Economic Relations between Kazakhstan and Russia

mining industries.

From the beginning of 1995, steadily increasing numbers of enterprises

were turned over for administration. Toward the end of December 1995,

external administration was introduced at some 20 major industrial

enterprises in various sectors. The necessary legislative basis was created

for the involvement of foreign capital in Kazakhstan.

Thus the implementation of economic policies in 1992-1995 in Kazakhstan

resulted in the liberalization and openness of the economy and the

expansion of private enterprise.

There were significant shifts in the market infrastructure. Trade and

the banking sector developed rapidly, and other financial institutions were

born - in other words, there was, progress in those spheres of the economy

that had previously; been underdeveloped but that were vital for the

functioning of the market economy.

The liberalization of foreign and domestic trade resulted in a slight

reduction of export in 1994 and early 1995 compared to the decline in the

volume of GDP. The export of commodities, mostly to CIS countries, amounted

to $13 billion in 1994 and $4.97 billion in 1995. The greatest share of

exports went to the Russian Federation — 47 percent, or $1.4 billion's

worth in 1994; in 1995, the exports amounted to $2.8 billion, including

$2.1 billion to Russia.

Russia's share in Kazakhstan's imports from CIS countries at the

beginning of 1995 was the largest - 70 percent; Turkmenistan's, 10 percent;

and Uzbekistan's, 9 percent. Of considerable significance is the fact that

more than 50 enterprises securing Russia's defense interests work on

Kazakhstani territory. All principal roads of Russia leading east and

southeast, Yuzhsib and Transsib railways included, pass through Kazakhstan.

Major Russian high voltage power lines, communications lines, and pipelines

are also connected with Kazakhstan.

As before, Kazakhstan's exports to Russia are raw materials, oil and

petrochemical products, as well as products of ferrous and non-ferrous

metallurgy.

Deliveries of ferrous metals (35.2 percent), copper and items made of

copper (15.1 percent) make up a considerable share of exports. Russian

enterprises are also the main consumers of Kazakhstan oil and petroleum

products, which amount to 40 percent of the exports of mineral products.

In 1994, Kazakhstan's imports of industrial and technical goods and of

consumer goods from the far and near abroad amounted to $3.4 billion; in

1995, the figure was $3.7 billion. The largest share of imports fell on

Russia - $1.3 billion and $1.8 billion respectively. Imports from Russia

covered 30 percent of the demand of households and the republic's

enterprises for raw materials, 70 percent of the demand for industrial

manufactured products (including 90 percent of the demand, for complex

household appliances), and more than 70 percent of the * demand for

products of the chemical and timber industries. Kazakhstan's imports from

Russia are dominated by electric; machines, equipment, mechanisms, and,

transport vehicles. Their share in over imports amounts to 70-percent.

There are also imports of considerable amounts of raw materials for the

foodstuffs industry and the foodstuffs themselves (10.2 percent), mineral

products and metals (10.1 percent), and other consumer goods (7.8 percent).

More than half of imported mineral products and non-ferrous metals come

from Russia.

The share of deliveries against convertible currency in the export-

import operations between Kazakhstan and Russia amounted to 6.5 percent of

the total volume of exports; the share of baiter operations was 32.6

percent; and the share of clearing and similar operations, 60.9 percent. In

this process, baiter deals did not as a rule result in a balanced and

equivalent exchange. Analyses of export-import barter deals in 1993-1995

shows that total exports were twice as large as imports of commodities. As

a result of these operations, considerable funds of Kazakhstan Commodity

producers annually stay in Russia.

On the whole, the results of economic development show that the

republic was close to achieving macroeconomic stabilization, that the

impact of market incentives increased, and that a new system of reference

points and motivations developed. The main problems of the critical period

of development were partially solved, but new ones emerged.

