3.Kazakhstan’s response to Chinese advance

3.1 Shanghai Cooperation Organization and Eurasian Customs Union compared

Shanghai Cooperation Organization (SCO) is one of the world’s biggest regional structures currently consisting of six member states: China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan and having five observers and three dialogue parties. It contains enormous human resources and occupies an area equal to 60% of the Eurasian territory. With observer states included, the SCO accounts for half of the world’s population. Even if in different capacities, it is the only security organization in the world to embrace four major civilizations – a historic feat [20]. What started in mid-1990s as a platform for negotiations between China and Central Asian countries plus Russia on border issues after several years turned into complex international organization dealing with security, economic and political cooperation and scientific and cultural interaction. Despite being relatively young organization SCO quickly consolidated its position in the Central Asia overshadowing other regional structures. The presence of two regional powers Russia and China showed the serious intentions of the organization and also attracted much attention of western countries. For Central Asian governments Shanghai Cooperation Organization is another multilateral platform for solving regional economic and political problems with participation of two main regional actors. The presence of both of them in one structure is very important for Central Asian states for to be sure that there is a balance of power between Russia and China. For Beijing however SCO plays even more vital role. It is the only regional cooperation structure in Central Asia which includes China. Therefore it appears as the only organ for China to build relationships with Central Asian states. And as Beijing has a clear strategy towards Central Asia Shanghai Cooperation Organization is one of the main tools to implement it.

The first factor is security. Initially, in its relations with the newly independent states of Central Asia, Beijing acted solely from its own security interests.

As it is known, the first five to seven years of the 1990s saw a rise in separatist movements in the Xinjiang province. In that context, the Chinese leadership was faced with the task of ensuring the security of the country’s western borders by promoting “moderate” cooperation with Xinjiang’s Central Asian neighbors. Therefore, China deliberately limited its interaction with Kazakhstan and other Central Asian countries to cooperation in sphere of antiterrorism and counter-separatism, which were priorities for it at that time. Trade and economic contacts between the countries’ borders areas were developing spontaneously.

As the PRC strengthened, advanced its economy, and gained international weight, Beijing’s interests in the region also expanded, including its security interests. Today, reading into the U.S. and NATO policy attempts to “encircle” continental China with the aim of “containing” its further growth, the Chinese leadership still sees Central Asia as a key factor in its security. Furthermore, the importance of this factor has grown considerably in the past few years due to the complex geopolitical situation in the region as a whole and China in particular. As the risks and threats intensified, Beijing had to face up to reality: it is impossible to build and advance a viable national security system without factoring in Central Asian.

Its national security interests are compelling the PRC to intensify cooperation through the SCO and to expand its presence in the region. An ideal situation for the Chinese side would be to deepen relations and achieve a level of influence in Central Asian that would enable it to control the overall situation in the region and regulate the principal trends in the security sphere [21].

The second factor is economic, particularly the need of development of western parts of PRC. The adoption of a strategy for large-scale development of the PRC’s western region in the late 1990s marked a significant shift in Beijing’s interests with respect to Central Asia. By that time, Beijing had clearly defined the role of its western region in the process of the country’s general modernization: 12 administrative entities of the western region had started playing a key role in the country’s development. It became evident that unless the country’s leadership managed to lift this vast region (accounting for almost one half of the PRC’s territory) out of depression, that would jeopardize not only the economic but also sociopolitical security of China [21].

China has assigned the Central Asian resources strategic importance in the implementation of its regional development strategy. Indeed, to invigorate economic activity in China’s western provinces, it would be expedient to channel the activity of local producers in the direction of neighboring Central Asian countries, as well as Russia and Mongolia: although they do not measure up to the level of developed economies, they are good enough for China’s western provinces and can effectively stimulate their progress.8 Furthermore, it is rather difficult for these PRC provinces to compete with the enterprises based on China’s eastern coast, which are a general rule oriented toward more developed markets. Therefore, Central Asia and the Russian Federation is the only unoccupied niche for the economy of China’s western provinces [21].

