The UK Has Political Differences With Russia, But Free Trade Potential With The Eurasian Economic Union Is Growing By Default
London is pursuing an Asian trade development strategy that will ultimately lead it to trade cooperation with Moscow
The United Kingdom’s current relations with Russia are not the way London would like to see, British Prime Minister Boris Johnson said during a telephone conversation with Russian President Vladimir Putin on Monday.
“The Prime Minister was clear that the UK’s current relationship with Russia is not the one we want. He said significant bilateral difficulties remain, including the poisonings in Salisbury in 2018. The Prime Minister also underscored the importance of Ukrainian sovereignty,” a Downing Street spokesperson said after their telephone call.
The Kremlin said after the conversation that the two leaders exchanged views on the current situation in bilateral relations and “expressed a common opinion that despite the existing problems Moscow and London should establish cooperation in a number of areas.” According to the Kremlin, the sides agreed to “maintain necessary contacts on the issues touched upon during the conversation.”
While the political issues remain, it is an encouraging sign that the two sides will maintain dialogue. There are significant trade reasons for doing so. Russia is the primary member of the Eurasian Economic Union, meaning where Russia FTA coincide with similar UK agreements, opportunities can exist to access the EAEU through being extant with a UK subsidiary in the FTA treaty country concerned and being in compliance with related rules of origin criteria. This may provide UK companies with access to markets within the Eurasian Economic Union without the need for a direct UK-EAEU FTA, while the same also applies to EAEU businesses wishing to access the United Kingdom.
THE EURASIAN ECONOMIC UNION (EAEU)
The EAEU comprises Armenia, Belarus, Kazakhstan, Kyrgyzstan, and Russia and fills a geographic space between West China and the Eastern borders of the European Union. It is a market of some 183 million and has a GDP of US$4.78 trillion, or about 80% larger than that of the UK. All of Russia’s Free Trade Agreements include the EAEU nations. Interestingly, the EAEU has an average per capita income higher than China.
We can examine where British and Russian/EAEU Free Trade Agreements overlap as follows:
The ASEAN trade bloc includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. The UK has Free Trade Agreements with Singapore and Vietnam and is increasing trade ties with Thailand. Brunei, Malaysia, and Singapore are all members of the British Commonwealth, while the UK has recently become a dialogue partner of the ASEAN community, expressing an interest in eventually negotiating a Free Trade Agreement.
Russia has Free Trade Agreements with Singapore and Vietnam through the Eurasian Economic Union, (EAEU) which also includes Armenia, Belarus, Kazakhstan, and Kyrgyzstan. It is also a dialogue partner with ASEAN and is also negotiating with other ASEAN members and the bloc for an ASEAN-EAEU FTA. The ASEAN trade potential for both Russia and the UK is significant, it is a market of some 661 million, of whom about 250 million are considered to middle-class consumer standard. It is the fastest growing consumer region in the world, with a total GDP of US$3 trillion and a growth rate expected to reach 6-7% per annum post Covid.
The UK is currently negotiating a trade agreement with India, with discussions likely to begin in substance early next year. Russia, again via the Eurasian Economic Union is negotiating a Free Trade Agreement with India. There are likely to be differences between the concessions granted to the UK and Russia as corporate India will not be so willing to let the powerful UK businesses access to their domestic markets. Consequently, a UK-India agreement is likely to be more services than trade based. These constrictions do not apply to Russia and the EAEU members as they are not viewed as being so likely to create competition in India’s domestic market sector. Then there are the differences between the UK and EAEU market sizes, with the latter being nearly three times larger.
The UK has ratified a Free Trade Agreement with Jordan, while the country is also negotiating with the EAEU. Jordan has strategic importance as it has Mediterranean Ports and access to the Middle East.
The UK has made a formal application to join the CPTPP, an Asia-Pacific Trade bloc that includes Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and South Korea. The EAEU is also in discussions with South Korea concerning a Free Trade Agreement with Seoul apparently keen to see this concluded.
Egypt is an important market as it opens trade with both African and Arabic nations. It is a member of the African Continental Free Trade Agreement (AfCFTA) which came into effect from January 1, 2021, and has essentially abolished intra-African trade tariffs. This means that sourcing can now be conducted throughout Africa and consolidated into one location. The UK has signed off an FTA with Egypt.
