Wooing China runs into local difficulty in Russia far east
By Kathrin Hille in Khabarovsk
July 14, 2014
When Russia and China inked a $400bn gas supply deal in May it marked an unexpected breakthrough after a decade of delays and bogged-down negotiations.
For Vladimir Putin, the deal was something more: the dawn of a new golden era in Russo-Chinese economic co-operation.
As relations with the west fray over Russia’s annexation of Crimea, Mr Putin has reacted by seeking to throw open the door to Chinese trade and investment.
In addition to the gas deal, Moscow has lauded China as Russia’s most important economic partner, set up a host of joint projects in energy, infrastructure and technology, and estimated that bilateral trade will more than double by 2020 to $200bn.
Yet a visit to Pashkovo, a village on the banks of the Amur river that divides the two countries, suggests Mr Putin’s vision – for all its potential – is still beset by longstanding rivalry and mistrust.
In 2008, two Chinese forestry companies invested here with the aim of serving their nearby factory. Two years later, they found the door slammed in their faces after Russia closed the local border crossing.
“[To begin with], we would ship the wood across the river to our plant in China for further processing, just a few kilometres away,” says Zhao Fuquan, director of the sawmill Heilongjiang Xin Chun Timber Group runs here. “Now every truckload has to make a 700km detour. That cut our profits in half.”
His frustration is but one example of the enormous hurdles Chinese companies face in conquering Russia.
Most are active in the Russian far east, a vast, resource-rich but sparsely populated region between Lake Baikal and the Pacific coast.
Kangbo, a Chinese seller of agricultural machinery in the Jewish Autonomous Oblast (JAO), is struggling to keep afloat as Russian customs imposes strict quotas on large gear.
“We have to undergo an onerous application process for every single combine harvester we want to import. In 2013 the government approved only one machine for the JAO for the entire year,” says Chen Dajun, the local manager.
Oubangde, another Chinese forestry firm, had its logging concession shut down last year after federal authorities conducted a series of raids and found fault with fire security measures, work permits and tax records.
Zu Guofu, head of the company’s operations in Russia, accuses the regional government of systematically targeting Chinese investors.
The Chinese are making inroads and steadily weaving themselves into the fabric of the economy. In Khabarovsky Krai, they accounted for 4 per cent of foreign direct investment last year, up from 2 per cent in 2009. If round-tripping by Russian groups registered offshore was excluded, the ratio would be much higher.
In Birobidzhan, capital of the JAO, most new buildings are built by Chinese contractors and the Chinese play a growing role in the local retail, logistics, hotel and recycling sector. “Without the Chinese, this whole place would stop running,” says Wang Mingwei, an official who represents the city of Yichun in Birobidzhan.
Larger firms are now following the small companies that spearheaded the move. Fuyao, one of the world’s largest manufacturers of car glass, has set up shop south of Moscow where it supplies a Volkswagen plant.
Russian officials say they are wooing Chinese investors but acknowledge that it is a process fraught with challenges for both sides.
“Bilateral trade and investment are growing fast, and all the more so now since the Ukraine crisis,” says Maxim Tarasov, head of the foreign economic co-operation and investment department at the ministry of economic development in the Khabarovsky Krai.
But echoing views widespread in Russia, he complains that Chinese investors are mainly interested in getting their hands on Russia’s natural resources and it is hard to persuade them to set up manufacturing operations or employ Russian staff – something Moscow considers key to making the partnership benefit the Russian economy. “The Chinese want whatever is most profitable,” says Mr Tarasov.
The Chinese have not endeared themselves to the locals by using mainly Chinese workers in the Russian far east – similar to their approach in Africa and Latin America.
Haihua, the other wood processing plant in Pashkovo, employs 105 Chinese and only 20 Russians. Chinese managers claim that local villagers are too lazy and too often drunk. Chinese staff, who stay at dormitories at the plant, work seven days a week from dawn to dusk.
The disregard for local knowledge and customs has proved costly at times. Consider China National Electric Engineering, a state-owned enterprise that is building an iron ore extraction plant in the JAO for an affiliate of the London-listed Petropavlovsk Group.
CNEEC was fined repeatedly for failing safety inspections. According to Gu Xiaomei, the deputy general manager, no member of the project team had any Russia experience and the company only hired a Russian chief engineer after the unsuccessful inspections.
Such sensitivities could become even more acute as the Chinese make a grab for Russian land. In recent years, Chinese state farms have followed a wave of individual Chinese farmers to the Russian far east. According to Russian data, the agricultural area contracted by farms from China’s northeastern province of Heilongjiang is expected to expand from less than 50,000 hectares in 2008 to 666,666 hectares in 2016.
As China’s vice-president argued during a Moscow visit in May: “You have the land and the resources, and we have the people and the money.”
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Japan and South Korea push their companies
Japan and South Korea are prodding their companies to team up in Russia to stem China’s economic power there, writes Kathrin Hille in Khabarovsk.
The embassies of Japan and Korea have in recent weeks hosted companies from both countries with investments in Russia and are planning more meetings this year, according to diplomats and company executives.
“Japanese and Korean companies in Russia should consider each other as partners now that China is getting stronger and stronger,” said a Japanese diplomat. “Russia’s decision to seek a much closer partnership with China can only create pressure on our economic interests. Our companies can counter this.”
The initiative follows Moscow’s move to crank up trade, financial and investment relations with China as economic ties with Europe, its main source of foreign investment, suffer as a result of the standoff over Ukraine.
Since the US and the EU slapped sanctions on Russian government officials and businesspeople, President Vladimir Putin has repeatedly singled out China as an important economic partner.
His signing of a $400bn gas export deal in May, which Russian state firm Gazprom had failed to close with its Chinese partner for more than a decade, is seen as a signal of a new willingness in Moscow to make concessions to receive access to the Chinese market and attract Chinese funds.
Last week, Russian and Chinese companies and regions signed contracts worth $3.15bn at a bilateral trade fair, with most funds earmarked for trade with Russia’s far east.
This has caused alarm in Tokyo and Seoul. This year, Park Byung-hwan, an official at the economic section of the Korean embassy in Moscow, warned that China was gaining a “huge impact on the region” and called Chinese companies’ growing presence there a threat.
Seoul and Tokyo see the Russian far east, with its energy and raw material resources and reserve of agricultural land, as vital for future energy and food security. South Korea’s keen interest in the energy resources of Russia’s far east was one factor behind Seoul’s decision to support the development of the Rason port in North Korea, which is linked to the Russian rail system.
Additional reporting by Simon Mundy in Seoul and Ben McLannahan in Tokyo