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Kyrgyzstan's Vehicle Reexport Boom Faces Headwinds

  • Businessman Yasir Hakimov represents the booming trade in Kyrgyzstan of reexporting cars to Russia, mainly sourced from China, South Korea, and the UAE.
  • Kyrgyzstan's government warns of an upcoming hike in customs duties, potentially as a result of pressure from Russia, which could impact the reexport business.
  • Reexporting cars has become a significant economic activity in Kyrgyzstan following the Russian invasion of Ukraine, leading to increased trade tensions and scrutiny.

Businessman Yasir Hakimov is engaged in a trade that has become very fashionable in his home city of Bishkek the past two years -- reexporting cars from third countries to vehicle-hungry, sanctions-struck Russia.

In November and December alone, Hakimov said he sent to Moscow nearly 200 vehicles initially imported to Kyrgyzstan, which is a member of the Russian-led Eurasian Economic Union (EEU) trade bloc.

Most of the cars came from China, with South Korea, the United Arab Emirates, and Europe sending in the remainder.

But having only got into the trade last summer, Hakimov is worried that business has peaked, as Kyrgyzstan's government warned importers of an incoming customs-duty hike -- perhaps as high as 20 percent -- in the near future.

Hakimov believes the measure is the result of "pressure" from the Kremlin, whose Federal Customs Service last year complained that cars imported into Kyrgyzstan were being deliberately undervalued.

Large-scale reexports of cars from Kyrgyzstan to Russia emerged after many countries ceased trading with Russia in the wake of Moscow's full-scale invasion of Ukraine in February 2022.

The trade then boomed in the first half of last year as Russia's demand for cars recovered to prewar levels.

Kyrgyz reexporters began having problems in the second half of the year after Russian authorities changed the recycling fees levied on imported cars in August and October.

The October rule change in particular disproportionately impacted individuals, who are now forced to pay the same fees as official dealerships, and who formed the bulk of the demand for cars imported via Kyrgyzstan.

The fee changes -- essentially a nontariff barrier that bears little relation to the actual cost of recycling -- were enthusiastically welcomed by Russia's domestic auto industry, which has watched forlornly as Chinese automakers and imports claimed a majority of the market.

But the changes were too much for some in Kyrgyzstan's "car-forwarding" business.

"The smallest players simply got squeezed out," Hakimov told RFE/RL of the effects of the increased recycling fees on Kyrgyzstan-based reexporters.

Losing A Competitive Advantage?

Reexports were long a cornerstone of Kyrgyzstan's economy, but suffered after it joined Armenia, Belarus, Russia, and Kazakhstan in the protectionist EEU in 2015.

Since joining, Kyrgyzstan has on multiple occasions been accused by fellow members of funny business at the borders of the union -- especially on its border with China, which remains something of a smugglers' paradise.

Russia's tolerance for Kyrgyzstan's booming export trade seems to have grown thinner now that it no longer faces such an acute shortage of new vehicles and is instead coming to terms with a domestic market suddenly dominated by Chinese cars.

In July, Moscow's Federal Customs Service released a statement noting the "practice" of cars imported to other EEU countries being deliberately undervalued, singling out Kyrgyzstan as the main violator. "If the Federal Customs Service identifies cases of undervaluation, then data on this is...transmitted to Kyrgyzstan [or other EAEU states] to organize post-control and take measures to collect unpaid payments," the statement said.

Kyrgyz car importers were informed at a meeting in December by Kyrgyzstan's Customs Service about the new customs duties that would be imposed in 2024. The reason for the decision was not mentioned.

Kyrgyzstan's customs duties on cars are currently around 15 percent compared to 20-25 percent in Russia depending on the car's year of manufacture. Value-added tax (VAT) on cars is also more favorable in Kyrgyzstan, at around 12 percent versus 19-20 percent in Russia.

In one YouTube video enthusing over Kyrgyz practices, Aleksandr Dolgov, a Russian involved in transporting cars from Kyrgyzstan to Russia, claimed that savings "on customs clearance alone" when importing a new Chinese Geely Monjaro SUV via Kyrgyzstan rather than Russia could total up to half a million rubles (nearly $5,800).

