Russia Looking East To Compensate For Loss Of EU Markets

By Chris Devonshire-Ellis 

New Eastern markets and corridors are opening up as Russia moves away from Europe

The Russian invasion of Ukraine can be expected to have long-lasting repercussions and to completely change global supply chains. In this article we discuss how Russia is looking east, the ports it will now fast track and develop and the new trade corridors and markets it will now target in the absence of any meaningful trade with the EU.

Sanctions Impact

The sanctions imposed by the United States, EU and UK have made a great deal of political noise, however the Russian Central Bank, along with other major Russian banks has long been prepared for a SWIFT disconnection and have pre-empted the freezing of assets by moving the vast bulk of these to alternative jurisdictions where they can continue to operate. The bulk of Russia’s foreign reserves and related assets remain under the control of the Central Bank.

In terms of trade, the impact of SWIFT disconnection has yet to be fully realized, however are unlikely to be fully inclusive. Payments for certain non-sanctioned products and using non-sanctioned Russian banks can be expected to continue, we provided some advisory here.

Russia’s ability to pay for product is not in question. Buyers from overseas may face initial difficulties in making remittances for goods and services, however Russia does have its own SFPS global payment system, and this can be expected to be used as an alternative for making payments to Russia, as may Russian correspondent banks in China and various other non-US and EU countries.

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Russia’s Diplomatic Pivot To Asia

The move to reposition Russia towards Asia has been long planned. As we noted just over a year ago, Russia now has more Asian diplomatic missions than the West. EU members all have Embassies in Moscow, but now just have 36 consulates across the rest of Russia. That is now outstripped by Asia, also with Embassies in Moscow but with an additional 42 consulates elsewhere in Russia. None of the EU nations have made it east of the Urals except for Germany, with a presence in Novosibirsk, Russia’s third largest city, situated in Siberia.

It is a different story for Asian nations, as the diplomatic shift between Russia and Asia continues. China, India, Japan, Kazakhstan, Pakistan, South Korea & Turkey all have consuls in St. Petersburg, right on the border with the EU and just a hour’s flight from numerous EU capital cities. Asian countries are far more spread out across Russia than their EU counterparts, making inroads into Yekaterinburg, where five Asian countries, including Vietnam see opportunities now closed off to the West.

It is only natural that multiple Asian nations have a presence in Vladivostok, in Russia’s Far East, just two hours flight from Beijing, Seoul and Tokyo. Vladivostok is Russia’s largest eastern seaport, and a developing link in the Northern Sea Passage, providing maritime services, energy and goods processing facilities between Asia and Siberia and possesses maritime corridor and trade links through to China, Hong Kong, ASEAN and through to Gujarat in Western India.

Russia-Asia Trade & Free Trade Agreements

Russia’s overall trade with Asia reached approximate parity with its EU trade last year and Moscow has been busy preparing for a huge push east. That can now be expected to manifest itself over the course of 2022 and 2023 as Free Trade Agreements currently being negotiated via the Eurasian Economic Union (EAEU) are set to be finalized with a large number of Asian economies. The fact that the Russian ruble has significantly declined in value by 25% as Western sanctions kicked in has only made these agreements more attractive in Asia.

Among Russian-Asian FTA to be concluded are numerous deals with various ASEAN members, including a complete deal with the entire ASEAN bloc. A roadmap for ASEAN-EAEU trade integration has already been worked out and is being actively promoted by Vietnam, which already has a highly successful FTA with the EAEU. Singapore is also putting finishing touches to an EAEU FTA it agreed last year.

India is also involved in EAEU free trade negotiations, with both sides keen and a deal seems increasingly likely. Pakistan is also known to be interested in expanding Russian trade and although due to India’s presence a full Pakistan-EAEU FTA may be awhile off yet, bilateral trade concessions can be expected. Rounding off the Indian subcontinent, Bangladesh made a formal approach to commence EAEU negotiations just a few weeks ago.

Iran already has a Free Trade Agreement with the EAEU and is poised to sign a 20-year cooperation agreement with Russia. Finally, China signed off an FTA with the EAEU in September 2018. That has not yet incorporated tariff reductions but when these are completed this opens up another, significant trade corridor.

Elsewhere, Russia has also been holding Free Trade Agreement discussions with the UAE, Egypt, Israel, numerous African states as well as with Latin America, with trade ties between two of the region’s largest economies, Argentina and Brazil having recently been approved.