The third factor is energy. As it is known, in 2005, the PRC’s economy consumed more oil than did the U.S. economy. The country’s energy shortage is increasing, and despite special government programs designed to develop domestic extractive sectors of industry, the Chinese economy is becoming more and more dependent on the import of hydrocarbons. And although Beijing does not intend to change the principal routes for oil imports in the foreseeable future, it is increasingly inclined to diversify hydrocarbon sources. Considering that China’s principal oil suppliers are Persian Gulf countries, regional instability, alongside a complex of problems caused by the U.S.’s Middle East policy, is prompting Beijing to accelerate the search for strategic solutions in this area. An additional factor in the invigoration of energy cooperation with Central Asia is the PRC’s aspiration to boost hydrocarbon production by Chinese companies through an expansion of their presence in various parts of the world. The PRC’s choice in favor of Central Asia as a convenient object for the application of Chinese oil producing companies’ resources is only natural.

And the last factor is about geopolitics. Securing the role of a regional center of force in Central Asia will enable China not only to secure its “rear areas” by ensuring the security and development of Xinjiang and other western provinces, but also to deal with outstanding geopolitical problems. Its geopolitical domination in Central Asia will provide Beijing with additional sources for enhancing its strategic power by:

• strengthening military-political security (due to Beijing’s geopolitical domination in Central Asia, sources of potential threats will automatically retreat behind the Caspian Sea, which on the whole places China’s territory beyond the reach of long-range strategic missiles from the west);

• securing extended control over the situation in Central Eurasia (due to its geopolitical domination in Central Asia, China will be able to obtain additional instruments to advance its influence to the Middle and Near East, South Asia, and the Caucasus, as well as to establish control over the situation in Afghanistan);

• gradually ejecting the U.S. from the Asian part of the continent, which would give China additional security guarantees in the event of a conflict over Taiwan (in the long term, the scenario for the ejection of the U.S. looks quite realistic, given the potential for China’s economic influence in Asia: the strengthening of the PRC’s economic influence will inevitably strengthen its political role as well);

• expanding geographic space for its further economic growth (the PRC will have better access not only to post-Soviet but also European markets);

• receiving guaranteed deliveries of energy and other strategically important mineral resources;

securing additional leverage over Moscow, etc.

Nowadays Shanghai Cooperation Organization has 6 members, namely China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan, 5 observer states which are Afghanistan, India, Iran, Mongolia and Pakistan, and three dialogue partners Belarus, Sri Lanka and Turkey. The fifth Central Asian country Turkmenistan traditionally practicing more closed policy decided to stay away from membership, however the country visits SCO meetings as a guest. This means that Ashgabat is interested in the work of organization considering also the fact that Turkmenistan and China have been increasing their cooperation mainly in energy field. Other guests of annual conferences are Association of Southeast Asian Nations (ASEAN) and Commonwealth of Independent States (CIS)

One of the biggest members of SCO and both political and economic partners of China is Russian Federation. It is known that Russia and China are two influential giants of the Eurasia who play in one side in global politics but compete for the status of hegemony in the region to provide own economic and geopolitical security. Russia, as all the post-Soviet states had difficult times and economic crisis during the 90’s, those times China started implementing its development plans, as it has already been mentioned, the tool of implementing Chinese strategies was SCO. China has special interests in cooperation with Kazakhstan as Kazakhstan was the richest and the biggest one in the region. As it was discussed in the previous chapters, China’s presense in Kazakhstan’s economy rose dramatically. Kazakhstan had to support open economy, to establish free trade agreements with the other states, to attract FDI’s in order to escape from the crisis and to develop rapidly. It was very profitable for Chinese growing Economy, and China started to invest into Kazakhstan’s economy. It was also profitable for Kazakhstan in most cases, but it had also negative sides.

1. Chinese production was too large, as a result Kazakhstan’s market was full of Chinese goods, which affected very negatively on Kazakhstan’s internal market..

2. Most of Chinese goods were very cheap and of the lowest quality..

3. China mostly invested into the fuel sector, hydrocarbons extraction , which led to the deeper dependence on oil and gaz production.

