Asian Countries Now Have More Diplomatic Missions In Russia Than The EU

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Op/Ed by Chris Devonshire-Ellis  

As news breaks that the United States is to close its two remaining consular missions in Russia, with the consulates in Yekaterinburg and Vladivostok to close leaving purely the Embassy in Moscow, we can examine the shift of Russian diplomacy to Asia instead of Europe.

Although the European Union, with 27 members, doesn’t have as many countries as Asia (33) it is also investing far less in diplomatic missions too. EU members all have Embassies in Moscow, but now just have 36 consulates across the rest of Russia. That is now outstripped by Asia with 42. The regional dynamics are of interest too; most of the EU member states with Consulates have then close to their own borders, such as Estonia’s Consul in Pskov, just 330km from Tallinn. The other EU Baltic States of Latvia, Lithuania and Poland all possess Consulates in Kaliningrad, a remarkable concentration for a city region of just 430,000. Most other EU members Consulates are in St. Petersburg. None have made it east of the Urals except for Germany, with a presence in Novosibirsk, Russia’s third largest city, situated in Siberia.

It is a different story for Asian nations, as the diplomatic shift between Russia and Asia continues. China, India, Japan, Kazakhstan, Pakistan, South Korea & Turkey all have consuls in St. Petersburg, right on the border with the EU and just a hour’s flight from numerous EU capital cities. Asian countries are far more spread out across Russia than their EU counterparts, making inroads into Yekaterinburg, where five Asian countries, including Vietnam (which has a FTA with Russia via the EAEU) see opportunities that the United States now deems unable to realize.

It is only natural that multiple Asian nations have a presence in Vladivostok, in Russia’s Far East, just two hours flight from Beijing, Seoul or Tokyo. The irony is that Vladivostok is closer to the United States (3,280 miles) than Washington is to Moscow (4,857 miles) or New York is to Paris (3,625 miles). By closing Consulates down in Yekaterinburg, the manufacturing heart of Russia, and in Vladivostok, Russia’s largest eastern seaport, and a developing link in the Northern Sea Passage, Washington has de facto conceded Russia to be part of Asia and has withdrawn. Western Europe is in danger of doing the same.

The Russian Market

Russia is a market of 146 million people, of whom about a third, or 50 million, are considered middle class standards. Of these middle-class consumers, about 7 million are in Moscow and about 3.5 million in St. Petersburg. After these two cities, Russia has 13 cities with populations more than 1 million and a further 34 with populations more than 400,000. The EU in comparison has 61 cities of that size. Russia therefore possesses tier 1&2 city population clusters equivalent to about 77% of that of the EU. It is this that is being lost, with Asian trade representatives working out the regional markets and Asian manufacturers and exporters starting to fill the gap being vacated by EU manufacturers being politically and economically dissuaded from entering the Russian market.

Russian Free Trade

Russia is a founding member of the Eurasian Economic Union (EAEU), along with Armenia, Belarus, Kazakhstan, and Kyrgyzstan. This is a landmass that sits between China and the EU. The EAEU has Free Trade Agreements with Iran, Serbia, Singapore and Vietnam, and is currently in negotiations with China concerning tariffs, India, Indonesia, and Mongolia. There are significant implications should the China and India deals be completed.

China-EAEU FTA

China signed off an FTA with the EAEU, however at present this is non-preferential and does not include tariff reductions. However, this is set to change. Both sides are resuming negotiations to conclude tariff reductions from January 2021, and both China and Russia have stated their intent to double bilateral trade to US$200 billion by 2024. When a China-EAEU FTA deal is reached – possibly late 2021 or 2022 – trade between the two countries will massively increase. The anticipation of this is one reason why China now has more diplomatic missions in Russia than any other country.

India-EAEU FTA

India withdrew from the RCEP FTA deal due to domestic market concerns with China as an RCEP member. Russian exporters however are less likely to compete for India’s own domestic market than the Chinese, while opportunities exist for Indian exporters and traders in Russia and the EAEU. There is an additional incentive – India, along with Iran and Russia is part of the International-North-South Transport Corridor (INSTC). That provides trade opportunities for India again to Russia, while free trade negotiations between India and Iran are already taking place.

The Russian cities aside from the two major markets of Moscow and St. Petersburg that have attracted the most diplomatic and trade interest are as follows:

Yekaterinburg

The 4th largest city in Russia with a population of 1.5 million, (equivalent to Munich) Yekaterinburg is in the heartland of the Urals and is Russia’s industrial hub. It is one of McKinsey’s Global City 600 in terms of economic power and is projected to have a GDP of US$40 billion by 2025 (equivalent to Florence). Yekaterinburg is one of the largest financial and business centres in Russia, with offices of multinational corporations, representative offices of foreign companies, and a large number of federal and regional financial and credit organizations.  The city has begun diversifying its economy, which has resulted in the development of sectors such as warehousing, transportation, logistics, telecommunications, financial sector, wholesale and retail trade and so on.

