The Russian coatings industry is concerned about the impact of overwhelming imports of coatings from politically neutral countries, primarily China and Turkey. Over the past two years, foreign suppliers largely helped to bridge the gaps in the market left by Western giants' departure, but now their presence limits further growth opportunities for local players.
On May 30, 2024, the working group on tariff control under the Russian Economy Development Ministry declined a proposal by a group of coatings companies to raise the import duty on finished coatings from the current 6.5% to 15%.
In a follow-up statement, Soyuzkraska, a union of Russian coatings manufacturers, stated that in the opinion of the organization's management, the decision was "more political" rather than economical.
As estimated by the Russian Research and Scientific Institute of the chemical industry complex NIITEKHIM, the country experienced a surge of deliveries from countries that local officials usually describe as friendly in recent years.
In 2022-2023, Russian coatings imports from China nearly doubled compared to 2021, NIITEKHIM calculated, not providing concrete figures. Imports from Turkey also jumped substantially, the analysts reported.
Since early 2022, the Russian government has consistently limited public access to foreign trade data to safeguard the supply chain from Western sanctions.
"In the absence of detailed statistics on Russia's foreign trade and settlement structure, many processes can only be judged by indirect signs or based on aggregated statistics," said Alexander Firanchuk, a senior research fellow at RANEPA.
While the separate figures on the Russian coatings imports from China are not available, it is still possible to judge the existing trends by the general chemical import dynamics. In this segment, China nearly doubled its share in deliveries to Russia from 13% in 2021 to 27% in the past two years.
Western Coatings are Still Around
Remarkably, Kazakhstan strengthened its position as the leading supplier on the Russian market with the share in delivering jumping from 25% to a record-breaking 39%, the official figures indicated.
Some Russian analysts believe that the growth in deliveries through the countries of Central Asia, in the first place Kazakhstan, is actually disguised imports from the European Union, which came to a halt in July 2022.
"Europe continues to trade with Russia, albeit through third countries, and by hook or crook tries to bypass US sanctions," a local engineering company ECG Center revealed. "Thanks to such a balanced position, when EU politicians feed their voters with bellicose rhetoric and remain pragmatic in business, the Russian economy has been able to adapt to the new conditions.”
However, the new delivery schemes clearly have certain disadvantages. As analysts with the ECG Center pointed out, consumers have to pay double or even triple the price for the tricky logistics and services of intermediaries.
"New routes for the supply of Western goods are no secret to anyone," the analysts claimed, adding that Kazakhstan has become the key "gasket" for the delivery of sanctioned goods, such as coatings, to Russia, but not the only one.
When it comes to European trade with post-Soviet countries, there are numerous abnormalities. For example, over the past two years Poland has increased its export to Kyrgyzstan by a factor of 19 times, ECG Center noted, citing the official statistical data.
Turkey, Georgia, and even Saudi Arabia are also used as hubs for delivering chemical goods from Europe to the Russian market.
"The bottom line is obvious: exports from Europe to Russia have not fallen much, including of sanctioned industrial goods. Most European countries are still trading with Russia. It is ordinary citizens who suffer without Western clothing brands, luxury cosmetics, and Netflix, while what is needed is being imported, though with difficulty, to the mutual benefit of all parties," ECG Center stated.
Western coatings have not been manufactured in Russia for almost two years. In June 2024, BASF sold its plant in the Moscow Oblast to a local company, Lakra Synthes, becoming one of the last European coatings manufacturers existing in the country.
Observers say that BASF was lucky to get state permission for the deal, as the Russian government has consistently made it more challenging for foreign investors to bid farewell to their assets in the country.
Sanctions Curb Imports
However, it is the mass inflow of Chinese coatings that the Russian coatings manufacturers primarily fear.
"The prospects for the mass arrival of Chinese coatings, which were very vague when the market was dominated by Europeans, are now becoming more realistic. In the medium term, this may even worsen the ability of small and medium-sized domestic [coatings] manufacturers to compete effectively," Dmitry Desyatichenko, senior analyst with the Russian Presidential Academy of National Economy and Public Administration, told local news outlet Vedomosti.
Only manufacturers of highly specialized products can feel safe in this context, he said.
"The window of opportunity for development and grabbing the market share for domestic coatings businesses is not that big," Desyatichenko warned.
Grigory Shifrin, CEO of OZ Company, a prominent Russian manufacturer of fire-protective and anti-corrosion coatings, agreed that imports from China made little difference in these market segments.
"The products most imported from China are putties, fillers, printing inks, and water-based coatings. The import of non-aqueous coatings has not increased in the physical terms," he said.
According to MarketGuide, a local think tank, the import of water-based and non-aqueous non-refractory compositions to Russia has plummeted by 30% in tonnage in the last two years. "Consequently, in our segment, competition with China in finished products is not yet noticeable," Shifrin noted.
However, there are signs that the fears of overwhelming coatings imports from China may be overstated since the dynamics of Chinese chemical exports to Russia in recent months have been mixed.
In March 2024, Russian imports of chemical products, in fact, slumped, by 26% compared with the previous year to $4.1 bn, the Customs Service revealed. In total, Russian imports from Asia fell by 17% and from Europe by 25%.
Payment issues are believed to be the main factor driving Russian foreign trade down in 2024. Big Chinese banks scrutinizing all transactions involving Russian businesses following the Dec. 22, 2023, threat by US President Biden to impose secondary sanctions against banks and financial institutions in third countries facilitating trade with Russia.
The issue is reportedly growing more pressing. In May, the Russia-China Trade Committee reported that 90% of payments by Russian businesses and individuals never reach the accounts in Chinese banks.
It is not yet clear to what extent the coatings segment is affected.
"Chinese banks and banks of other neutral countries have responded to the increased threat of secondary sanctions by thoroughly checking payments for the presence of goods and importers on the sanctions lists," Dmitry Kuznetsov, a research fellow at the Gaidar Institute's International Trade Laboratory.
As a result, Chinese exporters start demanding full prepayment for the ordered goods.
Kuznetsov said that, basically, the dispatch and even arrival of goods do not necessarily occur before payment is received by the exporters. "But in the case of Russia, we are seeing a refusal by exporters, even from neutral countries, to send goods to Russia before receiving payment, which can largely be associated with the risk of not receiving payment in principle. In this regard, we are now seeing shortages of goods, problems with payments for which began in January-February and continue to this day," Kuznetsov reasons.
These problems may have another dimension, as Russia imports not only finished coatings but also raw materials. As Shifrin revealed, the Industry and Trade Ministry calculated that the local manufacturers account for 30-40% of the supply in the resins, fillers, and solvents segments. In some other segments, the dependence on imports is still close to 90% or even 100%. This means that possible disruptions in imports could prove to be quite painful for the Russian coatings industry.
During the May 30 meeting of the working group on tariff control under the Russian Economy Development Ministry, officials also mulled the Russian coatings industry's idea of nullifying import duty on raw materials. Although the proposal has been backed by the authorities, the measure has not yet been implemented.