Russia’s 2017 Investment Trends & Opportunities Into Asia

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CDE Op-Ed Commentary

russia-graphic2016 has been a year of hard work and effort on behalf of Russia, beset by sanctions from the EU and US, and globally mired in bad press and media coverage. No matter what it does – from fighting Isis and terrorism in Syria to being accused of influencing the American election results, Russia is often described in far from flattering terms. All this noise has detracted Russia’s real achievements and clouded observation of the true directions the Russian economy is taking.

In fact, Russia has recovered from sanctions rather well, 2017 will see it move into positive GDP growth of 1.5% over the year, the same ironically as the EU. What has changed is that while the EU has damaged its trade relations with Russia – losing an estimated USD60 billion in export vales to Russia over the past two years – the efforts to supply the Russian market with product have moved instead to, and been taken up by Asia. President Obama and German Chancellor Angela Merkel, the two main protagonists of the sanctions, appear not to have understood that when championing a global market economy, the imposition of regional sanctions will not work.

It is for example telling that what used to be European Skandia trucks and buses on Moscow’s and St.Petersburg’s roads have instead become vehicles sporting names such as King Long and Daewoo. Sanctions have forced Russia’s famous double headed eagle to look East. It is also worth noting that next years FIFA World Cup Soccer Finals take place in Russia. With mass infrastructure spends and investments into tourism facilities including restaurants (such as the Ginza Project a huge Russian lifestyle chain that includes Asian financing) as well as supporting infrastructure, while these facilities are being serviced by cheap, non-EU labor from Russia’s neighbors. With Russia now spending money on infrastructure development, starting to develop a growing economy, balancing its economic base with more Asian exposure and in possession of huge volumes of commodities to sell, it is time to reassess the Russian trade potential.

 

China

China is both a buyer of Russian commodities as well as a supplier of goods. Russia has not been especially innovative when it comes to the processing of its raw materials, with everything from lumber to oil and gas having added value performed by the Chinese. Domestic opportunities exist in Russia for adding value on the Russian side of the border for commodities exported to China. At present however, most opportunities for Russian business exist in trading; Chinese goods remain competitive. Setting up trading companies with Import-Export licenses is relatively easy and cost-effective, while Hong Kong also offers an international hub. Russian entrepreneurs would do well to be examining setting up a sourcing base in China, and with better distribution awareness than the Chinese have in Russia, could well find themselves competitive and profitable.

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Hong Kong

We examined in some detail recently the introduction of the Russia-Hong Kong Double Tax Agreement, here. It entered into force in Russia on 1st January and will enter into force in Hong Kong on 1st April this year. Hong Kong is of especial interest to Russia as it provides an avenue for raising capital and as an entry point for China. In short, the DTA reduces Russian withholding taxes for payment of royalties to Russian companies and individuals conducting business in Hong Kong to 3% and 4.5% for individuals. This can reduce profits tax overheads incurred by Russian invested businesses operating in both Hong Kong and China, if the China entity is owned by a Russian-owned Hong Kong company. The DTA provides a platform for Russian companies to use Hong Kong as an investment base and to spearhead business transactions into China.

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India

As we reported earlier, Russia and India have pledged to boost economic co-operation and trade and this augers especially well for Russia on a number of fronts. India is expected to boost its military hardware capabilities in the next five years and has a budget of USD250 billion to do so. Russian businesses involved in this industry will be busy wooing Indian Generals, and fringe businesses will also do well to invest in India to set up trading and service businesses in line with that spend. The two countries have also set about setting up a USD1 billion joint Investment Fund – Russian manufacturers are attracted by India’s “Make in India” campaign and see financial benefits in doing so, not least to access India’s huge domestic consumer market. This is further underlined by India’s decision to negotiate a Free Trade Agreement with the Eurasian Economic Union . Current Russian-India bilateral trade stands at USD10 billion per annum, a relatively small amount given the size and population of the two countries, and meaning there is plenty of room for growth. Both Governments have committed to boost bilateral trade to USD30 billion by 2025, meaning significant tax and trade incentives will be on the horizon to facilitate this 200% growth in trade over the next decade.

It is relatively easy to set up trading companies in India, and the legal and tax systems are not disimilar to the old Soviet system. Russian traders and entreprenuers acting in the Indian market early may well find themselves doing well, and especially if they have already set up by the time India’s Free Trade with the EAEU kicks in.

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Singapore

With the Singapore economy floundering and relations with China not so good, Singapore has been busy looking around for other regional trade partners. Russia may not seem an obvious choice, but Russia is looking for investors from Asia and certainly offers opportunities in energy and to some extent, finance. Singapore and Russia expect to complete a feasibility study into the proposed Singapore Free Trade Agreement with the Eurasian Economic Union in May this year, while a protocol to the existing Russia-Singapore Double Tax Agreement was signed off in November and lowers the withholding tax rates for dividends, interest and royalties. These changes are expected to enhance trade and investment flows between the two countries.

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Vietnam

Vietnam is a signatory to the Eurasian Economic Union, and as a consequence offers great opportunities for Russian businesses to invest in manufacturing facilities to compete with Chinese goods entering the Russian and CIS markets. Vietnamese labour and overheads are about 30% less expensive than in China, meaning the opportunity is there for Russian investors into Vietnam to take on, and beat the Chinese at their own game in selling cheap product onto the CIS market, especially as China has not yet signed off on its own Eurasian Economic Union FTA. Taking advantage of this window should be a key driver for Russian investment into Asia. A full list of the tariffs reduced in bilateral trade between the CIS and Vietnam can be found in our article on the subject here

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Summary

Russian diplomatic efforts to better engage with Asia have stepped up considerably since sanctions were imposed by the West. The impact has been almost immediate, a host of tariff and duty reducing Double Tax and Free Trade Agreements have been, or are about to be implemented. This impacts positively on potential Russian investors into Asia, both in terms of purchasing cheaply made Chinese products for sale in the Russian market, manufacturing such products in countries such as Vietnam and India who are competitive with China, and to create new consumer markets in Asia for premium Russian products and brands. Cities such as Hong Kong and Singapore, and to a lesser degree the major cities elsewhere in Asia are ripe for the introduction of smartly targeted Russian produce.

EU and US investors too may also be able to circumnavigate the imposition of sanctions by selling product to Russia from Asian based operations. The Russian-Asian Trade Corridor is now open, and can be expected to develop fast, with the kick-starter of the World Cup Soccer FInals just 18 months away. Now is the time to step into gear and start to action this new, emerging and potentially lucrative dynamic in Asian trade and investment.

Russia Briefing is published by Asia Briefing, a subsidiary of Dezan Shira & Associates. We produce material for foreign investors throughout Eurasia, including ASEAN, China, India, Indonesia, the Silk Road & Vietnam. For editorial matters please contact us here and for a complimentary subscription to our products, please click here.Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Eurasian region. We maintain offices in Moscow and St.Petersburg through our Russian partner firm, as well as our own offices in China, South-East Asia and India. For assistance with Russian issues or investments into Russia and Asia, please contact us at russia@dezshira.com or visit us at www.dezshira.com