Emerging Russia-Asia Trade Corridors

These FTA as and when they materialize will open up new Trade Corridors of both Eurasian and Global significance as follows:

The Northern Sea Passage

Huge investments are being made in rail, air and shipping facilities all along the Northern Sea Passage, which extends from Vladivostok in the Russian Far East to Russia’s Western European Ports at Murmansk, where Russia borders Norway, which is not a member of the European Union. The route, which due to global warming is becoming increasingly viable, offers a less costly and time consuming maritime route between Europe and Asia. Roughly equidistant is the Yamal Peninsula, part of Siberia and the source of much of Russia’s gas and oil wealth. Both shipping and pipelines carry Russian energy resources back to Asia, including China, numerous ASEAN nations and as far south-west as India. Russia will be looking to sell more gas to Asia, meaning additional port and processing facilities will be added to existing ports all along this route.      

International North South Transportation Corridor (INSTC)

The INSTC route extends from India’s Western ports at Mumbai and Gujarat via shipping to Iran’s Chabahar port on the Persian Gulf. Russia has an FTA with Iran and is negotiating one with India.

The route then transits Iran north-south to the Caspian sea, where goods can then be distributed by shipping north to Russia, at the Lagan Port near Astrakhan. The INSTC also heads east via rail to Afghanistan, and Central Asian markets in Turkmenistan, Kazakhstan and through to Uzbekistan, or West via Azerbaijan’s Baku Port to Turkey and onto Europe across the Black Sea. At present the overland route is by road, however Iran is in the process of completing rail connectivity to and from Chabahar. The INSTC therefore gives Russia multi-modal access to the Caucasus, Central Asia, the Gulf States, Iran and to East Africa, India, and South Asia. The key Russian Port servicing these markets is Lagan, which is currently still being developed and which accesses four major Belt and Road transport routes including transshipment to Kazakhstan and onto China.

Central-South Asia Connectivity

Multiple projects are being integrated into one massive Central-South Asia connectivity map that will ultimately see Omsk, a Siberian Russian city, as well as other Central Asian cities connected by road and rail to China’s southern seaports and ASEAN. More on that here.

Part of this is China’s National Highway G213 which is now open and extends North West from China’s border with Kazakhstan to Russia and South East to China’s southern ports and Vietnam.

Trans-Siberian & Mongolian Railways

The well-known Trans-Siberian railway is a key part of the Belt and Road Initiative and Russia-Asia connectivity. There are two main spurs, the Trans-Siberian which connects through from European Russia to Vladivostok and maritime connectivity with East China, Japan and South Korea, and then links south to China’s national rail network at Harbin. The Trans-Mongolian departs Russia at Irkutsk, then bisects Mongolia before ultimately terminating at Beijing with access to China’s national rail network and markets in Shanghai and beyond. Additional capacity and hi-speed rail are both being enhanced, as are routes back into Russia and the new hi-speed rail between Kazan, heading West via Moscow to St. Petersburg.

The Russia-Asia Trade Impact

Although some of these projects are incomplete at present, all are underway with a fast track of the Free Trade negotiations in addition to certain trade corridor infrastructure investments already being made. It should be remembered that Russia signed a US$80 billion, ten-year agreement with China just last month, and that Russian-China trade is rapidly expanding. As both Free Trade Agreements and Infrastructure connectivity come online, the Russia-Asia trade corridors will take on greater significance than Russia’s trade with Europe.

Trade Administration & Finance

As I mentioned to begin with, sanctions will impact on Russia’s ability to trade. Russian companies may find it difficult to open bank accounts for example. However, dealing with these impositions has already been worked out, and alternative mechanisms for trade bypassing SWIFT are already, and will increasingly become viable.

Russian businesses have the entire Asian market to consider. At the recent UN debate on Ukraine, both China and India abstained from passing a motion against Russia. Both are well aware that their future trade options need to be focused in part, on what Russia has to offer. With the country still in possession of the some of the world’s largest mineral, gas and oil reserves, together with a hi-tech manufacturing industry, a significant market and a massively under-valued currency, the opportunities for Russian businesses to expand into a value for money, rapidly expanding and increasingly significant, Asian middle class economy represents an extraordinary opportunity to Russian business to access Asia. The blueprint and roadmap are already in place.

Dezan Shira & Associates provide investment assistance and advisory to Russian companies looking to set up in Asia and have done since 2011. For help in understanding the Asian markets please contact us at russia@dezshira.com or visit www.dezshira.com

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