Including the Far East in Global Value Chains: Effective Strategies

The Far East has its own geographical advantages: it has a huge neighbour with a gigantic population – of course, that is China. We have a great number of consumers. Every day we consume an incredible number of products, and it is very important for the Far East to think about how to use this enormous Chinese market, how to target the Chinese market and get the benefits — Zhenwei He, Secretary-General of the China Overseas Development.

Shymkent has a joint venture that has launched a catalytic cracking facility and produces propane propylene fraction. The propylene with a 72% concentration is used for utilities gases – they burn a valuable product on regular stoves. We already have the competence to process these fractions. We can supply the processed product to China while returning a high-quality product to our friends in Kazakhstan. <...> China does not have enough of this resource, but there are other refineries that can process propyl alcohol in five other ways. At the same time, we import this product. Here is the cooperation, which basically will bring added value both to them and to us and will stir mutual interest — Mikhail Sutyaginskiy, Chairman of the Board, Titan.

Despite the crisis, despite the drop in prices [for coal, – Ed.], we chose constructing mines and concentrators. We ended up with high-quality coal, and this quality is stable. Output refining gave us a high-grade concentrate with marginal added value, which allowed us to triple the price of our product and opened up promising export markets in the Asia Pacific, where we are now successfully selling our products — Anna Tsivileva, Chairman of the Board of Directors, Kolmar Group.

In today's global economy, the country's role as a player in the global market is largely determined by its ability to fit into today's global production chains, which have a popular name of global value chains. The APR is one of the largest centres where such chains are formed. Therefore, naturally, the Russian Far East can and should claim a prominent place in the Russian economy and business as a participant of these global chains — Alexander Daniltsev, Director, Institute for Trade Policy, National Research University Higher School of Economics.

Attempts to compete based the old model are unlikely to work today. It is inefficient to be guided by this model. <...> The key link in the chain is the stage that goes beyond industrial assembly or industrial production. It is R&D, design, after-sales service, marketing, and stages before and after production itself. <...> Today, the winner in the chain is the one who does not offer cheap labour, but offers either state-of-the-art capital capabilities, or the most qualified labour – regardless of the costs – which makes a product that is not yet available in the market, or conceptually new, or very different from what is already there — Timur Maksimov, Deputy Minister of Economic Development of the Russian Federation.

Whereas in the past they [value chains, – Ed.] were the result of quantitative parameters, now they result from qualitative ones. And, of course, it should somehow change our attitude to organizing our participation in them and the choice of strategies, because we talk a lot about human capital, qualifications, etc., but somehow chains are always separate from human capital — Alexander Daniltsev, Director, Institute for Trade Policy, National Research University Higher School of Economics.

The free port of Vladivostok, ASEZ, priority socioeconomic development zones – there are a few special regimes that offer a whole number of tax, investment and customs preferences. <…> Has it resulted in the necessary and expected effect? <…> People that use these regimes are mostly domestic market oriented, with just a few exceptions. MAZDA SOLLERS is the perfect case of how these things can and should be working. Yet, they are still a rare exception. So far, it is not a mass phenomenon. The regime created in the Far East implies a certain localization with a further export. In reality, domestic market is today’s focus — Timur Maksimov, Deputy Minister of Economic Development of the Russian Federation.

One of the trends in the development of such chains [value added chains, – Ed.] is the focus shift from the commodity stage of production to more complex high-tech ones. As we can unfortunately state, the mechanism of value chains in the Russian Federation has not gone beyond the energy sector so far in contrast to such countries as the USA, EU and China already established in creating and benefiting from such chains. There are certain success stories that go beyond this rule, such as MAZDA SOLLERS. It is a joint venture that produces engines in Vladivostok: the engine is assembled from the parts imported from Japan and then the whole engine is exported back to Japan. Most of the chains our country is involved in are unfortunately incomplete. In many ways, our initial links are still outside the Union, and final product is almost never exported — Veronika Nikishina, Member of the Board (Minister in charge of Trade) of the Eurasian Economic Commission. .

