Foreign Investment Opportunities In Russia 2021

Op/Ed By Chris Devonshire-Ellis 

• Trade with China expected to double by 2024 
• Eurasian Economic Union exports up 43%
• Favorable tax and free trade incentives 
• Membership of BRICS 
• Middle class consumer base of 50 million 

Global businesses needing to recalibrate their export and trade markets next year in the wake of changing supply chains, Covid 19, Brexit and indeed the impact of China may wish to take a look at Russia. We can examine why as follows:

Brexit – Opportunities For British Businesses

With the UK exiting the European Union on 31st December, British businesses need to be on the lookout for new markets and new opportunities. Historically, the two countries have long shared Royal, Comradery and business ties. British exports to Russia have remained fairly constant since 2015, at about the £2.63 billion mark. That is a significant reduction of exports from pre-sanctions times, when the UK was sending between £8-9 billion worth of goods to the Russian market. Clearly, there are opportunities to grab some of that back now the UK isn’t bound by EU sanctions – although how closely or not it intends to follow them remains to be seen. But there are plenty of products not under sanctions – British companies are currently exporting vehicles, machinery, pharmaceuticals, electronics, medical and optical apparatus, plastics, and chemicals to Russia, and there is pent up demand for consumer goods including fashion. Britain is also considered a second home for many Russian’s with Russian personal property investments in the UK worth an estimated £11 billion in the London area alone. As Alf Torrents, the CEO of the Russia-Britain Business Council put it in an interview with Sputnik yesterday “We definitely see it as an opportunity. The official government line is encouraging businesses to look for new markets outside of the traditional EU ones and the line we’re taking is that it makes sense to look at Russia as it’s got many things going for it as a new market.” Flights from Heathrow to Moscow take just 4 hours.

The Export To China Opportunity

Manufacture in Russia to sell to China? It’s not as crazy as it sounds. The Russia-China bilateral trade corridor is expanding and is set to double by 2024 to US$200 billion. Both Governments have put in place specific policies and trade incentives to encourage this to happen, mainly as both are highly motivated to decrease their trade exposure to the United States. China is deficient in many areas and its middle class consumer base is also expanding – it will reach 550 million by 2024 – three times larger than that of the United States. China’s imports are thus growing from key strategic markets and Russia is a neighbor with a long border and increasing valuable infrastructure connections. For example, the first significant bridge over the Amur River was completed this August while Vladivostok is booming as a Port. We wrote about the developing attractions of the city in the article Vladivostok Being Developed As A Significant Asian Resource And Trade Hub.

So what is China buying?

This year, the supply of meat and offal from Russia to China increased nine times, soybean oil by five times, and sunflower oil exports doubled. Russia also began supplying beef to China for the first time this year. We discussed 2019 China purchases from Russia in the article China-Russia Bilateral Trade: What Is China Buying?

China also signed a Free Trade Agreement with the Eurasian Economic Union, which includes Russia, back in 2018. At present, that is non-preferential, and import tariff reductions of specific products are still be negotiated. However when these are agreed, Russia-China bilateral trade will massively increase. That may well happen next year to spur recovery after Covid-19. With the EAEU as a geographical presence sitting between China and the European Union, we can look at how EU exports from the major billion Euro EU exporters have performed in their China trade over the past three years as follows:

Clearly, with Russia and the EAEU situated in between, there are opportunities within the EU-China corridor that greatly impact upon Russian logistics and support services.

Tax Incentives

There are other reasons to consider setting up in Russia. The Individual Income and Corporate Profit Tax rates are competitive, at 15% for earnings above 5 million rubles for personal income, and 20% for standard corporate income tax, although incentives if used properly can reduce this to 15.5%. VAT is chargeable at between 10-20% depending upon the product.

These compare as follows:

Russia Double Tax Treaties

Russia also has an extensive network of Double Tax Treaties (DTA). These are useful instruments for foreign investors or trade businesses to understand and utilize as they mitigate against the potential for being taxed in two countries, and often provide clauses that permit the reduction in income tax, VAT, and other pertinent taxes between citizens of Russia and another treaty state. This means the application of them can help open up new markets in Russia and vice versa by reducing the overall tax burden. This can have significant impact on trade profitability. We provide a full list of countries that Russia has a DTA with in the article Russia’s Double Tax Treaty Agreements.

Russian Free Trade – The Eurasian Economic Union

Russia is a member of the Eurasian Economic Union, a free trade area that also includes Armenia, Belarus, Kazakhstan, Kyrgyzstan and Russia. It is a combined market of 182 million consumers and a combined GDP of more than US$1.9 trillion. Trade has been growing among member nations, and is currently about US$750 billion per annum. Global exports from EAEU member states have also been increasing as a result.