In the short-term, says Tilek Kozhokulov, chairman of the Association for the Protection of the Rights of Motorists and Auto Importers of Kyrgyzstan, reexporters fear the new duties will be slapped on cars currently in transit and already slated for sale in Russia.

He argues that in the long run the country risks losing the initiative to countries such as Belarus and Kazakhstan, who he says are tweaking their laws to benefit vehicle importers. "And we are doing the opposite -- raising duties," he told RFE/RL's Kyrgyz Service.

Kyrgyzstan's Customs Service did not reply to a request for comment.

Russia's Backdoor

Notoriously modest official Kyrgyz customs data shows a fivefold increase in imports of vehicles, totaling almost 160,000 for the first 10 months of 2023.

Data from the same source for car exports would suggest exports in the low thousands, outnumbered even by imports from Russia.

In reality, according to Suiyunbek Myrzakanov, a businessman who spoke to RFE/RL's Kyrgyz Service, that is probably because only cars that are registered in Kyrgyzstan and receive Kyrgyz number plates count toward exports. Myrzakanov estimated that at most 10 percent of the vehicles imported this year had remained in Kyrgyzstan.

Among the cars Kyrgyzstan imported, vehicles from China lead the way, totaling more than 60,000.

Chinese customs data, for its part, shows a more than 60-fold year-on-year increase of car exports to its Central Asian neighbor in the first 11 months of 2023.

Distances and logistics make working with Europe harder for Kyrgyz reexporters, yet the fact that countries like France and Germany have cut ties with the Russian market has opened up opportunities there, too.

In December 2023, Robin Brooks, a former senior economist at the International Monetary Fund, highlighted official German data that showed a 5,500 percent increase in exports of cars and parts to Kyrgyzstan, reaching 30 million euros ($34 million) monthly in the first half of 2023, before tailing off to around 20 million euros ($23 million) toward the end of the year.

"This export surge started after Russia invaded Ukraine, so it's obvious this stuff is going to Moscow. This has to stop," Brooks wrote on X, formerly Twitter. Brooks had previously argued that Kyrgyzstan was an ideal "test case" for secondary sanctions.

Although the decisions of countries like Kyrgyzstan and Kazakhstan not to join Belarus in vocally backing Russia's invasion helped challenge perceptions of the region as Moscow's "backyard," there is no doubt that the EEU has proven a Russian "backdoor" for sanctions evasion.

From the moment the United States and its allies in Europe and Asia imposed sweeping sanctions on Russia in response to its invasion, analysts had highlighted the trade bloc's usefulness for Moscow.

A 2022 Chatham House explainer on the organization stressed that actual economic integration between the five members remains "cumbersome and patchy" with only around 40 percent of customs duties harmonized and "Russian unilateralism and its uneasy relationship with the smaller member states" coloring trade relations inside the group.

Nevertheless, "the aftermath of the 2022 aggression has made the EEU considerably more useful economically to Russia than ever before," the authors concluded, noting member countries' roles in helping Moscow access dual-use goods to aid its war effort.

Kyrgyz entrepreneurs would argue in response that the war has created enough economic problems for their country, and that they are only taking advantage of new opportunities that are available.

Moreover, many of these opportunities only last as long as conditions in the Russian market allow.

Sewing shops in Kyrgyzstan, for example, saw orders from Russia go through the roof in 2022, with many turning to freelance seamstresses in a bid to meet demand. But 2023 has been a different story, with the ruble's weakness relative to the Kyrgyz som undermining the trade and sending some factories out of business.

Such bumps in the road matter less to gargantuan China, the source of much of the raw fabric for Kyrgyzstan's garments industry as well as the tens of thousands of cars that Kyrgyz reexporters now send to Russia.

Citing Chinese customs data, a report by the Eurasian Rail Alliance Index showed that Beijing's garment exports to Russia rose by around 30 percent year-on-year in the first nine months of 2023, reaching $1.43 billion.

Chinese exports of cars and car parts to Russia rose by more than 350 percent in the same period, meanwhile, hitting $16.41 billion as Russia became the No. 1 market for Chinese-made cars in the world.

By RFE/RL

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