Eight Russian Belt And Road Initiative Opportunities Coming To Completion That Foreign Investors Should Be Aware Of
Op/Ed by Chris Devonshire-Ellis
Lists of Russia Belt & Road Initiative projects produced by other media outlets tend to concentrate – or only include – the massive Power of Siberia gas pipeline that leads from the Russian Arctic to China. However, although this is important, there is rather more going on than purely viewing the Russia-China relationship as only an energy play.
There are a number of positive ways in which foreign investors can look at the Russia-China axis; even though it is often dismissed as being too remote or politically untouchable. For this, the role of the West has much to play as Governments, usually lead by the United States have taken an increasingly aggressive stance towards the rise of both. Yet it is that very same issue that demands a closer look is required.
Sanctions of course remain an issue, and have done their job in terms of promoting American interests while demonizing Russia especially. An example is Russian gas supplies to Europe versus US fracking. The American product is far more ecologically damaging and expensive – yet to push its supply, Washington sanctions Russia’s Gazprom.
These political trade barriers aside, there are rather more projects than foreign investors can legitimately be involved in, within Russia, than is generally recognized amongst all the negativity. It remains an irony that one of the larger investments into Russia this year was made by an American company, California’s iHerb who just invested US$100 million into the market.
In terms of the Belt & Road Initiative and Russia, there are a number of specific projects that are coming to completion, and in doing so will offer post-project opportunities for foreign investors to participate in. This is especially true in the services sector and where transportation corridors and trade development technologies and agreements have and are emerging.
We can look at several impressive projects and opportunities that may appeal to foreign investors as these near completion or become ripe for involvement:
BIG TICKET ENERGY
The Power of Siberia Gas Pipeline Project is perhaps the best illustration of the potential of the Sino-Russian alliance. Russia’s Gazprom is building a 3,000 kilometre natural gas pipeline, traversing three Russian provinces: the Irkutsk and Amur Regions and the Republic of Sakha (Yakutia) to the north east of China.
The US$55 billion project is among the biggest BRI projects. Last December, the first phase of Power of Siberia was brought into operation and the first-ever pipeline supplies of Russian gas to China were launched, with subsequent phases under construction.
Once fully complete, the project will export 38 billion cubic metres of gas to China annually for 30 years, generating an estimated US$400 billion for Moscow over the project’s lifetime. The deal will also make China the second largest Russian gas customer after Germany.
The second phase of the project will include the construction of a section stretching for 800 kilometres from the Kovyktinskoye field (Irkutsk) to the Chayandinskoye (Yakutia) field and should bring the Kovyktinskoye field onstream in late 2022. The third stage provides for expanding gas transmission capacities between the Chayandinskoye field and Blagoveshchensk. Russia is the largest recipient of BRI investments in oil and gas among the member countries. The eventual total of US$123.87 billion being invested by China in these projects is four times more than China is spending on energy supplies from Saudi Arabia.
Mining is also emerging as a major area of collaboration, with five of the top 10 BRI mining projects located in Russia. This includes the US$1.8 billion Coal Mining Complex on the Mezhegey Deposit in Russia. This project is being implemented jointly by the Evraz Group, who owns the right of exploration and mining of coal in the deposit and China’s Coal Energy Company.
It is included in the Roadmap for Coal Cooperation between Russia and China, with a total production capacity of 7 million tonnes of coal per year. The reserves of the Mezhegey coal deposit amount to 213.5 million tonnes of hard coking coal (grade Zh under Russian classification). The reserves should be enough for more than 30 years of production.
The Eurasian High Speed Railway
The construction of the Eurasia high speed railway (HSR) connecting Europe to China is underway. The 772 kilometre line connecting Moscow to Kazan is just one part of a US$60.9 billion Eurasia High Speed Railway Project, and is scheduled for completion by 2023. The St.Petersburg-Moscow line is already High Speed. Eventually, the Russian segment of the HSR should run from Krasnoye Station on the Russian border with Belarus to Zolotaya Sopka Station on the Russian border with Kazakhstan. It is being financed with participation of the Russian Direct Investment Fund, BRICS New Development Bank, Eurasian Development Bank, Silk Road Fund and Russia-China Investment Fund, according to Russian Railways. The project also provides for participation of major railway equipment manufacturers and construction companies from Russia, Europe, and China.
From Belarus the HSR will connect with existing rail networks into Germany and the EU, and from Kazakhstan onto China and its existing HSR network. The Eurasia high speed railway will become the biggest railroad transport project in the world, with a total length of 9,447 km (Beijing – Moscow – Berlin distance), including the Russian segment of 2,366 km. Russian railways have said that the entire HSR route can be completed by 2026. We commented on the project previously in this article here.
One can imagine the needs of travelers along this route. The same is also true of the next item.
The Meridian Highway – Tokyo to London
Not to be outdone, road connections have had their say as well. A US$9 billion 2,000-kilometre motorway upgrade across Russia was approved last year. The Russian section is known as the Meridian Highway, and it will serve as a vital BRI link connecting China to Russia, Central Asia and Europe. The Eurasian section is part of the existing agreement signed by 32 countries to allow the highway to cross the Eurasian continent and also reach to Europe and into Asia. The project aims to make maximum use of the continent’s existing highways to avoid the construction of newer ones, except in cases where missing routes necessitate their construction. Early beneficiaries of the Asian Highway project are the planners within the national land transport department of the participating countries as it assists them in planning the most cost-effective and efficient routes to promote domestic and international trade. Non-coastal areas, which are often negligible in terms of infrastructure connectivity, are the other beneficiaries.