4. Chinese Economy is one of the biggest in the world, which means that integration with China is fatal for Kazakhstan.

However, despite all the facts, China is the most important partner of Kazakhstan, and the cooperation between two neigbors are crucial for the future development and prosperity. As a result, Kazakhstan had to find the counterbalance to China, in order to boost cooperatiom without threat of expansion of China. Thus, the only way to reach this aim was integration with Russia, membership in ECU.

The Eurasian Customs Union (EACU) is a customs union which consists of all the member states of the Eurasian Economic Union. It came into existence on 1 January 2010 as the Customs Union of Belarus, Kazakhstan, and Russia (Russian: Таможенный союз Белоруссии, Казахстана и России).[22] The union initially consisted of Belarus, Kazakhstan, and Russia, and was enlarged to include Armenia and Kyrgyzstan from 1 January 2015.[23] The original treaty establishing the Customs Union was terminated by the agreement establishing the Eurasian Economic Union, signed in 2014, which incorporated the Customs Union into the EEU's legal framework.

The Customs Union was launched as a first step towards forming a broader European Union-type economic alliance of former Soviet states.[24] The member states continued with economic integration and removed all customs borders between each other after July 2011. On 19 November 2011, the member states put together a joint commission on fostering closer economic ties, planning to create a Eurasian Economic Union by 2015.[25] On 1 January 2012, the three states formed a single economic space to promote further economic integration.[26] The Eurasian Economic Commission is the regulatory agency for the Customs Union and theEurasian Economic Community.[26]

The creation of the Eurasian Customs Union was guaranteed by 3 different treaties signed in 1995, 1999 and 2007. The first treaty in 1995 guaranteeing its creation, the second in 1999 guaranteeing its formation, and the third in 2007 announced the establishment of a common customs territory and the formation of the customs union.

The political or geopolitical motives prevail over economic ones in recent Russian activism in promoting Eurasian regionalism because it was realised that the country is losing its influence in the post-Soviet geography and the rebuilding of its influence requires ‘an attractive alternative’ for the post-Soviet states.9 Second, the statist position advocates for strong centralised state that would revive Russia’s Great Power status on international arena . For statists, the integration with post-Soviet states is necessary to cement the leading role of Russia in the region and to construct multi-polar world order Statists usually operate with such concepts as ‘multipolar world’, ‘strong state’, ‘state support’, and ‘patriotism’. Third, the civilisationist position views Russia [27}

as distinct civilisation that is usually defined in opposition to the West Civilisationist or civilisational nationalists are reluctant to accept Russia in its current borders and argue for an expansionist foreign policy that will result in the creation of Eurasian/Russian Empire/Confederation at least within the borders of the former Soviet Union The concepts of ‘special path’, ‘Third Rome’, ‘Russian world’, ‘Eurasian civilisation’, and ‘will of nation’ are the conceptual tools often used in the discourse generated by civilizational nationalists.[27]

If to analyze both advantages and disadvantages of the integration we can see that Kazakhstan losses more than gains from the Union. Challenges which Kazakhstan faces are as follows:

. Kazakhstan has become dependent on Russia on issues such as pricing and customs control of goods imported from outside the Customs Union (from third countries, including China). Today, more than 90% of the custom duties consist of Russian import duties. 90% of the revenue from those fees go to the treasury of Russia (“Customs Union: pros and cons”, 3 November 2012).[3] According to the recent reports, the Customs Union has led to more than 20% increase in consumer prices in Kazakhstan. This is because the tariffs in Russia and Belarus are the same, but the tariffs of Kazakhstan have always been much lower. Consequently, Russia's tariffs were applied to 80% of all items of goods despite Kazakhstan’s request to extend this process from five to ten years. Increase in prices affected virtually the entire spectrum of essential commodities in Kazakhstan, including food, clothing, building materials, machinery, household appliances, electrical equipment, office supplies, toys, cosmetics, household chemicals, pharmaceuticals The exports of Kazakhstan to Russia and Belarus are mainly composed of natural resources. Thus, 75% of Kazakh exports to Russia are comprised of two types of goods. The first kind of goods – are hydrocarbons and fertilizers, which make up 56% of Kazakhstan's exports to Russia and Belarus. The second type of goods – are iron ore andmetal products, which account for 19% of Kazakhstan's exports to Russia and Belarus. Country members of the Customs Union do not recognize national trademarks and there are shortcomings in the application of tax legislation in the member states of the Customs Union, the lack of rules in the Agreement on indirect taxes, the different rates of value added tax within Customs Union. The last point is very problematic for the government of Kazakhstan. In Kazakhstan, the VAT is 12%, in Russia the VAT is 18%, in Belarus - 20% [28]

