic Commission (EEC) if it was not satisfied with its inquiry into the matter, and even consider withdrawing from the EAEU. Earlier during the EAEU summit in May 2020, President of Kyrgyzstan Sooronbai Jeenbekov also raised the issue of the Commission’s powers and the effectiveness of its work.

The reason

I practically exclude geopolitical reasons for the queues on the Kyrgyz-Kazakh border, i.e. that this is some kind of hidden pressure on any of the EAEU member states. Presumably, the most likely reason is the competition between customs services and transport-logistics companies for goods flows going to the Russian Federation.

In 2019, the Russian Federation accounted for 83.7 percent of all extra-EAEU imports. This means that large Russian retail chains and business groups are the final customer of the bulk of foreign products, imported into the EAEU and transited through the territory of the other member states. In this regard, these Russian retailers have the market power to decide on how to import goods onto the Russian market. There are several main options: 1. By open seas through Russian ports (St. Petersburg, Novorossiysk, etc.). 2. From the EU through Belarus. 3. From China through Kyrgyzstan and Kazakhstan. 4. From China directly through Kazakhstan.

Formally, customs duties are distributed according to an agreed formula between member states, but de facto there are many nuances. For example, there are various permitted methodologies for calculating the value of imported goods. Unfortunately, shadow trade occupies a large share in extra- and intra-EAEU imports. E.g., during 2012-2018 the average annual under-recording of Chinese exports to the Eurasian Economic Union was USD 2.4 bln or 3.9 percent of exports from China to the EAEU.

So, what will the Russian retail chain do if trucks with goods from China spend days on the Kyrgyz-Kazakh border? She or he will choose another route directly through the Sino-Kazakh border, for example, the Dostyk checkpoint. Accordingly, Kyrgyz customs services and transport companies lose out and Kazakhstani win.

However, it should be emphasized that in this situation there are no black sheep in one country and all the rest are angles in another. Everyone is crooked in their own way. All member states, such as Kazakhstan, want the initial customs clearance to take place at their border. Many importers and transit companies, e.g. Kyrgyz shuttlers, are trying to “save money” through frauded or incomplete shipping documents. And, unfortunately, in all the member states there is a constant problem with corruption.

This is the same reason for the continued existence of shadow re-exports through Belarus of European agri-food products, which are under Russian import ban: Belarusian smugglers would not exist without an the Russian retail chains or street market owners ordering the sanctioned products. As a result, honest importers and Eurasian integration suffer.

However, one should not think that such issues are exclusive to the post-Soviet region. A recent study by the Kiel Institute for the World Economy showed that in 2018, the EU had a surplus with itself of EUR 307 billion, which indicates huge amounts of VAT fraud. The loss in tax income could amount to as much as EUR 64 billion each year.

The solution(s)

There are several solutions, each of which has its own drawbacks. Firstly, the EAEU member states could agree to prescribe the obligatory installation of electronic navigation seals on trucks and cargo containers. The question is which border or territory to install them on. Suppose goods transit from China through Kyrgyzstan, then through Kazakhstan and finally to Russia. If the seal is installed on the territory of Russia or Kazakhstan, then we will de facto reinstate again internal customs borders within the EAEU. This also does not solve the problem with queues at the borders. If, however, the seal is installed on the Sino-Kyrgyz border, then the fears of the Russian and Kazakhstani customs services about the possible dishonesty of the Kyrgyz customs organization may persist – with all the potential for further conflict.

Secondly, the EAEU member states could agree on digital traceability codes to be put directly on the products. Marking ought to become mandatory and without it one can’t sell goods in the store. By this the entire delivery chain can clearly be traced. However, the implementation of such an initiative would prove rather expensive for businesses and for domestic households, as well as also technically difficult. Or, in some cases, even almost impossible. For example, how would one put digital traceability codes on tomatoes?

And in both of the above-mentioned options, there remains the issue that both navigation sealing and digital marking is owned and promoted by national business groups in each of the countries of the EAEU separately. This implies a further conflict potential, unless the EEC doesn’t establish either uniform requirements or clear mutual recognition rules.

The third option, but rather as an additional one, is the signing and implementation of agreements between the customs services of the EAEU member states and third parties on the exchange of operational customs information. A similar agreement was inked with China in June 2019. Its implementation began in December of that year. Unfortunately, there is no such agreement with the EU, since, for political reasons, the European Commission still refuses to officially recognize the existence of the Eurasian Economic Union as a subject of international law. But this is rather short-sighted, because the European economy is also losing from shadow trade with its eastern neighbor.

Fourth, the most radical, but from my view point the only option that can fundamentally solve the problem is: 1. either by transferring the customs powers to the supranational level and by creating a “Eurasian Customs Service”; 2. or by creating a mixed customs check at the EAEU’s external borders, e.g. when goods flows will be jointly checked at the Sino-Kyrgyz border by the customs services of Kazakhstan, Kyrgyzstan and representatives of the Eurasian Economic Commission. Or at the Euro-Belarussian border by the customs services of Belarus, Russia, and the EEC. Such a practice exists at the external border of the European Union.

The collected customs duties will continue to be distributed according to the usual methodology adopted and agreed by all EAEU member states.

Indeed, such a step will limit national sovereignty over border control, import duty and VAT collection. However – only symbolically, and not where it is important – in terms of state finances. On the contrary, due to greater transparency and by lifting of a large part of third-party merchandise imports out of the shadow sector, this step will increase government revenues and create more even conditions for domestic industries.

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