Opportunities For British Investors In The Russian Far East
New UK-Russia Tariff Regime Offers Up Potential For Both Russian & Chinese Markets
Although there is still some way to go before normal relations come to the fore between the UK and Russia, there are viable trade developments that are starting to make Russia look like a potentially attractive and profitable destination for British investors.
These include both the new duty tariff regime that will kick in from 1st January 2021 as a result of the UK leaving the EU, in addition to expected free trade developments between Russia and China.
Vladivostok (pictured above), is the central city for the Russian Far East, and is now developing as a Russian version of Shanghai, with updated infrastructure, finance and connectivity handling trade between Japan, South Korea, China, and then heading back to the UK via the Trans-Siberian rail through Central Asia, and on to Europe. In fact, China-EU cargo along this route has expanded by over 30% this year as rail takes a bite out of air cargo due to the Coronavirus.
Vladivostok also possesses Free Trade and Special Economic Zones as per the Chinese model for foreign investors, in addition to tax incentives. Russian profits tax is relatively low, at 20%, while the UK also has a Double Tax Treaty with Russia, which can further reduce this if used correctly.
As a consequence of the development of Vladivostok and the multiple cross-border trade corridors it handles, the Russian Far East is now attracting 32% of all FDI into Russia.
In terms of other development pointers, these are:
- China signed off a Free Trade Agreement with the Eurasian Economic Union (EAEU) in 2019. The EAEU extends from the borders of China to the borders of the European Union. Although the FTA has not currently impacted upon China-EAEU tariff reductions, this issue is currently under negotiation. When tariffs are agreed, bilateral trade between China and Russia in particular, will boom. This means that British businesses operating in Russia will also qualify for this as Russian legal entities and can take advantage of the lower manufacturing costs, improved rail connectivity and the new UKGTS tariffs to either buy in China, jointly manufacture in China and Russia, and export back to Britain. There will be considerable costs savings in certain cases.
- China-Russian bilateral trade is currently at US$100 billion per annum and increasing at rates of about 20% per annum. Both governments have committed to doubling this trade volume by 2024. This directly equates to opportunities for British owned businesses invested in Russia to take advantage of the China market.
- Russia shares a long, 4,209km border with China and is part of the Belt & Road Initiative. Long-neglected cross-border transport links are being earmarked for upgrades. Current China-Russia teu volumes by rail are on track to reach 1 million, having jumped to 750,000 teu in 2019. Additional infrastructure and investment is needed to keep pace with demand. There are investment opportunities here.
- China amended its Foreign Investment Law from 1st January 2020 and now permits foreign enterprises in China to compete and/or partner with local Chinese companies for procurement and other State requirements. This means British businesses already in China could examine the possibility of adding a Russian component, such as an inexpensive liaison office in Russia, in order to win such contracts.
- China provides tax incentives for foreign investors who re-invest profits realized in China back into investments. This means developing a Russian angle to a British business operating in China could be financed through tax incentives and applicable reductions.
Chris Devonshire-Ellis, Head of our Russia desk, has 30 years experience of dealing with China. His recent article, written exclusively for the Russo-Britain Business Council is entitled Accessing Funding & Investment Projects In Russia’s Far East Via China & Hong Kong and explains these scenarios in greater detail.
This article was originally published as Opportunities For British Businesses In China: The Russian Far East on February 6 2020 and has been updated to reflect recent trade developments.
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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.