In addition, Russia retains a preferential right to vote in the Customs Union. In the Commission of the Customs Union, while Russia owns 57% of the vote, Kazakhstan and Belarus equally share

the rest. This means that Kazakhstan or cannot make any changes unless approved by Russia. Similarly, 84% of the officials who work for the Customs Union are citizens of Russia, which simultaneously serve the Russian government.[28]

We can see from analysis of M. Assanbayev, that the membership in the ECU is full of disadvantages. However, an official justification of the Union was that it will prevent Chinese economic expansion in Kazakhstan .

There arise the question: if ECU is able to prevent China’s advance in Kazakhstan? Does ECU hurt the Chinese interests? Which of these two organizations is more powerful?

If to look at the value of the trade between China and Kazakhstan since the entrance into the ECU, we will not see decline, it has been steadily rising for all the years.

The value of Kazakhstan’s import from China in 2010 was $ 7.6 bln , in 2013 it reached $ 11.2 bln, and this year were signed an agreement on trade with the value of $14 bln.If to consider the value of the import from Russia during the given periods. We can see that in 2010, it was $7.5 dollars, it is the same with China’s share. After, by 2013 I had risen dramatically to $17bln. If to calculate the share of the market before ECU and after, it is seen, that before the creation of ECU Russian portion was 24 % and by 2013 it increased to 36%. The Chinese share was also 24 % and declined to 22.5 %.The trend was that the import from Russia increased by 229 %, while Chinese imported goods value rose by 49%.As we can see Chinese share of market decreased, even though the total value is rising. This is the result of Common external Tariffs, increased control of the quality of goods and Kazakhtan people’s perception of “Soviet Quality”.However, the total volume and value of the goods will not decrease, it will rise year by year, as it is the part of co-called ‘Globalization” . China is the biggest “world factory”, which produces all the products of the world.

If to consider the export value, In this sector of our economy, China has very significant role. Since the ECU creation, the amount of our export to China rose sharply. In 2009 it was 4 bln $, in 2010 8 billion $, in 2013 it reached 14 bln $, while Russian piece was 5 bln $.Here, we can see that export volume CU didn’t have any impact, because we are extremely dependent on China.Especially, these days, when the price of oil is lower than ever, when Russia is sanctioned by the West, when our country is in a big crisis, our economy needs close cooperation with China.

SCO and ECU . fundamentally, don’t contradict to each other’s principles. Also, ECU doesn’t hurt much China economically, in addition, to some extent it is profitable for China. As the market of Chinese supply became bigger, because of its access to all the CU states through Kazakhstan. ( China’s export to Russia increased from 17.5 bln (2010) to 50.5 bln (2013).

However, the political development of SCO will be restricted, it will be challenged for SCO to compete with ECU. ECU is much more powerful than SCO, as the former is supranational body while the latter is intergovernmental. In other words, how much China will develop economic relations, so much it will benefit, but China cannot take the control of the region.

To conclude it can be stated that the most significant advantage of the Union that is counterbalance to rising Chinese Economic presence within the framework of SCO.

Recommendations: How to escape from the fist of Heavenly Empire?

China’s economic penetration into Kazakhstan is mainly aimed at developing and importing raw mineral and energy resources and comprehensive stimulation of the export of Chinese goods; trade relations are already developing along the lines of “end products in exchange for raw materials.”

The growing dimensions of China’s economic presence in Kazakhstan are giving the country the status of raw material source. China is evidently quite happy with this state of affairs, while Kazakhstan , in turn, has not changed its status..

