Asia to oust Europe as Russia’s largest trading partner

Asia might soon catch up with the European Union in terms of its share of Russia’s foreign trade. India, China and Indonesia will become the main drivers of bilateral trade growth, according to Russian experts.

By the end of February, the Kremlin is expected to decide on which agency will be put in charge of developing Siberia and the Russia Far East. President Putin has already criticised the newly-established Ministry for the region’s development and instructed the government to reconsider creating a state-owned corporation, which, judging by initial proposals by Russian ministers that were leaked to the media, may receive very extensive powers, such as issuing licences for subsurface resource development.

It is too early to talk about a final wording of the decision. One thing is clear though: Russia’s focus on developing its eastern regions and hence on cooperating with Asia will only be increasing.

The latest crisis has demonstrated that it’s not just Russia’s economic structure that needs modernisation. Its foreign trade structure needs to be updated, too, because a high degree of dependency on a single partner, the European Union, is fraught with development setbacks.

The European Union’s share of Russia’s foreign trade turnover has been steadily declining, falling below the 50 percent threshold in the first nine months of 2012. In contrast, China’s share doubled to more than 10 percent, with Asia as a whole accounting for 24 percent of the total.

Given that the centre of global economic growth has shifted to Asia, home to the bulk of the world’s population, its share of Russia’s foreign trade turnover will keep rising, according to Investcafe analyst Liliya Brueva. Lack of infrastructure and factory capacity remains an obstacle on this path. For instance, Russia is still unable to meet the Asia-Pacific region’s natural gas demand for the simple reason that it does not have enough liquefying plants.

According to Investcafe analyst Darya Pichugina, the growth of Asia’s share will be capped at half of Russia’s foreign trade for the next 10 to 15 years. “Barring some global economic or political cataclysms, Asia will catch up with Europe in terms of goods turnover”, she said confidently. A safe ceiling for foreign trade with Asia outside the CIS stands is around 40 percent, as this would help fully diversify Russia out of its dependence on exports to Europe and America, said Mikhail Krylov, Lead Analyst with Alpari’s Research Department.

The primary drivers of Russian-Chinese trade are more or less obvious: natural gas, coal, and electric power. “I believe that, for cooperation with Russia, the Chinese leadership is mainly betting on coal mining – Russian coal supplies to China are growing by the year. There is also a project for cooperation in the area of electric engineering but this is not as high-profile. Aluminium exports to China could develop too, though this is still just an idea; Rusal has announced it was planning to build a smelter in Siberia jointly with a Chinese company”, Pichugina said.

The turn towards the East has already been reflecting on yuan trading in Russia – the renminbi remains the only Asian currency that Russian banks can exchange trade on a daily basis. The Moscow Exchange launched yuan to rouble trading at the end of 2010, with five banks acting as market makers: Bank of China (ELOS), Industrial and Commercial Bank of China, My Bank, VTB, and Vostochny Express Bank. Exchange trading of the Chinese yuan rose 72 percent last year to RUB 7.7 billion, with 75 banks taking part. The Moscow Exchange is planning to expand its yuan operations, including by introducing trading with partial advance depositing, instruments with Т+1 (ТОМ) and T+2 (SPT) clearing terms, swap transactions, and longer hours for trading in the currency.

Russian banks are seeing the scope of their conversion operations increase as trade between Russia and China grows. Going forward, once the Chinese government eliminates the yuan’s pegging to the US dollar, the volume of exchange-based transactions will rise substantially, according to Oleg Poddymnikov, Head of Investment at AKB Lanta Bank.

Not only China, though, will be developing trade with Russia. Large infrastructure projects with India and the opening up of Indonesia for Russian products will also contribute to the growth, said Anatoly Voronin of the FIBO Group international financial holding. Moscow and New Delhi will sign more large-scale contracts like the building of nuclear power plants and development of an anti-ship missile. Indonesia is growing rapidly, meaning that trade could increase as part of this growth. “Contracts with Indonesia in the military area are well known. Now we have managed to push through the supplies of the SuperJet 100 against all odds. Indonesia has swallowed the deaths of its specialists and said it was ready to continue cooperating with Russia”, he said.

The analyst believes growth of trade with Indonesia will be driven by state-owned projects but “accompanying” private businesses will spring up along the way too. “Indonesia is known as a manufacturer of goods for American brands and retail chains that are higher-quality but not much more expensive than Chinese-made products. The niche for such goods on the Russian market is not yet filled”, he said, adding that cooperation with Indonesia on space research was also possible.

Indonesia is very well located geographically for rocket launches. “There were plans for building a cosmodrome but nothing has been announced officially yet. Russia is gradually leaving the Baikonur, while building the Vostochny cosmodrome in the Amur Region. This, though, is located further north than Baikonur, meaning that launches from there will be less profitable. More cargo can be lifted from the equator. So it is tempting to set up a more southerly cosmodrome while creating the infrastructure at the Vostochny. This is more a political issue, though that could trigger considerable opposition from American aerospace corporations”, the analyst said.

That said, Asian entrepreneurs who are planning to expand cooperation with their big northern neighbour should bear in mind Russia’s strong predisposition towards Europe, to which it has been traditionally attracted, despite being situated on both continents. Russia’s “European party” is still extremely strong, particularly among the liberally-inclined economists and political elite. Rich Russians prefer to live in the United States or Europe rather than in China or Korea, said Vladislav Zhukovsky, Senior Analyst at the RIKOM-Trust investment company.

“The children of Russian liberals live in the UK, the US, or at least in France. It’s in Europe rather than in Asia that they keep their assets, such as castles, yachts, jets, bank accounts, etc.”, he said. Perhaps once Asia’s interest in luxury goods equals that in Europe, a paradigm shift will happen in Russia’s economic cooperation with major global markets.

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