Russia’s Increasing Trade Ties With Africa
Interview with the Chairman of Afreximbank as Russia-African trade exceeds US$20 billion
Africa today is one of the most attractive markets and promising regions for long-term investment. The continent shows the world’s highest consumption growth rates, due in part to the African Continental Free Trade Agreement (AfCFTA) that kicked in from January 1 this year and has eliminated intra-African tariffs on 90% of all traded products. That has made pan-African sourcing and supply chain development a major growth driver. This, combined with improving infrastructure investments made both by China’s Belt & Road Initiative and Russia, coupled with a significant, young, and competitive labour force are boosting African trade on a global basis. Within the next ten-twenty years it will develop as the new ‘workshop of the world’.
Russia has been paying attention and has ramped up business activities in the region. The first-ever Russia-Africa summit, held in Sochi in 2019, was a powerful impetus for this. The second one is due next year. Both sides expect a considerable increase in the number of contracts that will be concluded.
To explore what this means for Russian investors and businesses, Russia’s TASS newspaper interviewed the African Afreximbank President Professor Benedict Oramah. That interview, together with our additional comments and technical trade intelligence follows.
Afreximbank was founded in 1993 and is headquartered in Cairo, with five regional offices covering the Central, West, East and Southern African regions. It is a pan-African multilateral bank and is being positioned to be the trade finance bank for Africa. Its primary investors are African governments, African Central banks, African development banks and other African financial institutions. It is capitalised at US$5 billion.
The banks President, Benedict Oramah stated in his Tass interview that trade between African countries and Russia have seen considerable progress. “Just six years ago there were exports of some US$8 billion from Russia and imports to Russia from Africa of US$2 billion or less. Today we have Russian exports to Africa worth US$14 billion a year and imports of African products of about US$5 billion. That means bilateral trade is about US$20 billion”. This represents a doubling in Russian-African trade since 2015, or an average annual growth rate of 15%. The trade corridor is rapidly expanding.
Russian and African businesses are developing considerable mutual interests towards each other. The first Russia-Africa 2019 summit helped introduce these partnerships and illustrated there was mutual consumer demand. The contract value concluded at that event exceeded US$12 billion. Oramah predicts that deals clinched at next year’s forum could exceed US$20 billion.
Opportunities For Russian Investors
Oramah believes that Russian companies have several advantages over their competitors in Africa in a number of fields, such as the construction of railways.
“Because of the AfCFTA, African countries are now building a pan-African railway network. Today we have the Chinese, we have the Americans, we have the Germans, who are in all these projects…That is a very, very promising area,” Oramah said. Russia for example is providing rolling stock for the Egyptian highspeed rail link between the Red and Mediterranean Seas.
Oramah sees Russian companies’ great potential in mining, information technologies and medicine. Vast opportunities exist in industry as well. Oramah said Africa would soon be moving towards added value production and this will require investments in processing facilities.
“The era of commodities is disappearing. Everywhere you go engineering services are required, Africa is building its infrastructure. It is very much behind and it’s trying to catch up,” Oramah said.
In this connection, he stressed, Russian businesses can reap the benefits of the Russian industrial zone, which the Russian Export Center is creating at Port Said close to the Suez Canal in Egypt. It is a special territory with tax incentives for Russian resident enterprises, which will be entitled to preferential lease terms and tariffs and business sites ready for operation. That means cheap land and building rents as well as discounted utility overheads.
Such zones also provide for the duty-free importation of Russian (or other) components, which can then be combined with African components to complete a finished product made with African labour rates.
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The duty free import facility permits businesses to work on manufacturing processes without being liable for duty or VAT at the production stage, which can save millions of dollars in cash flow expenditure. The finished item can then be reexported back to the AfCFTA market (at which point the imported parts duty becomes due) or exported to other markets such as Russia, the Eurasian Economic Union or elsewhere, in which case relevant import duties will apply. However, the cost savings from using African labour would still be an advantage.
Oramah said one of Russia’s major advantages was goodwill. He remarked that even young people in Africa knew how Russia helped African people fight for independence. “So an emotional link is there,” he said.
“There is also the political will demonstrated through the actions of President Vladimir Putin. And, of course, our relationship that EXIAR (the Russian Agency for Export Credit and Investment Insurance) has with Afreximbank. Afreximbank is a key player on the African market. That’s a big advantage for Russia,” Oramah stressed.