It would seem that the format of economic relations developing is extremely undesirable , long-term interests since the orientation of China’s economic activity in the region toward the production and export of industrial raw materials will promote resource depletion in the country and regression of the processing branches of industry.

Despite, these facts, China and Kazakhstan are biggest neighbors and partners. China’s role in the economy of RK is crucial. Kazakhstan is in the fist of China, as China is one of the main investors and trade –partners of Kazakhstan.

As it has been discussed in previous chapters, China has invested 22 bln $ in the economy of Kazakhstan, in international relations system with anarchic world order, where every state follows it own interests and seeks for power , it cannot be talked about innocent intentions of China to develop Kazakhstan , money invested by PRC in RK is not for free, this can be considered as the economic tool to control the state. As a result, China will become the main player who dictates its own rules according to its own interests.

However, It has been proven by the experience of rapidly developing countries that FDI’s are the main source of Economic growth. But, there is the one condition, if they are used properly and rationally. There given some recommendation by author in order to escape from the fist of China using their investments.

The Chinese investment are considered to be the biggest threat to Kazakhstan’s economy because they are directed only to the energy sector. To solve this problem the following steps should be made:

1.Chinese investments should be attracted in Agriculture sphere of Kazakhstan. China’s population is rising every year, the demand for food also is increasing. Kazakhstan has comparative advantage on the development of Agriculture.

Agriculture is one of the key sectors of the Kazakh economy. Kazakhstan is the 9th largest country by land mass. More than 74 percent of the country’s territory is suitable for agricultural production, representing 5.5 percent of GDP and employing over 20 percent of the labour force, with 43 percent of the population living in rural areas.

For a country with a long nomadic history, it is not surprising that stockbreeding is the traditional and dominant agricultural sector. The development of agriculture is mutual beneficial for both states.

In order to attract Chinese investments the following tasks must be carried out:

• To identify the problems which have been preventing the development of Agriculture and to find out he solutions of the problems.

• To make detailed analysis of Kazakhstan’s agricultural perspectives

• To make both short- term and long-term plans of future development

• To train the diplomats and brand-managers who can reveal to the Chinese side the opportunities and benefits of the investments into Kazakhstan’s Agriculture.

• To build factories in order to produce final goods from agricultural products.

If Kazakhstan could develop its agriculture it would be able to provide its internal market with food. Also, as Chinese investments were used, it would give opportunities to export to China, the state with the biggest population. Consequently, Kazakhstan would save the budget which it used for import of food.

As a result, money earned by export of agricultural products can be invested in other sectors of economy. In the view of author, the most perspective investments are the investments in Education and Science. In the scientific report of the World bank "Where There Is a National Wealth" (on inspection of 150 countries) urgency of reflection of two blocks, - the social (human) capital - the level of operation of environment is marked out. Preservation and enhancement of the highly educated intellectual environment which got in inheritance is strategic is a competitive advantage in the solution of problems of industrial and innovative modernization of RK. One of the important directions of modernization is mass distribution of new knowledge. Transformation of knowledge into productive force is connected with transition from consecutive process of generation, broadcasting, accumulation and use of knowledge (linearly - diffusion model) to generation and use of knowledge as continuous process. According to specialists of the Organization for Economic Cooperation and Development the main directions of mass distribution of new knowledge are: system of the higher education, research activity, information systems [31]

Agriculture is historical advantage of Kazakhstan, talented and educated youth is the treasure of the state. If to direct Chinese investment to develop these two sectors , it will be the first steps of the development and Kazakhstan and will have positive results in the long term.

2. Multi-vector Policy must be the cornerstone of the Foreign Policy of RK:

There are a lot of argues among the specialists on the disadvantages of the Eurasian Union, on increasing integration between Russia and Kazakhstan. But, Kazakhstan is the country which connects two big powers, two civilizations and two leviathans. Kazakhstan always used and goes on using multi-vector policy to keep a balance. That is why, further cooperation with Russia is very significant for Kazakhstan, as it is the only counterbalance to China in the region. Also, Kazakhstan should go on cooperating with third actors ( the USA, the EU, the Arab World) .

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