What Countries Sell

International trade is an area of conflict and changing standards. Economic leaders give way to new players, and digital technologies rewrite industry rules. The status of world trade and Russia's prospects are covered in a report prepared by experts* from the HSE University's Centre for Structural Policy Research and Institute for Trade Policy.

Services Instead of Goods

The growth of international trade in goods has been slowing down relative to the overall world economy growth rates. Demand remains weak, and only Asia continues to provide heat.

More goods than services are being traded at the moment, but the latter's contribution to the global economy is starting to prevail. According to UNCTAD, between 2010 and 2017, world trade in services doubled compared to a 1.7 increase in world trade in goods. ICT services are the fastest growing export due to the penetration of digital technology, such as blockchain, AI, IoT, and 3D printing.

What is traded worldwide
(sector typology in terms of export scale
and growth rates)

Group 1. Traditional industries with low export shares and slow expansion rates: fabricated metal products, office and electronic equipment, wood and paper products, fuel, and public administration services.

Group 2. The most dynamic sectors linked to the digital economy: computer, ICT and creative services.

Group 3. Sectors with low export shares and medium expansion rates. These include products and services designed to meet current consumption and investment needs, such as industrial, construction, insurance and financial services; energy, industrial, transport and communications equipment; grains, textiles and clothing apparel.

Group 4. Sectors with high export shares and medium expansion rates. These are products used as components and materials in areas such as the electrical and automotive equipment industries, food, and chemicals.

Global Sellers

The free market is shrinking, in particular due to the emergence of global value chains (GVCs) which comprise the full range of activities to bring a product or service from conception to end use and beyond.

In a global value chain, the various stages of production are located in different countries. The largest firms implementing GVCs have become the most influential trading players. In 2014, according to UNCTAD estimates, 1% of the leading companies accounted for, on average, 57% of all exports of goods (except oil) from their respective countries.

Between 2000 and 2014, foreign value added in Russian exports declined by 13%, and domestic value added dropped by 22%. The key reasons for Russia's limited participation in global value chains include low investment activity and insufficient industrial technology upgrades.

Who Changes Geography

Participation in GVCs helps to strengthen developing countries' positions, particularly in high-tech exports (48.5% of all global exports in 2017). The highest contributors include Hong Kong, Korea, Singapore, Taiwan, Indonesia, Malaysia, the Philippines, Thailand, and to a large extent, China.

The growing role of developing economies has led to a shift in the geography of trade routes from North-North (between developed countries) to North-South (between developed and developing countries) and South-South (between developing countries).

In terms of trade structure, developed economies have retained their relatively stable (about 50% of all exports) positions in high-tech segments employing a highly skilled workforce, while transitional countries have only slightly expanded their presence in the commodity market.

Exports from Russia

Over the last 20 years, commodities have continued to dominate Russia's foreign trade, with the share of crude oil and petroleum products in the country's gross exports increasing from 31% in 1995 to 51% in 2017. A certain increase in the share of manufactured goods is linked to exports of semi-finished products, while no consistent progress has been observed in the machinery and equipment sector.

Structure of Russian exports
(%, 2017, нbased on COMTRADE data)

Machinery and equipment — 6,4%

Chemicals — 7,2%
Metals and metal products — 12,5%
Wood processing,
pulp and paper industry — 3,7%
Petroleum products — 17,1%
Petroleum gases and other gaseous hydrocarbons — 5,8%
Crude oil — 28,3%
Agribusiness — 6,8%
Others — 12,2%

In Russia, according to the report authors, the largest companies (with revenues exceeding 10 billion rubles) contributed 81% of the country's total exports in 2017, followed by large companies (2-10 billion rubles) contributing almost 13%. While the combined share of medium-sized (800 million-2 billion rubles) and small (up to 800 million rubles) exporters totalled just 6.5% in 2017, it increased by 28% for the former and virtually doubled for the latter between 2016 and 2017.

Large businesses mostly sell raw or minimally processed goods: about 42% of their exports are food crops like grain, vegetables and fruit, industrial crops, chemicals, fertilisers, lumber, processed stone, iron and steel, and unprocessed non-ferrous and precious metals.

In contrast, small and medium-sized businesses tend to sell highly processed goods: about 40% of their exports are engineering products, pharmaceuticals, household chemicals, clothing, shoes, furniture, toys, printed goods, and food, as well as high-tech materials and intermediate products (rare-earth and some minor metals, radioactive compounds, medical components, and diamonds).

Exporters: Inside Look

In Russia, high-growth ('gazelle') companies whose growth rates outpace those of other players in their industries and in the broader economy tend to be the most active exporters.

