Central Asia To Benefit As Sanctions Force Russian Manufacturers To Relocate
Posted by Russia Briefing Written by Chris Devonshire-Ellis
The CIS and EAEU countries could soon be receiving a new wave of Russian manufacturing investment
Sanctions and tariff wars always result in the movement of cross-border businesses, most recently seen with China during the US trade war -the imposition of increased tariffs motivating many Chinese and other international investors based in the country to shift part, or all, of their production to neighboring Vietnam.
The same situation will occur in Russia, as Russian and international companies impacted by the imposition of sanctions will relocate elsewhere. There are additional compounded difficulties with the Russian situation as enhanced ‘Know-Your-Client’ protocols will be aimed at preventing Russian-ownership via additional banking restrictions. That will introduce an interesting dynamic – as Russian businessmen and operators will be forced to enter into contractual agreements signing off their direct ownership to other proxies. Trust will be the new watchword for Russian businessmen abroad; lawyers will be busy, as side agreements and undated contractual transfers of equity and assets start to emerge into the cross-border new Russian business environment. It will usher in not just a ‘Know-Your-Client’ methodology for banks, it will usher in a ‘Know-Your-Business-Partner’ mantra for Russian investors too.
There are immediate destinations that Russian manufacturers can look at in the EAEU and CIS. This includes Armenia, Belarus, Kazakhstan, and Kyrgyzstan in the EAEU and Azerbaijan, Georgia, Moldova, Tajikistan, Turkmenistan, and Uzbekistan in the CIS.
We discuss these as follows:
The Eurasian Economic Union
The Eurasian Economic Union (EAEU) includes Armenia, Belarus, Kazakhstan, and Kyrgyzstan as well as Russia. It is a free trade bloc, and has FTA with Iran, Serbia, Singapore, and Vietnam and is negotiating many others, most notably with India and China. We can look at the individual members and what they can offer Russian manufacturers as follows:
Armenia
Armenia’s main exports are Copper Ore, Gold, Ferroalloys, Tobacco and Liquor, suggesting it could be used for automotive, aviation and rail construction, all sanctioned businesses in Russia today. Interestingly, it has a Comprehensive Economic Partership Agreement (CEPA) deal with the European Union, which came into force in March last year.
Armenia also has free trade agreements with Commonwealth of Independent States countries, and a free trade agreement with neighboring Georgia. Armenia is able to export certain products to the United States and European Union under generalized system of preferences programs.
Belarus
Belarus is also under and facing new sanctions from the United States and EU so won’t be of much use in accessing these markets. However, it is a major exporter of fertilizers, with Brazil recently signed an agreement with Russia to supply these. It also has an excellent Free Trade Zone near Minsk, the Chinese Great Stone Industrial Park and there will be opportunities for Russian JVs with China in this area, which is mainly automotive driven.
Kazakhstan
Kazakhstan has an export-oriented economy that is highly dependent on shipments of oil and related products (73% of total exports). In addition to oil, its main export commodities include natural gas, ferrous metals, copper, aluminum, zinc, and uranium. China, Italy, and the Netherlands are major clients. Kazakhstan has Free Trade Agreements with the CIS nations and is a major route east-west from the Caspian Sea and overland rail to China.
Kyrgyzstan
Kyrgyzstan’s major exports include gold, cotton, wool, garments, meat, mercury, uranium, electricity, machinery, and shoes, its largest markets are China, the UK, Russia, Kazakhstan, Uzbekistan, and Turkey. There are mining and smaller opportunities in the fabrics industry.
The Commonwealth of Independent States (CIS)
The CIS also includes Azerbaijan, Georgia, Moldova, Tajikistan, Turkmenistan, and Uzbekistan. Unlike the EAEU it operates slightly differently to the EAEU as a closed economic space, but does have partial free trade between all members. That eliminates export and import duties on numerous goods but also contains exemptions that will ultimately be phased out, but this is not as extensive in coverage as the EAEU, and are negotiated on a bilateral basis rather than the multilateral basis of the EAEU bloc. Several CIS countries possess other trade agreements that will be of interest to Russian manufacturers.
