Not oil alone: ​​what awaits Russian exports

Today, Russia’s foreign trade is undergoing profound changes. Many foreign markets for Russian products have been lost, air traffic and maritime transport have been disrupted, correspondent accounts of banks in foreign currency have been frozen. Where, to whom and how to deliver goods, how to build exports in conditions of almost total isolation? The fate of domestic business and the economy depends on the answer to these questions.

The statistics are very misleading. According to the results of 5 months of 2022, the foreign trade turnover between the Russian Federation and the European Union reached €127 billion, which is 41% more than in 2021. Even more interesting is that Russian deliveries to the EU grew by 85.8% to €101.8 billion. However, the lion’s share in their structure was made up of energy resources: today it is both a competitive advantage and the Achilles heel of the economy. Oil exports grew in value terms due to the increase in world prices for it: in June, revenue soared by $20.4 billion. But the physical volumes of supplies fell in June by 250,000 barrels per day, to 7.4 million bpd. And this is an alarming signal against the backdrop of an extremely unstable price environment in the markets. Oil quotes depend more than ever on big politics, and Brussels, in its sanctions “sleeve”, also holds the decision on the oil embargo.

“Since the beginning of the 2000s, exports have been the country’s main source of foreign exchange and, accordingly, technological and consumer goods,” says Anton Sviridenko, adviser to the Commissioner for the Protection of the Rights of Entrepreneurs under the President of the Russian Federation, director of the Growth Economics Institute. P. Stolypin. – Today, the fuel and energy sector is affected by sanctions in all areas: logistics, demand, and settlements are affected. We need to decide on a new export strategy; it is risky to continue to rely on the raw materials industry. New technologies are on the way, electric transport, by 2030 the world is expected to reduce the consumption of oil and coal.”

Meanwhile, in addition to the state energy sector, the crisis has not spared medium and small private companies. According to the business ombudsman and expert of the Institute named after P.A. Stolypin Boris Titov, out of 6003 enterprises in the Russian Federation, 86.8% fell under sanctions. Of these, 11.7% closed completely or partially, 77.4% managed to adapt. These economic entities made a very modest contribution to the overall increase in Russian exports in the first half of the year by 37.2% ($319.5 billion versus $232.9 billion a year ago). More than 60% of deliveries fell again on energy carriers. The rest is food and agricultural raw materials, machinery, equipment, wood, furniture.

Air communication with unfriendly countries is now almost completely blocked. Sea freight has become unaffordable due to the shortage of containers, restrictions on cargo handling in European ports and the lack of ships ready to take on board cargo of “Russian origin”. All this has led to a redistribution of supply chains to the East. Over the first half of the year, rail transit through Kazakhstan and Belarus more than doubled, cargo that used to go through the ports of the Russian North-West and South, today will be redirected to the ports of the Far East and land border crossings with China.

“Exporters quickly adapted to the new realities,” says Anton Sviridenko. – The turn towards Southeast Asia, Latin America, the Middle East and Africa has already yielded the first results: we have found markets for traditional goods – raw materials, primary processing products. However, these markets are not able to “digest” all the supplies in the volume in which they went to the west. Rapid redevelopment is a temporary solution. The challenge for the coming years is to understand the expanded demand in the new partner countries and adapt the supply to it.”

The markets of the EAEU, India, Central Asia, the Middle East have been and remain open to the Russian Federation. The following are in high demand here: Russian furniture, building materials and wood (boards, timber), jewelry, cosmetics and care products, leather goods (wallets, bags, mobile phone cases), chocolate, ice cream. You can not completely discount and consumers in Europe. If there is no direct transport connection, you can always build delivery schemes and receive payment through friendly countries. Interest in building materials, spare parts for furniture assembly, textiles, cosmetics, workwear for the needs of the construction industry has not faded in the West.

As for energy resources, pipeline natural gas (in addition to oil) is in demand in China: in 2021, supplies from the Russian Federation increased by 2.54 times, exceeding 7.53 million tons, and their total cost increased by 2.37 times, to $1.51 billion. However, the possibilities for further increasing raw material exports in the East are severely limited by the throughput capacity of the existing pipeline system. At the same time, China, India, Vietnam, and other Asian markets need supplies of chemical products – potash and phosphate fertilizers, ammonium nitrate.

If we talk about the export of Russian agricultural products, then its geography does not need a radical restructuring. In 2021, Russia supplied the most grain (the share in the structure of agricultural exports is 30.8%) to Turkey, Egypt, the EU and Saudi Arabia. Meat and dairy products were actively purchased by China, sugar – by Kazakhstan and Belarus.

A separate big topic is the underdevelopment of the transport and logistics infrastructure in Russia itself. After all, for starters, goods must be delivered to the country’s borders, including along poor-quality roads. The average speed of their movement in the Russian Federation is 3–5 times less, and fuel consumption is 1.5 times higher than abroad. And in 2022, cargo transportation has risen in price by 17-20% in general due to the growth of online retail and the lack of warehouses. A long-standing systemic flaw is also the system of cross-subsidization, when companies in one industry “sponsor” the transportation of goods in others, and 60% of these are low-income goods, mainly coal. Finally, there are few multimodal logistics hubs with their own warehouses in Russia. This makes delivery times unpredictable.

“Russia’s economic strategy is uncompetitive without export diversification,” notes Anton Sviridenko. – The composition of industries as a whole should be more balanced. It is necessary to provide conditions for the development of new export directions and the development of new markets: support for clusters, preferential taxes on investments, project financing, the creation of hubs for the processing of raw materials, the signing of agreements on the removal of trade barriers, lending and factoring, the provision of settlements in national currencies, the creation of an independent logistics systems.”

That is, summarizes the director of the Institute for Growth Economics. P. Stolypin, it is hardly worth striving for a complete restoration of exports in the same composition. We need to think through the strategy and support it with a set of structured, results-oriented measures.