This means a presence in Russia gives favorable access to the other EAEU markets, and beyond. In addition, the EAEU also has Free Trade Agreements with Iran, Israel, Serbia, Singapore and Vietnam. Others are currently being negotiated, including with several African and Asian nations including India. Russian investment and trade with Vietnam as an example went from practically zero to US$10 billion in two years following the Vietnam-EAEU FTA.

The BRICS Nations – 50% Of Global GDP By 2030?

Russia has the Chairmanship of BRICS this year and Russian President Vladimir Putin has stated that he wanted to use this time to further enhance and develop the growing stature of BRICS, including with the United Nations.  At the same time, the BRICS nations have expressed interest in developing alternative global payment systems, a BRICS cryptocurrency and generally creating a global trade model that is less dependent upon the United States, collectively seen as an abuser of power. The BRICS bank – the New Development Bank has recently upgraded its operations and is beginning to provide project financing to the private sector within the BRICS region to get things moving ahead at a faster pace. There is a long way to go. However, the BRICS have laid out their intentions and already individually possess or influence significant trade assets that if bought into collective use would bring into being a major shift in global supply chains, how we do business, and with whom.

Global manufacturers looking at where new supply chains are emerging and where new consumer markets are developing should be keeping an eye on the BRICS group and how and when they intend to stitch together their collective component trade assets. It is becoming apparent that in time, a BRICS Free Trade Agreement should be very much on the cards. There is more about Russia and the BRICS partnership in the article BRICS Nations Headed For 50% Of Global GDP By 2030. Russia is also about to host the annual BRICS heads of state – via videoconference – on November 17. Readers can view the objectives of that meeting in the article Russia Prepares To Host BRICS 2020: BRICS Strategy For Economic Partnership To 2025.

Russia’s Middle Class 2020 – 50 Million

Russia is a total market of 147 million people with per-capita income around one-third higher than China’s. And although much of this vast, dispersed nation has some traits of a developing country—such as outdated infrastructure and insufficient health care—its consumers exhibit characteristics of buyers in more mature economies. Russia’s urban areas—where 74% of the population of 147 million resides—comprise rich opportunities for foreign companies and represent a solid middle class consumer base of about 50 million, or about a third of that of the United States. In fact, around one-quarter of Russians live in cities of 1 million or more. Moscow, with 12.4 million inhabitants, is among the richest, with a per-capita income of around US$12,000—nearly twice as high as the average for other Russian cities and nearly four times higher than in rural areas. The key to reaching Russian consumers is to understand the logistics and how to reach them beyond the obvious cities of Moscow and St. Petersburg.

Selling To Russia – Ecommerce

Almost one third of the total volume of e-commerce in Russia is accounted for by cross-border selling. In addition, goods are ordered in foreign online-stores and supplied to the end-user directly from abroad. For deliveries with a value of less than €1000, a distributor overseas pays between 0-15% on the transaction. Revenue in this sector is projected to reach US$23 billion this year and is expected to show an annual growth rate of 6.1%, resulting in a projected market volume of US$31 billion by 2025.

Selling To Russia: Where?

Russia is of course a massive country. Where to start?

The Russian Arctic

Russia recently declared the entire Russian Arctic a Free Trade Zone, with tax incentives and reductions available for income and individual income taxes, land, property, social insurance and so on. That has spurred the development of a Karelia border zone aimed at enhancing trade with Finland, Norway and Sweden, and especially in fishing, tourism, transport and logistics. Tourism is also the theme of Murmansk, the capital city of the Arctic FTZ, and this both to develop as an upgraded Arctic trading port and trade centre but is also attracting gourmets, setting up restaurants and bars for tourists wanting to sample Arctic cuisine. Arkhangelsk is not to be outdone and is developing its Pomor Marina as a Yachting Centre.

But this is not purely about Trade and Tourism. The Russian Arctic provides the coastline and with it support services for the Northern Sea Passage, with the massive Yamal oil and gas fields able to supply China and India with enough energy for the next 40 years. That means massive investments in Ports, Road and Rail connections throughout the Arctic region. In time, as they come online they will require support services of their own.

The Meridian Highway

The Meridian Highway will stretch from the Belarus border with the European Union to the Russian border with Kazakhstan, providing the European and Urals leg of an existing highway that already crosses Kazakhstan to China. The Meridian Highway will effectively link China directly to Western Europe by road. It stretches just over 2000 km through some of the more remote areas of the country – acting as a “Moscow bypass” between China and Europe.

