New Crisis Brings New Opportunities for Chinese Business and Russia

On 20 March 2022, Zhang Hanhui, Chinese Ambassador to Russia, said that Chinese business in Russia should “seize the opportunity to fill the void in the Russian market.” This statement was made at a meeting with Chinese entrepreneurs living in Moscow.

In Russia, Chinese business is perceived as a force capable of bridging the gap with the West for the Russian economy.

1. What are the niches that China’s big business could occupy in the future?
2. High-tech production, which includes cars, household appliances, etc.;
3. Projects in retail and service, primarily in the hotel line of business;
4. Advanced mining projects that require both large capital investments and technology.

Amid unprecedented sanctions the West has imposed on Russia, big business faces many and varied challenges, as Ambassador Zhang Hanhui pointed out in his speech. Therefore, business tends to take a wait-and-see attitude, if not stop operating in this difficult situation for the time being.

However, there should be no inflated expectations of attracting China’s big and high-tech corporations. The approval process for any such project takes many months, if not years, even in a stable and predictable situation. Things will not move from the dead point until the outcome of the special operation is clear, until the “printer of U.S. sanctions” calms down, and until there is an understanding of what the Russian government is prepared to support when it comes to foreign investors.

Small and medium-sized businesses follow suit in typically taking a wait-and-see attitude and observing not only the fluctuations of the ruble but also the government’s willingness to make compromises to foreign investors.

As eight years ago, in the wake of the “post-Crimea” wave of sanctions, China’s principal calculation is that Russia would supposedly offer “special and privileged” terms of operation to Chinese business. Translated into economic pragmatism, this means: 1) obtaining state guarantees for investment deals, insuring the investor against being cheated by the Russian partner; 2) admission to strategic industries – ports, mineral resources extraction; 3) simplification of procedures for processing workers from China and duty-free import of equipment and machinery for investment projects; 4) implicit advantages over investors from other countries.

In eight years, the Chinese have never received such concessions. By the way, in private conversations, they would take offence at this, saying that Russia got more from China than China got from Russia after the deterioration of the two countries’ relations with the West.

Will the situation change now? I would hazard a guess that it will not. What is certain is that the situation will not change dramatically.

First, it is not in the interests of Russia, which does not want to swap one dependency for another. Protecting strategic industries from falling under the control of foreign capital, prioritizing domestic specialists and localizing production are the pillars of Moscow’s investment policy.

Second, Chinese capital still has the option of investing in countries with low purchasing power and a yet weaker state, which is unable to rigidly dictate its rules to foreign partners. The Chinese work much more comfortably in such countries than in Russia.

Therefore, there will be more and more Chinese goods in Russian shops, and they will replace Western products in most market niches. Eventually, Chinese tourists, attracted by cheap prices, will also return. It is likely that two or three flagship projects, like Yamal-LNG, will be implemented. However, there will be no mass attraction of Chinese investors on the special conditions that China hopes for. This, however, will in no way affect the vibrancy of the Russian-Chinese strategic partnership.

On 20 March 2022, Chinese Ambassador to Russia Zhang Hanhui said that Chinese business in Russia should “seize the opportunity to fill the void in the Russian market”. This statement was made at a meeting with Chinese entrepreneurs living in Moscow. “Big companies face major challenges, including disruptions in payment and supply chains. There comes a moment when private, small- and medium-sized enterprises could play a role,” the ambassador concluded.

Unexpectedly, the rather cordial meeting, attended by just eight Chinese businessmen and three representatives of the Confucius Culture Promotion Association in Russia, which hosted the event, received significant media exposure from all over the world. An alarmist article was published by Bloomberg, whose thesis was as follows: “Despite warnings from the White House, Chinese diplomats are urging Chinese businesses to become more active in the Russian market, thereby supporting Moscow.”

The Chinese diplomats themselves are probably unhappy that they got embroiled in such a media story, given that Beijing continues to take a balanced stance, maintaining room for maneuver in relations with both Russia and the U.S., despite threats and attempted provocations from Washington. Ambassador Zhang Hanhui merely repeated what is now being extensively talked about on both sides of the Russian-Chinese border, namely that Russia has little choice but to go for even greater rapprochement with China in the new foreign policy and socio-economic environment.

Against this background, Chinese business is perceived as a force capable of bridging the gap with the West for the Russian economy. But is it all so clear-cut? Will these expectations be justified? Let’s find out.

Cautiousness of Big Business

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Amid unprecedented sanctions the West has imposed on Russia, big business faces many and varied challenges, as Ambassador Zhang Hanhui pointed out in his speech. Therefore, business tends to take a wait-and-see attitude, if not stop operating in this difficult situation for the time being.

Most of their concerns have to do with the fear of secondary sanctions. The U.S. regulator now has the right to impose restrictive measures on anyone who continues to work with companies on the sanctions lists. Thus, it is not only unwanted companies, such as the VTB Bank, but in some cases all of their foreign counterparties that are affected by sanctions.

China’s financial institutions have been careful not to do business with Russian counterparties, even in less nerve-racking situations. Since 2017-2018, for example, opening an account with a Chinese bank has become a real problem for Russian companies, and this despite the Beijing–Washington trade war.

Besides, trade, logistics and production chains have now been severed, many of which have been linked to Western shipping lines or financial-credit organizations. The situation is fraught with many uncalculated risks, and even those companies that seem to have nothing to fear are acting cautiously against this background. Oil corporation Sinopec, for example, has said it is suspending talks with Sibur on a new gas chemical plant.

Certainly, all of the above are problems of the moment. Businesses will eventually find loopholes, and there will be intermediaries in logistics and banks who can help some to earn and others to spend their money.

