Kazakhstan: Sanctions Against Russia: Repercussions on Kazakhstan and Eurasian Economic Union’s viability. By Sergey Marinin.

Sergey Marinin, MA graduate of the OSCE Academy, Politics and Security. s.marinin@osce-academy.net

This paper aims to analyze what effects current economic sanctions imposed on Russia project on its closest Eurasian integration allies – Kazakhstan and Belarus. The paper also seeks to examine the problem of feasibility of the Eurasian Economic Union in light of the sanctions against Russia.

The protracted conflict over annexation of Crimea and military resistance of Donbas separatists to the incumbent Ukrainian government have resulted in unanimous Western condemnation of Russia’s involvement in Ukraine. There have been numerous claims made by high-ranking Western politicians and respected academics that the Donbas militant groups are assisted militarily by Russia. John Mearsheimer in his article “Don’t Arm Ukraine” said the separatists “have Russian troops and weapons on their side”. Some indirect evidences of the presence of Russian troops in Donetsk and Luhansk provinces have also been released by the Russian opposition media[i].

While everyone agrees that Russia destabilizes the situation, Western powers fail to present a common position on conflict resolution in Ukraine.  The recent statements of John Kerry during his visit to Kyiv about the possibility of providing Ukraine with comparable amounts of lethal arms[ii], is a cautionary sign that might escalate the antagonism between the conflicting sides even further. Angela Merkel along with Francois Holland, however, excluded any military support to Ukraine and insisted on diplomatic dialogue, negotiations and economic sanctions methods [iii]. Nevertheless the diplomatic means have not proved to be fruitful: Recent ‘Normandy 4’ informal meeting have shown no real progress and only reaffirmed that the Russian president reserves his positions.

Meanwhile, Western sanctions against Russia already had substantial effect on Russia’s economy and side affected its EEU partners Belarus and Kazakhstan. Therefore, it is important to examine how well the union copes with overcoming effects of the sanctions regime and what development prospects shall Kazakhstan expect within this system.

The economic effects of Western sanctions.

While the policy of Western sanctions against Russian economy has exerted considerable effect on country’s economic capacities, Russia does not suffer alone. Its neighbors and accomplice in creation of the Eurasian Economic Union (EEU) Kazakhstan and Belarus are highly affected as well. Just recently Kazakhstan’s sovereign credit rating was downgraded due to a “need to adjust the external economic imbalances by correcting the rate of the national currency”[iv] based on the S&P Report. Prior to that, back in mid-February 2014, when the conflict situation in Ukraine went into a military phase, the Russian ruble lost about 10 percent compared to euro-dollar basket, forcing Kazakhstan to devalue its own national currency by 18.9 percent[v].  These troubles in economic development of the countries, influenced by the ruble crisis in neighboring Russia and a number of other hardships related to the sanctions, directly influences integration process of the EEU. Little over a month has passed since the signing of the Eurasian Economic Union’s establishment treaty and there have already been numerous disagreements among the member-states in regard of trade and foreign policy towards Western states.

President Lukashenka has demonstrated that his country’s interests are more significant for him than any ephemeral initiatives to create an unjust common market. Trade wars between Belarus and Russia are no rare and surprise nobody. The latest case was when Belarus closed the border in response to Russia’s ban of Belorussian pork and milk. Russian Federation suspected Belarus in the re-export of food products from the EU that were banned according to the Russia’s retaliation sanctions. Considering that the export of dairy products brings 2.2 billion dollars to Belorussian budget which constitutes the second largest export item between vehicles that make 2,5 billion, and machinery with 1,5 billion dollars[vi], the trade wars with Russia is a significant risk for Belarussian economy. As a result, IMF report ranked Belarus as the country facing the fullest risk because of Russian economic turmoil and the impact of Western sanctions [vii].

Kazakhstan, in turn, incurred its own substantial losses mainly due to the oil prices decrease, but also not in small part because of the ongoing Russo-Ukrainian conflict. According to a prominent Kazakhstani analyst Daniyar Ashimbayev, Kazakhstan’s trade with the Ukrainian Southeast outreaches combined trade volume with the whole Central Asian region. Because of the continuing discord, bilateral trade has decreased by one-third of the maximum of 4 billion dollars per year[viii]. Furthermore, neither Belarus nor Kazakhstan supported Russia’s retaliation sanctions against the EU; thus both countries suffered a negative riposte from Russia in the form of trade restrictions on their own exports [ix].

