Export-Light: Customs Union Countries

You can start exporting by entering the markets of the Customs Union countries.

Export activity is a challenge for any company. It is especially difficult to take the first step and start working with export markets if the organization has not had such experience before. In this case, it is reasonable to consider the markets of countries with which the Russian Federation has a most-favored-nation trade regime: the Republic of Armenia, the Republic of Belarus, the Republic of Kazakhstan, and the Kyrgyz Republic.

Main parameters of the markets of the Customs Union countries

The Customs Union consists of five countries: Armenia, Belarus, Kazakhstan, Kyrgyzstan, and Russia. Although these countries have much in common, primarily due to being part of one state for many decades, there are no fewer specifics important for an exporter.

The main point to consider is the incomparable market scales and the completely different standard of living of the population in these countries.

Of course, the specifics of the exported goods strongly influence the assessment of market capacity. But in any case, there are upper limits related to the population (if we are talking about goods for B2C markets) or the "size of the economy" for working with B2B markets.

According to the latest data, the population of the CU countries is as follows:

1. Russia – 146,749 thousand people.
2. Kazakhstan – 18,839 thousand people.
3. Belarus – 9,408 thousand people.
4. Kyrgyzstan – 6,524 thousand people.
5. Armenia – 2,962 thousand people.

If we focus on population, then Russia's potential market is 3.9 times larger than all other countries combined. At the same time, the market of Kazakhstan is approximately equal to the markets of the other three countries (and roughly at the level of the Moscow agglomeration market). The market of Kyrgyzstan roughly corresponds to the market of the St. Petersburg agglomeration. And the market of Armenia is comparable to the markets of Russian regions in the "second ten" – at the level of the Samara Oblast or Krasnoyarsk Krai.

Let's look at the ratio of industrial sectors. The World Bank calculates the indicator of value added in industry (together with construction). For the five countries under consideration (data for 2019):

1. Russia – 546,787 million US dollars.
2. Kazakhstan – 59,546 million US dollars.
3. Belarus – 19,742 million US dollars.
4. Armenia – 3,321 million US dollars.
5. Kyrgyzstan – 2,334 million US dollars.

In terms of industrial production and construction, the disparities are even more "profound" (which is worth considering for equipment manufacturers and many other goods for production). Russia is "larger" than the other Union members by 6.4 times already.

Similarly, for other significant macroeconomic indicators that form the capacity values of markets, the Russian Federation will many times exceed its partners combined. If we talk about the qualitative state of the economy, which is described by specific indicators, the disparities will not be as "pronounced".

For example, according to such an indicator of the level of economic development of a country as GDP per capita by purchasing power parity (PPP) (2019 according to IMF calculations):

1. Russia – 28,184 USD per person (53rd in the world).
2. Kazakhstan – 27,292 USD per person (54th in the world).
3. Belarus – 19,942 USD per person (66th in the world).
4. Armenia – 14,177 USD per person (88th in the world).
5. Kyrgyzstan – 5,516 USD per person (135th in the world).

What do indicators like GDP per capita by PPP tell an exporter? About the approximate level of "purchasing power" of the economy as a whole – both the population and businesses. As we can see, Kazakhstan is at the same level as Russia, and Belarus, although inferior, is not critically so. At the same time, the situation with Kyrgyzstan is very poor – one clearly cannot count on sales margins corresponding to the Russian or Kazakh, or even Armenian market here.

However, territorial proximity and a favorable trade regime influence the fact that economic cooperation in terms of exports and imports between the countries is quite active. If we analyze the import of Russia from other Customs Union countries and exports to them, the situation in 2019 was as follows:

Belarus: exports – 20,545 million USD, imports – 12,801 million USD.

Kazakhstan: exports – 14,051 million USD, imports – 5,571 million USD.

Armenia: exports – 1,680 million USD, imports – 830 million USD.

Kyrgyzstan: exports – 1,551 million USD, imports – 316 million USD.

Russia has a positive trade balance with all countries, with trade links best established with Belarus (even if we "remove" supplies of goods from group 27 – mineral fuels, which Kazakhstan provides for itself, then even in this case, exports to Belarus and Kazakhstan will be approximately at the same level). Since the size of the economy and population in Kazakhstan is much larger, we can talk about a lesser realization of the export potential to the Kazakh market by Russian companies compared to the Belarusian one.

Exports to Armenia and Kyrgyzstan are already significantly inferior to goods flows to Belarus and Kazakhstan. Our business works less actively with these countries, including due to market sizes. But in any case, trade with the Customs Union countries is much more developed than with others – comparable in population and level of production development.

Let's take, as an example, a state – a former republic of the USSR – Uzbekistan. This country has a population of 34,586 thousand people (approximately like Kazakhstan, Belarus, and Kyrgyzstan combined), value added in industry – 19,204 million USD (at the level of Belarus). At the same time, exports from Russia in 2019 amounted to only 3,908 million USD – 3.5 times less than to Kazakhstan, 5 times less than to Belarus.

Such results are related to the additional advantages that exist for exporters to the Customs Union countries; let's consider them further.

Why is it easy to export to Customs Union countries?

The main advantage of trading with Customs Union countries is that when supplying goods, there is no crossing of the customs border. Therefore, the company does not need to bear costs associated with customs clearance of the goods.

Due to the fact that uniform conditions for conducting trade activities apply within the Customs Union, the exporter does not pay customs duties when supplying its products. At the same time, a "regime" of a zero VAT rate applies, which is also used for exports outside the customs border.

