The Investment Climate of the EAEU and Korea’s Entry Strategy

_ Jae-Young Lee, Cheolwon Lee, Jiyoung Min, Korean Institute for Economic Studies. Seoul, January 2017.

Established in January 2015, the Eurasian Economic Union (EAEU) set a grand vision to create a “Eurasian Union” resembling the European Union by 2025 through a multi-stage integration plan.

The EAEU consists of five countries — Russia, Kazakhstan, Belarus, Kyrgyz Republic and Armenia — with 180 million people and a combined GDP of 1.48 trillion dollars. Currently, free movement of goods, services, capital and labor is guaranteed within the region. The members of the EAEU are planning to integrate the drugs and medical market by 2017, the electric power market by 2019, and the oil and gas market by 2025. EAEU membership is expected to expand, namely with the accession of Tajikistan, and the scope of partnership is also likely to extend out toward the APEC region.

In the meanwhile, Korea is facing a number of challenges under escalating economic uncertainty around the world. Protectionism in trade is spreading worldwide with the launch of the Trump administration, and China has engaged in economic retaliation against the deployment of a THAAD missile system in Korea. Also, Korea has to escape from the geographical isolation imposed by the division of the Korean Peninsula. Responding to these developments, Korea will need to diversify its partnerships with emerging economies and reduce its economic dependence on the Chinese market. Strengthening cooperation with the northern Eurasian countries, and securing new economic growth engines to replace old ones, will be a way for Korea to overcome the current challenges. Indeed, the EAEU can be an attractive partner as a window of new economic cooperation in developing future-oriented relations between Korea and the northern Eurasian countries.

Korea has a high potential to develop sustainable and mutually beneficial relations with northern Eurasian nations because both sides share characteristics in economic cooperation that are complementary to each other. Korea needs to construct a third route, a “northern economic cooperation route,” in addition to the maritime route which connects Korea with the U.S. and Japan and the China route.

It will also be necessary to pioneer such a “northern economic growth space” through strategically enhancing economic cooperation with the EAEU member states. Recognizing these considerations, the Moon Jae-in administration inaugurated in May 2017 has presented a “Responsible Northeast Asia Plus Community Initiative” as one of its major national policy agendas, where the new northern policy stands as an important pillar. Accordingly, promoting economic cooperation with the EAEU has become an issue of great priority. It is timely and desirable for us to study the investment climate of the EAEU, and to devise feasible strategies to enter the EAEU and expand into the northern Eurasian region.

This study provides an in-depth analysis on the investment climate in the EAEU and sophisticated entry strategies for Korea. This study emphasizes the necessity to establish an FTA between Korea and the EAEU, the largest market Korea has yet to conclude an FTA with.

The EAEU’s growing presence within the world’s political and economic spheres hints at the emergence of the EAEU as a significant partner for Korea to diversify its international economic cooperation and generate new growth engines. The results of this study will be useful to prepare negotiations for a Korea-EAEU FTA and come up with mutually beneficial economic cooperation programs. We carried out comprehensive analyses of the literature and pertinent statistics, and conducted a survey of Korean businesses that have entered or are planning to enter the EAEU market. To supplement the results of this survey, in-depth interviews with Korean companies were conducted as well.

There are five chapters in this study. Following the introduction, a brief explanation of the integration process of the EAEU and its strategic value are presented in chapter two. In this chapter we also analyze the major features of the economic conditions and markets of EAEU member countries. In chapter three, the economic cooperation between Korea and the EAEU is examined and evaluated, after which we make forecasts for future relations. Chapter four introduces the overall investment policies and major programs of the EAEU, and analyzes the investment environment and responsiveness

of Korean businesses to internal and external factors, based on the survey results. Lastly, chapter five provides a SWOT table with combined market entry strategies, and suggests various policies to promote investment and penetrate into promising sectors within the EAEU. The investment climate of the EAEU is evaluated across four different categories: marketability, growth potential, stability and other comprehensive indexes. First, Russia is the biggest market in the region followed by Kazakhstan, Belarus, Kyrgyz Republic and Armenia. Since Russia and Kazakhstan have low levels of trade openness and they are actively implementing import substitution policies, it will be more adequate for Korea to roll out investment promotion measures rather than trade expansion policies to vitalize economic cooperation with these countries. Second, Kazakhstan has the highest growth potential, followed by Kyrgyz Republic, Russia, Belarus and Armenia. Kazakhstan shows relatively high population growth, quality human resources and favorable logistics infrastructure. Third, Armenia is the most stable economy, followed by Russia, Kyrgyz Republic, Kazakhstan, Belarus. According to the global competitiveness index, Russia is the most competitive, and Kazakhstan, Armenia, Kyrgyz Republic follow, in that order.

