Kazakhs find uneven playing field in Russia's trading bloc

Many Kazakh businesses have felt the effects of Russian competition

Kazakhstan is holding a snap presidential election, with the state of the economy posing a major challenge to the incumbent, Nursultan Nazarbayev. As the country deals with the impact of the global economic crisis, its efforts at economic integration with Russia are proving particularly difficult.

At the beginning of this year Russia and Kazakhstan, together with Belarus, launched the Eurasian Economic Union with great fanfare. But already this integration project, which is supposed to open borders and ensure free movement of goods, is facing restrictions and import bans.

In the past couple of months, Kazakhstan's committee for protection of consumers' rights has seized Russian products for "not meeting technical regulations".

Among them were five tonnes of poultry meat and two and a half tonnes of milk. Kazakh authorities also removed Russian mayonnaise, chocolate, butter, cheese, yogurt, beef, sausages, canned meat and other products from the shelves.

In response, Russian authorities refused to let nearly 60 tonnes of Kazakh cheese enter its territory last week. Russia's consumer watchdog also seized Kazakh dairy products for "not meeting quality and safety requirements".

Russian media called it a "trade war". But Kazakh officials claim that they are targeting only those producers who violated the regulations. They say their actions are not part of any policy to contain Russian imports.

Cars are among the goods that have been cheaper in Russia for Kazakh consumers

For countries that just joined an economic union, this must be a very embarrassing situation.

So what went wrong? The fall of the Russian rouble in 2014, when it lost more than half its value against the US dollar, simply made Russian goods much cheaper than the Kazakh ones.

Russian products flooded Kazakhstan, pushing local producers out of the market.

Although officially Russian imports to Kazakhstan are declining, there is a "substantial growth of grey trade and the increase of shadow turnover" since there are no customs at the border, says Rakhim Oshikbayev, deputy chair of the National Chamber of Entrepreneurs.

Since people do not pay customs duties, buying a car in Russia became much cheaper than getting one locally. Kazakh consumers clearly benefited from this but the Kazakh car industry suffered significantly.

According to the Kazakhstan Auto-businesses' Association, the sales of cars in the country dropped by 40% in January this year. Production of cars in Kazakhstan also declined by a third during the first quarter of 2015.

According to the National Chamber of Entrepreneurs, a new regulation is being finalised, stipulating that only those distributors who have a special license will be allowed to import cars.

Despite the trade disputes, Kazakhstan remains one of Russia's main allies

The Association of Poultry Producers say that about 10,000 tonnes of poultry meat remain in stores because they cannot compete with prices Russian producers offer.

"Chicken and eggs are perishable products and we need to sell them every day," says Ruslan Sharipov, president of the Association of Poultry Producers. "All small farms are under threat of being closed. Big ones will have to cut their staff by half to survive."

'Imaginary advantages'

Kazakhstan's National Chamber of Entrepreneurs has listed 30 goods, ranging from flour and milk to pipes and construction materials, for which it has lobbied for import restrictions.

In March, the import of petroleum products from Russia was temporarily banned.

But Vladimir Osakovskiy, chief economist for Russia and CIS at the Bank of America Merrill Lynch, believes that the existing problem can be solved if Kazakhstan devalues its currency.

He argues that the current rate of the Kazakh tenge is too high and needs to be adjusted, since the price on Kazakhstan's main export commodity - oil - has dropped significantly, as have the values of currencies in neighbouring states, particularly Russia.

Mr Osakovskiy estimates that the currency needs to be devalued by 30%, then "the gap in prices on the same goods from Russia and Kazakhstan can be closed.

"As a result the flow of consumer goods from Russia will decline and there will be no need to use administrative restrictions on Russian imports."

He claims that the current restrictions are only a temporary measure and will not affect the economic integration between Russia and Kazakhstan.

Experts say some of Kazakhstan's economic problems are due to its currency being overvalued

But Kazakh entrepreneurs say that the difference in the currency rate is only part of the problem.

According to Mr Sharipov, the Eurasian Economic Union creates unfair competition because entrepreneurs in the member states are not in equal positions.

He says that the government of Belarus subsidises 18% of costs in the poultry industry, in Russia it is 6.4% and in Kazakhstan it's 4.8%. "And we also import our feed, medicine, equipment. Russia has them all," Mr Sharipov adds.

Gaziza Shakhanova, a managing director at Kaznex Invest agency, argues that Moscow is prioritising its domestic interests and "containing competition from Kazakhstan using financial and non-financial leverages".

Mrs Shakhanova suggests that Kazakhstan needs to protect its businesses too.

"In its race for imaginary advantages of the Eurasian Economic Union's market, Kazakhstan may lose its domestic market."