Prospects of the EEU.

The CU/EEU has hardly changed the position of Kazakhstan in terms of exports to Russia/Belarus, whereas imports to Kazakhstan have undergone greater changes and now consist mostly of the Russian products[x]. In 2007, exports to Russia and Belarus constituted about 10% of the total exports from Kazakhstan, while in 2011 dropped to 8.7%. In 2007, imports from Russia constituted 36.7% of total imports in Kazakhstan, whereas in 2011 it reached 46% [xi].

Business community of the republic is earnestly worried about the latest negative trends in Russian economy. Therein, Director of the Center for Macroeconomic Research Olzhas Khudaibergenov urged Kazakhstani authorities to restore the customs border with the Russian Federation emphasizing that due to the rapid collapse of the Russian currency this measure is intended to support the Kazakhstani economy and protect country’s market from the influx of cheap Russian products[xii]. Among other top reasons of falling of tenge, Chairman of the financial services consumers Union Aydar Alibaev named low oil prices, the crisis in the Russian economy and the continued depreciation of the ruble[xiii]. The first Deputy Prime Minister Bakytzhan Sagintayev made a number of statements on the future of EEU and the possibility of tenge depreciation. He assured that Kazakhstan will never go out of the Union and there will not be another devaluation of the national currency[xiv]. Although previously he said that Kazakhstan could restore customs posts with Russia and this act should be treated with understanding from the northern neighbor. Some protectionist measures might be introduced if the situation with ruble deteriorates further as due to the influx of cheap goods from Russia domestic businesses become no longer competitive. On the other hand, Belarusian President did not rule out the possibility of withdrawing from the EEU. Such claims are a strong indication that Russia’s partners are ready to take decisive actions in case their national interests are undermined.

Director of the Institute for Regional Development of the International Academy of Business Valikhan Tuleshov believes that Russia has shown its geopolitical interests are much more important than those of the EEU. He asserts that Russia has long been engaged in protectionism, preventing to pump Kazakhstani oil by domestic prices, not giving domestic tariffs for the railway transportation of products, introducing sanctions regime which plagues Kazakhstani economy[xv]. The expert also notes that the Accelerated Industrial and Innovative Development (AIID) program will fail if Kazakhstan does not introduce any protectionist measures. This means that Kazakhstan will drift away from achieving economic diversification. European Bank for Reconstruction and Development (EBRR) believes that membership in the EEU went to the detriment of Kazakhstan, as the country feels the effects of the Russian counter sanctions[xvi]. A distinguished political scientist Dossym Satpayev reasonably states that, ‘… within the CU Kazakhstani producers were almost non-competitive, and imagine what will happen in the WTO, where we will have to compete with foreign corporations?’[xvii] He continues his thought by expressing doubts in efficacy of the current integration policy: ‘Kazakhstan’s problems within the CU related to seizures, artificial restrictions, use of sanitary norms for political purposes should have alerted our officials. We had to analyze the confrontation trend between Russia and the West since the Russo-Georgian war. This trend for a multi-vector Kazakhstan was not the best moment for entry into the EEU[xviii].’

Conclusions

The economic integration within the EEU is complicated by the Western sanctions as they influence all Russia’s partners. As the economies of the EEU are not complementary and are disproportionately developed, integration might cause strained relations over the wealth distribution. Some of the early signs of it are trade wars between Russia and Belarus. Increasing pressure of sanctions will provoke further economic hardships for Russia and concurrently for Belarus, in lesser degree for Kazakhstan, but still having a considerable effect in terms of production and imports. Kazakhstan’s participation in the EEU makes the country more exposed to Western sanctions because of the deepening economic connections among the Union members and increasing interaction between the countries in economic and financial dimensions. Considering these economic implications, the integration progress might become weaker or be postponed and remain on political rhetoric level. Belarus and Kazakhstan are evaluating all possible and forthcoming negative effects, operating with intimidating rhetoric of possible withdrawals from the Union. However, the latter scenario is neither practical nor probable for both countries, given the current developments in Ukraine and Russia’s belligerent behavior in the post-Soviet space. Therefore, at this stage when Kazakhstani economy is not yet tightly linked to manufacturing and industrial sectors’ production of Russia, Akorda’s response will largely be about limited protectionist measures.

