In this issue:

1. Kyrgyzstan gives nod to joining Customs Union

3. With new engine plant, Uzbekistan aims at increased localization of its car-making industry

1. Kyrgyzstan gives nod to joining Customs Union (Kyrgyzstan, December 1, 2011-issue 697) BY MARIA LEVINA

BISHKEK (TCA) — “Kyrgyzstan has made the fateful decision to begin the process of joining the Customs Union and Common Economic Space,” Kyrgyzstan First Deputy Prime Minister Omurbek Babanov said at the international conference "Accession of Kyrgyzstan to the Customs Union of Belarus, Kazakhstan, Russia: Advantages and Risks" last week. Babanov stated that Kyrgyz foreign trade turnover with the three countries of the Customs Union over the years has been about 44 percent of the total trade turnover. The export share is 40 percent and the imports share is 47 percent. The largest share of turnover is with Russia (27 percent), then Kazakhstan (17 percent), and Belarus makes about 1.5 percent. In 2010, Kyrgyzstan’s exports to the Customs Union countries amounted to $715.2 million. The rest of the export volume to other countries without gold and oil re-exports amounted to only $304 million. First Vice Prime Minister outlined the most important benefits of Kyrgyzstan’s joining the Customs Union. Kyrgyzstan will be able to import tax-free strategically important goods needed by the Kyrgyz market. In addition, attraction of investments in strategic projects in hydropower, oil and gas industry infrastructure will be simplified. According to the CU Executive Secretary, Sergey Glazyev, investment in Kyrgyzstan will rise considerably once the country enters the Customs Union. Businesses will have to re-equip and modernize their enterprises and improve their efficiency. Kazakhstan has shown results already, said Glazyev. During the year of working in the CU, Kazakhstan’s mutual trade has increased by 41 percent, and trade with Belarus has grown fivefold. Babanov believes that the most important argument in favor of the Customs Union is energy supply without export and import duties within the CU. This will allow Kyrgyzstan to provide stable fuel supply during the spring and fall field work. The participation of Kyrgyzstan in the Customs Union will provide not only duty-free movement of goods and common transport, educational and cultural space, but also free movement of capital, services and labor, creating conditions for sustainable economic development. Cancellation formalities, duties and customs controls at the internal borders of the Customs Union will help reduce the cost of foreign trade activities, and create favorable conditions for the wholesale markets in the country. The population in border areas will be able to purchase products and goods without restrictions. In the case of accession of Kyrgyzstan to the Customs Union and Common Economic Space, migrant workers will be able to travel without limits and enjoy all the social rights which the CU citizens have. Babanov explained that the Agreement on Government Procurement provides for the granting of national conditions for purchasing. Each CU country will provide suppliers of other CU states no less favorable conditions than domestic suppliers enjoy. The Interdepartmental Committee under the Kyrgyz Government is studying all issues of joining the CU. Babanov said, "We hope that our partner countries will support us by certain preference provisions, such as time and procedural breaks, taking into account our obligations under the World Trade Organization." Accession of Kyrgyzstan to the Customs Union may be complicated by the country’s membership in the WTO. In WTO, there are certain customs duties, and if Kyrgyzstan becomes a member of the CU, where customs duties are higher, it will have to negotiate with the WTO members.

Risks

Minister of Finance, Melis Mambetjanov, talked about risks arising from the accession to the CU. First of all, internal customs tariffs should be brought into conformity with the CU tariffs. As a result there will be a rise in prices for imported consumer goods, especially imported from China, because customs duties will be determined not by weight, but according to the value of the goods. However, long-term perspective has more optimistic forecasts. In particular, it concerns investments in Kyrgyzstan for the members of the CU. The Kyrgyz Government has not yet undertaken substantial preparation for the entry in the CU. Kyrgyzstan officially applied for accession to the CU in the spring of 2011. A month ago, Babanov stated that the country is not ready to join the Customs Union by the beginning of 2012, it has to discuss and approve many issues, including the question of the grace period for Kyrgyzstan in certain sectors of the economy. "We must clearly understand that when entering the CU, tens and even hundreds of thousands of people in Kyrgyzstan will remain without work and without means of livelihood," he said. Kyrgyzstan has just given the nod to join, but it is not known how much time the country needs to solve all the related problems.

