16.09.22 Review

Russia’s Asian breakthrough unlikely to happen soon, according to Central Bank’s analytical review of the problems plaguing the Russian export sector

According to a large-scale survey conducted by Russia’s central bank, 10% of companies exporting raw materials have halted their exports as a result of losing access to Western markets, 20% have lost part of their contracts, 15% have managed to replace Western contractors and another 40% declare that nothing has changed in their export trade. Analysts note that the Asian market is able to absorb a significant amount of Russian raw materials, however, geographical remoteness (vital for the timber and woodworking industries; exports from the European part of Russia were almost entirely to the West), poor infrastructure in the east and south of Russia, and an overly-strong ruble signal serious problems for Russian companies wanting to export to Asia. There is also the issue of self-sabotage: Russian authorities require companies to pay for exports in national currencies, while most international trade is conducted in dollars and euros.

According to a study published in the September issue of the central bank’s “Regional Economy” review, a survey of 14 thousand companies showed that 45% of businesses involved in the export of raw materials have experienced some sort of problems with their exports since sanctions were implemented. The number could actually be higher, as another 14% of the enterprises surveyed did not indicate an absence of difficulties, but refused to elaborate any further on the matter.

Export situation, August 2022, % of the number of surveyed export companies

Energy exporters lead the way in terms of having successfully reorganised their practices. By August, all customers refusing to do business with these companies had been replaced. Meanwhile, businesses exporting precious metals have found themselves in the most difficult situation: only 18% of them reported no issues with their trade, 29% were able to partially replace their importers, and 12% could not do so at all. The situation is similar for exporters of wood and its byproducts: 9% of companies have stopped exporting, whilst 43% managed to partially replace their former buyers. For wood producers, transport remains the key issue: complicated logistics significantly lower their competitiveness in Asian markets.

The search for new buyers has been more successful among metal exporters: 35% of them have already completely replaced their European partners with Asian ones, despite the thorny issue of having to trade in national currencies. Russian exports are small compared to the capacity of the Asian market, and this undoubtedly plays a vital role in these businesses' success. In 2019, metal imports into Asia amounted to approximately 1.8 billion tons, while exports from Russia only slightly exceeded 50 million tons, the central bank’s study notes.   

The limited capacity of supply routes to the east and south (including the capacity of pipelines) has led to their congestion, as well as to higher sea and rail transportation prices. “The current total port capacity in the European part of Russia is noticeably higher than in the Asian part,” the authors of the review write. But these ports currently stand idle, and it is impossible to funnel Russian goods through eastern transport corridors. This also applies to the railway system, as well as the capacity of gas and oil pipelines, which were built for premium European markets. Therefore, logistics and transport remain an issue for exporters (including those in the energy sector), who are now aso forced to sell their products at a discount. In addition, another serious issue plaguing transport and logistics is the refusal of container companies to work with Russia. As a result, growing logistic costs pose a significant problem for Russian companies and result in the competitiveness of their products weakening.

Most exporters have experienced difficulties replacing their imported equipment: there are often no similar products readily available, or, if there are, they are inferior in quality, the central bank notes. This means that companies cannot adapt their products to new customer’s needs. Finally, in addition to the requirements of the Russian authorities to conduct trade with foreign partners in national currencies (which these partners themselves are completely unprepared for), almost all exporters, except for energy companies, are under pressure from the excessive strength of the ruble.

Thus, despite the fact that Russian raw materials can be exported to Asia due to the market’s size, it will not be possible to actually do this in the near future. It requires time, significant investment into new infrastructure (despite the fact that the west of the country already possesses all the necessary infrastructure), and adaptation to new trading conditions, those in which Russia lacks premium markets.