Russia – Africa Continental Investment Opportunities & Potential Explained

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Op/Ed By Chris Devonshire-Ellis

The New Africa Continental Free Trade Deal Is Good News For Russia-African Investors

Russia’s interest in Africa should not really come as any great surprise, and especially in the context of Russian-Chinese relations. Both countries are poised to make efforts to unite the continent – albeit for different reasons. Russia is looking to some extent at new export markets; the ability to become more involved in the African oil and gas industry, but also to use cheaper labour resources to supply Russian and EAEU domestic demand.

The Chinese African diaspora meanwhile has long been energetic and far reaching, mostly involved in trade. Many of them have African roots dating back centuries, with artifacts still cropping up on the East African coast from Chinese Admiral Zheng He’s voyages in the mid 1400’s. With a resource-hungry China on a global search to secure supplies, and well as improve infrastructure to obtain political influence and secure trade routes, the African adventures China has been having are starting now to impact upon supply chains, and move beyond the sales of low end goods to relatively poor African consumers. Russia is part of this progression upstream.

China’s positioning when it decides to get involved in continental trade though isn’t just a matter of turning up with a treasure map and a dictionary translating “win-win” into Swahili. Beijing, and Moscow are far more careful planners than the West often gives them credit for, and engage in developing new markets on several different levels. Africa is no exception, and both Russia’s and China’s attention to the continent has become far more sophisticated and deliberate in recent years.

An example of this is the introduction of numerous Investment Treaties that Russia has begun introducing to African nations over the past few years. This includes Morocco, who whom it has a Bilateral Investment Treaty (BIT) – a tax and duty driven agreement that provides a useful mechanism for understanding the legal, tax and dispute resolution mechanisms for investors into the country. As such, BITs are a useful starting point to clarify legal and tax treatments under bilaterally agreed conditions and should be understood as a bilateral document of first resort when understanding the investment environment, and protection mechanisms that Russia offers its many trading partners. These tend to be of particular importance for understanding the rights of companies investing from or into emerging markets. I wrote about their use in some detail back in 2013 here

BIT have also been important for China’s trade relationship with Africa as these introduced a system of codifying exactly what was meant, this providing an initial trade platform. This is particularly important in emerging markets overseas where local cultural and trade practices may differ. BIT provide a basic platform of mutual understanding, and we can expect to see more of these signed between Russia and African nations in the next two years.

More recently, as Russia has begun to understand greater specifics about doing business with African nations and where specific opportunities and needs are, it has signed off a series of more product and services specific bilateral agreements: Double Tax Treaties (DTA). Despite the name, these seek to reduce the prospect of a company involved in trade in and with Russia being taxed both in its home country and in Russia. They also seek to reduce tariffs on certain products and services, and provide for a tax loophole in the provision of withholding taxes – which can be used to mitigate against a higher profits tax.

DTA are therefore of extreme importance to African businesses with a potential market in Russia – Moroccan coffee traders for example. The same is also true in reverse, and Russia has its eye on increasing wealth creation across the continent as Africans upgrade from ox and cart to motorbikes and onto vehicles. Companies like GAZ make vehicles highly suitable for off-road conditions in Africa, and compete in the gruelling pan-African Dhaka Rally. It will only be a matter of time before GAZ Africa emerges and when that happens they will want their Russian component suppliers to service them in Africa too. We can take a look at the increasing amount of Russian investments into Africa as follows, courtesy of the Africa Report:

africa-russia

To ensure this continues to happen, Moscow has been making a lot of efforts to negotiate DTA with an increasing number of African countries, and these now include: Algeria, Botswana, Egypt, Mali, Morocco, Namibia & South Africa. The latter is a member of the BRICS grouping along with Russia, China, India and Brazil, and is a 20% shareholder along with Russia of the BRICS New Development Bank.

Thus we can see how Russia’s diplomatic and trade spread is currently evolving. It is also having a positive impact on Russia-Africa trade. While the region is fairly volatile, and subject to currency swings and regional disputes, in 2018, bilateral trade reached US$20 billion, increasing by 17% YoY.