However, this will be a long and painful process due to both the caution of Chinese enterprises and the ill-preparedness of Russian partners to interact with China in an effective manner, given a Western-centric mentality, lack of competence and experience. It will take years, unless something extraordinary happens, such as a similar rift between China and the West.

What are the niches that China’s big business could occupy in the future?

First, high-tech production, including cars, household appliances, etc., where Western and Japanese companies were involved, having now announced a “temporary suspension” of their activities in Russia.

Second, projects in retail and service, primarily in the hotel line of business, which will lose Western capital. In practice, the companies that have put down roots in Russia in earnest, such as Auchan or Leroy Merlin, are not leaving, but niches in this area will definitely be vacated.

Third, advanced mining projects that require both large capital investments and technology. There is a precedent, namely JSC Yamal-LNG, where the Chinese CNPC corporation owns 20% and the Silk Road Fund almost another 10%. There is a successor project already, Arctic LNG-2, in which the Chinese capital so far owns 20%, but there is a feeling that another 20% owned by France’s Total and Japan’s Mitsui will soon become available.

However, there should be no inflated expectations of attracting China’s big and high-tech corporations. The approval process for any such project takes many months, if not years, even in a stable and predictable situation. Things will not move from the dead point until the outcome of the special operation is clear, until the “printer of U.S. sanctions” calms down, and until there is an understanding of what the Russian government is prepared to support when it comes to foreign investors.

Small Business Hopes

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If things are difficult with big businesses, maybe it would be easier with smaller ones?

In fact, Ambassador Zhang Hanhui’s idea is precisely to actively involve small and medium-sized enterprises (SMEs). However, it is often only a “small business” by Chinese standards. For example, Huaxin, originating from the small border county-level city of Dongning in the Heilongjiang province, has long been the largest Chinese investor in the Russian Far East.

It is the Chinese SMEs that own numerous restaurants and hotels in Russia, most of which focused on Chinese tourists before the COVID-19 pandemic. It is the micro-enterprises from the Chinese border regions that are seeking to obtain resident status in various preferential areas in the Far East, namely the Territories of Advanced Development and the Free Port of Vladivostok.

However, China’s small and medium-sized businesses have been facing serious problems in recent years:

First, they have gradually been squeezed out by major players, both Chinese and Russian, in the most profitable sectors. The example of the Huaxin company is quite illustrative. In 2016, its de facto subsidiary Armada-Land sold all its assets to the Russian corporation Rusagro and left the market.

Second, the difficulties in hiring Chinese workers due to the depreciation of the ruble, as well as administrative measures to get foreign businesses out of the shadow sector, have put many of the smaller Chinese companies in a very uncomfortable situation. They could no longer work the old way, relying on Chinese labor and tenebrous schemes, but were unable and unwilling to work the new way.

Third, the coronavirus pandemic dealt a serious blow to the Chinese SMEs. The flow of Chinese tourists, thanks to which many Chinese firms profited, ceased. After it became clear that the epidemiological situation in Russia was much worse than in China, ‘returnees’ streamed back home. According to subjective estimates, between a third and a half of Chinese entrepreneurs doing business in Russia have physically left the country. Many of them have sold their businesses.

Will they return to Russia now? There are no formal obstacles. In June 2021, Moscow unilaterally lifted all entry restrictions for Chinese citizens, but the turbulence of the current situation and the stereotype of Russia as a “country incapable of coping with the pandemic” (even though we have already abolished most of the restrictions, while China still puts one city after another on lockdown), seriously affect the desire to live and work in our country.

My interlocutors who work with Chinese businesses confirm that the interest in the opportunities that are opening up in the Russian market is huge. Everyone is now getting a lot of requests from Chinese colleagues for giving a breakdown of the situation in a particular industry. The explanation for this interest is very simple: goods and services are becoming much cheaper for the Chinese with the current exchange rate of the Russian ruble.

So far, however, words are not turning into deeds. Small and medium-sized businesses follow suit in typically taking a wait-and-see attitude and observing not only the fluctuations of the ruble but also the government’s willingness to make compromises to foreign investors.

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As eight years ago, in the wake of the “post-Crimea” wave of sanctions, China’s principal calculation is that Russia would supposedly offer “special and privileged” terms of operation to Chinese business. Translated into economic pragmatism, this means: 1) obtaining state guarantees for investment deals, insuring the investor against being cheated by the Russian partner; 2) admission to strategic industries – ports, mineral resources extraction; 3) simplification of procedures for processing workers from China and duty-free import of equipment and machinery for investment projects; 4) implicit advantages over investors from other countries.

In eight years, the Chinese have never received such concessions. By the way, in private conversations, they would offence at this, saying that Russia got more from China than China got from Russia after the deterioration of the two countries’ relations with the West.

Will the situation change now? I would hazard a guess that it will not. What is certain is that the situation will not change dramatically.

First, it is not in the interests of Russia, which does not want to swap one dependency for another. Protecting strategic industries from falling under the control of foreign capital, prioritizing domestic specialists and localizing production are the pillars of Moscow’s investment policy. So far, there have been no exceptions, even for such an important partner as China.

Second, Chinese capital still has the option of investing in countries with low purchasing power and a yet weaker state, which is unable to rigidly dictate its rules to foreign partners. The Chinese work much more comfortably in such countries than in Russia.

Therefore, I see the situation for the next decade as follows:

There will be more and more Chinese goods in Russian shops, and they will replace Western products in most market niches. Eventually, Chinese tourists, attracted by cheap prices, will also return. It is likely that two or three flagship projects, like Yamal-LNG, will be implemented. However, there will be no mass attraction of Chinese investors on the special conditions that China hopes for. This, however, will in no way affect the vibrancy of the Russian-Chinese strategic partnership.