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All news / Russian Sanctions Echo The 2018 US-China Tariff War

  • 23 May 2022, 10:07

Opportunities By Forcing Investment Into Emerging Markets With Kazakhstan A Clear Winner As Geopolitics Reshape Central Asia

Russian Sanctions Echo The 2018 US-China Tariff War

Kazakhstan has been placed in an awkward balancing act during 2022 as concerns its relationship with Russia. While bilateral and political relations are warm, as evidenced by Russia’s lending support in January to quell mass rioting, the Ukraine conflict has created both problems and opportunities for the country.

Kazakhstan is a member of several trade and political organisations along with Russia, not least the Free Trade Bloc of the Eurasian Economic Union, the trade bloc of the Commonwealth of Independent States (CIS), and the regional Shanghai Cooperation Organisation among others. Kazakhstan holds the Presidency of the CIS this year and will be keen to see its trade increase as regional barriers change.

Russian-Kazakh trade reached US$25.6 billion in 2021, up 34% YoY, while Kazakhstan’s trade with the Eurasian Economic Union reached US$1.7 billion in January this year alone, indicating an increase of 29% over the previous January 2021. Since then though, supply chains have been disrupted by the closure of EU ports and borders with Russia, which in turn has impacted Kazakhstan as the EU’s northern ports where the primary transit point for China-EU freight – much of which passed through Kazakhstan en route, earning the country transit fees. Although that is in the process of being resolved via the use of the China-Kazakh-southern route via Kazakhstan’s Caspian Sea Aqtau Port to southern Europe, there has been a dip in trade.

Kazakhstan has been treading carefully not to get caught in Russia’s sanctions, although it has no obligation to do so – but has stopped supplying iron ore to Russian steelworks in Siberia. The Kazakh Rudniy SSGPO plant, based in Rudniy, was supplying 70% of the ore sourced by the MMK steelworks in Magnitogorsk, which lies just 340 km away. However, Government intervention has suspended those supplies, leaving SSGPO now looking for alternative buyers while MMK has merely sourced from alternatives. That decision was taken to allow the Kazakh Government to open up renewed trade discussions with the European Union, its largest trade partner in the realization that Kazakh trade with Russia (second largest) may dip. Such are the sacrifices one has to make these days to discuss trade with Brussels, even though the gesture was somewhat ineffective – and would have been discussed with Moscow beforehand.

Kazakhstan is also host to Russia’s space program at Baikonur – talk of the two countries falling out are way off the mark. A BRICS+ meeting, held last Friday (May 20th) included the Kazakh Foreign Minister who has stated interest in joining the group. The BRICS currently includes Brazil, Russia, India, China, and South Africa.

On the other hand, Kazakhstan is a beneficiary of Russian investment – its well-developed industrial base is seeing an influx of Russian businesses, now sanctioned from the EU to establish Kazakh subsidiaries instead, while Kazakh businesses have been buying up Russian banking subsidiary assets in Kazakhstan. CenterCredit, based in Almaty, purchased the assets of Russia’s Alfabank Kazakh subsidiary last month, thus freeing it from sanctions.

Kazakhstan has also distributed 10,000 personal ID numbers to Russian nationals, since March, assisting them to establish a Kazakh identity. An estimated 162,000 bank accounts from Russian nationals are now established in the country, according to the Kazakh Agency for the Regulation and Development of the Financial Market.

As citizens of countries which are fellow members of the Eurasian Economic Union, a free trade zone, Russians and Belarusians benefit from simplified residence and employment rules in Kazakhstan. They can easily obtain permission to work, and can remain in the country for 90 days at a time without residence permits. This makes traveling to Kazakhstan to open bank accounts straightforward, especially from neighboring Russia. The financial regulator was at pains to stress that due diligence is performed on new customers, including stringent ID checks.

Russians are also being given the option to do the same in Uzbekistan by Russian travel agencies offering special packages purely to open bank accounts instead of doing the usual tours around exotic Silk Road sites. Tours cost around US$270 without flights at current exchange rates. They include assistance with preparing paperwork in advance to open an account, and a visit to a bank to sign documents and collect a debit card.

The upshot to all this is that Kazakhstan and Uzbekistan are becoming beneficiaries of the Russian situation – while pushing Russian money to invest into Central Asia at a greater rate than was previously the case.

This is not totally unlike the impact of the US tariff wars against China, which forced US sourcing companies to seek lower cost products from countries such as Vietnam. That had the dual effect of upgrading Vietnamese (and other, primarily ASEAN nations) manufacturing and production capabilities, while pushing China to concentrate more on its domestic consumption rather than its export trade. That has happened, with China introducing new ‘dual circulation‘ strategies designed to boost Chinese domestic consumption and imports (good news for US and EU exporters among others) while assisting other regional economies such as Vietnam to develop.

The same impact will and is starting to occur in Central Asia and Russia. Russian investment capital is being partially forced to look elsewhere – with countries such as Kazakhstan and others benefitting. It actually speeds up, and diversifies the internationalisation of Russian capital, which has been traditionally conservative and rather slow to act.

As for the Russian domestic market, sanctions will spur greater efforts by Russian businesses to develop domestic technologies that up to now have been the preserve of EU and US imports and have rendered, to some extent, some elements of the Russian technological industry lazy and inefficient. The mass pullout of Western retailers and brands from Russia has also left significant new branding opportunities for Russia’s domestic businesses to consider, as well as introducing up and coming Asian brands to the market.

It took the US tariffs on China (a form of sanctions) to spur the country to adopt policies that would develop its own consumer market. Russian reactions to sanctions are already having a similar effect. We can start to look forward to a slew of new investment laws and state development policies from the end of this year and into 2023 as Russia adapts to a new reality and countries such as Kazakhstan (and Uzbekistan) get to share more in Russia’s gigantic, if slow-moving potential.