[Analytics] Non-oil exports to be doubled: What Russia is selling now and what it wants to sell

Last week govt founded “Russian Export Center” (REC) gathered together about 3 thousand people from 50 countries at the “Made in Russia” Forum in Moscow. The participants highlighted many problems of Russian exports and suggested ways to solve them. Pan Pacific Agency tried to understand whether Russia, traditionally exporting mainly raw materials, is able to transform its export image as fast as the country’s authorities declared.

Exports: what does it mean for Russia

Over the past decades the main Russian export products were the minerals (according to the official statistics, it produced $290 billion of the $450 billion of total export revenue in 2018). A share of oil exports in Russia’s GDP for 2018 is only 9% (UN’s estimate). But the budget highly depends on the situation in the oil and gas markets. According to the Russian Ministry of Finance, in 2018 “oil and gas revenues” amounted to 9 trillion rubles or 46.3% of the Russia’s budget.

On the other hand, only about 2% of enterprises in Russia supply products to foreign markets, although a similar world’s average is 10-15%, Anton Siluanov, Russian first deputy PM, said last week at the international forum “Made in Russia”. Somewhere between these two indicators the reasons why the Russian authorities intend to change the export structure, that does not suit them, are hidden.

The first key question is – “how”?

The structure of Russian exports, 2018. Source: Foreign economic information of the Russian govt (ved.gov.ru)

Changes in the Russian exports structure are necessary cause its current structure is unprofitable for the country. In 2016, when exports in Russia fell by 44% compared to the peak level of 2013, the losses of the Russian economy due to the changes in the global prices amounted to more than $250 billion, as the Russian “Center for Strategic Research” calculated in 2018.

“The unfavorable situation in exports overlapped with the Russia’s domestic economic problems, which raised the question of the need for large-scale and rapid modernization of the export sector. The scenario of the Russia’s transition to economic growth implies a strong, diversified export sector, that generates technological impulses for the economy and ensures a steady flow of financial resources for development,” analysts said.

The question of “how to diversify Russian exports” looks even more complicated due to the situation on the global market. It could be described with the word “uncertainty,” Pavel Kadochnikov, the vice-rector at the Russian Academy of Foreign Trade, explained at the international forum “Made in Russia”.

“Trump, Brexit, trade wars, sanctions and many other phenomena that we observe are the consequences of in-depth processes that have taken place in the world’s leading economies over the past quarter century. It is a globalization. It is the economic growth in Asia, where about 1 billion people have come out of poverty over the past 25-30 years. As well as technological changes, the development of the digital economy, when everyone in the world is able to communicate with each other through the gadgets. It is a growing life expectancy, and a host of other positive technologies’ transformations. We know for sure that ‘uncertainty’ is our reality. In 2016, the forecast for world trade growth for 2019 was 4.3%. Now it’s only 1.1-1.2%, which is three times lower. We all fish in troubled waters,” the scientist said.

“The second factor is still optimism. The world’s population will increase by 400 million people by 2025. All these people need to eat, to build, to charge their gadgets. It is a growing demand for energy and food. These aspects are the very real export opportunities that Russia can turn into advantage. The third factor is the growing complexity of export transactions. Direct sales are reality for the world that existed 100 years ago. Now from 40 to 60% of the goods are selled through the services. You do not sell metal – you supply construction solutions. You do not sell equipment – you supply engineering solutions. About 12% of the world trade are carried out through online platforms. About 80% of the world trade are connected with data transfer. About a third of the world trade is related to special financing. It means that the importance of govt assistance to exporters will only grow,” Pavel Kadochnikov said.

Govt removes the barriers

Russian officials do not hide that they are dissatisfied with the world trade system, where the United States and China are dominating. The sanctions against Russia by the United States and Europe explain this displeasure. “Speaking directly, the rules of the World Trade Organization today do not work. We didn’t receive any preferences from membership in the WTO. How does this affect us? It doesn’t,” Denis Manturov, minister of industry and trade of Russia, said at the “Made in Russia” Forum.

According to him, today a really free trade is created by agreements between trade alliances or countries. “As members of the Eurasian Economic Union, we have concluded free trade agreements with several countries. The first of them we signed with Vietnam. We felt the effect: trade turnover has already grown and is growing steadily. In the early 2000s, we started with $180 million. In 2018, it amounted to $6 billion, and it’s an absolutely real to increase it to $10 billion, because Vietnam has reduced customs fees for products from the Eurasian Economic Union,” the minister said.

So, Russia will make its way to foreign markets, primarily in the Asia-Pacific region, through the bilateral free trade agreements, Denis Manturov said. He has many other examples of how the Russian industry is successfully integrating into global production ties.

