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How much and where does the Chinese really invest in Russia?

Most of the Chinese investments in the Russian economy are through intergovernmental cooperation, dominated by the energy sector and major infrastructure projects. There are not so many private investors from China, and they have to carefully select Russian projects. The specifics of legislative work in Russia, the specifics of competition, as well as the state of the Russian economy create risks that most investors do not have to bear.

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Photo: shutterstock.com

Vyacheslav Kushnaryov

Director of the Far Eastern Institute of Management RASHiGS
When it comes to foreign investment, we should immediately specify what type of investment we are talking about. Conditionally they can be divided into two main types - direct and portfolio. Direct investments involve the purchase of such a share in the enterprise, which gives the investor the right to participate in the management of the firm (in Russia this share most often corresponds to the threshold in 10% of the share capital). In other words, these investments are strategic for the investor, and he plans to develop this business. Unlike direct investments, which are "seriously and permanently", portfolio ones are aimed at extracting financial benefits. This means that the investor only expects an increase in the value of the stake he has bought, and as soon as the price exceeds a certain mark, he will sell his share. Speaking of the Chinese investments in the Russian economy, we are of course interested in the first type - foreign direct investment, since they reflect the long-term interests of Chinese investors.

Volume and dynamics of investments

The official statistics of Russia and China draws not the best picture of Chinese direct investment. Over the past three years, the volume of investment from China to Russia did not exceed $ 2,8 billion (see chart). At the same time, the amount of all Chinese direct investments abroad in 2017 amounted to $ 120 billion. That is, according to official statistics, China has invested in Russia less than 2% of all its foreign investment. To this, it should be added that in 2017, China began to fight "ill-considered investments" of Chinese companies abroad and reduced its FDI by 30% compared to 2016. Then Russia attracted less than 0,8% of all Chinese direct investment. It turns out that even in a year when Chinese companies made many "rash investments", Russia attracted less than one percent of their total number.

An even more eloquent indicator is Chinese direct net investment with a view to participating in capital. The prefix "net" means that out of direct investments for a given year, the investments withdrawn from the country were deducted. In 2016, net investments took on a negative value: the Chinese sold shares of Russian companies for a larger amount than they bought new ones (here we must not forget that we are talking about shares of companies in the development of which the Chinese wanted to participate before). In 2017, this indicator again became positive, but the value of $ 461 million is insignificant by international standards.

Obviously, there is a problem with the identification of the exact figures of Chinese investments in Russia. As experts say, a lot of investments from China go through offshore (Cayman, the Netherlands and others), which greatly complicates the real assessment. On the other hand, there is no good reason to believe that even including these hidden figures will greatly change the picture drawn by official statistics.



Intergovernmental projects: roads and oil

Chinese investments fall into Russia, following one of two paths. Or when a Chinese investor finds an attractive project in Russia, or when the two governments agree on them. Unequivocally there is a huge imbalance in favor of the second way.

With the participation of the first persons, a Russian-Chinese investment fund with a capital of $ 1 billion was created (a joint project of the Russian Direct Investment Fund and China Investment Corporation). The Russian-Chinese intergovernmental commission, under the leadership of the first vice-premiers of both countries, agreed on 73 common projects, 17 of which are under implementation. In 2015, Russia and China signed an agreement on the interface of the Eurasian Economic Union and the "One Belt and One Way" (OP-OP), a large-scale China project to build a logistics infrastructure between China and Europe. How close this cooperation will be is not yet clear. There is a certain probability that part of the infrastructure will pass through the territory of Russia. In this case, Russia would attract significant amounts of Chinese investment.

In addition to the construction of infrastructure, through the intergovernmental cooperation, investments are being made in the oil and gas sector of Russia. Recently, the Chinese bought 20% of Rosneft's subsidiary PJSC "Verkhnechonskneftegaz". The Silk Road Fund (OP-OP Fund) and the state development bank of China Development Bank acquired 10% in the petrochemical concern Sibur.

The meeting of the leaders of the two states is almost always accompanied by the signing of contracts for the implementation of dozens of projects. But not always in these projects there is economic logic. Russia has established itself as not the most reliable partner in infrastructure projects (it is only necessary to recall the Sochi Olympics: failure to meet deadlines and repeatedly increasing the estimate). However, due to political importance, the projects are still being finalized. Therefore, despite the economic inexpediency, the Chinese are much more relaxed to cooperate in projects where there is political support at a high level.

