Business Opportunities For Russian Companies In ASEAN

Op/Ed by Chris Devonshire-Ellis

Adding Russian Component Parts To Lower Cost ASEAN Production Makes A Lot Of Business Sense

Russian interest in Asia extends to the Eurasian Economic Union (EAEU), which comprises the countries of Armenia, Belarus, Kazakhstan, Kyrgyzstan (and Russia). This trade bloc extends from the western borders of China to the eastern borders of the European Union and is a natural, and customs free land bridge zone between the two. Reaching out from Russia, or any of the EAEU nations is a logical next step for businesses within the region – while the reverse is also true.

In terms of proximity, we can see the EAEU and ASEAN together in the map below, which also highlights other regional countries with either an FTA with ASEAN or the EAEU, and regional countries currently negotiating these. As can be seen, the trade emergence of an EAEU-ASEAN bloc, united by free trade agreements is beginning to emerge. Most of these will be in place within the next two-three years, indicating that now is a good time to start to make moves into ASEAN to take advantage of the trade relations that are being built between the two blocs and within the region as a whole.

ASEAN itself is a similar trade bloc to the EAEU, and about double in size. Like the EAEU it also comprises a mixture of economic development in terms of its members. Many have had, or still possess, a communist party background, meaning that the administrative procedures and protocols employed by the communist party remain in place in some countries and will be familiar to businessmen with a Soviet era background.

What is exciting about Russian businesses in ASEAN however is that the region is going through a huge growth cycle, partially spurred by the development of China over the past 20 years. Like the EAEU, only more advanced in terms of agreements over free movement of goods, the ASEAN bloc enjoys free trade on 95% of all goods and services traded within ASEAN, and furthermore has Free Trade Agreements with China and India as well, giving the massive additional benefit of additional access to these huge markets. This has spurred a growth boom in ASEAN, as can be seen in the 2019 trade and development growth trends in ASEAN this year to date.

In terms of ASEAN itself, the member countries vary in what they can offer in terms of foreign investors. As a bloc however, a Russian business is effectively able to enjoy the same status as an ASEAN member purely by setting up a subsidiary company in the region. That means a Russian subsidiary, under the relevant ASEAN rules of origin, and import-export to all other ASEAN nations in addition to China and India. A good way for a Russian business to take advantage and support its parent company back in Russia is to examine this, and work out what components can be introduced from Russia and added to components sourced from ASEAN, taking advantage of some of the lower-cost ASEAN labor. ASEAN also has a large number of free-trade and export processing zones throughout the region, meaning Russian components can be exported to ASEAN, worked on there without having to submit to import duty or VAT charges, with the complete product then being able to be shipped to the destination market. We have written about some of these zones as follows:

In terms of ASEAN as a whole, the specific countries can broadly be defined as follows:

Singapore
The Russian-business friendly city-state is typically used as an ASEAN HQ as it is a major service center for ASEAN with experienced (including Russian) banking facilities, HR and related services for the region. It is a low tax jurisdiction and ideal for holding Russian investments into other countries throughout the region – including China and India.
See also Russian Investments Into ASEAN: Using Singapore As An Optimum Base

Cambodia, Laos, Myanmar
These are the least developed ASEAN nations, and with the least developed infrastructure and HR capabilities. However, it is possible, for experienced Asian investors, to organize factories here and take advantage of the low wage overheads.

Indonesia & Malaysia
Indonesia is a huge country, with the largest Muslim population in the world, which may be relevant to some Russian and EAEU investors. Kamaz set up a factory in Indonesia last year. The economy is growing fast, infrastructure is improving, and there are good development zones available in Java. Malaysia is also largely Muslim with a highly integrated Chinese diaspora involved in commerce. Proximity to Singapore is useful and the infrastructure and economic zones are generally excellent.

Philippines & Thailand
These are Catholic and Buddhist nations, with fast growing service and light manufacturing sectors. Infrastructure can still sometimes be a bit difficult especially during the rainy season but this is offset by a strong work ethic.

Vietnam
Vietnam already has a Free Trade Agreement with the EAEU and is becoming well established as a Russia-friendly location for investors. Bilateral Russia-Vietnamese trade has risen from practically zero to US$10 billion in just two years, and the country possesses excellent manufacturing areas along the east coast.

Choosing a location in ASEAN requires some thought; certain industries serving a global market are concentrated together in a particular region. Attention therefore needs to be paid to this issue and advice sought. The main issues are working out the costings, including productivity ratios, wages, utilities and so on, in addition to local taxes. Our regional overview of the differing ASEAN tax positions can be accessed here

When choosing a location in ASEAN the following questions need to be answered:

• Should I invest directly from Russia or establish a Holding Company?
• Are banking facilities available for a Russian business?
• What applicable Russia-ASEAN DTA and FTA can positively impact my business?
• Can I meet both EAEU and ASEAN production standards?
• What is the optimum operational location for my Russia business in ASEAN?
• What are the optimum wages, HR and tax regimes available?

With the growth rates we are seeing in ASEAN at present likely to continue for some years, now is an excellent time for Russian and other EAEU based businesses to be looking at the region, in terms of business development and sustainability. We can foresee a time when the assets held by Russian owned businesses become in certain cases more valuable than the assets held in Russia.