Russia’s Export To Asia Opportunity

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Op/Ed By Chris Devonshire-Ellis

Manufacture in Russia to sell to China? It’s not as crazy as it sounds. The Russia-China bilateral trade corridor is expanding and is set to double by 2024 to US$200 billion. Both Governments have put in place specific policies and trade incentives to encourage this to happen, as both are highly motivated to decrease their trade exposure to the United States. China is deficient in many areas and its middle-class consumer base is also expanding – it will reach 550 million by 2024 – three times larger than that of the United States. China’s imports are thus growing from key strategic markets and Russia is a neighbor with a long border and increasing valuable infrastructure connections. For example, the first significant bridge over the Amur River will be completed in August 2021 while Vladivostok is booming as a Port.

So what is China buying?

This year, the supply of meat and offal from Russia to China increased nine times, soybean oil by five times, and sunflower oil exports doubled. Russia also began supplying beef to China for the first time this year.

China also signed a Free Trade Agreement with the Eurasian Economic Union, which includes Russia, back in 2018. At present, that is non-preferential, and import tariff reductions of specific products are still be negotiated. However, when these are agreed, Russia-China bilateral trade will massively increase. That may well happen later this year to spur recovery after Covid-19. With the EAEU as a geographical presence sitting between China and the European Union, we can look at how EU exports from the major billion Euro EU exporters have performed in their China trade over the past three years as follows:

The point here is that the Suez route is not the optimum transshipment between China and the EU: Russia is, either via the rail network – which reached a record 12.400 trains travelled between China and the EU last year. Meanwhile, the Northern Sea Passage is coming onstream and saves 35% shipping time and costs than using Suez. That has very specific implications for Russian FDI as companies need to take advantage of those savings and it lies inbetween.

Russian Manufacturing Tax Incentives

There are other reasons to consider setting up in Russia. The Individual Income and Corporate Profit Tax rates are competitive, at 15% for earnings above 5 million rubles for personal income, and 20% for standard corporate income tax, although incentives if used properly can reduce this to 15.5%. VAT is chargeable at between 10-20% depending upon the product.

These compare as follows:

Russia’s Double Tax Treaties

Russia also has an extensive network of Double Tax Treaties (DTA). These are useful instruments for foreign investors or trade businesses to understand and utilize as they mitigate against the potential for being taxed in two countries, and often provide clauses that permit the reduction in income tax, VAT, and other pertinent taxes between citizens of Russia and another treaty state. This means the application of them can help open up new markets in Russia and vice versa by reducing the overall tax burden. This can have significant impact on trade profitability. We provide a full list of countries that Russia has a DTA with in the article Russia’s Double Tax Treaty Agreements.

Russian Free Trade – The Eurasian Economic Union

Russia is a member of the Eurasian Economic Union, a free trade area that also includes Armenia, Belarus, Kazakhstan, Kyrgyzstan and Russia. It is a combined market of 182 million consumers and a combined GDP of more than US$1.9 trillion. Trade has been growing among member nations, and is currently about US$750 billion per annum. Global exports from EAEU member states have also been increasing as a result.

This means a presence in Russia gives favorable access to the other EAEU markets, and beyond. In addition, the EAEU also has Free Trade Agreements with Iran, Israel, Serbia, Singapore and Vietnam. Others are currently being negotiated, including with several African and Asian nations including India. Russian investment and trade with Vietnam as an example went from practically zero to US$10 billion in two years following the Vietnam-EAEU FTA.

The Russian Arctic

Russia recently declared the entire Russian Arctic a Free Trade Zone, with tax incentives and reductions available for income and individual income taxes, land, property, social insurance and so on. That has spurred the development of a Karelia border zone aimed at enhancing trade with Finland, Norway and Sweden, and especially in fishing, tourism, transport and logistics. Tourism is also the theme of Murmansk, the capital city of the Arctic FTZ, and this both to develop as an upgraded Arctic trading port and trade centre but is also attracting gourmets, setting up restaurants and bars for tourists wanting to sample Arctic cuisine. Arkhangelsk is not to be outdone and is developing its Pomor Marina as a Yachting Centre.

But this is not purely about Trade and Tourism. The Russian Arctic provides the coastline and with it support services for the Northern Sea Passage, with the massive Yamal oil and gas fields able to supply China and India with enough energy for the next 40 years. That means massive investments in Ports, Road and Rail connections throughout the Arctic region. In time, as they come online they will require support services of their own.

