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Is Eurasian Union Protectionism Right? Kyrgyz Used Car Market to Decline

One negative consequence of Kyrgyzstan joining the Russia-led Eruasian Economic Union will be the higher cost of cars. Would the EEU be better off with low import duties?

This article originally appeared at Business New Europe

The sun is setting over Kyrgyzstan’s once-thriving used car market as the country raises customs duties as part ofentry into the Eurasian Economic Union (EEU). Imports of used cars plunged in the first two months of the year, and once the huge stock of vehicles imported before the tariff hike is exhausted, dealers will have to adjust to the new reality.

Total car imports fell to 383 vehicles in January and February, according to figures from the State Customs Service. That is just a fraction of the over 13,000 cars imported in the same period of 2014, the State Customs Service figures show.

“[The plunge] is directly related to the increasing customs duties and it’s mostly used cars [that were affected], whereas the only cars that still got imported were new vehicles,” Nurbek Tursunbayev, head of a local association representing the car business, tells bneIntelliNews.

The Kyrgyz car market has prospered for years thanks to extremely low customs tariffs. Car dealers used to import thousands of second hand vehicles every month, luring bargain-hunters from all over the region to the open car markets in the outskirts of the capital city of Bishkek or other major cities.

Yet things are quickly changing as the country committed in December to joining the Russian-led Eurasian Economic Union (EEU). Launched in January on the foundations of the Customs Union of Belarus, Russia and Kazakhstan, the EEU aims at establishing a common market in the former Soviet space. Armenia already joined the three founding states to become a new member of the common market on January 2. Kyrgyzstan is expected to follow suit in May, but the country has already had to give up its historically low customs tariffs as part of the preliminary adjustment required to give preference to EEU manufacturing.

Customs duties for passenger vehicles older than 10 years, which used to make up around 60% of annual total imports of used cars, grew to 2.6$ per each cubic centimeter (cc) on January 1, 6.5 times higher than the previous 0.4$/cc. Today, duties on an 11-year old, 2,000cc car amount to $5,200, up from $800 in 2014. Tariffs vary depending on the vehicle’s age and power, but they will all be subject to a $0.5/cc annual increase until 2019.

As customs duties for the oldest vehicles likely exceed the vehicles’ market value itself already, car dealers have to adjust lest they go out of business. Yet they gained some time by accumulating a large stock of used cars before the new tariffs fell through on January 1.

“There are over 100,000 used cars on sale across the country. That is enough to cater to the local market for the next five years,” Tursunbayev said. Total car imports amounted to 111,524 vehicles in 2014 alone, according to figures from the State Customs Service.

But once the accumulated stock of vehicles is gone for good, Russian cars are expected to take the place of Japanese and European cars in Kyrgyzstan’s car markets.

“As we join the Customs Union we will be able to take advantage of the customs union to buy cheap cars from Russia, for example,” Tursunbayev added.

Russia is the world’s 11th largest vehicle manufacturer, with 2014 production standing at 1.89mn for passenger cars and industrial vehicles combined, according to figures by the International Organisation of Motor Vehicle Manufacturers (OICA).

Yet exports of Russian vehicles have always struggled to make their way to markets beyond the country’s sphere of influence. Russian car exports amounted to just 142,000 units in 2013, with Kazakhstan alone accounting for 88,000 vehicles, the Moscow Times reported in 2014.

Russian producers aim to raise that figure to 1mn by 2018, according to a KPMG survey published in 2013. Within this perspective, the EEU will create a preferential lane for Russian vehicles, in Kyrgyzstan and other EEU countries. 

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