References

[i] Aleksei Ponomaryov, “Pictures from the funeral of the Pskov paratroopers are published,” [Opublikovany fotografii s mesta pohoron pskovskih desantnikov] Slon.ru, August 25, 2014, accessed February 12, 2015, http://slon.ru/fast/russia/opublikovany-fotografii-s-mesta-pokhoron-pskovskikh-desantnikov-1147803.xhtml.

[ii] Shaun Walker, Alec Luhn and Spencer Ackerman, “Ukraine: US considers military help for Kiev as separatists plan to mobilise army,” The Guardian, February 2, 2015, accessed February 6, 2015, http://www.theguardian.com/world/2015/feb/02/ukraine-us-considers-miltary-help-kiev-separatists-plan-mobilise-army.

[iii] Ibid.

[iv] “Standard & Poor’s downgraded the rating of of Kazakhstan,” [Standard & Poor’s ponizil rejting Kazahstana], Tengri News, February 10, 2015, accessed February 12, 2015,http://tengrinews.kz/private_finance/Standard–Poors-ponizil-reyting-kazahstana-269819/.

[v] John C. K. Daly, “Kazakhstan Nervously Contemplates Possible Impact of Sanctions Against Russia,” Jamestown Foundation, May 21, 2014, accessed February 16, 2015, http://www.jamestown.org/single/?tx_ttnews%5Btt_news%5D=42405&no_cache=1#.VOTegfmsXDm.

[vi] “As Sanctions Hit Russia, Belarus and Kazakhstan Share Potential Economic Risks,” Stratfor, August 10, 2014, accessed February 16, 2015, https://www.stratfor.com/analysis/sanctions-hit-russia-belarus-and-kazakhstan-share-potential-economic-risks.

[vii] The Republic of Belarus. IMF Country Report № 14/227. <http://www.imf.org/external/russian/pubs/ft/scr/2014/cr14227r.pdf&gt;, accessed February 18, 2015.

[viii] Maksym Bugriy, “Nursultan Nazarbayev’s Ukraine Diplomacy,” Jamestown Foundation, January 14, 2015, accessed February 16, 2015, http://www.jamestown.org/regions/centralasia/single/?tx_ttnews%5Btt_news%5D=43400&tx_ttnews%5BbackPid%5D=657&cHash=3692b83bbf32dc6636bd50b21c306cdd#.VOy53PmsXDl.

[ix] Ibid.

[x] Dmitry Kazakov, “The impact of the Customs Union on Kazakhstan’s economy,” [Vlijanie Tamozhennogo sojuza na jekonomiku Kazahstana], BRIF Research Group, September 19, 2012, accessed February 4, 2015, http://www.brif.kz/blog/?p=2354.

[xi] Ibid

[xii] Askar Muminov, “Crossed all boundaries. Khudaibergenov offers to return to the Russian customs posts,” [Pereshli vse granicy. Khudajbergenov predlagaet vernut’ tamozhennye posty s Rossiej], KURSIV.KZ, January 26, 2015, accessed February 5, 2015, http://www.kursiv.kz/news/details/vlast/granitsy_na_zamke_khudaybergenov _prizval_vosstanovit_tamozhennyy_kontrol_mezhdu_rk_i_rf_837/.

[xiii] “Expert: To maintain the rate of tenge $ 3.2 billion are being spent per month,” [Na podderzhanie kursa tenge tratitsja $2-3 mlrd v mesjac – jekspert], KURSIV.KZ February 4, 2015, accessed February 5, 2015, http://www.kursiv.kz/news/ details/finansy/ v_kazakhstane_na_podderzhanie_kursa_tratitsya_2_3_mlrd_v_mesyats_564/.

[xiv] Askar Muminov, “Never say Never. Why Sagintaev contradicts the statements by the President about the EEU?,” [Nikogda ne govori nikogda. Zachem Sagintaev protivorechit zajavlenijam prezidenta po EA’ES?], KURSIV.KZ, February 2, 2015, accessed February 5, 2015, http://www.kursiv.kz/news/details/vlast/nikogda_ne_ govori_nikogda_zachem_sagintaev_protivorechit_zayavleniyam_prezidenta_po_eaes _819/.

[xv] Ibid.

[xvi] Ibid.

[xvii] Ibid.

[xviii] Ibid.

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