Russian business is turning to new markets – Europe must do the same
The pattern of onshoring, nearshoring and import substitution established during the pandemic accelerated dramatically after Russia sent troops into Ukraine. Six EU sanctions packages followed, and over 200 foreign companies exited the Russian market.
But the EU is not the only destination for Russian goods and services. The Global South accounts for 80% of the world's population and just over half of global GDP. Russia is an established player there, and Russian companies have proved quick on the draw in re-directing their Europe-bound trade to the South.
Alexey Miller, CEO of state-owned gas giant Gazprom, told executives and politicians at the St Petersburg International Economic Forum (SPIEF) that the company had increased its gas exports to China by almost 70% in the first five months of 2022 when compared with the same period the previous year.
China has accounted for 32% of the growth in world demand for natural gas from 2011-2021, according to RIA Novosti, so is a key strategic market for gas providers. With Chinese gas demand growing by an average 22bn cubic metres a year for the past five years, Russia’s pivot to China is only set to accelerate.
Meanwhile, China and India have overtaken Germany as the biggest buyers of Russian crude oil. Russia exported a record 8.42mn tonnes of discounted crude oil to China in May – almost 2mn barrels per day (bpd), which is an increase of 28% relative to April. Russia said last month it expects up to RUB1 trillion ($14.4bn) in additional oil and gas revenues in 2022. India and China between them are purchasing enough Russian oil to compensate for the loss in western custom.
The phenomenon is not limited to energy giants. Russian companies across the board have been redirecting trade flows in response to dwindling import demand in Europe.
China is one of the most significant new markets for Russian business. Russian trade with its southeastern neighbour grew by 26% from January to April, exceeding $50bn per year, according to data published by Chinese customs. China and Russia hope to grow that figure further – to a whopping $200bn per year by the end of 2024.
Russia’s metallurgical companies turned to China after Europe banned imports of Russian steel slab. Fastmarkets reports that Russia exported 1.3mn tonnes of steel slab to European countries in 2020. With this market gone, steel companies Severstal, NLMK and Evraz re-directed exports to emerging markets. The 400,000 tonnes of semi-finished steel products sent to China by the three companies in the second half of April exceeded the amount exported to China in the whole of 2021 by more than five times.
By selling their products at a significant discount relative to the other regional steel producers (such as Malaysia and Indonesia), the Russian companies hope to establish a foothold in the Chinese market and cultivate relationships with new clients.
Petrochemicals manufacturer Sibur provides another striking example. More than 20% of Sibur’s products used to be exported to Europe, which was the company’s second largest single market beside Russia. Sibur goods went primarily to Eastern Europe, France, Germany and the Netherlands. Now, the share of Sibur’s sales going to Russia’s western neighbours has been reduced almost to zero, while its Asian exports have ballooned. Forced to re-shape its trade flows, the company now plans to increase exports to Asia significantly this year. The company will most likely return to the market if sanctions are lifted, but for now some European companies will not be receiving products from Sibur.
Meanwhile, European imports of synthetic rubber and polymers from Russia have dropped steeply, as have some of the components needed to manufacture them such as naphtha and LPG. Analysts are predicting shortages of both goods unless European companies can find new suppliers to make up the shortfall, but specialist materials like these can be notoriously difficult to source at short notice.
Sibur’s case is a particularly effective litmus test because the company has not been sanctioned. It is therefore a useful indication of the general flow of Russian goods away from Europe and towards the Global South.
Sibur may well be ahead of the curve here, as it has been working with China for more than 10 years, allowing it to adapt more quickly than other Russian companies. The Chinese direction was set by former CEO Dmitry Konov, who left the company this year amid Western sanctions against Russian officials and businessmen. Educated in Switzerland, Konov has a reputation for striking up foreign partnerships and championing an outward-looking management style. His strategy of increasing resilience by orientating trade flows towards developing markets has proved very perceptive.
If Sibur is indeed an early indicator, and other Russian companies follow its pivot to the Global South, the implications for world trade could be significant.
Speaking at a business forum of leaders from BRICS countries in June (Brazil, Russia, India, China and South Africa), Russian President Vladimir Putin said that “Russian business circles are activating their contacts with the business communities of the BRICS countries… The volumes of Russian oil delivered to China and India are growing noticeably. Collaboration in the sphere of agriculture is developing dynamically. Russia is exporting significant volumes of fertilisers to BRICS states. Russian IT companies are expanding their activities in India and South Africa…”
As Russian producers forge new trading partnerships and strengthen existing ones, business confidence in June reached its highest level since February. Activity in Russia’s manufacturing sector also began expanding again last month.
There can be no question that European sanctions are contributing to adverse effects on the Russian economy, and a deep recession is on the way. Russia’s Ministry of Economic Development estimated that growth was down 4.3% in May 2022. And transactions through the Central Bank of Russia’s payments system were down 7.2% in June compared with the previous quarter – a reliable sign of economic decline.
But it is also clear that Russian companies are flexible enough to look for new trading partners, and that many of them have long been geared up to do just that.
On the other hand, European industry is looking increasingly anaemic without the supplies of Russian raw materials which it had got used to. The EU is the world’s largest importer of natural gas, and some very industrialised countries such as Germany rely heavily on Russian commodities for their export-based economic model.
With benchmark European gas prices around five times higher than they were a year ago, Europe is reeling. The shock has contributed to a steady devaluation of the euro, which is now at its weakest level in twenty years.
WTO forecasts for merchandise trade volumes in 2022-3 show “Europe is now expected to underperform on the import side”. The continent is set to experience shortages of some of the raw materials and consumables provided chiefly by Russia, including grain, energy and rare metals like palladium.
European companies must now show that they are as resilient as their Russian counterparts, which are forging new partnerships and entering new markets. Africa could be an invaluable partner in this undertaking.
Italian Prime Minister Mario Draghi has signed a new gas supply deal with Algeria to increase gas imports by around 40%. And British energy giant BP is looking to new projects in Senegal and Mauritania to help fill the gap created when it left the Russian gas market.
West African LNG supplier Nigeria LNG is looking to boost gas production from the end of the year in order to help meet increased demand from the likes of France and Portugal.
The Middle East will be another important player in the bid to wean Europe off Russian commodities. US President Joe Biden recently returned from a visit to the region, ostensibly hoping to improve trading relations with Saudi Arabia as well as to promote the US’ geopolitical objectives.
In an article for the Washington Post, Biden wrote that he was going to the Middle East because the region’s “energy resources are vital for mitigating the impact on global supplies of Russia’s war in Ukraine.”
Biden added that Saudi officials are “working with my experts to help stabilise oil markets with other OPEC producers.”
Qatar, which currently supplies around 30% of its gas to the European Union, has so far been the only Gulf state to indicate that it is willing to increase supplies to Europe to help cover the shortfall. But much more can be done. Israel alone could provide Europe with 10% of the gas currently coming from Russia. The Middle East’s steel market, meanwhile, can churn out about 16 times the annual volume formerly supplied to the EU by Russia.
Russian industry has shown that the decline in trade relations between Russia and Europe need not be a death knell. European companies must demonstrate the same versatility if the West is to successfully re-orientate its model of trade.