Russia As A European Union Services Industry Partner. Where Is The Market Heading?

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Op/Ed By Chris Devonshire-Ellis

How well balanced or desirable is Russia’s services trade with the European Union? Who are the EU’s competitors?

Sanctions imposed by the European Union on Russia in 2014 have diminished bilateral trade with Russia considerably over the past four years. Although there is signs of some recovery as markets adapt and move on, the sanctions remain in place, in moves that are estimated to cost the European Union some US$240 billion, while Crimea, the region that sparked the sanctions, is currently the fastest growing economy in Russia.

In terms of the services industry, trade in services plays an important role in all modern economies. A resilient tertiary service sector, as well as an increased availability of services, can boost economic growth and enhance industrial performance. In an increasingly localized world, services such as finance, insurance, transport, logistics and communications deliver key intermediate inputs and thereby provide crucial support to the rest of the economy.

However, when it comes to Russia, sanctions imposed have seriously affected the European financial services industries right across the board, in addition to tourism, infrastructure, oil and gas, deep water exploration, and import-export. Specific sanctions have also been placed on a number of prominent Russian businesses involved in construction and other infrastructure development industries, cutting off their ability to trade with EU contractors, some of whom have specific and valuable expertise to sell. Today, the remaining EU bilateral service trade with Russia is worth about €70 billion to the EU as a whole, having dropped by @60% since sanctions began.

The question is, does this matter to the EU’s services industry? How balanced is the EU services trade position with Russia? Would Russia be a net buyer of EU services or a net exporter? How valuable would its contribution likely be if sanctions were lifted?

We can take a look as follows at the services sector in terms of bilateral trade in 2018:

EU Services Industry, Bilateral Trade 2018
Country Exports To Russia (€, Billions) Imports From Russia Balance
Austria 11.36 4.63 +6.7
Bulgaria 7.34 8.5 +6.5
Belgium 5.05 4.66 +0.3
Croatia 4.53 1.68 +2.8
Cyprus 4.81 2.89 +1.9
Republic Czech 1.13 0.34 +0.7
Denmark 0.42 0.29 +0.1
Estonia 0.27 0.58 -0.25
Finland 2.07 0.81 +1.26
France 4.67 2.45 +2.22
Germany 5.71 3.43 +2.27
Greece 1.33 0.13 +1.19
Hungary 0.33 0.21 +0.1
Ireland 4.56 1.27 +3.36
Italy 2.69 1.01 +1.67
Latvia 0.54 0.39 +1.44
Litduania 0.46 0.43 -0.03
Luxembourg 0.53 1.65 -1.12
Malta 0.16 0.19 -0.03
Netderlands 2.71 1.76 +0.95
Poland 0.64 0.60 +0.04
Portugal 0.18 0.03 +0.14
Romania 0.53 0.56 -0.03
Slovakia 0.109 0.104 +0.005
Slovenia 0.07 0.19 -0.48
Spain 2.39 0.37 +2.02
Sweden 0.64 0.31 +0.32
United Kingdom 4.26 3.21 +1.25
*Source: Russian Central Bank

The figures show that the EU is a major net exporter of services to Russia, and can be compared with other prominent countries and regions as follow:

EU Services Industry, Bilateral Trade 2018 
Country/Region Exports ( billion)   Imports Balance
ASEAN 97 130 -33
China 50 26 +24
Japan 40 20 +20
Russia 70 45 +25
United States 220 210 +10
*Source: EU Commission 

According to the European Business Services Alliance (EBSA) the services sector accounts for more than 70% of the GDP in the EU, and Business Services is the fastest growing service industry. Business services represents around 12% of the European economy and are key drivers in increasing European productivity and transforming the European economy. In the latest calculations from Eurostat, business services grew by 6,1 %, an impressive growth rate in a period where other parts of the economy is struggling. Business services on EU-28 average account for 10% of employment, and in some member states up to more than 16% (The Netherlands). These employees are employed in 1.3 million businesses of all sizes throughout the EU.

What Is Russia Buying In Global Trade Services?
Russia then remains a self-inflicted negative in terms of the EU, as trade in services has dropped off since the imposition of sanctions. This is especially true in the financial services and construction/infrastructure related industries. This should be of trade concern, as Russia is a net purchaser of EU services, and would purchase considerably more if permitted too. We can examine Russia’s purchases in the global services sector this year to date:

Russia’s Services Industry, Global Imports, 2019
Sector Amount (€ billion)
Construction 4.28
Telecoms & Information Systems 4.19
Insurance & Pensions 0.89
Financial 1.61
Other Business Services 18.20*
Personal, Cultural, Recreation 1.61
Other Services 7.53**
*significant service sectors include: mining, manufacturing, retail, vehicles, professional, academic.
**significant service sectors include: accommodation, travel, insurance
Data from the Russian Central Bank
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The United States & Asia Have Replaced The EU In Supplying Russia In The Services Industry
Clearly Russia remains a significant global purchaser of services, in a market whose purchase value is growing (according to TradeMap) by about 10% per annum. Increasingly though, these services are being provided by alternative markets:

Top Ten Non-EU Major Services Suppliers To Russia, 2018
Country Service Export Value (€ billion)
Belarus 15.7
South Korea 12.7
United States 12.1
Switzerland 9.3
China 5.7
Singapore 3.1
Hong Kong 3.0
UAE 2.9
Kazakhstan 2.8
Turkey 2.3
*Source: TradeMap, UN Comtrade.

There are some surprises here. Firstly, that the United States, despite sanctions, has increased the amount of services it has been selling to Russia, and has grown its sales to the Russian market by 30% since 2014, when sanctions were imposed. That is in direct contrast to the position of the European Union, who have lost significant share, while following the US lead on sanctions. Brussels might want to reflect on that.

What is also of note are the positions of Belarus and Switzerland. These high figures can be attributed to EU businesses involved in Russian trade & services relocating out of the EU, and establishing presences in these countries to allow them to continue to access the Russian market. All other service providers to Russia are in Asia, and have been growing their Russian market access by an average of 10-15% per annum since 2014. The loss of the European Union market in terms of servicing Russia has been to alternative providers, most notably the United States and Asia.

There are implications here. One is the relative honesty of the United States towards the European Union when it comes to sanctions upon Russia. US-Russia trade was not extensive in 2014, while the European Union trade has been. With the EU losing significant ground in bilateral services, the United States has grown its share by 30% over the same period.

Russia has also been buying many more services from Asia. These have come from familiar Asian service suppliers, such as South Korea, China, Hong Kong and Singapore. Not included in the list above is Vietnam, who due largely to the Free Trade Agreement, covering services it has with the Eurasian Economic Union, has seen its exports to Russia rise from zero to US$1 billion in just over two years. Other Asian markets are following suit as Russia looks to expand and diversify its services purchase reach away from the EU.

That is a natural progression and goes hand in hand with Russian manufacturers starting to develop overseas – they need on the ground services but with professionals familiar with Russia. Small Russian SMEs and entrepreneurs are now finding they can establish businesses in Asia to service Russian MNC needs. In this manner, the development of supplying services to Russia is moving away from the European Union. Opportunities await for Russian and other businesses able and willing to supply the Russian market in services both home and abroad.

About Us

Russia Briefing is produced by Dezan Shira & Associates. The firm advises international businesses on investing, setting up businesses and administering them throughout the Eurasian region, including Russia, China, India & ASEAN, and maintains offices and partners in each of these countries and regions. For assistance with investing in Russia, or for Russian businesses wishing to invest in Asia, please contact Maria Kotova at maria.kotova@dezshira.com or visit us at www.dezshira.com.

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