Advancing Russian Free Trade with Asia, China, & the Pacific

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With the United States moving away from free trade with Asia, following Donald Trump’s scrapping of the Trans-Pacific Partnership (TPP), Asia Pacific nations have begun to examine alternatives. Japan and Australia, especially, have been vocal about continuing the TPP without the United States, with calls for that agreement to now include China.

Other alternatives include the Regional Comprehensive Economic Partnership (RCEP), which would bring together the members of ASEAN (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam) and the six countries with which ASEAN has existing free trade agreements – Australia, China, India, Japan, New Zealand, and South Korea.


Another alternative, the Free Trade Area of the Asia Pacific (FTAAP), an Asia-Pacific Economic Cooperation (APEC) project, initiated by China, is still awaiting an overdue feasibility report from Beijing.

RELATED: China Lays Foundations for Eurasian Free Trade after TPP Failure

Russian businesses are now interested in the potential for developing free trade with Asia. While Russia’s overall trade volume with the region may remain low, renewed efforts are being put in to turn Russia’s face – Eastward – as a combative reaction to the sanctions placed upon it by the West. Russian trade with Asia is both fast-growing, viable, and sustainable and fits right in with China’s One Belt, One Road ambitions. Russia is also a member of APEC, and keen to develop its under-utilized eastern seaboard.

Getting Russia on board, however, is going to have to involve its own trade bloc, the Eurasian Economic Union. This bloc includes Armenia, Belarus, Kazakhstan, and Kyrgyzstan. This may seem a somewhat unusual grouping until one appreciates that from China, goods can travel via Kazakhstan and Russia through to Belarus, right on the border with the European Union. China is already engaged with negotiations concerning an FTA with the EAEU, in a move that would effectively bring Chinese manufacturing capacity right up to Europe’s borders. Both Russia and China have mutual interests in developing Russia’s Arctic Ports, which offer additional routes to Europe via the Northern Sea Passage.

Armenia is also important as an alternative European gateway through the Caucasus and the Black Sea to access Eastern Europe, a route India is especially interested in, and that Russia has been jointly developing with Delhi via the International North-South Economic Corridor. India is also negotiating with Moscow over committing to an FTA with the EAEU.

This is not wholly untrodden ground for Moscow or the EAEU. The bloc already has a Free Trade Agreement with Vietnam, which itself is estimated to be worth about US$5 billion in exports by 2030. Russia could also leverage this by exporting goods produced in Vietnam to the TPP, RCEP, or FTAAP markets, should such agreements eventually come on stream.

Singapore, along with China and India, is also negotiating an FTA with the EAEU. Getting these individual agreements into place is an ongoing process. However, it now may be time to expedite this: Russia and the EAEU need to work more pro-actively in embracing Asia. For instance, by becoming more involved with FTA talks with Japan and Australia. China, India, and Singapore already doing so, and the obvious next step is to accelerate this process by involving Russia and the EAEU into the still evolving RCEP, FTAAP, and even TPP talks.

To some extent this is already happening via proxy. Russia’s President Vladimir Putin last year proposed an “economic partnership” between the EAEU, the Shanghai Cooperation Organization (SCO), and ASEAN. This later transformed into the Greater Eurasian Partnership, which is now actively promoted by Russian official foreign policy as well as seemingly embraced by China as part of its OBOR plans.

RELATED: Understanding China’s Free Trade Agreements Along The OBOR Routes

These concepts – Free Trade Agreements between the EAEU and Asian nations and the Greater Eurasian Partnership idea – demonstrate that the desire for Russia to engage in free trade throughout Asia is certainly there. However, there are significant steps to take before Russia may be able to actively promote a direct involvement in free trade with Asia. Firstly, it remains to be seen exactly what sort of response this would produce in Washington. The United States is current firmly anti-Russian in its views, and seeing Moscow potentially signing up free trade agreements with the US’s own strategic trade partners may not go down too well, even if Trump has exited the TPP. Political pressure to refrain from dealing with the EAEU, transmitted from Washington, may be too much for some parts of Asia.

Secondly, aside from Russian traditional industries such as oil and gas, heavy machinery, nuclear technology, and agricultural produce, Russian companies still lack the international competitiveness that is necessary if extensive free trade negotiations are to make sense for the Russian economy. But times are changing. Russia is involved with jointly developing a new commercial aircraft with China and will be looking to export this technology to new markets less tied to Boeing and Airbus dominance. Russia’s domestic auto industry is also surging, and Russian IT is world class.

Infrastructure developments are also pointing the way towards Russia coming on board with a major, game-changing Free Trade Agreement, forming an Asian and Eurasian bloc. It is opening up its Eastern seaboard with links to Japan and bridges to Sakhalin Island, and is assisting China’s transportation of its northern products to the Pacific via the opening of the Primorye-1 transport corridor. Moscow is also offering investment incentives to foreign investors in the Primorsky Krai region, which includes the strategic port city of Vladivostok. Just a glance at the geopolitical map shown will illustrate just how influential Russia could become in developing future Asian trade flows.

China will also have a large role to play in coaxing Russia to pivot more towards Asia – it needs Russian energy and agriculture, and is keen to develop its OBOR plans across Eurasia. It cannot do this without Moscow. Russia meanwhile will be waiting to assess what it can get from China – in a sustainable manner – to allow it to do so. It is wary of China’s massive population pushing up against its sparsely populated Siberian treasures. Meanwhile, on financial terms, developments may point the way ahead: Moscow has recently signed a Double Tax Treaty with Hong Kong.

This suggests that stealth here seems to be key. What may appear to be an Asian trade facilitation strategy appearing as a creeping, hush-hush set of agreements, one country at a time, may end up being rather more. Russia as part of the TPP, RCEP, FTAAP or whatever evolution these proposed agreements take, certainly seems to be a viable option and a probable good long term bet.

 

Russia Briefing is published by Asia Briefing, a subsidiary of Dezan Shira & Associates. We produce material for foreign investors throughout Eurasia, including ASEAN, China, India, Indonesia, the Silk Road & Vietnam. For editorial matters please contact us here and for a complimentary subscription to our products, please click here.

Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Eurasian region. We maintain offices in Moscow and St.Petersburg through our Russian partner firm, as well as our own offices in China, South-East Asia and India. For assistance with Russian issues or investments into Russia and Asia, please contact us at russia@dezshira.com or visit us at www.dezshira.com

 

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