This can be expected to continue; Africa has recently agreed the African Continental Free Trade Agreement (AfCFTA) which dispenses with tariffs on 90% on all intra-African products. Only Nigeria remains outside the FTA. This move has significant benefits for Russian businesses trading and manufacturing in Africa as they can now source cross-border throughout much of the continent.

The AfCFTA deal reduces tariffs – to be phased in over a five year period among some members – to zero on about 90% of all intra-African traded goods, thereby essentially demolishing cross-border trade barriers. That, coupled with the still-developing DTA network that Russia has built up in Africa over the past decade is set to provide a huge boost to Africa-Russia trade, with some estimates suggesting it will rise by a further 25% in the next 12 months. That will spur further infrastructure development and increase Russia’s role in Africa exponentially. It will also impact upon South-East Asia – not far away across the Indian Ocean, which washes up against the East African coast, and where Moscow is also making inroads in trade and with Free Trade Agreements between several of the ASEAN nations and the Eurasian Economic Union. That has come to pass: Vietnam has a highly successful FTA with the EAEU, Singapore has recently agreed an FTA with the EAEU while ASEAN nations such as Cambodia and Thailand are also in the queue to join, as is India, another country with huge African experience. We can expect to see geographically strategic commercial ties develop between Russian enterprises and businesses in ASEAN, India and China to exploit opportunities in Africa and Asia over the coming two decades. The movement in this direction has already begun.

The trade development in Africa is likely to see additional cooperation between Russian and Chinese businesses on the Continent. This is because the low end manufacturing that China pushed out to South-East Asia is starting to be pushed out again – both due to intensive labor issues and increasing operating costs. The implementation of AfCFTA is expected to see millions of African workers currently engaged in agriculture shift into manufacturing. About 50% of the African workforce is currently engaged in agriculture, yet it only produces a small amount of GDP. Shifting that worker pool into manufacturing has a significant impact on productivity.

This is turn will mean that production facilities that were in China ten years ago and are now in South-East Asia will eventually relocate to Africa, and especially the East and Southern African nations of Kenya, Tanzania, Madagascar, Mozambique and South Africa. Spill-over will occur in Uganda, Zambia and Zimbabwe. Russia has concentrated more on North Africa and has a jointly invested in a Free Trade Zone for Russian manufacturers in Port Said in Egypt. Russian bilateral trade with Egypt has subsequently boomed, and rose 37% in 2018. Moscow is currently negotiating a similar deal with Morocco.

Russia additionally has a logistics base in Eritrea, giving it access to the Red Sea. Russian Foreign Minister Sergey Lavrov has also recently visited Angola, Namibia, Mozambique, Ethiopia, and Zimbabwe, signing a raft of agreements for economic zones, mineral exploration and for other co-operations including military supplies and training. The first Russia-Africa Economic Forum is shortly to be held later this month in Sochi.

Russian investment activity is heating up in Kenya too, with Russian Ambassador to Kenya Dmitry Maximychev saying that Russian companies are expressing interest in setting up manufacturing plants producing automotive industry products in the country. Russian-Kenyan bilateral trade is currently running at just over US$ 300 million per annum.

“Current relations between Russia and Kenya are very multifaceted. Kenya is our largest partner on the African continent, ranking 4th in terms of trade. among sub-Saharan African states. We mark the interest of Russian companies in launching assembly plants of the domestic auto industry in Kenya, joint ventures for production of fuels and lubricants for sale in East Africa.” Maximychev said.

While sanctions against Russia continue, Russia continues to expand its trade, commercial and diplomatic ties elsewhere, and has well known historic and cultural connections with Africa. The beloved Russian Poet Alexander Pushkin was a Great-Grandson of the Ethiopian Prince Gannibal, who rose to the position of General in the Russian Army after having been presented to Tsar Peter the Great by the French Court as a boy. On many levels, but especially on bilateral trade, the Russia-Africa trade corridor is one to watch.

 

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About Us

Russia Briefing is written by Dezan Shira & Associates. The firm has 27 years of operations in China and assists Russian and Foreign investors establish operations into the country. Please contact us at russia@dezshira.com or visit us at www.dezshira.com

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