Russia and Vietnam Aim to get US$10 Bln in Bilateral Trade by 2020

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By Marina Romanova

russia-and-vietnam-aimIn May 2015, after six years and eight rounds of negotiations, Vietnam signed a free trade agreement (FTA) with Russia-led Eurasian Union (EU). Although, it took another 17 months for the deal to finally come into force in October 2016, Vietnam became the first and only country so far to establish a free trade zone with EU, comprise of Armenia, Belarus, Kazakhstan, Kyrgyzstan and Russia.
Many observers believe FTA with Vietnam was possible due to special historical ties between two states.


Historical background of comradeship with Vietnam

Russian-Vietnamese relations are developing on the foundation of the alliance of the USSR and Vietnam in the period of the Cold War. During the Indochina War the Soviet Union supported North Vietnam and after the war the Communist superpower became a principal economic partner and a political ally of the united Socialist Republic of Vietnam. After the collapse of the USSR cooperation between two countries decreased, but was not totally ceased. The joint venture oil company Vietsovpetro was still working, there were also cooperation in arms sales.

Many Vietnamese maintain warm personal feelings toward Russia, dating from Vietnam’s years as a committed member of the Soviet bloc. This is particularly true for current political and military elites, mostly northerners, who received training in Moscow or elsewhere in the Soviet Union and occupy senior positions throughout the Communist Party and state apparatus, including the party leader Nguyen Phu Trong.
In 2001 Russia and Vietnam signed a declaration on strategic partnership. Russia is Vietnam’s biggest arms provider. In 2009, Vietnam signed a contract to buy six Kilo-class submarines from Russia worth about US$2 billion. Five of them have already arrived at the Cam Ranh naval base in the central region.

In the 2010s cooperation in defense sphere increased (mostly as a result of the tensions in the region and in South China Sea in particular).

According to TASS data, the country buys a broad range of Russian armaments, including Gepard-3.9 frigates at a cost of US$300 million and submarines of Project 636 (known as Varshavyanka). Vietnam also builds Molnia-class missile boats (project 12418) under the Russian license.

russia-and-vietnam-aim3Some experts estimates Vietnam’s shopping list of military equipment, including patrol aircraft, tanks, combat jets and attack helicopters up to  US$13 billion. According to Ben Moores, a defense analyst at consultancy IHS Jane’s, “about 82 percent of Vietnam’s spend in on 2015 went to Russia,” the Wall Street Journal quote him as saying.

In 2012 Russian Gazprom signed a deal to explore two licensed blocks in Vietnam’s continental shelf in the South China Sea, taking a 49 percent stake in the offshore blocks, which hold an estimated 1.9 trillion cubic feet of natural gas and more than 25 million tons of gas condensate. Nearly 80 percent of Vietnamese oil and gas comes from Vietsovpetro — Moscow-Hanoi joint venture — and the income correspond to around 25 percent of GDP.

Notably, since 2012, as Russia became the 156th member of the World Trade Organization, Vietnam’s exports to Russia have enjoyed significant tariff reduction against the previous period.

Role of Vietnam for Russian policy in the Asia-Pacific region was highlighted in the Concept of the Foreign Policy of Russia, adopted in 2013.

However, position of Russia as an economic partner remains unassuming. According to available statistics, Vietnam – Russia bilateral trade in 2014 was US$2.6 billion; in 2015 it was just about US$4 billion, which is only a fraction of Vietnam’s trade with its top five trading partners, namely China (over US$66 billion), Association of Southeast Asian Nations – ASEAN – (US$42.1 billion), United States (US$41.5 billion), EU (US$41.2 billion) and South Korea (US$36.7 billion).

With a total capital of US$2 billion, Russia ranks 17th among countries and territories currently investing in Vietnam. Vietnamese companies have invested nearly US$3 billion in Russia, mainly in the oil and gas industry, Asia Times reports.

Export and Import Patterns

Russia ranked 22nd among Vietnam’s trading partners, accounting for merely 0.7 percent of the total export value of the country in 2015. Vietnam has exported more than twenty commodity groups to Russia, which are mainly electronic equipment and spare parts, telephones and spare parts, computers, coffee, seafood, footwear, garments and textiles.

According to Russian Export information portal, the bulk of Vietnam export to Russia -45 percent – is electronic equipment. Machinery, nuclear reactors, boilers accounts to 10 percent; footwear, gaiters and the likes – another 10 percent of the export; coffee, tea, spices holds fourth place in export pattern and accounts for 7 percent of country ship to Russia. Same 7 percent accounts to articles of apparel and accessories.

Other goods including fish and seafood; nuts and fruits; leather products; vegetables; furniture and toys each accounts to smaller percentage in export structure and totaled to 1 percent to 3 percent at the most.

In 2015 Russia has exported to Vietnam the defense and military equipment (64 percent); mineral fuels, oils, distillation products (10 percent); electrical, electronic equipment (8 percent); fertilizers (5 percent).

vietnam-russia-tradeAccording to the Vietnam General Department of Customs (GDC) the year 2016 showed some positive dynamic. In the first three months of 2016, export value to Russia’s market was US$338.1 million, up 6.7 percent against the reviewed period of 2015. In March, 2016 alone, export turnover was US$126.38 million, up 31.1 percent against the previous month.

Notably, coffee experienced highest growth in export value, maintaining its second place with US$37.51 million, up 60.5percent against the reviewed period of last year and taking up 11.1 percent of the total export turnover. In March 2016 alone, export value was USD 13.14 million, up 37.9 percent against February 2016.

