Russia – Italy 2023/24 Bilateral Trade, Situation, and Prospects – Russia Briefing News

Bilateral trade has huge potential and is hanging on but political winds of change are needed to get it back on track.

By Farzad Ramezani Bonesh

Russia and Italy are long-standing partners with a rich history of relations dating back to the 16th century. Italian architects and composers often dedicated their entire careers to helping develop St.Petersburg in particular.

In the new era, direct relations were established in February 1924. After a period of tension, full diplomatic relations between the two sides were restored in October 1944. With the establishment of the Russian Federation in the 1990s, economic and trade relations were intensified with a friendship treaty.

Since 1991, the relations between the Russian Federation and Italy had been on an upward trend until 2014. But the anti-Russian sanctions since 2014 have affected trade. Apart from developments such as the expulsion of two Russian diplomats by Italy in March 2018, trade, cultural, and political relations remained visible.

With the beginning of the Ukraine conflict in February 2022, Italy strongly condemned Russia and announced its support for Ukraine. Rome has adhered to the West’s economic sanctions against Russia.

Since then, the summoning of the Russian ambassador, the declaration of a state of emergency, the expulsion of 30 Russian diplomats, the seizure of a yacht connected to Russia, and so on have worsened the relationship.

Russia added all the European Union members to its list of “unfriendly countries“. Sanctions and counter-sanctions have created significant barriers to business development and high-level contacts and meetings have decreased. However, diplomatic relations between Moscow and Rome are still operational and have not crossed the point of no return.

Contracts and Mechanisms

Part of the relationship between Russia and Italy is regulated by agreements between Russia and the European Union, of which Italy is also a part. But there are also bilateral treaties between Italy and Russia. During the Soviet era, agreements such as trade and navigation, a new customs convention, and trade and payments agreements were signed that are still in effect.

The Italian-Russian Chamber was established in 1964 and has been very useful for trade and bilateral relations. The main issues of trade and economic cooperation are also under consideration by the Inter-Governmental Council.

Over the past few decades,the 2006 Russia-Italy Cooperation Protocol, a Bilateral Investment Treaty (BIT) between Italy and the Russian Federation entered into force on July 7, 1997. Also, the Agreement on the Promotion and Protection of Investments in April 1996, and the Convention for the Avoidance of Double Taxation of Income Taxes of April 1996, has helped to create favorable business conditions.

During the Italian Prime Minister’s visit to Moscow in October 2018, the parties also signed 13 economic agreements.

Main Trade Areas

Energy

Relations in the energy sector go back more than 130 years, and in the 1970s, the supply of natural gas to Italy from the Soviet Union began and a number of agreements were signed. ENI’s contract to import oil from the Soviet Union was signed in 1960, and negotiations to build ENI’s gas pipeline to supply Italy with methane gas from the Soviet Union were completed in 1969.

Strong energy cooperation based on commercial interests has been the most important trade issue between the two sides in the past decades.

In 2006, ENI and Gazprom signed an agreement to build the South Stream pipeline. From the beginning of the second decade of the 21st century, continuing active cooperation, developing low-emission energy technologies, and modernizing and developing transportation and distribution networks have been under consideration by Moscow and Rome.

Signing a memorandum of understanding for cooperation in energy efficiency and renewable resources in 2009, several agreements such as the strategic cooperation of ENI and Rosneft for the development of Russian fields in 2012, the presence of Lukoil in the ISAB refinery in Sicily in 2013, a number of agreements 2016 as Rosneft and ENI on cooperation in the Black Sea have been parts of the growing trend of cooperation between Russia and Italy in the field of energy. Also, Enel has been active in the electricity sector.

Russia used to be Italy’s number one supplier of natural gas (and fourth largest supplier of oil), covering about 43% of Italy’s energy resources. At the beginning of 2022, Vladimir Putin emphasized the role of Italian companies in Russia’s vital energy sector and welcomed the long-term gas supply contract between Italy and Gazprom (cheaper gas).

After 2017, Italian companies signed a number of contracts with their Russian counterparts, especially in the energy sector. However, should Italy cease buying Russian gas from December 2023 and relies on other countries for gas or lowers the share of Russian gas to the EU proposed 16%, trade in this area will be significantly reduced.