Vladivostok

Vladivostok is the capital of the Russian Far East and is developing as a major shipping, processing and transit hub. It is a major smart port offering blockchain applications with connections through to Europe via the Trans-Siberian railway and the Northern Sea Passage. In many ways, it is developing as a Gateway to Russia and Europe from North-East Asia, including Northern China, Japan, and South Korea. It has a Free Trade Zone, home to the Eurasian Diamond Exchange, the world’s largest market for raw and processed diamonds. India’s KGK gem cutting business have their operations there alongside many other similar businesses. The Russian Far East is the fastest growing region in the country and is attracting about 32% of all FDI into Russia.

With major connections through to China, when the China-EAEU Free Trade Agreement is completed as concerns tariff reductions between the EAEU, Russia and China, Vladivostok – already something of a boom town – will see massive investment and growth to support the resulting trade development. See also: Vladivostok Being Developed As A Significant North-East Asian Resource & Trade Hub.

With the United States pulling its consulate out of Vladivostok, no other Western countries currently have a presence here.

Khabarovsk

Several Asian, but no European countries have established a diplomatic mission in Khabarovsk, also in the Russian Far East. It compliments Vladivostok as a gateway to China,

and was the regional capital until 2018. It is on the Trans-Siberian rail, connecting it to China and Europe, and is a major regional industrial hub with industries such as iron ore processing, steel milling, the Khabarovsk shipyard, machinery manufacturing, petroleum refining, flour milling, pharmaceutical industry, meat packing and manufacturing of various types of heavy and light machinery. Vladivostok is the Port serving the city industry. Again, when the China-EAEU Free Trade Agreement is finally agreed in terms of tariffs, Khabarovsk will boom – which is why savvy Asian nations such as China, Japan and Mongolia all have a diplomatic presence here.

The Long Term Impact Of Western Sanctions On Russia

While the initial call for sanctions were instigated by the United States, it appears the EU is following the same path. Russia joined the WTO in 2012, and trade with the EU immediately increased. Two years later, Russa fund itself under sanctions, imposed following Russia’s annexing of Crimea in 2014. That incident followed unrest between local Crimeans and the Ukrainian Government who had essentially ceased investing in the region due to its pro-Russian stance. A (technically illegal) referendum was held in Crimea to establish whether rule from Kyiv or Moscow was preferred, the locals chose Russia and Russian troops marched in. One person died, an elderly man from a heart attack. Since then, significant investment has been made into Crimea by Russia, including building Europe’s longest bridge over the Kerch Straits.

The impact on sanctions imposed by the EU on Russia as a result of this saw bilateral trade nosedive from €322 billion in 2012 to €183 billion in 2016. Many view the position over Crimea as a US-driven excuse to sanction Russia and prevent expansion of Russia’s overseas Oil and Gas sales and from competing with the United States, and especially in the EU for the same product. This is why the Nordstream 2 project – designed to pipe Russian LNG to the EU – has also faced US sanctions. Meanwhile, the United States has been targeting EU clients to purchase American LNG – but at higher prices.

The on-going battle of wills between Washington, Brussels and Moscow over gas supplies, in addition to sanctions, is one part of the debate. But the danger for the EU, and the United States, is that the longer term implications of this are shutting the Russian markets out of reach and that Russian investments will also begin to manifest themselves eastwards rather than to the West. It is becoming apparent that it is Asia who will benefit, and as can be seen from the diplomatic missions being established, Asian nations generally have no problem with investing political time and money in developing these. This changing dynamic has already been noticeable in Russia for some time; what used to be Scania (Swedish) buses and trucks on the streets of St.Petersburg have long been replaced by King Long (Chinese) and Kia (South Korea). It surely will not be long before Tata (India) start to get into the mix.

Europe’s loss will be Asia’s gain – but with Russia expecting to become one of the top five global economies by 2030, and the global balance of wealth having tipped from the West to Asia in 2020, the repositioning of Russia as an Asian country is already well underway.

Russia’s national symbol is a double-headed eagle. It is turning its face east – good news for Asian manufacturers and exporters. A disaster though for the EU, who need to react fast to limit damage caused by short term political actions leading to far longer-term implications. With Asian products and technologies shortly to become common on the EU borders, a re-think of the relationships and engagement between the EU and Russia need urgent reassessment.

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About Us

Russia Briefing is written by Dezan Shira & Associates. The firm has 28 offices throughout Eurasia, including China, Russia, India, and the ASEAN nations, assisting foreign investors into the Eurasian region. Please contact Maria Kotova at russia@dezshira.com for Russian investment advisory or assistance with market intelligence, legal, tax and compliance issues throughout Asia.

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