Harsh monetary and credit policies, liberalization of the domestic and

foreign markets promoted the formation in the republic of market mechanisms

for the regulations of the economy and for ensuring equal possibilities and

guarantees for all the agents of economic activity. In this situation the

possibility appeared of creating a common economic space covering

Kazakhstan and Russia, in which free circulation of commodities, capital,

and labor would be made possible.

The development of Kazakhstani-Russian relations between 1991 and 1995

showed that the two states adopted a great many documents covering a wide

range of economic issues.

The implementation of these agreements created favorable conditions for

establishing economic links between economic agents and for the development

of a common market that would be advantageous for the economic interests of

both Kazakhstan and Russia.

The relations between the two countries in the economic sphere

developed, against the background of improving multilateral cooperation:

within the CIS framework. The legal basis for this, process was the treaty

on the jetting-up of the CIS Economic Union signed on September 24, 1993.'

This document proclaimed as the main goal a voluntary, stage-by-stage re-

creation, on new, market principles of unified economic space, or common

market, with free circulation of commodities, services, capital, and labor.

On the basis of the treaty, a solid legal groundwork was created. On

October 21, 1994, an interstate economic committee was set up at a-session

of the council of CIS heads of state, and a memorandum on the main

directions of integration development of the Commonwealth of Independent

States was signed. These documents envisaged a stage-by-stage formation of

a customs union and the possibility of movement of different countries at

different speeds toward a unified economic space within the Economic Union.

A characteristic feature of the situation in the CIS is universal

recognition of the need for stepping up integration processes in the

economic interaction of CIS countries. It should be noted that, among CIS

countries, economic relations were most intense between Russia, Kazakhstan,

Ukraine, and Byelorussia, with 80 percent of commodity circulation within

the CIS taking place within these countries.

One of the basic documents on economic integration was an agreement on

a customs union between the Russian Federation, the Republic of Kazakhstan,

and the Republic of Belarus.1 Let us recall that on January 20, 1995 the

presidents of Kazakhstan and Russia, in their joint declaration on the

expansion and deepening of Kazakhstani-Russian cooperation, instructed

their governments to sign an agreement on the customs union. The heads of

governments of Kazakhstan, Russia, and Belarus signed this document.

The formation of the customs union was preceded by extensive

preparatory work aimed at harmonizing the legislative systems of the two

countries. A number of governmental and interdepartmental agreements,

protocols, and joint normative acts were signed, including those on free

trade, on a unified procedure for regulating foreign trade, on the re-

export of commodities, on the introduction of a unified procedure for non-

tariff regulation of trade with a coordinated nomenclature and volumes of

licensed and quoted commodities, on the establishment of a free trade zone,

on the unification and simplification of customs procedures, on

collaboration between customs services, on combating illegal drugs

trafficking, on the terms of maintenance of military facilities on the

territories of the two sides, and on joint security measures for the

protection of the external borders of the Customs Union. These agreements

covered a sufficiently wide range of issues, and they formed the basis for

further action.

The agreement on the setting up of the Customs Union was based on the

principles of unified customs territory of the member states of the Customs

Union and the existence of a uniform mechanism of economic regulation. It

is proposed to form the Customs Union in two stages. At the first stage,

tariffs and quantitative restrictions on mutual trade are lifted that are

envisaged in the agreement on a unified procedure for regulating foreign

trade activity of April 12, 1994; fully identical systems for regulating

foreign economic links, identical trade regulations, common customs tariffs

and non-tariff measures for regulating relations with third countries are

introduced. At this stage, work is envisaged on the unification of

legislation on foreign trade, customs, currency, finances, tax, and of

other laws bearing on foreign trade activities.

Agreements on the Customs Union envisage the possibility of

introduction of coordinated time restrictions on mutual trade in case of

shortages of commodities on the domestic market, acute payment deficit, and

other circumstances.

The countries assumed the obligation to establish unified control over

their customs organs and organize joint supervision of the movement of

commodities and transport vehicles on the borders. The procedures for such

supervision are regulated by agreements between the customs organs of the

states involved.