Private investment: three perspectives

Chinese investments in Russia are few. If you deduct investments made on the initiative of governments, there will be very little private investment. As the report of the audit company Ernst & Young shows, Chinese investors consider high risks of doing business in Russia and therefore are afraid to come to the Russian market. However, there are several promising sectors.

So, the Chinese are invested in the production of cars. Over the past few years, automobile plants have been built and built in the European part of Russia (for example, in Karachaevo-Cherkessia, Tatarstan, Kaliningrad region). Despite the fact that in 2016 the share of Chinese cars in the Russian market has grown, while it remains low and fluctuates around 3%. On the one hand, Chinese cars represent a good value for money. On the other hand, they are poorly recognizable in Russia and are still poorly perceived by the Russian consumer.

Another interesting sector for the Chinese sector was commercial real estate. In 2017, Russia took 6 place among the countries that attracted the largest investments in real estate from China. Last year, several major transactions were carried out, the largest of which was the purchase of the Chinese Fosun Group business center "Voentorg" in Moscow. Also, other Chinese companies are planning to build a business park in the suburbs and hotel-residential complexes and casinos in the Far East. It is significant that more than Russia real estate investments attracted Singapore, South Korea, Malaysia, New Zealand and the Czech Republic (in descending order). At the same time, Singapore attracted $ 3,9 billion, and Russia - $ 170 million. It is likely that investment in Russian real estate will grow. According to the forecasts of the government and international institutions, the Russian economy will gradually accelerate, which should lead to an increase in property prices in the future, so investing in it now seems reasonable.

The third and very promising sector is electronic commerce and electronic payments. If the introduction of the Chinese payment system AliPay in Russia seems more than a step towards the Chinese tourists, the development of the AliExpress online platform can definitely be considered to be oriented towards the Russian consumer. E-commerce turned out to be one of the few sectors of the Russian economy that has been steadily growing over the past ten years. Today, the monthly audience of AliExpress is about 20 million people. The company launched its own social network for shoppers "Club of Shopaholics" and builds cooperation with bloggers. Recently, the company announced the opening of a separate site with goods up to 600 rubles, designed for young buyers.

About (not) obvious difficulties

Recently representatives of the Russian Internet Trade Association appealed to the government of the Russian Federation. They asked to set increased duties on purchases in foreign online stores. Russian players see the potential of Chinese competitors and are trying their best to influence the situation. This kind of protectionism is one of the fears of Chinese investors in Russia.

When conducting tenders, Russian contractors prefer domestic suppliers to Chinese, although this is often economically impractical. As analysts write Ernst & Young, Chinese construction companies for this reason prefer not to get involved in the competition for tenders and provide "harmless" design services.

In addition to the fairly predictable lobbying by Russian competing companies, investors fear unpredictability of lawmaking activity. Here, first of all, we mean the recent law on the storage of personal data. Large online services, which hold a lot of user personal data, are forced to move their data centers to Russia, but they can not physically have time to do this before the law comes into force. Accordingly, Chinese investors talk about such unexpected costs when it comes to the risks of doing business in Russia.

In 2016, the Russian-Chinese business forum for small and medium-sized businesses was held in Sochi, where the Chinese responded rather harshly to the Russian bureaucracy. In their opinion, in most cases, officials either do not make contact, or show "an innate dislike for business." It is difficult for a Chinese entrepreneur to obtain a work permit, and he, along with the investment, usually brings Chinese employees. The actions of the Federal Migration Service are also often not very friendly. The combination of these factors forms in Russia a very specific culture of doing business, which is not accepted by foreign investors, including the Chinese.

One of the most obvious risks for Chinese and foreign investors as a whole has been the prospects for low economic growth in Russia. The government sets the benchmark for economic growth to the level of 4-6% to 2020. But so far, the calculations of the Central Bank and international financial institutions seem much more realistic: growth is unlikely to exceed the world average (3,9%). And it's sad, because it means that there are a lot of countries in the world that are much more attractive than Russia in this indicator. Even in Russia's much-like economy, Brazil has attracted an average of $ 60-70 billion FDI annually in the past five years, and Russia has lost less than $ 20 billion. Although Brazil has experienced a severe political crisis and a fall in oil prices during this time.

In Russia, a very small share of Chinese foreign investment settles down. And unlike the fact that only the Chinese are afraid to invest in the Russian economy. For foreign investors from around the world, investing in the Russian economy seems too risky. And perhaps reducing these risks is one of the most important tasks of economic policy for the next 10 years: how to unleash this tangle of low economic growth, unfair competition, bureaucratic resistance, unpredictable lawmaking and the dependence of large projects on political will?
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