Azerbaijan
Azerbaijan is an energy play with its top exports being Crude Petroleum, Petroleum Gas, Refined Petroleum, Tomatoes, and Gold, exporting mostly to Italy, Turkey, Israel, Germany, and India. Russia is a major investor in its energy sector. Azerbaijan has CIS trade agreements with all members and an additional trade agreement with Turkey. It is growing its trade relations with Iran and is jointly developing export processing zones on the border with its southern neighbour. Aside from energy, Baku is a key port for the International North-South Transportation Corridor and there are opportunities here for Russian processing, logistics, transportation, and packaging businesses here with connections through Central Asia, the Caucasus, European Union, Iran, the Middle East, East Africa, and India.
Georgia
The top exports of Georgia are Copper Ore, Automotive, Ferroalloys, Wine, and Packaged Medicaments, exporting mostly to Russia, Azerbaijan, Armenia, Bulgaria, and China. It has been attracting Chinese investments looking at EV automotive manufacturing for the EU markets – Georgia has a ‘Deep & Comprehensive Free Trade Agreement‘ (DCFTA) with the EU that is specifically targeted at industrial goods, agriculture, and transport manufacturing sectors. It has access to markets in the Caucasus and Turkey as well as Central Asia and the INSTC via rail links through to Baku.
Moldova
The top exports of Moldova are Insulated Wire, Sunflower Seeds, Wine, Corn, and Transportation Seats, exporting mostly to Romania, Russia, Italy, Germany, and Turkey. Like Georgia, Moldova also has a DCFTA with the EU making the EU Moldova’s largest trade partner. There are opportunities in Moldova for automotive components manufacturing, IT services and agriculture processing exports.
Tajikistan
Tajikistan has negotiated free trade agreements with CIS members, and exports mainly Gold, Raw Aluminum, Raw Cotton, Zinc Ore and other Ores, mostly to Turkey, Switzerland, Uzbekistan, Kazakhstan and China. It is looking to develop added value and processing facilities, and if much-discussed rail connectivity to China can be agreed, would become an important Belt and Road Initiative transit route between China and Central Asia.
Turkmenistan
The top exports of Turkmenistan are Petroleum Gas, Refined Petroleum, Crude Petroleum, Non-Retail Pure Cotton Yarn, and Nitrogenous Fertilizers exporting mostly to China, Uzbekistan, Turkey, Azerbaijan, and Romania. Its Caspian Sea Port and trans-national rail provide connectivity to the rest of Central Asia and it is looking to diversify its economy away from traditional energy and into new energy such as solar and wind power. There are opportunities here in these industry sectors as well as in logistics and light manufacturing industries.
Uzbekistan
The top exports of Uzbekistan are Gold, Petroleum Gas, Non-Retail Pure Cotton Yarn, Refined Copper, and Ethylene Polymers, exporting mostly to Switzerland, the United Kingdom, Russia, China, and Kazakhstan. It has FTA with other CIS members and recently became an observer to the EAEU. The European Union accepted Uzbekistan as the ninth beneficiary of its expanded General System of Preferences (GSP+) trade arrangement, which removes tariffs on two thirds (6,200 titles) of the product lines covered by GSP. The United Kingdom has signed a similar agreement with Uzbekistan, with the country becoming increasingly popular with European investors following relaxation of its domestic investment laws and a desire to follow a more open market economy. Of all the Central Asian states, Uzbekistan is currently the more open and forward-looking in adapting to Western style reforms and development. It should be noted that the Russian subsidiary of Volkswagen (VW) have been discussing the establishment of several potential joint venture projects including EV production.
Summary
Sanctions on Russia mean that many Russian businesses will now need to consider expanding overseas. In the longer term this may not be a bad thing, as Russian investment and technologies can help develop Central Asian economies, while at the same time avail themselves of the Trade Agreements some of these countries have that are now off-limits to Russian businesses in Russia.
Partner Risk Analysis
There needs to be a two forked approach, one the legal aspect and implications of using a separate, holding company structure to hold the overseas facility and to arrange either direct or proxy control. Contractual terms in the event of local partners taking control need to be sound, possibly secured against other assets and if not, certainly passed through a sound due diligence and risk analysis evaluation.
Free Trade Market Research
Local research also need to be conducted into the extent of Free Trade and related DCFTA agreements that respective countries have in force and especially with a view to rules of origin criteria. This requires professional assistance and a business case built up as required.
Dezan Shira & Associates are experienced in this field and may be hired to evaluate specific market sectors and the opportunities, the firms business intelligence unit is hired by international Governments and regional businesses to conduct bespoke research and has been in this market for 30 years. Please email the practice at [email protected]
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 [email protected] for Russian investment advisory or assistance with market intelligence, legal, tax and compliance issues throughout Asia.