Effects on the banking sector of Uzbekistan joining the EAEU

_ Yuri Kofner, non-residential research fellow, Skolkovo Institute for Emerging Market Studies, editor-in-chief, analytical media “Eurasian Studies”. Munich. 17 March 2020.

In October 2019, the Ministry of Economy and Industry of Uzbekistan unveiled the draft “Concept for the Comprehensive Social and Economic Development of the Republic until 2030”, which includes plans to “conclude a free trade agreement with the Eurasian Economic Union (EAEU)” by 2021 and to “assess the feasibility of joining the EAEU and the WTO” by 2025 . In March 2020 the Government of Uzbekistan approved the proposal become an observer state with the EAEU. As next steps this proposal will be decided on by the Uzbek parliament, then by the president of Uzbekistan, and then it will be submitted to the Supreme Eurasian Economic Council for consideration. Currently, the only other observer state with the EAEU is the Republic of Moldova.

Both sides – Uzbekistan and the EAEU member states – intend to use the observer format to further explore all the possible challenges and benefits of the country’s potential accession to the Eurasian Economic Union later on.

Model


While studies are currently being conducted to examine the possible effects on merchandise trade of joining the EAEU, the purpose of this article is to estimate the trade and welfare effects in the service sector. As a case study the author will look at the potential effects on financial services of Tashkent’s participation in the common financial market of the EAEU, which implies taking on all obligations to provide a national regime to lenders from all other EAEU member states.

The choice of this research question is due to the fact that in private expert interviews, profile specialists have repeatedly expressed the opinion that in joining the EAEU, one can expect the expansion of Kazakhstani and Russian banks to the Uzbek banking market.

Despite the liberal reforms initiated by President Mirzoyev in 2017 in all sectors of the economy, the country’s banking sector is still quite closed to competition – both external and domestic. According to a recent report by the World Bank, the five dominant state-owned  banks account for 85 percent of system-wide assets and for 89 percent of total loans. Tellingly, by early 2020, there were only  five banks with foreign capital, yet the only truely foreign lender to enter Uzbekistan since the start of Mirziyoyev’s reform program is Kazakhstan’s Halyk Bank.

The author defined the republic’s participation in the common financial market of the EAEU as two scenarios: the first was, was defined as a 20 percent mutual reduction in non-tariff barriers (NTBs) in the banking sector, the second as a deeper 50 percent mutual reduction in NTBs.

For the simulation in this article the author used the following input data: 1. Bilateral data for trade in financial services from 2012 for four parties (EAEU, Uzbekistan, USA and the “rest of the world”) taken from the OECD Statistics and UN Comtrade databases using the EBOPS 2002 classification (“financial services”). For the bilateral trade flows, imports were preferred. 2. Ad-valorem equivalents of non-tariff measures (AVEs of NTMs) in commercial banking for the EAEU, the USA (21 percent) and the rest of the world (~ 40 percent), were taken from the OECD’s STRI database for 2018. The estimates for AVE’s of NTMs in commercial banking for Uzbekistan and the non-Russian EAEU member states, listed in the current scientific literature, are unrealistically small – usually between 5 and 20 percent. Therefore, the author chose to use Russia’s Services Trade Restrictiveness Index of 35 percent from 2018 as the EAEU’s overall AVE of NTMs in this sector. In 2018 the Russian Federation accounted for ~ 86 percent of total extra-EAEU imports of services. Intra-EAEU AVEs of NTMs were taken as zero.  The AVE of NTMs in commercial banking for Uzbekistan were estimated by the author at ~ 50 percent according to the quantification methodology by (Gootiiz 2012), taking into account reforms and relative protectionism in the country’s banking sector. 3. Import elasticities taken from (Ghodsi et al. 2016). The export supply (1.5) and substitution (5) elasticities were taken as constants across all sectors and regions.

Results


Uzbekistan’s joining the EAEU and participation in the Union’s common financial market, defined as a mutual reduction of NTBs by 20 percent, would increase total Uzbek exports of financial services to the Eurasian Economic Union by 22 percent (USD 0.6 mln) and increase Eurasian exports to Uzbekistan of financial services by 30 percent (USD 2.3 mln). The gross welfare effect (producer surplus + consumer surplus) would be USD 0.9 mln for the Republic of Uzbekistan and USD 0.5 mln for the EAEU. A deeper integration into the Union’s common financial market, defined as a mutual reduction of NTBs by 50 percent, would increase Uzbekistan’s exports of financial services to the Eurasian market by 54 percent (USD 1.5 mln) and increase Eurasian financial services exports to Uzbekistan by 74 percent (USD 6.3 mln). The gross welfare effect of deeper integration would be USD 2.3 mln for the Republic of Uzbekistan and USD 1.1 mln for the EAEU member states. In both scenarios neither Uzbekistani, nor Eurasian banks would incur losses from the mutual opening of their markets.

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