The new link is expected to cost around 600 billion rubles (US$9.5 billion), and will be built using a public-private partnership – with guarantees to investors about returns. The main source of revenue is likely to be trucks between Europe and China, and it is expected to take some of the freight that currently uses the Trans-Siberian Rail and the Suez Canal. Construction is now underway with total completion due sometime in 2030. However, parts of it will be completed sooner than others, meaning strategic hubs will develop along the route. Those will become service and logistics centres. We discussed where these are likely to be in the article Key Logistics Hubs Along Russia’s Meridian Highway.

The Trans-Siberian Land Bridge

Russia announced the opening of the “Trans-Siberian Land Bridge” with a successful first test run of cargo from Yokohama to Europe last year. Essentially the route covers a dual maritime-rail link that initially sees products travel by ship from ports on the Japanese west coast, travel to Vladivostok and connect with the trans-Siberian express through to Moscow and onto Brest in Belarus, right on the border of the EU and Poland. From there they enter the EU market and be dispersed as required. Although the concept is not entirely new, it is a new commercial route, and cuts down the journey time in shipping goods from Japan to the EU by 50%, taking about 20 days, saving considerable amounts of time and money. The route intersects with both the Meridian Highway and Russia’s extensive national water network of canals and rivers, along which are 20 cities with populations in excess of 1 million. We have identified 20 key hubs along the route and discussed them in the article The Top 20 Key Cities Linking Vladivostok To Europe. Concerning manufacturing facilities, both Russia and China have been busy putting in Free Trade Zones along this corridor, allowing manufacturers along the route to take advantage of regional labor costs and skills, in addition to the usual tax holidays and other incentives. We discussed those in the article Free Trade Zones Linking Russia, the Eurasian Economic Union and China. 

An Emerging Hi-Tech Economy

Russia has been investing significant amounts in new technologies and is rolling out a 5G network to massively increase digital capability. It is a major player in the development of key trade technologies such as blockchain, and is expected to be rolling out a digital version of its currency, probably in 2022.   

As at 2020, Russia is the world’s eleventh largest economy yet is making strides to reduce dependence on the United States (as is China) and is using investments in hi-tech to do this. It has earmarked US$26 billion to spend on National Digital Economic Development. Russia’s largest consumer bank has also just joined up with HSBC’s blockchain network.

Russia has been pioneering driverless, electric vehicles to enable it to exploit the vast inland regions, which can be difficult terrain and challenging for drivers. Smart roads and smart cars are the way ahead. We summarized some of these new vehicles in the article Russian Auto Boost With Electric, Driverless & Top Range Cars. Kamaz for example have been testing driverless trucks in the Arctic. Coping with the huge distances in Russia is a major factor for the national embrace of new technologies.

Russian architecture and construction technologies are also first class. Russia yesterday opened the Lakhta Centre in St. Petersburg. It is the tallest skyscraper in Europe at 1,516 feet and has just won the Emporis’ 2020 Skyscraper Award. It is certified LEED Platinum making it one of the five most eco-friendly skyscrapers on Earth, and marks the first time any European building has won the Skyscraper Award since 2013.

Exploiting The Belt & Road Initiative Infrastructure

Russia has been a key player in China’s Belt & Road Initiative and is undergoing numerous, impressive projects as part of this. These investments, often partnering with China, are starting to come to fruition and will present opportunities for businesses and investors to exploit that same infrastructure build. We listed eight key BRI projects in Russia in the article Russian Belt & Road Initiative Opportunities Coming To Completion That Foreign Investors Should Be Aware Of .

A Developing Global Trade Player

As can be seen, there is plenty to consider about Russia. It has had a tough time of it due to sanctions, which have been mainly about the United States wishing to block sales of Russian natural gas to Europe than actual arguments about the Crimean issue. Several years on however, and Russia has been reinventing itself, both upgrading existing infrastructure, investing in new build especially in the Arctic region and on its borders with China, and actively pursuing new export markets. It has been doing this both in soft form via Free Trade Agreements through the Eurasian Economic Union, but also in hard form by investing in Free Trade Zones in Africa, and Asia.

Russia is extremely wealthy in terms of what it has in the ground, and export development is likely to be swift. With attractive tax rates, a raft of foreign investment incentives, the expansion of trade and export is a key area of national policy. Now is the time to be looking again at this emerging, dynamic market with tremendous manufacturing potential and pent-up demand from its consumer class. Russia should be back on the foreign investment radar for new opportunities.

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• Russia’s Involvement With China’s Belt And Road Initiative: Interview With Chris Devonshire-Ellis