Russian Service Exports Outstrip Imports For First Time In Four Years

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By Chris Devonshire-Ellis

Growth opportunities for foreign investors especially in transport services

The continuing rebalancing of Russian exports away from purely energy commodities has received a boost in that the Central Bank has stated that foreign trade in Russian services last month outstripped imports by US$126.7 million.

This is the first time Russian services exports have been higher than imports since 2017, and the first time that a full quarter (April-June 2021) has exceeded imports since 2001. We itemize the Russian service growth sectors as follows:

Transport & IT Services

The strongest growth of exports over imports was in Russian transport and IT services. The Ministry of Economic Development and Trade said that they are updating the strategy for the development of export of services so that the trend for an increase in this sector is sustainable. Russian transport service exports reached US$1.5 billion in June.

Telecommunications & Computer Services

The telecommunications and computer services industry sector exported US$652 million, a sharp rise year on year compared to June 2020 when Russia exported US$18.7 million.  At the end of Q2 2021 foreign purchases in Russia’s IT service sector was three times more than in the same period last year.

Other Service Sectors

However, other sectors did not fare so well and remain inhibited by Covid. Travel and tourism declined as have Construction services, Culture, and Recreation. Business services also declined, partially due to a downturn of foreign investment in Russia.

Fundamentals

However, overall, Russia’s balance of foreign trade in services is now in positive territory, which is a positive sign. Russia’s Central Bank and the Ministry of Economic Development has stated that they see a steady trend towards an increase in the volume of deliveries of services of certain categories from Russia. Overall, the trend appears to be up, although 2020 was marred by the effects of the Covid-19 pandemic.

If comparisons are made between the indicators for the service exports in 2019, then Q2 2021 shows an overall decline of about 15%. However, IT services grew by 38%, construction services by 7%, and business services by 5%.

Meanwhile, the positive dynamics within IT services is related to two growth drivers, a change in Russia’s tax regime in this sector and growth in the export of transport services – with an increase in the volume of transit traffic. Rail freight from China to Europe transiting Russia doubled in 2020 and looks like doing so again this year. We highlighted some of the regional hubs that foreign investors should be looking at in this article here.

The growth in the export of transport services is associated with the gradual adaptation of the industry to work in a pandemic, and the increase in demand for the supply of IT services from Russia is due to the massive transition to remote work and the introduction of restrictions on movement. At the same time, policies laid out from Moscow have also had a significant impact on the development of the IT market in Russia through the fiscal support of the industry.

The excess of export of transport services over imports was a consequence of the restoration of supply chains, as well as efforts to create a common market for such services, mainly through the development of the Eurasian Economic Union (EAEU) – whose intra-bloc trade rose 33% in H1 2021. Russian business services can also be expected grow as free trade agreements with the EAEU start to kick in and businesses from markets such as Singapore (who signed an EAEU FTA last year) begin to kick in. This will grow especially when China agrees tariff reductions with the EAEU – Russian service businesses with Chinese-speaking staff will be in demand.

New Services

There are new services coming online too, for example Russian TV series are popular in various markets and educational training for foreign nationals via online courses on mass platforms are also starting to contribute.

Russia is also developing concessional financing for export projects. The Ministry of Economics, together with the All-Russian Academy of Foreign Trade, is working to update the strategy for the development of export of services, and this should be a key sector for foreign investors to look at for partnering with strategically placed Russian firms.

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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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