Customs Union of Belarus, Kazakhstan and Russia: Trade Creation and Trade Diversion in Central Asia in Roman Mogilevskii Institute of Public Policy and Administration, UCA Bishkek, 15 November 2012

Introduction The issue of the CU creation and operations is big in the current policy discussions in the region and in the news Major growth of trade between Russia and Kazakhstan (turnover 28% ↑) and between CU and other CA countries (turnover 19% ↑) has been reported in 2011 Is this growth due to the CU? This is the main question addressed in the paper Trade between (i) Kazakhstan and other CU members, (ii) Kazakhstan and other CA countries, and (iii) other CA countries and other CU countries Reservation – it is still early days of the CU, many potential effects had no time to materialize yet

Key facts on the Customs Union Kazakh-Russian trade is concentrated on energy, metals and, in the case of Russian exports, manufactured products Kazakh-Belorussian trade is relatively small Formal free trade regime with other CA countries has not changed Trade between Kazakhstan and non-CU CA countries is concentrated on energy, cereals, and agricultural products Trade between Russia and non-CU CA countries is concentrated on energy, machinery, agricultural and light industry products

Expectations from the CU Two major effects of regional trade agreements – trade creation and trade diversion Few studies on the impact of the CU on its members and neighbours CU effect on Kazakhstan depends on the success in improvement in Kazakh-Russian trade facilitation If this improvement is achieved, substantial trade creation and positive welfare effects If no improvement is achieved, Kazakh imports diversion from non-CU countries to other CU members and possibly CA countries accompanied by welfare losses

Measurement of trade creation/diversion Analysis of country trade shares - Increase in share of a CU member country in other members’ total exports/imports may signal trade diversion if accompanied by a decline in trade with non- CU countries, or trade creation if no decline is observed Apart from the changes in trade policy, exports/imports depend on international commodity prices, domestic demand changes in trading countries etc. Country shares allow accounting for these factors Trade is disaggregated to eight types of commodities: (i) energy, (ii) metals, (iii) cereals and flour, (iv) other agricultural products and foods, (v) chemicals and plastics, (vi) light industry products, (vii) machinery, and (viii) other products

Dynamics of commodity prices in 2011

Imports of articles of steel to Kazakhstan

Trade creation/diversion – evidence Commodity group Partners Trade creation (TC)/trade diversion (TD) Russia and Belarus Other CA countries China Rest of the world Energy Metals Agr. products & foods TC Chemicals &plastics TC Light industry572 Machinery TD Imports of Kazakhstan

Trade creation/diversion – evidence (2) Commodity group Partners Trade creation (TC)/trade diversion (TD) Russia and Belarus Other CA countries China Rest of the world Energy Metals Agr. products & foods Chemicals & plastics 9-16TD Light industry TD Machinery33-83TC Exports of Kazakhstan

Trade creation/diversion – evidence (3) Trade of other CA countries with Russia & Belarus Commodity group Exports to Russia and Belarus Imports from Russia and Belarus Energy Metals and ores311 Agricultural products and foods Chemicals and plastics15 Light industry products5017 Machinery Other products327

Trade creation/diversion – evidence (4) Trade creation in Russian exports of chemicals and plastics, agricultural products and foods to Kazakhstan and the Kazakh exports of computers to Russia Large case of trade diversion in machinery imports to Kazakhstan Minor case of transition from exports of semi-fabricated product (leather) to exports of higher-value-added product (leather footwear) Minor case of conversion of previously informal imports/re-exports from China into formal import/export flows Possible small diversion of exports of the Russian vehicles from OCAC to Kazakhstan as well as exports of OCAC apparel to Russia

Trade creation/diversion – evidence (5)

CU’s impact on informal trade flows Direct and indirect (via Kyrgyzstan) informal imports of Chinese consumer goods to Kazakhstan and Russia are worth of many USD billion Major changes in border crossing regime for physical persons on Kazakh-Kyrgyz border in April 2010 and in July 2011 Informal trade diversion in Exports of Chinese light industry products to: USD billion Kazakhstan Kyrgyzstan Russia

Other economic changes in Kazakhstan Only rapid assessment Possible effect on trade in services, investments, prices, government revenue, employment Significant gain of the GoK budget in import duty revenue ≈ US$1.4 billion No other significant changes

Conclusions Major increases in the intra-CU trade and in trade between the CU and other CA countries are due to the growth of energy and metal prices Few small cases of creation of trade between Kazakhstan and Russia Large case of trade diversion with Kazakhstan’s imports of machinery shift from developed countries to China and Russia – possible welfare loss Few other minor trade changes attributable to the CU effects

Conclusions (2) Significant CU-attributable gain for the government budget of Kazakhstan Cumulative effect of the CU on the economy of Kazakhstan seems to be ambiguous CU impact on other CA countries is small with minor gains for Uzbekistan Actual effect of the CU so far is well below expectations General assessment of the CU effects is not going to be unambiguously positive or negative; there are winners and losers in each country; accounting for details and nuances seem to be necessary