The agreement on the Customs Union is open to all other CIS member

states that will recognize the provisions of the agreement and express a

readiness to fulfill them in their entirety.

The joint statement was in effect an agreement on coordinated moves for

further realization of economic reform and creation of a uniform mechanism

for regulating the economies based on market principles. It set the task of

unification of legislation on foreign trade, customs, currency, finances,

prices, taxes, and other economic laws ensuring free development of

production links and of enterprise, as well as equal possibilities and

guarantees for economic agents of the three states.

In that document, the heads of the governments of the three states

noted the considerable progress in the creation of possibilities for a real

formation of a customs union on the basis of agreements and protocols

signed. The sides agreed that tariff and quantitative restrictions on

mutual trade will be lifted through the setting up of fully identical

systems of regulation of external economic links, unconditional guarantees

for effective joint protection of the external borders of the member states

of the Customs Union, and establishment of identical trade procedures,

common customs tariffs, and measures for non-tariff regulation with respect

to third countries. It was stressed that the development of foreign

economic links will be promoted by the stage-by-stage formation of a

clearing union to ensure continuous clearing on the basis of mutual

convertibility of national currencies and formation of an effective payment

system.

An agreement was reached to render state support to the development of

direct links and cooperation between enterprises, to the establishment of

financial-industrial groups, formation of favorable conditions for mutual

access and protection of investment, and acquiring real estate,

Measures were outlined for the formation of a common

scientific/technological space for a more rational utilization of the

available intellectual, scientific, and technical potential.

State delegations headed by deputy heads of governments take part in

regular monthly sittings of the commission. These sessions consider the

implementation of agreements, analyze the state of affairs in the practical

formation of the customs union, and coordinate joint measures.

At the same time each side set up its own national sections of the

intergovernmental commission on the customs union. Five groups were set up

in the framework of each national commission to cover the following areas:

1. Creation of the Customs Union. Solving tasks in the realization of a

mechanism for the establishment, of a. free trade zone; working out

normative acts for the unification of currency, financial, and general

legislation; preparing proposals for the introduction of unified procedures

for foreign trade regulation and an identical customs tariff, for

coordinating a unified procedure of customs control, for working out an

agreement on unified management of customs services, and so on.

2. Harmonization of legislative systems to coordinate the legal basis

of agreements with agreements already achieved and to eliminate

discrepancies in the economic legislative systems of the states, and to

solve other issues.

3. Realization of the provisions of treaties; of friendship,

cooperation, and mutual assistance; preparation of draft agreements and

documents on freedom of movement, citizens' legal status, conversion,

mutual debts of enterprises, and on military cooperation.

4. The development of production and enterprise. Taking coordinated

measures for economic reforms, preparing agreements on scientific and

technological cooperation, investment activity, state support of

enterprises participating in joint financial-industrial groups.

5. In the area of finances and payment relations: the organization of

work on providing regular quotations for the national currencies, on the

setting up of a network of currency exchange points, on concluding an

inter bank agreement on mutual access to domestic markets of authorized

banks, on working out a common mechanism for currency regulation and

control, on unification of taxes and their size, on the methodology of

price formation, and so on.

Practically all issues have been resolved in. the framework of the

three countries on non-tariff regulation of foreign trade activity; work

on the unification of normative legal acts in this area has been

completed. The partners came to an agreement on the procedure for

registering contracts on exports of strategically important commodities.

Work is being completed on the establishment of unified operation

modes in trading with countries and on re export of commodities.

Apart from bilateral agreements, the Customs: Union also relies on a

number of multilateral agreements and conventions adopted by the CIS

Countries, including The Foundations of Customs Legislation, A Unified

Methodology for the Customs Statistics on Foreign Trade, On the Movement of

CIS Countries' Citizens Through Their Territories Without Visas, On

Guarantees for the Rights of Individuals Belonging to National Minorities,

On the Establishment of a Unified System of Air Defense of CIS Member

States, and On Legal Aid and Legal Relations in Civil, Family, and Criminal

Cases.