“In 2009, Sony TVs comprised 15% of China’s components. Today it’s 90%. The Russian automobile industry, on the contrary, provides about 60% of components for foreign vehicles produced in the country. The localization of the several Renault-Nissan’s models in Russia reaches 70%. It’s an answer to the question what industries the non-resource non-energy export of Russia will be based on. We will develop basic industries: metallurgy, chemical industry, mechanical engineering,” the minister said.

“Our task is to help exporters to promote the product, to make the product competitive, to provide information on which product is in demand. Of course, we’re interested in increasing the number of exporting enterprises. Russians’ income and the standard of living in general will increase,” Anton Siluanov said at the Forum of exporters.

A senior official is confident that in Russia “there is a good macroeconomic situation, a forecasted course, and there are stable investing conditions.” Some rules that remained in Russia from the time of the USSR, for example, the requirement to return foreign exchange earnings, are already outdated, he admitted. “Abolish them. We are gradually moving to remove all these barriers,” Anton Siluanov said.

Barriers facing Russian exporters are not only within our country, but also beyond it, Timur Maximov, the deputy minister of economic development of Russia, added. “Foreign economic demand is one of the key drivers of economic growth in the medium term. Many countries consider the same. This means that we work in a highly competitive environment. We help Russian exporters to remove discriminatory barriers in foreign markets, and to fight unfair competition. We have a lot of tools to do this,” he said.

From $150 billion to $250 billion: as the president ordered

In 2018, Russian president Vladimir Putin issued a decree that established several ambitious tasks for the Russian economy. According to the decree, by 2024, the volume of the Russian non-resource non-energy exports should grow to $250 billion. In Russia ‘non-resource’ means mainly products of the metalworking, the engineering, the timber industry, food and chemical products. Steel semi-finished products and cast iron, wheat and fertilizers were the drivers of the growth of non-resource exports of Russia in 2018. Separately, Russian statistics take into account the export of services: in 2018, according to the REC, the country sold services at the $65 billion, of which $22 billion is a transport service.

Vladimir Putin ordered, that Russian engineering should export products annually at $50 billion, agriculture – at $45 billion, and the service sector (education, medicine, tourism and transport) – at $100 billion, and the transport sector should still provide about a third, by 2024. Almost everywhere indicators should be at least doubled in absolute terms.

It’s an ideal picture, which is the goal of the Russian authorities. But what happens in reality?

Non-resource non-energy exports, according to officials, have been breaking records for the second year in a row. Thus, its volume by the end of 2019 could reach a record $151 billion, Andrei Slepnev, the CEO at the REC, predicted in Sept 2019. The previous record was set in 2018 – $149.3 billion, according to the Russian Ministry of Economic Development. In 2017, according to the REC, non-resource non-energy exports amounted to $133.7 billion.

A gradual increase in the non-resource non-energy exports is taking place against the backdrop of an ambiguous situation with Russian exports in general. A few days ago, the consulting company Finexpertiza published a study of Russian exports in the first eight months of 2019. The researchers’ conclusions are rather pessimistic for officials trying to implement President Putin’s decree. “The recovery trend in export earnings, which replaced its protracted decline in 2014-2016, seems to be broken this year. In 2019, the revenue of Russian exporters is unlikely to even reach the 2018 figures,” said in Finexpertiza.

Revenue of Russian exporters, 2010-2018. Source: Finexpertiza

Record export revenue for the Russian economy was amounted to $527 billion in 2013. In 2018, Russian exports recovered to the level of $449 billion, not reaching the 2013 figures by more than $78 billion. “This year, we are unlikely to even reach the figures of the last year. If, according to the results of the first four months of 2019, the export revenue indicators were slightly higher than the results of the same period of 2018, then from May to August they were significantly lower than the monthly values of the same period of the last year,” said in Finexpertiza.

Certain regions of Russia are increasing non-resource non-energy exports rapidly. Perm Region, that exporting fertilizers, for 2017-2018 increased its indicators by 24%, to $3.7 billion, Maxim Reshetnikov, the region’s governor, said optimistically at the plenary session of the “Made in Russia” Forum. According to him, the region expects to achieve growth of 57% by 2024. “A quarter of exports go to high-tech industries, and they are growing faster. We believe that such growth is associated with the implementation of government supporting measures to non-resource exports,” the governor said.

However, according to him, there are a few problems. “We are moving towards complex exports, the export of mechanical engineering. We need to move from the existing mechanisms for approving each transaction to issuing long-terms permits, providing a “green corridor” to a conscientious exporter,” the governor said. “We need to digitize the entire export management and export support system. Unfortunately, to process a VAT refund, you need to prepare one package of documents to the tax service, another to customs, and a third one to the Federal service for technical and export control. The task of paperwork without paper should be solved faster,” Maxim Reshetnikov said. “Digitalization is a serious stop factor for export development,” Alexander Brechalov, the governor of the Udmurt Republic, agreed.