African Cooperation With EXIAR
Oramah believes that cooperation with the Russian Agency for Export Credit and Investments Insurance (EXIAR) will be a major factor that will let Russia gain a firmer foothold in Africa.
In January 2022, the two agencies begin a staff exchange program. This will help them better understand each other’s operations and establish contacts between Russian and African businesses that wish to do business together.
Afreximbank is providing EXIAR with access to its digital platform ‘Africa Trade Gateway’, due to be launched next year.
Oramah described the platform as an ecosystem of digital products, such as a customer due diligence system, a trade information portal meant for the search for supply chains, and a portal of trade regulations that contains all banking, trade, and investment regulations from 55 African countries. Other integral components of Africa Trade Gateway are a pan-African payment system and protocol, used for making global payments.
One remaining trade resource is yet to be commissioned – a trade information portal. Potential exporters can use it to search for information about all African companies in different countries that have ever imported goods of interest to them. Tenders are being put out to deliver this platform.
“All those services will be integrated into the Africa Trade Gateway platform. It is the only marketplace that will be made for AfCFTA. This is the only platform that has all the information crucial to doing business in Africa”, Oramah said.
Guarantees For Foreign Investors In Africa
One of the biggest challenges for Russian and other companies looking to enter the African market is the lack of financial mechanisms to support and guarantee their investments.
“We have discussed this with EXIAR. We have what is called AFGAP – Afreximbank Guarantees. We provide country risk guarantees, we provide investment guarantees and we provide other forms of guarantees that investors need: for example, completion risk guarantees, market availability guarantees. But the key ones are country risk and investment guarantees,” Oramah said.
According to him, Afreximbank is also offering such services for many African companies. For Russian companies that are coming the bank is sharing the risk 50-50 with EXIAR. Meanwhile, as Oramah notes, Afreximbank is willing to cooperate with other Russian financial and credit organizations.
“We are working already with some Russian banks such as VTB, and we are in discussions with VEB. Our lines of credit are open for several Russian banks,” Oramah said.
Russia is also opening a US$5 billion trade platform to allow Russian online traders access to African consumers. It will facilitate payment as well as deliveries.
The AfCFTA: An African Continental Game-Changer
Important steps have been made among African countries for creating better conditions for their business development and the shaping of an attractive investment climate. The biggest thing that happened in Africa is the agreeing and implementation of the AfCFTA. That is a huge game-changer.
“The reason Africa has been behind economically is that is it a continent divided into 55 small countries. Many are too small and don’t have the capacity to make big deals. What the AfCFTA has done is remove those barriers. It integrates the entire African continent and its population of 1.3 billion people. Oramah stressed. According to him, AfCFTA creates an economy of US$2.6 trillion.
Russia-Africa Institutional & Free Trade Developments
Russia, together with South Africa, are both members of the BRICS group, which further promotes connectivity and trade developments between members. South Africa is the continents largest economy and a major global driver for pan-African investment. The other BRICS members are Brazil, China and India. Collectively, they have invested in the New Development Bank, (NDB) which provides national low-cost financing with a particular emphasis on green finance. The NDB is capitalized at US$100 billion.
BRICS have also been developing digital payment systems and other intra-member digital trade platforms, much of which can later be expected to be introduced into the African economy.
Russia, as part of the Eurasian Economic Union (EAEU) bloc that also includes Armenia, Belarus, Kazakhstan, and Kyrgyzstan has also been discussing Free Trade Agreements with various members of the AfCFTA bloc. These include the North African nations of Egypt, Morocco and Tunisia and can be expected to come into effect 2022-23. They are also likely to include specific Special Economic Zones of the type described earlier at Egypt’s Port Said. Plans for example to do this have been discussed with Mozambique and Namibia. These will give access to AfCFTA sourced products, cheaper African labour and to Mediterranean Ports, then giving further competitive access to the pan-African AfCFTA markets in addition to Europe, the Middle-East and South Asia.
Several other African nations are also understood to be discussing Free Trade Agreements with Russia and the EAEU meaning that over the next ten-fifteen years, there will be some relocation of certain Russian and EAEU manufacturing facilities to Africa, a negligible trend at present but one that will ultimately occur.
In addition to this, Russia itself has signed off Double Tax Treaties with numerous African countries, including Algeria, Botswana, Egypt, Mali, Morocco, Namibia, and South Africa. Double tax avoidance treaties 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.
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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 firstname.lastname@example.org for Russian investment advisory or assistance with market intelligence, legal, tax and compliance issues throughout Asia.