Thus the main principle on which the Customs Union is founded is the

existence of a unified customs territory and a uniform mechanism for

regulating the economy, based on unified legislation.

Toward the end of 1995, significant changes occurred in the trade and

economic relations of Kazakhstan and Russia. The agreement was revised on

trade and economic relations; the emphasis was made on the development of

direct links between producers, which resulted in a considerable increase

in the exchange of products. In 1995, trade between Kazakhstan and Russia

amounted to $319 billion, or 54 percent of the total volume of the

republic’s trades, an increase of 55.4 percent on the same period in the

previous year. Exports amounted to $2.1 billion, which made up 42 percent

of the total volume of Kazakhstan export; exceeding the 1994 figures by a

factor of 1.5. Imports reached the $1.8 billion mark, or 49 percent of all

imports, exceeding the 1994 imports by 66 percent.

Work on the formation of the Customs Union can thus be seen as one of

the main achievements in the field of economic integration of Kazakhstan

and Russia. A breakthrough was achieved in the establishment of a common

market. The three countries established a unified customs zone and

eliminated controls at their internal borders. Close businesslike links

were established between the customs services.

The Customs Union brings tangible results to each of its members. The

overall volume of trade between the CIS countries outside the Customs Union

continued to fall, while the lifting of custom barriers enabled Kazakhstan,

Russia, and Byelorussia to considerably increase commodity circulation.

In October 1995, the heads of the governments of Russia, Kazakhstan,

and Byelorussia issued a joint appeal to the governments of CIS member

states to join the triple union. Running somewhat ahead of the story, let

us note that in March 1996 Kyrgyzstan joined the customs union.

At the same time progress in the development of bilateral economic

relations is checked by a number of problems, notably by chronic nonpayment

of mutual debts. Kazakhstan's debt for electric power received from Russia

grew almost threefold in 1995. In turn, Russia owed a large sum to

Kazakhstan for the coal from Ekibastuz.

Serious possibilities are sometimes missed for successful cooperation

between enterprises in the fuel and energy complex, in metallurgy, and

other branches of the economy of Kazakhstan and Russia. Close production

links became established between the Orskneftegazsintez JSC and the

Aktyubinskneft JSC, which form the Orenburg JSC. Early in 1995, the

management of these associations conducted mutual consultations and decided

that a joint oil company must be set up.

In Russia, the formation of financial-industrial groups went on at an

increasing pace. The results of their work in 1995 show that integration of

industrial and banking capital had a positive impact on economic

development.

Further effective economic cooperation between Kazaklistan and Russia

calls for systematic analysis and work on a mechanism of control over the

implementation of bilateral Kazaklistani-Russian treaties and agreements.

The following tasks should in our view be singled out in the field of

economic cooperation between Kazaklistan and Russia that are of mutual

interest and call for coordinated decisions of the governments:

a) Stabilization of export of raw materials and subsequent increase in

it as a basis for the growth of currency earnings for the

modernization of production;

b) Diversification of exports;

c) Additional currency and investment resources for restructuring the

economy;

d) Support for active trading policy on CIS countries' potential

markets;

e) Moderate protectionism in relation to newly created import-replacing

production lines.

Under these conditions the two countries will have to solve new

problems in economic integration in the framework of the Customs Union and

in the system of world economic links, in searching for additional

financial resources necessary for the implementation of economic

restructuring and their balanced growth, in defending the interests of the

domestic market from unfavorable conditions in the world economy and from,

foreign competition at the stage of stabilization of their economies.

In choosing a promising export and import specialization, Kazakhstan

and Russia should give preference to commodities that are least susceptible

to market fluctuations. To achieve this, it is necessary to conduct regular

analysis and forecasting of the situation on the markets for the principal

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