The main Eurasian route extends from Tokyo to the border with Bulgaria, passing through China and Russia as well as branching off to other countries in Southeast, Central and South Asia including India. To complete the route, existing roads will be upgraded and new roads constructed to link the network. US$25 billion has been spent or committed to date, with an additional US$18 billion needed for upgrades and improvements to 26,000 km of highway. The route was originally completed in an Aston Martin driven from Tokyo via Istanbul to London, a distance of 15,349 km. While there are political problems to overcome with some of the routes in and around India, Pakistan and Iran, the Russian section should be upgraded and ready for use in 2027. We wrote about the key logistics points that will develop along intersections of the Russian Meridian Highway in our previous article Key Logistics Hubs Along Russia’s Meridian Road. This coincides with Russian manufacturing and technological advances in self-driving and electric cars and trucks which will become ideal vehicles of choice for these routes.
The Russian Arctic Free Trade Zone
China has been a huge investor in the Russian Arctic, and not just within the Energy Sector. Beijing knows that the Northern Sea Route is going to become a major shipping route from Asia to Europe and vice versa, and is working with Russia to develop this. Russia has also responded by designating the entire region a Free Trade Zone. According to Russia’s Ministry of Economic Development, the Russian Arctic is the biggest economic zone in the world – it covers almost 5 million square kilometers. Arctic residents will enjoy tax benefits and easier administrative procedures. The development of the region comes as the Northern Sea Passage increases its viability as a shipping route between China and Europe, with the Russian Arctic coastline set to provide market access and support services. The Zone is also attracting Russian and Chinese investment in road and rail to support the route.
Tax Incentives are being offered to investors, while the knock-on infrastructure requirements are huge. US$243 billion is being set aside in funding in a region that is expected to generate US$500 billion per annum by 2030. Upgrades to Arctic Ports and Airports are already underway, while opportunities exist in everything from construction, logistics, transport, tourism and the fishing sectors. At the other end of the Arctic, cities such as the already impressive and booming Vladivostok is being developed as a significant North-East Asian hub, offering access to China, Japan and South Korean markets.
The Eurasian Economic Union (EAEU) is a free trade bloc that includes Russia, in addition to Belarus, Armenia, Kazakhstan and Kyrgyzstan. It covers the bulk of the Eurasian land mass and is geographically placed between the European Union and China. The EAEU has a population of some 183 million and a GDP of some US$5 Trillion. Intra-EAEU trade has been significantly increasing and rose 38 percent last year. Vietnam signed off on an FTA with the EAEU three years ago, while China signed a non-preferential FTA with the EAEU in 2018. Singapore, Serbia and Iran have also signed off deals, while numerous ASEAN countries, in addition to a number of African nations have all expressed interest. The EAEU is in partial response to Western sanctions, with Russia now needing to develop new markets overseas. The Vietnam example is a good one; bilateral trade since the FTA was signed reached US$10 billion from practically zero in just two years.
The China position remains to come to maturity, as the China-EAEU FTA is non-preferential at this stage and does not provide any reduction in tariffs. However, we understand that these are on-going. When tariffs are introduced into the FTA, Sino-Russian trade will experience a significant and rapid increase. 2019 trade figures produced a US$110 billion bilateral trade corridor, both countries are keen to double that by 2024.
Selling To China
Directly linked to the development of the EAEU and China is the China market itself. It is highly unlikely that relations between Moscow and Beijing deteriorate to the point they start to impose punitive tariffs or place sanctions on one another. China’s market meanwhile is growing, and its middle class consumer base set to reach 550 million by 2023. As and when the China-EAEU FTA includes tariff reductions, a strong business case can be made for servicing that market from Russian manufacturing facilities. China has already reduced import duties in Free Trade Zones operating on its borders and has reduced profits taxes for investors in its zones in Manzhouli and Inner Mongolia, both on the border with Russia. China is clearly intent on incentivizing Russian traders to invest in the China market. We looked at what China is buying from Russia in this article here and discussed how to set up online sales platforms aimed at the Chinese consumer here. I recently discussed how Russia could be a good manufacturing base for products destined for China in the article Why Russia Is Suitable For Subsidiary Manufacturing Investments Supplying The China Market.
Digital & Blockchain Technologies
Rather than being a specific project, Russia has been working closely with China on the development of digital technologies for several years and the two nations have been coordinating efforts. These range from the 5G communication networks being installed across Eurasia, linking ATM networks, blockchain technologies to assist with the transportation of goods (and payment of duties) across the massive Eurasian region, in addition to the securitization of finance. Both are working towards the creation of digital currencies. China is trialing the Digital Yuan right now and Russia has approved laws making the use of such mechanisms legal in the country. Paul Goncharov, a noted expert in this field, discusses Russia’s move into these technologies in his articles Russia 2021: The Dawn Of The Blockchain Era and the use of Crypto-currencies in Russia in his article here.
The moves towards these technologies, which are being rolled out at speeds the United States and EU can only wish for, are driven both by the need for new solutions to deal with the sheer size of the Eurasian continent, and thereby further exploit and develop the opportunities within, but also in part a reaction to Western attitudes towards them and particularly the use of the US dollar as a sanctions weapon in global trade. The development of Chinese and Russian technologies in these fields will have significant impacts in how future business and trade, sales and payment systems are processed.
The Russia-China trade corridor is not one that many businesses internationally consider. This is a mistake as opportunities very much exist as this months iHerb announcement to invest US$100 million points out. The political and trade dynamics of these two countries are on the rise, and with billions of dollars being spent on the hard infrastructure, those opportunities are only going to increase. As the United States border to imports from Russia and China closes, the Chinese and Russian borders with each other are opening. Add to that the increasing amount of Free Trade Agreements that both China and Russia have, and it appears certain that significant future investment potential lies within this corridor.
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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 firstname.lastname@example.org for Russian investment advisory or assistance with market intelligence, legal, tax and compliance issues throughout Asia.