2. LETTER FROM THE STEPPE: The struggle between bread and banknotes: how to rate raters (Kazakhstan, December 1, 2011-issue 697) By CHARLES VAN DER LEEUW SPECIAL TO TCA

ALMATY — Spotlights have been shining bright over Kazakhstan of late, following “upgradings” of the country by global economic watchdogs such as Moody’s, Standard & Poor’s and Fitch. But rather than being as cheers as cheers could be, governments and civil parties on the spot should take a closer look at arguments put forward by such agencies. Such a closer look could well reveal motivations behind the pranks that are far less to the benefit of the nations involved than by those who seek to abuse the economic position those nations find themselves in. They should be given heed – but not as intended. The signboards put up indicating the proper drinking wells in fact point at the poisoned ones and thereby indirectly indicate where the healthy way to go leads. Following Standard & Poor’s earlier upgrading, Fitch recently followed pace by giving Kazakhstan another prank. “Fitch Ratings has upgraded Kazakhstan’s Long-term foreign and local currency Issuer Default Ratings (IDR) to ‘BBB’ from ‘BBB-’ and ‘BBB+’ from ‘BBB’, respectively,” a media outlet from Fitch divulged on November 21 reads. “The Outlooks on the ratings are Positive. The agency has also upgraded the Country Ceiling to ‘BBB+’ and affirmed the Short-term foreign currency IDR at ‘F3’.” The news starts with a cheer. “Kazakhstan’s sovereign balance sheet has strengthened, with sovereign net foreign assets affording a growing cushion against revenue shocks, and underpinning the Positive Outlook,” the message quotes Charles Seville, Director in Fitch’s Sovereign team, as declaring. “Greater sovereign assets would mitigate dependence on oil revenues and would, as in 2009, provide flexibility to contend with any future terms of trade shocks,” Fitch’s verdict reads. “At a national level, gross external debt is high at 70% of GDP, including borrowing by state-owned enterprises that form a contingent liability of the sovereign. However, given present trends, the economy could become an external creditor by end-2013. Nevertheless, a major commodity price shock that resulted in a weakening of the sovereign balance sheet could prompt a negative rating action. Given a CAGR of 9% in oil output over the past decade, added to rising prices, Kazakhstan’s ability to adjust to a severe and prolonged revenue shock has not been tested.” CAGR stands for Compound Annual Growth Rate – meaning net gains on returns from gross capital input. Over a 10-year period, the ratio of the ending value to beginning value has to be raised to the power of 1/10, then subtracting 1 from the resulting number in order to get the right amount, economics handbooks explain. In the case at hand, it comes down to the sobering conclusion that while oil remains an overwhelming factor in national income, Kazakhstan’s net economic gain on it stands at a ration of less than 1 to 10 to overall economic growth. A rift in oil markets that would cut more than skin-deep into the economy is therefore still capable of causing major havoc for the country. The perhaps biggest erroneous element in assessors’ reports is putting up cash as a tangible asset. The terrible truth is that cash is as non-tangible as non-tangible could possibly be. Bread is tangible; the banknotes that cause its speculative surplus value are not. The more bread is being baked, the more artificial value banknotes will lose. This reduces retail prices, and increases income purchasing power – the last thing, apparently, the likes of Fitch and those in whose service they propagate would like to see. To put it simply: growth in income’s cash value is supposed to be a leading prosperity indicator. It is all untrue: if people’s cash income increases by 20 per cent on-year and what they can buy for that money decreases by 40 per cent, people will simply starve. The rest is a formidable chain of lies. It is with little other aim than to keep people credulous and the lies looking credible that misleading pseudo-economics keep being trumpeted in the judgments and counsels coming in avalanches from these formidable propaganda machineries. “At 37 per cent, non-performing loans are among the highest in the world and are concentrated in institutions under state control,” Fitch’s report on Kazakhstan reads. “The state has the resources to step in and restore banks’ balance sheets where necessary. Otherwise, incremental reforms to encourage loan write-offs, and the slow growth in banks’ balance sheets should gradually reduce the scale of contingent liabilities.” This puts up the laborious task for governments working for communities in places like Central Asia to choose the side of the people they work for in the first place and minimize rather than maximize the impact of cash value on the value of the tangible assets they have under their historic control. Within the current global macroeconomic framework, assets and liabilities are communicating tubes. The more assets you lose, the more liabilities you receive and paying up for those liabilities will always cost more than the asset value you leverage it against. This leads to the rather shocking conclusion that attracting investments, such a popular slogan in the region these days, makes you lose asset value while liabilities are piling up at the expense of host nations. It is therefore that the best thing to do for countries in Central Asia is rather than to start purring beneath each and every pat on the head is to take the pat as a warning that they are most probably on the wrong track if they follow directives that can only result in loss of intrinsic asset value. In other words: sit on your oil in the case of Kazakhstan, on your gas in the case of Turkmenistan, on your gold in the case of Kyrgyzstan. These have value one can grasp, whereas cash puts you at the mercy of people few among whom have appreciable intentions.