Trade between Korea and the EAEU peaked in 2014, then decreased until 2016. Korea’s annual investment in the EAEU recorded 8,000~10,000 million USD up to 2010 but plunged to 2,000~3,000 million USD recently. In short, economic cooperation between Korea and the EAEU falls far behind the economic size and potential of these two entities. Even that cooperation currently in progress is concentrated in Russia and Kazakhstan. Korea’s cooperation with Belarus, Kyrgyz Republic, Armenia remains weak. The economic recovery of the EAEU and the growing share of APEC countries in trade with the EAEU makes it likely for trade between Korea and the EAEU to increase.

Regarding the investment climate of the EAEU, a survey on Korean companies who have entered or are planning to enter the EAEU market was conducted from the period of May to August of 2016. A total of 56 Korean businesses participated in the survey. In order to heighten objectivity and feasibility of the study, we held in-depth interviews with Korean enterprises in Kazakhstan and Kyrgyz Republic in May 2016. Companies situated within the Gumi and Guro industrial complexes in Korea were interviewed as well.

Among external factors, “Economic/industrial development and investment promotion policies of the EAEU” was the most imporant opportunity factor in entering the market. On the other hand, the factor of “Administrative barriers such as corruption, bureaucracy and so forth” was the most risky among these factors. The respondents perceived the market as an opportunity rather than risk. The companies showed an average level of Responsiveness. Among internal factors, the biggest strength factor is “Competitiveness in the innovation and high-end technologies, such as IT.” The most critical weakness factor is “Insufficient information on the EAEU.”

When it comes to penetrating the EAEU market, the strengths of Korean companies are slightly overshadowed by their weaknesses. That is, the respondents perceived themselves as not significantly competitive enough to enter the EAEU market.

Based on these analyses of the external and internal investment environments, combined strategies are presented in this study. The government most likely needs to make efforts to specify and realize the proposed strategies. Meanwhile, the study suggests to lay the foundation for economic cooperation and expand industrial cooperation. The following four measures are the keys to create an institutional base for economic cooperation.

First, it will be critical to conclude a Korea-EAEU FTA. Such an FTA would provide a new concept for strategic cooperation in the so-called “Eurasian value-chain system,” as well as in the new Eurasian growth space. It will be a window of opportunity for the Eurasian region to establish significant links with Korea, and to bring the APEC region closer to Russia.

Second, utilizing the Korea-Russia investment platform when entering the EAEU market is an important element. The Korea-Russia investment platform created in 2013 has not been utilized at all up to now. Through discussion with Russia, it will be necessary to adjust the investment destinations, industries, methods, and scope of cooperation to employ the platform. In this way, the platform can be expanded and become more useful and effective.

Third, designing investment package support programs for SMEs is another significant measure. Overseas investment by SMEs will be important in building a foundation for cooperation with the EAEU when considering the economic complementarity of the two sides. Such collaboration is possible due to the EAEU’s demand for modernization in its manufacturing sector. Job creation and competitiveness improvement could be realized through the sophistication and internationalization of Korean SMEs.

Fourth, it will be necessary to establish a “graduate school for Eurasian policy.” When the agenda of strengthening cooperation with Russia and the northern countries is incorporated into Korea’s mid- and long-term international strategy, it will become an urgent task to build a human resources nurturing system. Thus the founding of such a graduate school should be seriously considered. Given Russia’s growing political and economic presence in the international community, it is necessary to train elite talent to deal with issues regarding the EAEU.

In order to lay the institutional foundation, a close cooperation between the two sides is significant, perhaps by reorganizing or newly launching channels under the governments. Also necessary will be an organization that is mainly dedicated to Eurasian issues. Most importantly, embarking on negotiations for a Korea-EAEU FTA should come first to promote investment between Korea and the EAEU. Members of the EAEU think that the Korea–EAEU FTA has to extend beyond the scope of conventional FTAs. Bilateral industrial cooperation stimulated by Korea’s investment must be included and enhanced. To enable Korea-EAEU FTA negotiations to commence, an “investment promotion committee” should be formed and the needs of EAEU member states must be discussed. At the same time, it will be necessary to establish a “northern cooperation fund” which supports SMEs to enter the EAEU market under the Ministry of

Strategy and Finance. The positive effects that a Korea-EAEU FTA would have on investment should be communicated through a number of regular investment forums. Constructing industrial zones and discovering the investment promising sectors in the EAEU will have to take place as well. In particular, industrial complexes jointly planned by the two sides will help Korean enterprises to enter the EAEU market. For this, additional studies on the conditions of possible industrial zones and specialized industries should be carried out. Investment promising sectors have to be detected through analysis on industrial competitiveness, policies and investment climate.

Source: KIES

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