The Meridian Highway

The Meridian Highway will stretch from the Belarus border with the European Union to the Russian border with Kazakhstan, providing the European and Urals leg of an existing highway that already crosses Kazakhstan to China. The Meridian Highway will effectively link China directly to Western Europe by road. It stretches just over 2000 km through some of the more remote areas of the country – acting as a “Moscow bypass” between China and Europe.

The new link is expected to cost around 600 billion rubles (US$9.5 billion), and will be built using a public-private partnership – with guarantees to investors about returns. The main source of revenue is likely to be trucks between Europe and China, and it is expected to take some of the freight that currently uses the Trans-Siberian Rail and the Suez Canal. Construction is now underway with total completion due sometime in 2030. However, parts of it will be completed sooner than others, meaning strategic hubs will develop along the route. Those will become service and logistics centres.

The Trans-Siberian Land Bridge

Russia announced the opening of the “Trans-Siberian Land Bridge” with a successful first test run of cargo from Yokohama to Europe last year. Essentially the route covers a dual maritime-rail link that initially sees products travel by ship from ports on the Japanese west coast, travel to Vladivostok and connect with the trans-Siberian express through to Moscow and onto Brest in Belarus, right on the border of the EU and Poland. From there they enter the EU market and be dispersed as required. Although the concept is not entirely new, it is a new commercial route, and cuts down the journey time in shipping goods from Japan to the EU by 50%, taking about 20 days, saving considerable amounts of time and money. The route intersects with both the Meridian Highway and Russia’s extensive national water network of canals and rivers, along which are 20 cities with populations in excess of 1 million. Concerning manufacturing facilities, both Russia and China have been busy putting in Free Trade Zones along this corridor, allowing manufacturers along the route to take advantage of regional labor costs and skills, in addition to the usual tax holidays and other incentives.

An Emerging Hi-Tech Economy

Russia has been investing significant amounts in new technologies and is rolling out a 5G network to massively increase digital capability. It is a major player in the development of key trade technologies such as blockchain, and is expected to be rolling out a digital version of its currency, probably in 2022.

As at 2021, Russia is the world’s eleventh largest economy yet is making strides to reduce dependence on the United States (as is China) and is using investments in hi-tech to do this. It has earmarked US$26 billion to spend on National Digital Economic Development. Russia’s largest consumer bank has also just joined up with HSBC’s blockchain network.

Russia has been pioneering driverless, electric vehicles to enable it to exploit the vast inland regions, which can be difficult terrain and challenging for drivers. Smart roads and smart cars are the way ahead. We summarized some of these new vehicles in the article Russian Auto Boost With Electric, Driverless & Top Range Cars. Kamaz for example have been testing driverless trucks in the Arctic. Coping with the huge distances in Russia is a major factor for the national embrace of new technologies.

Russian architecture and construction technologies are also first class. The Lakhta Centre in St. Petersburg was completed last year. It is the tallest skyscraper in Europe at 1,516 feet and has just won the Emporis’ 2020 Skyscraper Award. It is certified LEED Platinum making it one of the five most eco-friendly skyscrapers on Earth, and marks the first time any European building has won the Skyscraper Award since 2013.

Exploiting The Belt & Road Initiative Infrastructure

Russia has been a key player in China’s Belt & Road Initiative and is undergoing numerous, impressive projects as part of this. These investments, often partnering with China, are starting to come to fruition and will present opportunities for businesses and investors to exploit that same infrastructure build.

A Developing Global Trade Player

As can be seen, there is plenty to consider about Russia. It has had a tough time of it due to sanctions, which have been mainly about the United States wishing to block sales of Russian natural gas to Europe than actual arguments about the Crimean issue. Several years on however, and Russia has been reinventing itself, both upgrading existing infrastructure, investing in new build especially in the Arctic region and on its borders with China, and actively pursuing new export markets. It has been doing this both in soft form via Free Trade Agreements through the Eurasian Economic Union, but also in hard form by investing in Free Trade Zones in Africa, and Asia.

Russia is extremely wealthy in terms of what it has in the ground, and export development is likely to be swift. With attractive tax rates, a raft of foreign investment incentives, the expansion of trade and export is a key area of national policy. Now is the time to be looking again at this emerging, dynamic market with tremendous manufacturing potential and pent-up demand from its consumer class. Russia should be back on the foreign investment radar for new opportunities.

 

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About Us

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 russia@dezshira.com for Russian investment advisory or assistance with market intelligence, legal, tax and compliance issues throughout Asia.

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