Why Russia Is Suitable For Subsidiary Manufacturing Investments Supplying The China Market

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Op/Ed by Chris Devonshire-Ellis

The Covid-19 virus is waging war across Europe, with new daily totals mounting. Businesses and personnel are facing lockdowns. Russia, too is affected – with a cluster of 100 cases in Moscow, and a handful across the country. Yet it has not been as badly affected as Europe, mainly because the country was quick to close borders and to cease incoming flights. The recent spike in Russian cases have mainly been attributable to Russian nationals returning home from skiing holidays in Italy. Regardless, it appears quick Russian reactions and strict enforcement policies have enabled Russia to escape the worst. This means it is likely to recover any manufacturing downtime rather faster than Europe.

An Attractive Ruble Rate 
That doesn’t mean to say that all is happy in Russia – but it does have implications for investors who have been looking at the Russian market and who now have an opportunity to do it on the cheap. Despite Russia’s resilience, the Ruble has dropped 30% in value in the past month, making it 30% less expensive to invest in than it was in January. Rates are currently floating as follows:

  • 82 Rubles to the US dollar
  • 90 Rubles to the Euro

Low Tax Regime & Worker Overheads 
There are additional factors too. Russia has a fairly low Corporate Income Tax rate of 20%, compared to countries such as Germany at 30%, France at 31%, and Italy at 24%. VAT is standard at 20%. Minimum wages in Russia are comparable with rates in South-East Asia, running at US$195 per month, while the country has a large available skilled and semi-skilled workforce of some 76 million. Obligatory national service means most Russian men are mechanically trained in one or other disciplines.

Proximity To China And A Lucrative Free Trade Deal On The Horizon 
However it is the downstream activity that is getting interesting – and it pays to be aware. Russia is part of the Eurasian Economic Union (EAEU) and has signed off a Free Trade deal with China. While the terms of the tariff reductions are still being worked out, it does mean that Foreign businesses invested in Russia will be able to take advantage of lower dutiable rates to attack the domestic Chinese market than would otherwise be the case. This is especially true for businesses originating in the EU and United States. What items are likely to be included in Russia-China tariff reductions?

A Rapidly Growing Russia-China Supply Chain Worth US$200 Billion By 2024 
In fact it is already a huge and growing supply chain, worth US$110 billion in 2019. We covered the Chinese purchase of Russian made products in the article Russia-China Bilateral Trade Hit US$110 Billion. What Is China Buying?

Both Moscow and Beijing, seeking to spread supply chain risks away from the West, have committed to doubling their mutual trade to US$200 billion by 2024. Covid-19 may depress that somewhat this year – but the intent is there. Businesses wishing to access China via utilizing Russia as a manufacturing base are following future trends as to where Governments are investing in directing and boosting trade, the tax regime is favorable and a boom is on the table when the China-EAEU tariff reductions are agreed.

Using a Russian base to access China may seem unusual. But times are changing, as are supply routes,  markets and free trade agreements. Those with a keen eye on upcoming developments can put Russia on a list of manufacturing destinations to consider. Our firm will be happy to provide research and cost analysis.

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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. Through our membership of the Leading Edge Alliance, we also have partner firms throughout Africa and have numerous Russian and African clients. For enquiries please contact us at russia@dezshira.com or visit us at www.dezshira.com

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