Inside the EAEU: Year One

Were it not for the situation in Russia, the answer would be simple: not at all. Kazakhstan already had a fairly high volume of trade with Russia, conducted duty-free, while trade with Belarus is negligible, and any change in it will have no particular impact on the economy. But the sanctions against the Kremlin, the retaliatory countersanctions and the uncertainty over the ruble exchange rate will undoubtedly play a serious role.

Let us consider two of the many possible scenarios for 2015.

1. The sanctions and countersanctions regimes remain in place, the ruble stabilizes, and inflation in Russia exceeds 10%. In these circumstances, Russian imports into Kazakhstan will decline, because Russia will have to make up for the losses in its own imports. Kazakhstan will have to replace the lost Russian imports with supplies from third countries, possibly at higher prices, which will put inflationary pressure on the domestic market. This scenario can be expected to play out in the second or third quarter, once the 2014 stock has been used up.

Another factor pushing prices up will be growth in exports of agricultural and food products to Russia. Overall, trade between Russia and Kazakhstan will stop growing or may even decline.

2. The sanctions and countersanctions regimes remain in place, the ruble continues to fall, and inflation in Russia exceeds 15%. If the ruble falls faster than inflation rises, imports from Russia into Kazakhstan will increase, primarily through shuttle trade in the border regions. This will put deflationary pressure on Kazakhstani consumer goods, hurting our domestic producers. This scenario was observed in the fourth quarter of 2014 and the first quarter of 2015.

The Russian "exchange rate–inflation" scissors will prove a barrier that is hard to overcome for Kazakhstani exports to Russia, both goods and services. On the other hand, capital flows from Russia to Kazakhstan will intensify. The negative net migration balance will shrink rapidly. The launch of the Eurasian Economic Union (EAEU) will not affect Kazakhstan's trade relations with other countries, unless, of course, Russia drags us into its trade wars.

The real problem is that Kazakhstan has exhausted, or is close to exhausting, its sources of economic growth, and this will have a greater impact on foreign trade than the EAEU.