Foreign Business Interest in Russia Rebounds

The first coatings plant in Russia is reportedly due to be launched by a foreign investor since the start of the Ukrainian military conflict in February 2022. The move is announced in the background of a tangible progress in import-replacement of the critical raw materials, and silent return of the Western firms to the country.

The Chinese coatings manufacturer Shanghai Hilong Shine New Materials is mulling plans to launch a factory for the production of ship coatings in the Russian Far East. This move is part of the import-replacement efforts, as the company aims to produce coatings locally, reducing the need for imports. Ren Weidong, a spokesperson for the firm, told a local news outlet Tass about these plans.

The company, which is already running three small factories in Russia, intends to deepen cooperation with the local shipbuilding industry, Weidong revealed. According to Weidong, preliminary negotiations have already been held with potential Russian partners for the construction of the factory, planned to be a joint venture with a local business.

This is the first time a foreign investor has declared plans to open a coatings factory in Russia since the Western sanctions triggered an exodus of foreign business from the country in 2022.

The Chinese firm, however, is confident that the mass departure of Western companies opened a window of opportunities for those willing to continue working in the local market, Weidong indicated. The key rationale behind the move is to simplify the logistics on the Russian market, as the company will not need to deliver its goods from China.

Western Firms in the Russian Coatings Segment

In the meantime, occasional reports indicate that Western business is still present in various forms in the Russian coatings market.

For example, Maxim Nikishin, a spokesperson for OBI, a German hypermarket chain, recently told a local news outlet, Retail, that 90% of imported brands are manufactured at localized capacities in Russia.

“As we remember, European companies massively announced that they were leaving Russia [in 2022], and we, the OBI hypermarket chain, were one of the first to be affected,” Nikishin recalled, adding that the initial blow was followed by a long process of adapting to the new reality. The challenges faced by Western firms included political turbulence and difficulties in maintaining operations due to critical raw materials supply disruptions.

“Having gone through the path of complete restoration, we perfectly understood the situation of our partners and found mutual compromise development options, localization stages and the return to the shelf, first of all, of top coatings,” Nikishin stated.

There are different ways how Western coatings find their way to the Russian grocery shelves.

For example, the German brand Alpina started producing part of its range in Belarus under its own brand. According to Nikishin, in general, Alpina and Caparol brands went through rebranding in the country, and retain their positions in the Russian retail under the name Linnimax.

Most Russian factories owned by foreign firms pulled the plug on operations shortly following the outbreak of hostilities in Ukraine in February 2022. During 2023, however, most factories were put back into business, especially after Lithum Group, the former Russian branch of Norwegian paint maker Jotun, consolidated control over the Russian factories PPG and Hempel.

Lithum Group is not providing much insight into its operations, but the first customers’ feedback suggests that the company offers coatings of quality similar to that of the former owners of its factories.

Earlier this year, local press reported that several Western brands, including some that publicly announced their decision to sever ties with Russia, continue business in the country, including importing coatings from other countries and even hiring new staff.

Over the past few years, Russian coating manufacturers have also indicated that the coatings of Western firms are present in the supply chain, though they primarily attribute it to parallel import through the countries in Central Asia and the Middle East.

Import-Replacement in Action

Western firms pulling out of Russia in 2022 cited not only political turbulence but also difficulties keeping operations running in the wake of critical raw materials supply disruptions. While the gap was primarily filled with imports from politically neutral countries, there is also outstanding progress in import replacement on the home ground.

Roschem, a prominent Russian chemical company, is under full sail to beat its goal of fully meeting Russian demand for titanium dioxide (TiO2).

During the first seven months of 2023, the period with the latest available data, Titanium Investments, a Roschem subsidiary for TiO2 production, tripled its output compared with the previous year to 21,500 metric tons.

This is still a far cry from plugging the gap in the domestic market, estimated at 109,000 metric tons per year. However, the five-year development plan adopted in 2022 envisages boosting the production performance to 120,000 metric tons.

Roschem revealed that the factory has embarked on a large-scale modernization campaign, replacing outdated equipment with new machines. Under the plant, the company will pump Rub 2.4 billion ($250 million) into Titanium Investments, formerly Crimean Titanium.

Rochem also unveiled that Titanium Investments has already started exporting its products to Turkey, Iran, Korea and New Zealand.

In previous years, Crimean Titanium relied largely on imports of ilmenite ore, the key raw material for TiO2 production. Occasional reports indicated that ilmenite ore was delivered from Vietnam and Mozambique and snuck in from Ukraine, where any trade with businesses registered in Crimea was prohibited. However, this business model was unreliable and costly.

In 2023, the company received the first batches of 10,000 metric tons of ilmenite concentrate from a mine in Amur Oblast, Russia. Self-sufficiency in key raw materials is believed to pave the way for a drastic rise in TiO2 production in the coming years.

TiO2 is not the only field where noticeable progress is seen.

Russian chemical company Attika has unveiled plans to invest Rub 900 million ($8 million) in the production of epoxide resins in the Leningrad region.

The project’s first stage, with a designed capacity of 10,000 metric tons of liquid epoxy, will become operational at the end of 2024, and the second stage, with a capacity of 8,000 metric tons of dry resins, will be operational at the end of 2025.

“This project is quite ambitious. It involves creating a full-cycle production of epoxy resins using technology we acquire from Chinese partners,” Matvey Rammo, CEO of Attika, has said.

According to him, most factories that have produced epoxy resins since Soviet times in Russia have been closed.

“These products are used for the production of coatings and composite materials, as well as building systems,” explained Rammo.

BusinessStat, a local consultancy, calculated that in 2022, the Russian market for epoxide resins stood at 47,900 metric tons, 8.6% down compared with the previous year due to a drop in consumption.
Until recently, foreign suppliers accounted for 95% of sales on the Russian epoxide resins market, the analysts reported. 

Gennady Averyanov, director of the Russian coatings manufacturers association Soyuzkraska, estimated that the coatings industry consumes an average of 30,000 epoxide resins per year.

“The key thing for the company is to successfully compete on price with imported product and develop the production of Russian raw materials for the production of epoxy binders,” Averyanov reported.

The Russian authorities expect import replacement in the coatings raw materials market to gain traction in the coming years. By 2030, around 2 trillion roubles ($21 billion) are due to be invested in the chemical complex, the Industry and Trade Ministry reported in 2023. A large part of this money should be pumped into research and development initiatives, including in the coating industry.