Russia is poised to do the same, again via the EAEU. However, Russia has also gone a step further and is in the process of developing a joint Egypt-Russia Special Economic Zone at Port Said, near the Suez Canal. That will permit Russian made component parts to be married, duty free, with components sourced throughout Africa under the AfCFTA and then either resold onto the African Continental market (in which case duty and VAT on the Russian components apply) or onto other markets such as the EAEU or elsewhere (duty on the African components then apply). It means that manufacturers can take advantage of Egypt’s cheaper labour and extend cashflow during the production process.
Both the UK and EAEU are currently negotiating Free Trade Agreements with Morocco.
The UK has ratified a full Free Trade Agreement with Tunisia, which is also negotiating an FTA with the EAEU. Like Egypt, Tunisia is a member of the AfCFTA and serves as a gateway from Africa to Europe via its Mediterranean Ports.
The UK has a Free Trade Agreement with Israel, while Russia is poised to agree one via the EAEU. The Israel Prime Minister held discussions with President Putin about this over the past weekend, with ratification likely in 2022.
The UK is negotiating an FTA with Moldova, which while one of Europe’s poorest countries has a high human capital ranking and possesses high IT literacy. It also makes fabulous wines. Russia is also, again via the EAEU, negotiating an FTA with Moldova.
The UK is negotiating an FTA with Serbia, while the country agreed a full FTA with the EAEU in 2019. Serbia gives access to the Balkan markets such as Bosnia-Herzegovina, which are non-EU but retain close, if sometimes erratic ties with Moscow. The UK for example has an FTA with Albania, and Kosovo and is negotiating with North Macedonia. These countries can also be expected to engage in negotiations with Russia and the EAEU in time as discontent and backtracking by the EU on acceptance has pushed them partially back into Moscow’s domain.
I mention the Ukraine here even though it left the Russian circle of the Commonwealth of Independent States (CIS) in 2018. The UK has a full Free Trade Agreement with the Ukraine, however despite the on-going conflict between Russia and Ukraine, and a lack of any current agreement with Russia, strong political and trade currents on both sides continue. British businesses should be astutely aware of the Russian influence remaining within the country.
The UK has ratified the UK-Andean Countries Trade Agreement, which includes Ecuador in addition to Colombia and Peru. Ecuador is currently negotiating a Free Trade Agreement with the EAEU. The country supplies 97% of all bananas to Russia and can also act as an influential discussion point to the wider LatAm markets of Mercosur, which includes the regional powerhouse economies of Argentina, Brazil, Paraguay, and Uruguay.
Both Russia and the UK share a surprisingly similar trade development strategy, born from one rejecting the European Union and the other being rejected by it. The consequences are therefore near identical as both need to recalibrate their international trade ties. This phenomenon has not been appreciated at present, but it will eventually lead to increasing UK-Russian competition in overseas markets, which will also lead to collaboration. It is the nature of businesses to look for opportunities, and it is inevitable that UK executives will wind up rubbing shoulders with their counterparts from Armenia, Belarus, Kazakhstan, Russia, and even far-flung Kyrgyzstan as these trade corridors converge.
In fact, much of the trade infrastructure is already in place to permit this, even without any formal UK-EAEU agreement. This is because not only do their Free Trade Corridors overlap, but because the UK has Double Tax Treaties in place with Armenia, Belarus, Kazakhstan, and Russia. Only Kyrgyzstan remains out of the UK DTA loop. Double Tax Treaties are highly useful when used in bilateral trade and can significantly reduce profits tax liabilities when correctly implemented by investors.
This curious set of arrangements and capabilities between the UK, Russia and EAEU countries has not been deliberately planned. Yet it has arisen because all seek new markets and consequently the opportunities to interact are there. Accessing each other’s markets via third countries where Free Trade Agreements converge is a smart way for all to overcome trade barriers and restrictions now in place and used imaginatively can open new opportunity corridors that have not generally been considered. Nonetheless, they exist and will continue to grow and develop as both the UK, Russia and the EAEU seek out and make agreements with new trade partners. Where these intersect should be part of every impacted business development analyst’s portfolio.
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.