Potential for a Pakistan-Russia Free Trade Agreement

This study by the Pakistan Business Council (PBC) titled “Potential for a Pakistan – Russia Free Trade Agreement” is a part of the Pakistan Business Council’s Market Access Series 2021-22.

The idea of an FTA between Pakistan and Russia was first proposed in 2004, however, since Russia at that time was in the process of joining the World Trade Organization (WTO), this could not move forward. In 2012, after Russia’s accession to the WTO, Pakistan once again requested Russia to restart negotiations on a trade agreement between the two countries. Since Pakistan’s last request in 2004, Russia had become a member of the Eurasian Economic Union Customs Union (CU) and needed approval of the other EAEU member countries before becoming a party to any new trade agreement.

In June 2017, Moscow proposed to enter into an FTA with Pakistan during the 17^th meeting of the Heads of the State Council of the Shanghai Cooperation Organization (SCO) in Astana. Pakistan’s Ministry of Finance, Revenue and Economic Affairs was tasked to prepare recommendations for a potential Pakistan Russia FTA.

Bilateral trade between Pakistan and Russia has always been in favor of Russia. Bilateral trade reached an all-time high in 2020 of $758 million. Pakistan’s major exports to Russia comprised of textiles and textile articles (HS-50-63) which accounted for 40 percent of Pakistan’s total exports to Russia in 2020.

The Russian market presents an opportunity for Pakistan to increase its exports but access is hampered by factors including those relating to banking and payment channels, a strict Russian business visa regime, the absence of direct cargo and passenger flights, very long transit shipment routes, increased freight charges in recent months, language barriers, over-cautious Pakistani banks, absence of an International Road Transport (TIR) agreement, and in Pakistan’s case the lack of a Trade Dispute Resolution Organization (TDRO).

Major Findings of the Study:

• Although Pakistan’s total trade with Russia increased by 108 percent between 2011 & 2020, exports have decreased by 24 percent whereas imports have increased by 270 percent in the same period. Pakistan’s trade deficit of about $469 million in 2020 was the highest on record.
• Exports of Pakistan to Russia in 2020 were worth $ 144.5 million with major commodities in the export basket being fruits, articles of apparel knitted & non-knitted, articles of leather, cotton, surgical instruments, toys and cutlery.
• Pakistan’s exports to Russia are highly concentrated as the top 10 exports accounted for 93.4 percent of total Pakistani exports to Russia.
• With an import value of $613.1 million, Pakistan’s imports from Russia were dominated by “Cereal” (HS-10) with imports worth $287.3 million in 2020 which contributed 47 percent to total Pakistani imports from Russia. Other imports included coal, shelled peas and chickpeas which accounted for 14 percent, 17 percent and 5 percent respectively of total imports.
• For Pakistan, there exists an export potential of around $2.8 billion in Russia mainly driven by the textiles ($1.6 billion), agricultural products ($330 million), surgical items ($356 million), chemical & allied products ($178 million), footwear ($82 million) and plastic products ($62 million).
• Pakistan possesses significant export potential in the meat and seafood sector. However, in the last 10 years, Pakistan has never exported either of these products to Russia. Products that can help Pakistan penetrate the Russian market include frozen shrimps, frozen prawns, frozen fish, fresh/chilled bovine cuts, cuttle fish & squid, and guts, bladders and stomachs.
• Analysis of agricultural products reveals that Pakistan’s exports of fruits are mainly concentrated around citrus fruit, especially kinnow. Pakistan is the 2^nd largest import sourcing market for Russia for kinnow having a share of 11 percent in Russia’s total kinnow imports from the world.
• Potato is another product in which Pakistan has a lot of potential and this product can be included in a potential FTA/PTA. Pakistan was the 4^th largest potato import sourcing market for Russia in 2020 having a share of 3.6 percent in Russia’s total potato imports from the world. However, for Pakistan to be able to access the Russian market, Pakistan needs to adopt various value-addition techniques.
• In 2020, Russia ranked 25^th in Pakistan’s textile export destinations. Russia’s share in Pakistan’s textile exports is only 0.5 percent indicating that there is immense untapped potential. For Pakistan to increase its textile exports to Russia, priority needs to be given to promoting and exporting high value-added products such as knitwear, towels, ready-made garments, bedwear, technical textiles etc.
• Before 2020, Pakistan did not import Liquified Natural Gas (LNG) from Russia despite Russia being the 4^th largest LNG exporter in the world. Moreover, LNG prices offered by Russia to Pakistan were also comparatively lower than those offered by Pakistan’s other import sources such as Qatar, USA and Egypt.

Recommendations:

• Pakistan Should Look to Sign a Broader FTA with the EAEU
  Russia, being a member of the Eurasian Economic Union (EAEU), is bound by several regulations and laws which limits Russia from signing a trade agreement with any country without the approval of all members of the EAEU. Thus, Pakistan should push for signing an FTA with the EAEU as a whole and not just with Russia alone.
• Resolving the Issue of High Freight charges
  The current high sea freight charges and the monopoly of a few of freight forwarders increases the cost of Pakistani products in the Russian market. To overcome this challenge, Government of Pakistan needs to support large logistics companies & freight forwarders and Pakistan National Shipping Corporation (PNSC) should consider acquiring containerized ships on wet lease (rent) to facilitate exporters.
• International Road Transport (TIR) Agreement Should be Signed by Pakistan
  TIR agreement between Pakistan and Russia should be signed to initiate road transport. Perishable items such as kinnow and potatoes can be exported via land route which will save cost and time and simultaneously increase exports.
• Revising Russia’s Tariffs for Pakistan’s High Potential Exports
  It is recommended to rationalize tariffs to those offered by Russia to its other trading partners to enhance Pakistan’s exports to Russia.
• Direct Linkages
  There is a need to practically implement Russia’s decision of allowing direct flights from Pakistan using the Russian air corridor of Central Asian Republics (CARs) to encourage trade and investment between the two countries.
• Facilitating Pakistani Companies to Establish Offices in Russia
  For on-ground knowledge, Pakistani companies need to establish their offices in Russia and hire local Russian staff. This is crucial since a number of products need to be registered in Russia before they can be imported. Ministry of Commerce & the State Bank of Pakistan need to facilitate the opening of such local offices in Russia.
• Registration of Companies is Mandatory on Chestny ZNAK – the Russian Track & Trace system
  Foreign companies cannot directly register to export their products into Russia rather they require a Russian distributor or partner as a middle man through which they can do business. Pakistani companies need to register their companies on the Russian track and trace system to be able to export to Russia.

The PBC is a private sector not-for-profit advocacy platform set up in 2005 by 14 (now 87) of Pakistan’s largest businesses including multinationals. PBC’s research-based advocacy supports measures which improve the Pakistani industry’s regional and global competitiveness. More information about PBC, its members, objectives, and activities can be found on its website: www.pbc.org.pk