It is very important that within the Customs Union, a unified system of product certification (EAC mark) operates. This means that the company does not need to collect information about existing market barriers and then pay for certification to sell its products on the market of a foreign state. Although in many cases during export this problem may be absent (the goods are not subject to certification or there are agreements on the recognition of certification documents between two countries), still much more often it is necessary to incur significant costs to obtain a package of permits to start export activities (be it European Union countries, China, the USA, etc.). For exporters to Armenia, Belarus, Kazakhstan, and Kyrgyzstan, such an issue is not relevant in principle.

If the contract is concluded in rubles, then the seller does not face problems with currency control either. There is no need to open a foreign currency account in a bank and track payments in case of full or partial post-payment for the delivered goods. Often, with companies from Kazakhstan and Belarus, it is possible to agree on settlements in rubles; most importers from these countries working with imports from Russia have ruble accounts in banks.

In the Customs Union countries, business communication is almost always conducted in Russian. Of course, knowledge of Kazakh or Armenian will be very useful when working in the markets of these countries, but it is not a mandatory condition for successful trade. Therefore, it is easier to conduct negotiations with a potential partner, as well as to collect market information within the framework of desk marketing research. There is no need to engage in translation and website adaptation, etc. That is, the exporter avoids many problems caused by language barriers in communication.

In Belarus, Russian is a state language; in Kazakhstan and Kyrgyzstan, it is an official language. In all four countries, the majority of the population understands Russian, and business community representatives are proficient in it.

Largely as a consequence of having a common language of communication in business, as well as historical heritage, the business communication culture is quite close, although the countries belong to different geographical zones – Russia and Belarus are Eastern European countries with predominantly Slavic populations, Armenia represents Transcaucasia, and Kazakhstan and Kyrgyzstan represent Central Asia. There are specifics, of course, and quite strong ones. But, on the other hand, any entrepreneur actively working with the numerous regions of Russia, representing, in particular, such different places as Moscow, the Urals, the Caucasus, the Far East, and the regions of Eastern Siberia, also faces the importance of considering local business customs and cultural characteristics.

Finally, we can also talk about a largely common trade infrastructure and logistics system. Within the Customs Union countries, the same marketplaces and some banking organizations operate, etc. Any more or less large transport company can easily organize deliveries to the nodal points of the CU countries. Moreover, the buyers themselves, especially Kazakh ones, can pick up goods from a warehouse in Russia (on FCA terms), which simplifies the implementation of an export project.

Despite the fact that exporting to Customs Union countries, at least organizationally, is easier than beyond the customs border, exporters can also count on state support measures when implementing projects in Armenia, Belarus, Kazakhstan, and Kyrgyzstan.

The Russian Export Center and export support centers in the constituent entities of the Russian Federation do not discriminate in any way against exporters to CU countries. You can get assistance in conducting marketing research, finding a partner, participating in exhibitions, etc. The transition in 2021 to a new "package" format of support provision (instead of individual services, their combinations within a package will now be offered – and each ends with an export contract) also will not in any way restrict those wishing to receive services to assist in developing exports to Customs Union countries.

Why is it difficult to export to Customs Union countries?

Despite the numerous advantages of trading with Customs Union countries, which is why many Russian companies start their export activities precisely with this geography, there are also certain difficulties.

It can be said that the disadvantages are mostly a continuation of the advantages – low barriers to entry, which are also low for competitors. In this regard, the markets of the Customs Union countries are often already saturated with Russian goods, which means that serious resistance must be overcome to occupy one's niche.

When exporting to countries like Kazakhstan or Belarus, Russian companies have a false sense that it will be easy to sell the goods, since there are no barriers in terms of duties or certification (as, conditionally, in the European Union or China). However, the absence of state regulation barriers does not mean that there are no actual market barriers. After all, competition, channel requirements, consumer preferences, etc., remain. Despite all the similarities of the markets of individual countries within the Customs Union, they nevertheless have pronounced peculiarities, so preparation is also needed to enter them – collecting information within the framework of marketing research, finding reliable partners, preparing targeted commercial proposals, conducting long negotiations, including visiting countries as part of specialized events – exhibitions, fairs, business missions, etc.

Despite all the openness of trade, preferences for local companies remain, especially in the sphere of public procurement. If a Russian company wishes to sell goods to the public sector, for example, in Kazakhstan, then in most cases it will be necessary to look for a partner within the country who meets preferential criteria, otherwise the probability of winning a tender is low.

The presence of developed trade between countries in the absence of a customs border leads to the fact that tracking goods flows can be problematic. Reverse movement of products and their competition with distributors in the Russian market is not excluded (especially if the sale to a foreign buyer is made with good discounts), "spillovers" of goods between the markets of the countries, etc. All this requires the development of a balanced distribution policy, building long-term partnership relations with organizations importing Russian products. The two largest markets – Belarus and Kazakhstan are also transit corridors, so the lack of control over sales can cause negative consequences both in the Russian market and in the markets of third countries. Pricing policy is very important, as the "corridor" of prices satisfying both parties may be narrow.

Although when trading with Customs Union countries, formalities are minimized, they remain, and they are often forgotten. Thus, for shipments made, each subsequent month it is necessary to prepare a form of statistical reporting and submit it to the customs authority at the place of registration (or in the personal account on the website of the Russian Customs Service), otherwise an administrative fine. There are features related to the documentary processing of VAT deductions, requiring built relationships with product buyers. Otherwise, there are risks of not using the advantages of export in terms of taxation for one's organization.

But still, the advantages in working with Customs Union countries far outweigh the disadvantages. Russian companies that plan to develop exports of both goods and services should consider the markets of Armenia, Belarus, Kazakhstan, and Kyrgyzstan on a priority basis. For most goods (not all) this direction of export development will yield a positive commercial effect.