Interviews with executives of 142 such companies conducted in 2019 by the HSE Institute of Innovation Management (IIM) and Centre for Structural Policy Research (CSPR) reveal that gazelle companies are more likely to trade with 'far-abroad countries' but only about 20% of such companies do not encounter serious barriers to trading their products.

Top 10 Export Barriers Reported by Gazelle Companies»
(%, frequency of mention)

 difficulties with product certification abroad (36,6%)
 specific characteristics of products limiting their export opportunities (24,4%)
 lack or shortage of funds and difficulty accessing loans for export contracts (23,7%)
 lack of information on foreign markets and potential partners there (22,9%)
 low brand visibility (21,4%)
 difficulty with setting up branches abroad for product marketing and servicing (16,8%)
 discrimination against Russian manufacturers abroad (16,8%)
 complexity and duration of customs clearance process (16%)
 lack of in-house expertise in foreign trade (14,5%)
 logistical challenges (13%)

Source: HSE IIM and CSPR survey of 142 fast-growing Russian companies, 2019

The types of challenges depend on the direction of exports. Those trading with EU countries report struggling with taxes and discrimination abroad, while exporters to Asian countries, including the Middle East, find product obsolescence to be their greatest problem.

Almost in equal proportions, Russian gazelle companies have been either positively or negatively affected by the sanctions regime:

 about 50% have suffered adverse effects from Western sanctions and Russia's retaliatory measures, including lower trust for Russian businesses abroad, higher cost of foreign goods and services, and problems with imports of raw materials and components;

 about 50% of companies have benefited from the situation by increasing their share in the domestic market due to import restrictions, starting to develop new products and technologies, and finding new consumers and suppliers inside Russia.

State Interests

According to the report, over the past decade, governments have increasingly recognised the need for a strategic trade policy which can be interpreted as a reincarnation of the industrial policy approach, i.e. governments’ efforts to improve the business environment and structure of the economy.

In Russia, the government has utilised various approaches to 'regulating' exports and imports over the recent decade. The paper identifies three distinct stages:

1. Before 2014: Foreign trade was important but not the top priority for the state. Adopted in 2011, the Strategy for Innovation-driven Development of the Russian Federation envisioned an increase in Russia's share in global high-tech exports and set up a special institution tasked with export insurance support, the Russian Agency for Export Credit and Investment Insurance (EXIAR).
2. 2014 to 2016: The state's policy prioritised import reduction and replacement in the context of worsening relations with a number of foreign countries. New entities were established to advance this policy: the Industrial Development Fund to encourage import replacement and the Russian Export Centre to support non-commodity exports.
3. Since mid-2016: The state's focus has shifted from import replacement to export advancement. Export development strategies were approved in four branches of engineering, and priority projects were launched in the manufacturing industry, agribusiness and education. The  International Cooperation and Export national project was approved which envisioned an increase in the volume of production and exports of non-energy goods from $149 billion in 2018 to $250 billion in 2024.

The shift of focus from import replacement to export expansion is well justified, but not so much the emphasis on traditional Russian products with uncertain export potential. In fact, low interest in updating export products is one of the limitations of Russia's foreign trade policy, others being the state’s excessive reliance on providing financial support to exporters, too little effort in encouraging participation in global value chains, and others.

Solutions for Growth

According to the report, Russian high-tech products with export potential include:

 medical and X-ray equipment;
 radar instruments, optics and equipment;
 sports goods and equipment;
 shooting sports equipment and sports weapons;
 leisure and entertainment goods;
 highly-skilled testing services.

According to the experts, there is no universal approach to boosting these or other exports, so different methods and their combinations need to be used depending on the current situation in each trade segment, from gradual product upgrade (agriculture, timber processing) to stimulating short-cycle segments to facilitate the entry of new exporters and new types of exports (medical equipment, instruments, electrical industry, and services).

The following measures could serve to boost exports:

 promoting export activity of small and medium-sized companies;
 providing incentives to gazelle firms;
 helping to create an effective service infrastructure for exporters (consulting, legal, logistical, go-between, financial and others services);
 supporting regional export initiatives to maximise local assets such as availability of unique crafts and skills.

IQ

*Contributors to the report Structural Aspects of Russia's Trade Policy include:

 HSE Centre for Structural Policy Research (CSPR): Yuri Simachev , Director; Mikhaill Kuzyk, Deputy Director; Anna Fedyunina, Leading Research Fellow; Nikolai Zudin analyst;

 HSE Institute of Trade Policy: Alexander Daniltsev, Director; Marina Glazatova, Deputy Director.

Author: Svetlana Saltanova, June 18, 2019