Transhipping China Trains and Ships to Europe – Understanding Russia’s Economic and Trade Performance in 2018 and Beyond

Since the sanctions were imposed on Russia back in 2014, the Western media position on reporting about the country has taken an almost complete step towards demonization. It is routine now for negative news and opinion to be the common viewpoint, in every regard. Sometimes, this reaches ridiculous heights. I recall reading a Washington Post article about how sanctions imposed by the United States on Russia had left Russian supermarket shelves bare, and how ordinary Russians were about to revolt against President Putin. It even featured a photo of appropriately empty supermarket shelves to illustrate the piece. The only problem with that report is that the day it was published, I had just completed a weekly shop at one of Moscow’s supermarkets, which was packed to the roof with product. There was some complaining about the price of potatoes and beetroot, but that was as far as it went in terms of rebellion. (Incidentally, Russian supermarkets remain full, and I stopped reading the Washington Post).

Getting information about Russia then is proving hard. Sometimes, in news, it is airbrushed out of the picture altogether. A recent article on the first goods train arriving in Antwerp from Tangshan in China reported, “The train’s consignee was Cosco Shipping Belgium and had 34 containers onboard, which were unloaded at Euroports for distribution in Europe. The train traveled via the border crossing of Alashankou, Kazakhstan, Belarus, Poland and Germany”. That’s fine until one realizes its impossible to route a train directly from Kazakhstan to Belarus. It has to traverse Russia. Or maybe it flew that bit.

This lack of hard and sensible, unbiased news about Russia makes it difficult to ascertain exactly how Russia is doing. It’s a form of censorship in itself. However, for firms such as mine, with a solid interest in China and Asia, the development of projects such as the Belt and Road Initiative means Russia becomes a key player, and especially the road infrastructure. Without Russia, those Chinese manufactured goods would not be able to reach their EU destinations. Longer term, neither would EU goods traveling the opposite direction be able to access China’s online consumer market of 600 million. Instead, Russia is conveniently forgotten, not mentioned, and pretended about as if it doesn’t really exist. This means a knowledge gap is appearing, and this has significant consequences for the West’s future ability to trade – not just with Russia, but other parts of Asia, including China.

This is especially important given the news that China is to sign a Free Trade Agreement with the Eurasian Economic Union tomorrow. Russia is part of the EAEU, which also includes Belarus, Armenia, Kazakhstan, and Kyrgyzstan. The EAEU has a population of 183 million people with a gross domestic product of more than US$4 trillion, and has been growing at trade volume rates of 30 percent per annum. That’s hardly surprising, as it makes up the landmass between China and the EU.

Russia’s own trade with China is set to hit US$100 billion, and the FTA will only serve to dramatically enhance this. The Russia-China trade space is also growing at a faster rate than China’s trade with the EU, meaning that future market opportunities for trade exist with significant pent up demand.

But what does this mean in terms of Russia’s own economic development? We cannot generally rely on sensible input from much of the Western media, including many of the big players. Fortunately Paul Goncharoff, a Moscow based, New York Columbia University educated lawyer has explained some of the missing data in this article on Russia Feed. Although he concentrates more on the legacy Vladimir Putin wishes to leave – having just assumed the Russian Presidency for the fourth, and probably final time, he does provide insights into Russia’s economic performance.

Goncharoff comments:”Russia should achieve a 2018 budget surplus of RUB440.6bn (US$7.1 billion), instead of the previously expected deficit of RUB1.27 trillion (US$20.5 billion), the government confirmed on May 10. This surplus is roughly 0.45 percent of GDP instead of the expected deficit of 1.3 percent of GDP, according to this year’s amended draft federal budget for 2018. The Finance Ministry also lowered its projected inflation levels, to 2.8 percent from the previously expected 4 percent. Inflation has been creeping up this year but remains on the level of 2.2-2.3 percent – a record low for the Russian Federation. The recent tumble of the ruble against the dollar caused by the imposition of new US sanctions this past April may spark more inflation, but efforts are underway to mitigate such effects. The Finance Ministry also revised upward Russian budget revenues for 2018, from RUB15.157 trillion to RUB17.032 trillion (US$270 billion)”.

In short – consistent and dynamic Russian growth. That fits in with our own analysis, which shows that Russia’s GDP growth is accelerating faster than that of the EU or United States. The China-EAEU FTA is going to be an important part of this Russian resurgence. It impacts on members states within the China-funded Lapis Lazuli Corridor, which connects the Caucasus to Central Asia, and is very much part of China’s Belt and Road routes. It is also a large component of the Xi-Putin concept of the Greater Eurasian Partnership, which is intended to see the ultimate uniting of China’s Belt & Road Initiative with the Eurasian Economic Union, Shanghai Co-Operation Organisation and possibly ASEAN.

This is of course of immense development interest to businesses in Asia. It is only further compounded when one realizes that Russia and the EAEU are close to signing Free Trade Agreements with India, Iran, Indonesia, and Singapore, among many others. Vietnam already has a productive FTA with the EAEU.

Then there are China’s ambitions to ship to Europe via the Northern Passage and the Arctic Ocean – again, Russian territory.

Russia’s economic developments as outlined by Goncharoff do not point to a negative outcome for the country. Neither do the on-the-ground feelings I get from my regular travels to Russia – where our practice has been getting into place the business relations we need to service the developing Russia-Asia trade space. Add to that, the infrastructure being built all along the Belt and Road, in addition to Free Trade Agreements now coming, or about to come into effect, and one begins to understand that to be a developing business in Asia, one now has to start to develop a Russia strategy. Asian businesses, unless there are strong corporate ties to the US or EU, can also disregard much of the West’s self-imposed sanctions, and take up the Russia trade banner instead, and crucially, with little competition from Europe or the US. Satisfying and exploiting Russian trade should be a boom time for Asian based businesses. Russia is now part of the Asian development story, and it is time to understand the impact of this and the future trends and opportunity developments this will usher in.

Related Reading:

Russia, China Agree to Coordinate OBOR with EAEU

Russia Ships LNG to India in First Silk Road Fund Arctic to Asia Deal

Assisting Foreign Investors into Russia

Dezan Shira & Associates´ Russian investment brochure offers an overview of the services provided by the firm – both foreign investment into Russia and Russian investment into Asia. It is Dezan Shira´s mission to guide investors through Russia´s complex regulatory environment and assist with all aspects of establishing, maintaining and growing business operations in the region.

Establishing a Foreign Business in Russia

In this issue of Russia Briefing, we explain the basics of business set up for foreign investors, from trademark registration, representation, trading mechanisms, and manufacturing. With low corporate tax rates, Russia is set to become the most dynamic of the trade corridors opening up to Asia.

• Dezan Shira & Associates Russia Desk
• Russia Briefing Magazine