Investment and Industrial Cooperation

Historically, Italian businesses have been present in many parts of Russia since 1960. After 1991 – Moscow and Rome consolidated their extensive trade relations from the automotive and energy sectors to machinery, textiles, furniture, and pharmaceutical products to the construction and automotive industries as well as aircraft manufacturing.

The role of Italian companies in the modernization of Russia is significant. A number of projects are important, such as cooperation in the creation of the Sukhoi Superjet-100 in 2006, and Rostec’s collaboration with Pirelli in 2013 for the production of automotive tires.

After the anti-Russia sanctions by the West in 2014, Italy and the Italian Entrepreneurs Association continued to be present in Russia.

Over the last decade, cooperation has gradually changed from the import of Italian products to the opening of high-tech industrial enterprises in Russia based on Italian technologies. Also, along with the traditional fields of cooperation, new fields of green energy cooperation, and pharmaceuticals are also evolving.

The presence of Italian companies such as Maire Tecnimont in the petrochemical sector, Marcegaglia with stainless steel processing, Danieli, active in the metallurgy sector, as well as other companies in the manufacture of electric motors, chemical complexes, pipe factories, shoes, fiber optic line, polypropylene, and ceramic tile production had been strengthened before 2022 in Russia.

In 2015, Italian investment in Russia had reached over €1.01 billion, while Russian investment in Italy was over €2.11 billion. In 2019, more than 400 Italian companies were operating in Russia. In 2022, there are more than 500 Italian-funded companies in Russia with a total annual turnover of about €7 billion.

At the beginning of 2022, Russian President Vladimir Putin said that about €7.33 billion of bilateral investments had been made between the two countries. Even amongst the EU sanctions, bilateral trade has continued in some areas. During the 2023 St. Petersburg International Economic Forum, agreements were signed between Russian and Italians investors.

Transit and infrastructure

Over the past three decades, with the cooperation of Moscow and Rome, the construction of civil aircraft, the construction of helicopters, and the modernization of rail transportation, cooperation in the field of safety and traffic management, cooperation in the railway, transportation, and logistics sectors, reconstruction of highways, equipping the sector, and the Adler-Krasnaya Polyana railway have been completed in Russia.

The presence of the Italians in the creation of a joint tanker transport company in June 2016 was also important.

Food and Consumables

Apart from the wide presence of Italian companies in Russia in the field of beverages, the collection of processing and packaging equipment for agricultural products, and the construction of pasta factories, have all been important business activities.

Since 2017, Italian companies have signed a number of technology development and research contracts. In 2019, eight banks and a number of law firms were operating in Russia.

After 2013, the number of Russian tourists in Italy and the average number of their purchases decreased, but according to various estimates, between 4,000 and up to 30,000 Russians own properties in Italy. Also, between 2015 and 2020, Italy sold €22.5 million worth of military equipment to Russia. Between January and November 2021, Italy also delivered €21.9 million of arms and ammunition to Russia.

However, there has also been a form of ‘technology transfer’ occurring. Italian meat, cheese and wine makers have been establishing operations in Russia and contributing to the development of these products in Russia. There have been significant improvements in the quality of these now Russian-produced products over the past few years.

Italian and Russian trade challenges

51% of exports from Italy to Russia have been sanctioned. Despite the non-sanction of some goods, conducting bilateral trade is facing problems. The current exchange of goods is affected by various factors, including issues related to the suspension of flights, the value of the ruble, and severe Western sanctions.

Moscow has described the Italian government as “unfriendly” and, in response to sanctions against Russia, Moscow has made trade and investment decisions that affect corporate businesses and individuals.

Sometimes economic operators adopt stricter control procedures to avoid serious consequences. If the situation does not change, many Italian businesses are at risk, and an estimated 500 Italian companies will be forced to revise their plans, leave Russia, transfer operational management to Russia, or sell their Russian assets and business.

Italian authorities are also freezing Russian assets due to sanctions. Some Russian companies are leaving Italy or are in the process of being sold. Tourism companies with Russian customers have faced near collapse in their business, while Russian owners cannot sell their properties. There is also a risk of wider nationalization of the properties and companies of assets held in each other’s country.

