Kazakhstan: Russia Worries that Customs Union Outpost is Smugglers’ Paradise

By Richard Orange

A line of 150 trucks waits to enter Kazakhstan. It takes so long to clear customs here that each rig usually only makes two round trips a month. And yet, contrary to appearances, documentary discrepancies suggest the checkpoint is a smuggler’s paradise.

Welcome to Khorgos, soon to become Russia’s new trade border with China.

On July 1, the checkpoint, 360 kilometers from Almaty, Kazakhstan’s commercial capital, will cease to be the gateway through which China exports a trickle of goods only to Kazakhstan's 16 million citizens. Instead, it will become Beijing’s main point of entry to the world’s largest customs union by area, stretching from Brest, near Belarus’ border with Poland, right through to Vladivostok in Russia’s Far East.

On that day this summer, Russia is scheduled to close down all checkpoints along its borders with Kazakhstan and Belarus, allowing free movement of goods between the countries, and giving Chinese exporters, via Khorgos, easy access to a market of 170 million people.

“Nobody knows what the increase in customs flow will be because of the Customs Union, maybe more than triple; it could be five times,” says Alexander Beisembiyev, president of Silk Road Logistics, which is building a warehousing and truck unloading facility at Khorgos.

What is certain is that as Khorgos stands soon to become a gateway to the Russian market, Moscow is demanding big changes in how it operates.

A study completed in 2008 for an international firm seeking to invest at Khorgos identified a glaring discrepancy. According to the Kazakh customs’ statistics, 3,000 trucks passed through Khorgos from China to Kazakhstan in 2007. Yet, Chinese customs authorities put the figure at 36,000 trucks. The difference, the firm concluded, was rooted in black market activity.

These days, when Russian Prime Minister Vladimir Putin talks to his Kazakh counterpart, Karim Massimov, containing black market trade is one of the toughest negotiating points.

“This is a very big issue. Putin is talking about this every time he's meeting with Massimov,” said a Kazakh businessman in the logistics industry, speaking on condition of anonymity out of fear of government reprisals. “Russians will not allow a single [black-market] truck to enter Kazakhstan, because by coming into Kazakhstan, they now also enter Russia."

Russia's anxiety is understandable. If everything goes according to plan, as much as 80 percent of the goods that cross the border at Khorgos will be destined for Russia. To make sure it gets its rightful share of revenue, Russia is now even pushing to post its own border officials at Khorgos.

Alexander Korsunov, a press officer at the Customs Union headquarters in Moscow, says the issue, which includes proposals for a joint-border force, will be a central topic of discussion at the Customs Union’s next official meeting at the end of February.

Kazakhstan's Ministry of Industry and Trade hopes to harness the Customs Union to spur the development of the country's manufacturing sector by setting up a 6,000-hectare Special Economic Zone (SEZ) at Khorgos. The idea is that international companies will set up factories, drawn by the prospect of producing “Made in Kazakhstan” goods with tariff-free access to the Russian and Belarusian markets.

“A Chinese factory from Urumqi will be able to build a factory in the SEZ,” explained Askhat Mukhamediev, director of the Khorgos center. “Goods which come from China will be brought into the SEZ in the form of raw materials. It will be produced in the SEZ, and exported under the brand ‘Made in Kazakhstan.’”

A new bill, presently under consideration in Kazakhstan’s parliament, would, if adopted in its present form, make it easier for temporary foreign workers to be employed in the SEZ. Russia is uncomfortable with this idea. It wants a clause added to the Customs Union regulations specifying that at least 50 percent of the value of such “Made in Kazakhstan” goods must be created on Kazakh soil. Kazakhstan wants this reduced to 30 percent.

Arguably, though, Russia’s revenue-related pressure is less of an immediate problem for Kazakhstan that is own slow progress in building the required infrastructure.

A half-finished new checkpoint is all that has been built so far at the International Center of Boundary Cooperation at Khorgos. Eventually, the $2.5 billion project is supposed to include a trading exhibition zone, seven high-rise hotels, an airport, a tourism and entertainment zone, and an ethnographic park. China finished its own, much larger, International Center of Boundary Cooperation several years ago. On April 1, the two countries are scheduled to begin a new four-lane bridge crossing the river that marks the border.

The hope is that, from July 1, Chinese trucks will be able to cross the bridge, and transfer their goods to Kazakh, Russian, or Belarusian trucks, without drivers from either side needing a visa. Ideally, Kazakh or Customs Union officials will be able to check goods and charge duty at the same time as they are being transferred between trucks at the warehouse. If this succeeds, a truck will be able to make a return journey in just one day.

So come July 1, that queue of 150 trucks should disappear, along with their two-week wait at the border. But work has yet to begin even on the $1 billion four-lane toll road between Khorgos and Almaty, let alone on far longer stretches to Astana, the capital, and beyond.

Any trucks will still face a long journey before they can get their goods across Russia's newly open borders and take advantage of the Customs Union.
Editor's note:  Richard Orange is an Almaty-based journalist specializing in Central Asian affairs.