3. With new engine plant, Uzbekistan aims at increased localization of its car-making industry (Uzbekistan, December 1, 2011-issue 697) By Dilshod Ashurmatov

TASHKENT (TCA) — The GM Uzbekistan Powertrain joint venture in mid-November commissioned the plant producing automobile engines. Experts believe that the Uzbek car-making industry needs modern engines, but the joint venture will have difficulties with the localization of production. In May 2007, when General Motors first declared its plans to create a joint production of automobile engines in Uzbekistan, the company signed a strategic cooperation agreement with the Uzbek government. Then, the management of Uzavtoprom (Uzbekistan’s state-controlled automobile company) said that the investment in the project will be comparable to investment in its automobile plant in Asaka (Andijan region), and engine production in the country will bring the localization level of the automobile industry to 80%. In December 2008, Uzavtoprom and GM signed the agreement to establish the GM Powertrain Uzbekistan JV with an authorized capital of US $100 million. GM owns 52% stake in the company, and Uzavtoprom owns 48% stake. The project, worth $522 million, was financed through Uzavtoprom ($298 million), loans from Uzbek banks ($157 million), a loan from Uzbekistan’s Fund for Reconstruction and Development ($15 million) and direct investment from GM Powertrain JV ($52 million). The joint venture will produce engines of 1.2 and 1.5 liters. The design capacity of the plant will be 225,000 engines per year, with the first engines produced at the plant to be installed in Chevrolet’s Spark. In 2012, the estimated production volume will be 40,000 engines, and in 2013 it will reach 205,000. The plant may reach its full capacity in 2014. “It was originally planned to produce 360,000 engines,” said Jurgen Spendel, Director General of GM Powertrain Uzbekistan JV, “but today the market needs 220,000-225,000 engines.” A local plant, producing engines, is the main hope in the implementation of the localization program. With the launch of the plant, the localization level in the automotive industry may grow from the current 53% to an estimated 82%. “Our estimation suggests that the engine, assembled in Uzbekistan, will have cost advantage of 15-20% in comparison to the Korean or Indian counterparts,” said a representative of Uzavtoprom, who asked to be unnamed. However, according to some experts, Uzavtoprom needs a plant to manufacture modern engines that meet international standards, but with the localization of production and lack of quality components, this might cause a problem. As part of the development program of the automobile industry of Uzbekistan for 2011-2015, Uzavtoprom estimates the total cost of the automobile industry development in the country to be $1.38 billion over the next five years. Of which, $444 million will be invested in the expansion of companies producing new component parts. "Today, the plant produces only one engine component - the cylinder head,” said an analyst Ilkhat Tushev. “All the rest is supplied by the partner companies. Even sand to fill the mold is delivered from the U.S.” It has recently become known that Uzavtoprom in 2012-2015 will establish a molding production for GM Powertrain Uzbekistan worth $50 million. The project includes the establishment of a production facility producing cylinder blocks and other cast iron pieces for automobile engines using casting. The project will be financed through Uzavtoprom’s funds worth $15 million and loans from Uzbek banks ($35 million). The project is really necessary for the engine production plant. In early 2012, Uzavtoprom will determine the production site to run the project and enter into negotiations with manufacturers of equipment and tooling. However, Uzbekistan does not produce cast iron, and foreign contractors will be required to run it, hence, the project’s cost will increase. “It is difficult to produce cheap engines in Uzbekistan,” said an analyst Anvar Jumayev. “Here, we have a reverse situation: now we have got capacity and technology, but there is a shortage of raw materials and human resources.” Natalia Zagvozdina, an analyst at the Renaissance Capital, shares the same opinion, saying that "The project is very promising, but the production of engine components in Uzbekistan is now less profitable than assembly of other automotive components.”

For further information: The Times of Central Asia