Two other agroforestry products out of three Vietnam’s exports to Russia experienced highest export value, which are pepper and rubber. Particularly, export of pepper gained US$7.23 million in the first three months of 2016, up 278.6 percent, rubber export gained US$2.26 million, up 144.8 percent, assorted iron and steel gained US$3.24 million, up 234 percent against the reviewed period of the last year.

Bilateral trade has grown strongly recently with Vietnam’s exports to Russia surging almost 20 percent year-on-year in the first 10 months of 2016. In the first ten months of this year, two-way trade hit US$2.2 billion.

 

FTA with Eurasian Economic Union

A free trade agreement between Vietnam and Eurasian Economic Union (EAEU), that came into effect in October, 5, is expected to assist Vietnamese companies in competing on a level playing field in the Russian market through the removal of tariffs (currently at 5.63 percent).

According to the free trade agreement, 95 percent of import tariff lines of Vietnam seafood exported to members of the Eurasian Economic Union will be eliminated in 10 year schedule, of which 71 percent tariff lines were removed when FTA came into effect in October.

In regard to textiles and garment, 95 percent of import tariff lines will be reduced or removed, of which 42 percent of tariff lines will be eliminated in 10 year schedule, FTA reads. In regard to footwear, 77percent of import tariff lines will be reduced or removed, of which 73 percent of tariff lines will be eliminated in 5 year schedule.

“In its turn, Vietnam will apply zero duties to our beef, dairy products, tinned fish, flour, cereals as well as to pipes, rolled steel, asbestos, ships, petroleum products and many other categories of goods,” Veronika Nikishina, Eurasian Economic Union’s minister of trade, said in her interview to Russian RBTH. She also added that the duty on petrol will be reduced from 19 to 0 percent with a transition period; on cables, from 20 to 0 percent over a period of 10 years; for large goods vehicles, from 17 to 0 percent.

“Vietnam has also agreed to partially liberalize access to its market for our tobacco products, while our automobile industry companies will be given exclusive access to the Vietnamese market,” she said.

“We hope that the growth in trade will increase by US$10 billion by 2020 as agreed upon by the two governments. This is a minimum, it can increase by US$15-20 billion as a result of the deal,” Dong Huan Min, Vietnamese Trade Counselor said to the press in September 2016, Sputnik reports.

 

Cooperation Beyond Energy Deals and Arms Sales

Apart from Russia’s habitual reliance on energy deals and arms sales, Moscow recently managed to attract Vietnamese private investors to its food processing industry.

The Vietnamese dairy producer TH True Milk project is regarded as Vietnam’s biggest investment currently active in Russia. The firm will pour US$500 million in the first phase, from which it expects to get the first batch of dairy products in mid-2017.

russia-and-vietnam-aim4The company will invest around US$2.7 billion in the three-phase project over 10 years. It hopes to raise 350,000 cows and reach milk processing capacity of 5,900 tons/day after the third phase, TH True Milk said, adding that it has another plan to set up 300 retail dairy stores under the name of ‘True Mart’ across Russia.

On May 16, TH signed a cooperation agreement with another Russian region – Kaluga province to set up three dairy farms worth US$190 million in total. The farms are part of the first phase of the project, Vietnam Express reports.

Some Vietnamese fish producers are hoping to fill some of the gap left by the Western ban on seafood shipments following the Ukraine crisis. The embargo has left Russia without some of its favorite fish, such as farmed Norwegian salmon and North Atlantic cod and mackerel.

As a result, fish consumption by Russians has dropped markedly. So far there is little sign of the ban being lifted, despite moves to do this by some EU countries.

Per Vasep, Vietnamese local producers have been increasing their supplies of pangasius catfish to Russia.

The country’s largest pangasius or shark catfish producer, Hung Vuong, has announced it will be moving some of its operations into Russia through the acquisition of a 51 percent stake of Russian Fish Joint Stock Company, www.fishupdate.com reports.

The move, says Hung Vuong, is aimed at gaining market share and improving levels and quality of Alaskan pollock in Russia.

Earlier in April 2016, as Russia-Briefing reported in May, the Russia’s central bank accredited Bank for Investment and Development of Vietnam (BIDV) to be country’s first financial representative on the Russian market to develop bilateral payment methods to facilitate trade and to arrange payments between Russia and Vietnam in the their national currencies. The joint bank was take part with Russia’s state-run VTB bank, its main financial partner in Russia for the last 17 years, in a pilot project aimed at arranging payments between two countries in their national currencies.

In November 2015, BIDV, VTB and VRB (Hanoi-based Vietnam-Russia Joint Venture Bank) has launched the bilateral payment channel, facilitating the transactions between two countries. BIDV is also a co-founder of VRB, which is so far the only financial institution with Russian capital working on Vietnam’s market.

However, certain challenges such as high shipping expenses due to the geographical distance, along with differences in business culture and language may prevent Vietnamese companies to accomplish the task “to catch a large share of the Russian market over the next few years,” as Vietnam Association of Seafood Exporters and Producers phrase it.

Dezan Shira & Associates can assist with investment into Vietnam and Russia. For assistance please email vietnam@dezshira.com or russia@dezshira.com

Please also see our Vietnam Briefing website at www.vietnam-briefing.com or visit our firm at www.dezshira.com

 

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