When we talk about various benefits of the Far East, we constantly mention the relative cheapness of human resources and workforce. But in fact, this is far from being the case. The preferential measures that the government spreads in the Far East, stimulate the inflow of capital. And all companies that are beginning to develop here need qualified personnel. Due to the lack of qualified personnel here, we are provoking an increment in wages, and at this point already it is absolutely impossible to talk about the benefits that the Far East provides in terms of wages This benefit does not exist anymore, unfortunately. It will only get worse in the future, because we are seeing the outflow of human capital from the Far East, and, unfortunately, today there are no mechanisms that would help us stop it — Dmitry Kudinov, General Director, Mazda Sollers Manufacturing Rus.

We face the problem of basic infrastructure-related constraints. The company exists, the product exists, the chain it can join exists, but there is just an infrastructure-related constraint. <...> There is no way to get connected to the infrastructure; the quality of our customs infrastructure or border crossing points has certain issues; logistics is too complicated, etc. Everything that prevents a good operation from joining the chain today. It makes product; it has a competence, R&D, certification and knows how to produce and who to sell. Unfortunately, infrastructure-related constraints simply do not allow it to enter the market — Aleksey Kozhevnikov, Senior Vice President, Russian Export Center.

There is no other element of foreign economic activity quite like chain formation and participation in them that would presuppose both business and the governments uniting and investing efforts. <...> It also requires efforts from business and investors, and maybe even taking some risk. It is also necessary to create a proper favourable regulatory environment, the necessary trade and political atmosphere and environment, as well as to establish relations with partners — Alexander Daniltsev, Director, Institute for Trade Policy, National Research University Higher School of Economics.

On September 4, we launched a joint project called Intertran – it is an electronic cargo processing. <...> We are moving away from enormous paperwork. This is what customers call for today. They require, above all, a quick and easy paperwork for this entire chain that they see as complicated. It is the marine and the railway bill of lading and the motor waybill, the customs and the transit bill of lading. All of this is now integrated into one electronic form, and we plan to process the entire transit in less than 20 hours in the future — Vadim Vetolskiy, Head of the Branch in Vladivostok, Fesco Integrated Transport.

I would like to break down the difficulties we must overcome today when forming chains into several elements. The first element would be traditional barriers. The second one is the simplification of customs procedures and the implementation of the one-stop principle. And, of course, there is a very important issue related the rules of origin and their application. <...> We have looked at all the existing statistics and come to the conclusion that lowering the barriers to value chain creation can lead to a five-percent increase in foreign trade, and that simple duties zeroing will result in a four times smaller effect — Vladimir Salamatov, Head of the Department of Commerce and Trade Regulation at the Moscow State Institute of International Relations (MGIMO University); CEO, International Trade and Integration; Chairman, EAEU Business Council on Trade and Economic Cooperation with the PRC and other Priority Trade Partners.

There are existing elements of government support (for export). This also applies to subsidized instruments that the government has and uses to reach out to market players. There are a lot of such instruments. <...> The second one is assisting the companies participating in trade relations in getting preferential financial instruments. There are a lot of instruments, starting from interest rate reduction, which can be achieved through discounting driven by such an instrument as the corporate programme for raising competitiveness. <...> We are working towards including Russian companies – primarily small and medium-sized – in international chains through the use of e-commerce tools. <...> There is a processing regime the government established at the customs territory – it is a pity that many people do not know about it — Aleksey Kozhevnikov, Senior Vice President, Russian Export Center.

Signing free trade agreements <…> is a deliberate policy that helps create opportunities for setting chains – they can even be incomplete – in the countries that we share specific export interest and potential with. Our free trade agreement with Vietnam is effective now. <…> We can see that what this agreement helps us with is not just direct export sales, but with chain elements that were in there on top of traditional duties reduction — Veronika Nikishina, Member of the Board (Minister in charge of Trade) of the Eurasian Economic Commission. .