Long roads and Digital services

Russia is a huge country, which is its advantage (it’s easier to create a transport bridge from Europe to Asia through one country) and a problem at the same time. “In terms of product transportation, Russia is far from the world markets. Logistics is expensive: you have to do transshipments. Over the past few years, the state budget has subsidized the costs of export transportation. In 2018-2019, the govt pledged 14-15 billion rubles for this. For 2020-2022, 5 billion rubles is pledged per year. This is three times less than it was. Maintaining at least the previous level of financing would be very useful for export development,” Mikhail Shamolin, president of Segezha Group (a timber processing company exports about 80% of its products), said at the plenary session of the “Made in Russia” Forum.

“We will redirect funds to subsidize export shipments from other budget items, we will definitely contact the Ministry of Finance with a request to increase subsidies,” the minister of industry and trade of Russia Denis Manturov answered the entrepreneur.

Indeed, it is rather difficult to plan how to send products from Siberia to China or to the European Union. To help enterprises, in 2020, the REC will launch an export calculator service that can be used by any exporter, Vladimir Salamatov, the CEO at the International trade and integration research institute, said.

The new service will allow the company to choose point A and point B, and nine transportation companies will offer their own route options. At the same time, it will be possible to receive faster a transportation subsidy from the Russian govt. “The same service, but more advanced, is already working in China and Europe. Exporters on a single website choose routes combining the services of various companies in road, rail, and sea transportation. In Russia, it will be possible to choose a route proposed by only one of the 9 companies,” he added.

Maersk Group (Denmark), the largest sea carrier, went on the same path, but far ahead of the Russian authorities. “On our website all customers already could find out the cost of transportations, create and print the bill of lading, receive all information about the transportation. The next step that we are working at is the ability to pay through the website for cargo carriage, insurance and additional services”, Zholt Katona, the CEO of the East European division of the Maersk, said.

“Now we’re developing a segment of air cargo traffic. This year we introduced the Maersk Spot online system. If a person wants to fly from Moscow to London, he goes to the Skyscanner website, sees all the options, selects the most profitable variant, pays and receives a ticket. Similar business opportunities are provided by Maersk Spot. New online product provides customers a cargo loading guarantee at a fixed price upfront. You could organize cargo traffic from anywhere in the world in a minute, just click the button,” he added.

Innovations that are at the bottom

So, Russia is increasing exports of metal products, fertilizers, forest products, food, machinery and equipment. The export of services is growing too. Yes, this is not oil or gas. However, the USSR was also famous for this. But what about innovation?

According to the Russian “Center for Strategic Research” (CSR), which refers to the calculations of the Russian Academy of Foreign Trade, the value of the innovation segment of Russian exports reached $40-45 billion in 2016. It’s almost a quarter of the country’s non-resource non-energy exports. About two-thirds of this volume came from only four industries: the defense industry ($10 billion), the aerospace industry ($7.6 billion), the nuclear industry ($5.6 billion), and the software industry ($7.6 billion). Significantly less brought engineering and technical services ($3 billion) and fees for the use of intellectual property, R&D and education ($1.5 billion).

Unfortunately, “in most capacious and promising markets for manufacturing products and services, especially in high-tech and knowledge-intensive segments, the presence of Russia is still weak, and even if the position is strengthened, it’s very slow,” the CSR said.

“Even if they include to the Russian high-tech exports the entire volume of arms deliveries (it was $18.32 billion in 2016, according to the Russian Academy of Foreign Trade), the sales volumes of Russian high-tech products are still very small and inferior to similar values, for example, of the Czech Republic ($ 20.3 billion), Canada ($24 billion), the Philippines ($ 26.1 billion) and half that of Vietnam, which is actively involved in regional and global value chains ($ 38.7 billion in 2015),” the CSR said. Comparisons in the export of technology with developed countries are even more deadly for Russia: according to the OECD methodology, the gap with the USA is 80 times, with Germany – 40 times, etc. The reason is a small amount of R&D funding and a low degree of commercialization of Russian technologies.

Another serious rival of Russia in the exports is the fast-growing China, which is not afraid to “enter aggressively those export niches where Russia previously felt comfortable.” “China has not only rejected Russian imports in many respects in favor of its own production, but also oppresses Russia in the markets of the third countries. This applies, first of all, to the basic industrial semi-finished products – chemical products, ferrous metals, paper and wood products. An effective strategy for Russia in this situation involves diversifying exports to find new export niches in China itself or moving to a higher level of redistribution and complexity in competitive product groups,” the analysts concluded.

Russian version of this article is available here.

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