Russia and Indonesia: The Trade and Investment Dynamics
By Emil Avdaliani
Russia and Indonesia have historically been close partners. Indonesia does not support Russia’s isolation from the West, and the two are trying to strengthen the strategic partnership between them. For Russia, Indonesia is a window into the ASEAN and the Indo-Pacific region. It is also is a rapidly growing economy, which is anticipated to overtake Russia in coming years and has an ambition to become the sixth-largest economy in the world (in PPP values). This pushes Russia, as its focusses on Asia, to seek closer ties with the south-east Asian giant. Yet the two countries have nevertheless faced significant geographic and geopolitical constraints. Indonesia, being a self-interested actor on international arena, pushes for a more independent foreign policy which also includes not choosing sides between the West and Russia. This neatly falls into the multi-vector foreign policy agenda pursued by Indonesia and other Asian countries. Rather the country also adheres to neutrality and pursues policies which allows it to increase its manoeuvrability on the global stage.
Russia-Indonesia Bilateral Trade
The volume of bilateral trade between Russia and Indonesia is growing: Indonesia reported that in 2022 it amounted to US$3.7 billion, while the Russian side recorded slightly more than US$4 billion of bilateral commercial activity. The trend had been visible over recent years when, for example in 2021, Russia’s trade turnover with Indonesia amounted to US$3.3 billion, an increase of 40.65% compared to 2020.
Russia exports mainly wheat, meat, fertilizers and petroleum products to Indonesia. Russia also actively imports fats, palm oil, tea, coffee, cocoa and spices, machinery and various equipment from the South-East Asian republic. Indonesian exports to Russia also include manufactured goods such as electrical appliances, footwear, textiles, raw materials and minerals, wood and various products from it. Moreover, Indonesia has expressed interest in the procurement of Russian coal. Indonesia has close ties with specific regions of the Russia Federation. For instance, compared to 2021, in 2022 exports of natural rubber and fertilizers to Tatarstan increased by almost 30%. Tatarstan is significant in that it is both a majority Muslim region and has pursued an active trade policy when it comes to reaching out to Islamic nations. The coming 2024 BRICS summit will be held in Kazan, the capital city of Tatarstan.
Russia has also made significant efforts to switch bilateral trade from USD into other regional currencies though meaningful progress has been slow. Still, bilateral trade has not reached the expected levels. A further boost to commercial ties could follow after the Eurasian Economic Union (EAEU) and the Indonesian authorities conclude a Free Trade Agreement (FTA) currently being negotiated. The Indonesian government began formal negotiations with the EAEU on this, the first round of which took place in April 2022. This is built upon a memorandum of cooperation signed between the EAEU and the Indonesian government in 2019.
However, progress has been slow and it is likely the conflict in Ukraine and the Western sanctions against Russia preclude quick resolution. Indeed, in May deputy Prime Minister of Russia Alexey Overchuk told Russian news outlet RIA Novosti that, despite Russian efforts, a FTA between the EAEU and Indonesia is unlikely to be established during 2023.
That said, fellow ASEAN member Vietnam has enjoyed a highly successful and diversified FTA with the EAEU and has recommended other ASEAN nations follow suit. Vietnam’s industrial consumer processing businesses such as aquaculture and dairy have found a growing market in Russia for their products as Russia weans itself off European suppliers.
Growing relations between Russia and Indonesia should be also seen in the light of developing Russia-ASEAN ties. Around US$20 billion in commerce was conducted between ASEAN and Russia in 2021. In 2022, the two-way trade between amounted to US$15.5 billion. Moreover, trade between Indonesia and the EAEU nations (Armenia, Belarus, Kazakhstan, Kyrgyzstan, and Russia) rose by 58% at the end of 2022 compared to 2021. One example would suffice: trade turnover between Kazakhstan and Indonesia also experienced a significant growth reaching US$400 million in 2022. Again, the Islamic connection between Jakarta and Astana has helped. Russia is an observer nation with the ASEAN bloc and maintains regular dialogue including the ASEAN-Russia Comprehensive Plan of Action – a review of current Russia-ASEAN relations can be viewed here.
To alleviate connectivity hurdles, Indonesia is interested in establishing trade lines with Russia without intermediaries. Another possibility is the expanding International North-South Transport Corridor, which aims at connecting Russia with India and the wider Indian Ocean region and South Asia.
By mid-2022 Russian investments in Indonesia reached US$8.7 million spread in over 149 projects. Indonesia has invited investors from Russia to participate in the construction of the new capital Nusantara on the island of Kalimantan. Indonesian authorities are interested in Moscow’s experience in developing transport infrastructure. Russian side also hopes to infuse investments from the Russian Railways into the new Indonesian capital.
Russian state corporations such as Rosatom, Rostec and Roscosmos also see the potential in participating in extracting Indonesia’s rich natural resources make energy a significant area for collaboration especially in oil and gas sector. In order to manufacture gasoline and raw materials for the petrochemical sector, the Russian corporation Rosneft Oil corporation and the Indonesian state-owned oil company Pertamina are moving forward with their plan to construct a refinery in the Indonesian province of East Java.
Beyond infrastructure and resource extraction, the contours of intensive bilateral cooperation have recently emerged in defence and aerospace. Indonesia has been an importer of Russian defence equipment, such as Sukhoi fighter jets. Both countries have also discussed the possibility of joint production and technology transfers in the defence sector.
Western sanctions complicate Russia’s ability to invest in Indonesia. For instance, Russia’s state-owned oil and gas company Zarubezhneft is working on a plan to exit Indonesia’s Harbour Energy’s Tuna oil and gas project.
The country is attractive for Russian investors also because of the recent measures taken by Indonesian authorities. The condition for foreign citizens or companies to obtain a “Golden Visa” in Indonesia are investments that vary in conditions between US$350,000 to US$50 million. In 2022, for the first time in three years, Indonesia entered the top 5 countries popular among Russians for long trips in winter. The number of tourists visiting the country has increased fivefold. That can be expected to increase, in March 2023, Russia announced the introduction of a simplified visa regime with Indonesia. Bali especially with its well-developed tourism infrastructure is a popular destination.
Another area is education; Russian private universities aim at expanding their presence in Indonesia. In 2023 the number of Russian government scholarships for Indonesians increased to three hundred from the 261 scholarships recorded in 2022.
Looking ahead, though bilateral trade and political ties are expected to grow, they will nevertheless be more trade-oriented. Indonesia has not been investing in Russia, nor is Russia especially active in expanding its overseas investment presence. What Russia wants is to alleviate the effects of the Western sanctions on the national economy – a goal which Moscow has largely achieved with the ongoing trade expansion.
Emil Avdaliani is a professor at European University and the Director of Middle East Studies at the Georgian think-tank, Geocase.
Dezan Shira & Associates assist foreign and Russian investors into Asia, and have offices in Indonesia. We provide investment intelligence, corporate establishment, tax planning and ongoing compliance services. Please contact Maria Kotova at firstname.lastname@example.org for assistance or view our 2023 Doing Business in Indonesia guide below.