This has all been accompanied by a significant decrease in the number of joint economic projects, meetings, and investment activities. In other words, there is a period of uncertainty. Although diplomatic channels remain open, Italy has participated in the adoption of a number of sanctions measures, and any official project aimed at promoting trade has been suspended.

In the new concept of Russia’s foreign policy in 2023, the position of Europe and Italy has been reduced.

Trade Volumes

In 2021, Italy exported €7.92 billion of goods to Russia. That same year, Russia exported €20.34 billion to Italy, with about ¾ of this being in the energy products sector.

Italy’s exports to Russia decreased to €6.09 billion in 2022. Although, in 2022, Russian exports remained positive, the indicators for the first quarter of 2023 show that Russian exports have fallen by 80% to a total value of €1.6 billion, while Italian exports have reached €1.3 billion, an additional reduction of 14%. However, against this and especially in the consumables sector, it should be noted that Russia supermarkets continue to stock large selections of imported Italian wines. These will have been exported from Italy to countries such as Georgia and Armenia and then resold onto Russian markets. It is doubtful that the true value of Italy’s exports to Russia have declined by as much as official Italy-Russia statistics suggest as parallel imports have taken up the gap.

Vision

The peak of business and humanitarian relations between Russia and Italy was in 2013 with a turnover of €53.9 billion. However, trade turnover between Russia and the European Union has decreased and its share is falling. Although, according to Italian statistics, the volume of imports from Russia to Italy in February 2023 decreased by 80% compared to February 2022, bilateral trade is still finding ways to satisfy demand.

Although Russia has responded to the economic sanctions imposed by the Western governments by implementing or threatening countermeasures such as “nationalization”, it is still not possible to speak of the complete drying up of economic relations. In fact, small and non-sanctioned businesses that sell products in Russia need support. Agricultural or construction sectors still have the potential for significant improvements.

Russia’s total exports reached the value US$592 billion dollars last year. The share of the US dollar and Euro in the settlement of Russian accounts may decrease from 90% in early 2022 to 10% by the end of 2023. On the one hand, the Central Bank of Russia (CBR) has registered the new Kwikpay international remittance system, which can partially include Russia and Italy.

Meanwhile,  the Chamber of Commerce of Italy and Russia (CCIR) has announced that it plans to create a mechanism that would enable Russians to purchase Italian goods authorized for import into Russia and pay in a third country.

In fact, 49% of the goods that Italy trades with Russia are exempt and many continue to operate. Therefore, creating a mechanism to simplify the payment process will strengthen the volume of business.

Vladimir Putin, in discussions with Italian senior managers, has also emphasized that he sees serious prospects for expanding the Russian-Italian trade partnership. From Moscow’s point of view, despite Italy sending aid, including weapons and intelligence data to Kiev, there are still diplomatic relations, and they have not passed the point of no return. In addition, Italy has already tried to mediate between Russia and the West. Some in Italy consider Russia an “ally” or “partner” of Europe or their country, and only about a third consider it a “rival”.

Also, an estimated 41% of Italian respondents want the Ukraine war to end as soon as possible, even if it means Ukraine losing territory. The purchasing power in Italy decreased by 54% during 2022, and inflation, increasing energy prices, reducing trade and slowing economic growth caused by the Ukraine conflict has greatly affected Italy. With its industrial activity focused on energy in the north, it does not want that elimination of trade with Russia to have an effect on the growth and dissatisfaction of voters.

Still, the economic synergy between Italy and Russia is based on the complementarity of their economies. Italy imports 95% of its gas, and many Italian companies are still present in Russia. Therefore, Italy’s “interests” and geopolitical pragmatism may be aimed at reducing political and diplomatic tension, reducing tension between Moscow and Brussels, and trying to reduce and remove sanctions, and reopen trade routes.

However, it should be noted that only a long-term solution to the Ukraine issue can help see Italian and Russian trade return to growth. A continuation of the Ukraine conflict will place Russia-Italian trade development into unfortunate and minimal conditions.

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