12.09.23 Review

The East is a Long Way Off: Russian exporters have shifted their focus from the EU to Asia, albeit at the cost of volumes and margins

In 2022, a majority of Russian exporters dedicated their efforts to overhauling their logistical operations. Over the course of a year, the percentage of exporters reporting no issues with supply organisation grew to 55%, a significant increase from the previous year's 40%. This shift indicates that the logistics crisis associated with this reorientation is far from over. In many sectors, there are businesses that have struggled to adapt and as a consequence have lost a substantial portion of their clientele or even completely withdrew from exporting.The reconfiguration of export channels primarily involves the pursuit of new customers in Asia, Africa, and the Commonwealth of Independent States (CIS). Some companies have shifted their focus to the domestic market. Given that Russia's economy has historically been Euro-centric, it has seen a significant rise in logistics costs compared to pre-war times, with some enterprises experiencing exponential cost increases.Another pressing issue for logistics is the severe shortage of skilled personnel. These factors are collectively acting as constraints on industrial output, as highlighted by experts at the Central Bank in their September review of 'Regional Economics.'

Despite the changes, the volume of commercial freight transportation in Russia did not collapse in 2022; instead, it is on the rise in 2023, as per insights from the Central Bank in its July report on 'Regional Economics.' However, the structure of trade logistics has undergone a radical shift. Prior to the invasion of Ukraine, Europe was Russia's largest trading partner, with the EU, UK, and Ukraine, including Moldova, accounting for 42% of its foreign trade. Now, the majority of export and import flows have shifted from the northwest of the country to the southeast. In the September edition of 'Regional Economics,' the experts from the Central Bank explore how exporters from different sectors and regions are coping with this restructuring.

The physical volume of raw material exports has remained largely the same after the redirection of shipments from Europe to the East and South. However, certain exporters have encountered problems. For instance, companies in the Volga-Vyatka economic region reported a decline in total exports in the first half of 2023 despite increased deliveries to 'friendly countries.' Coal companies in the Russian Far East, which previously supplied their products mainly to the EU, now primarily serve Asia, Africa, and the Middle East. Swift adaptation was made possible in part due to discounts. However, export opportunities have been constrained by the capacity of the railways in the East, port facilities, and border crossings.

Changes in the export logistics of key intermediate goods such as metals, fertilisers, grains, and others have led to increased costs or reduced delivery volumes, according to the Central Bank experts. For example, timber companies in the northwest had to cut production. While they managed to find new customers in Asia, North Africa, and the Middle East, their shipment volumes did not reach previous levels. The same is true for exports of fertilisers and metals. Nevertheless, in some cases, reduced exports have been offset by increased domestic sales. For instance, a metallurgical plant in Vologda, having redirected its deliveries from the European market to the CIS, now exports less. Previously, foreign deliveries accounted for 40% of its revenue structure, but now they account for 20%. However, growing domestic demand has allowed this enterprise to restore production. Agricultural enterprises have managed to increase exports by revising the geography of shipments in favour of CIS and Asian countries, which in some cases has resulted in significant export volume growth.

The majority of investment goods producers surveyed by the Central Bank experts increased their exports, mainly due to shipments to some former Soviet republics, as well as to Africa and Central and East Asia. However, in the overall structure of Russian exports, these quantities remain relatively modest. For instance, successful cases highlighted in the review include an Orenburg-based enterprise that manufactures plastic pipes and fittings (which increased deliveries to the CIS by 10%) and a solar module producer from Chuvashia (which managed to 'establish working supply schemes to Africa and the CIS'). Consumer goods manufacturers, having lost their partners in Europe, have turned their focus to the domestic market. Meanwhile, fishing and fish processing enterprises in the Russian Far East are attempting to tap into the markets of Africa and Southeast Asia.

According to real-time surveys conducted by analysts at the Central Bank, the proportion of exporters reporting no supply issues has increased over the year, albeit modestly, from 41% to 55%. At the same time, in most sectors, there are businesses that have been unable to adapt and have completely withdrawn from exports. Such examples are only absent in the mining, metallurgy, and pharmaceutical sectors.

The challenges lie not only in the difficulty of finding new customers but also in the fact that the reorganisation of logistics and the departure of most international carriers from the market have led to a significant increase in exporters' expenses — especially in regions distant from the new sales markets, the Central Bank analysts note. The transportation journey from Moscow to Vladivostok is eight times longer than to the nearest EU border. Enterprises located in the northwest informed the authors of the report of a nearly 2.5-fold increase in delivery costs to Asia and a four-fold increase to Africa. The reduced margin on deliveries is hindering production and exports.

An additional issue is the labour shortage in logistics. Transport companies estimate a shortage of approximately 60,000 drivers, or about 20% of the current workforce. In Russia as a whole, the authors of the report note, the number of new job vacancies in the logistics sector grew by 40% year-on-year during the first six months of 2023, while the number of CVs saw a 10% reduction.

The authors of the report summarise that the further development of export logistics depends on major investment projects, including the development of the 'North-South' international transport corridor, the modernisation of the Trans-Siberian Railway and the Baikal-Amur Mainline, the expansion of the Northern Sea Route, the construction of railways and highways, large-scale transportation and logistics complexes, and more (Re:Russia has previously covered in detail the prospects for implementing these projects).