Putin’s Kowtowing To China Is Hurting Russian Businesses

It seems Russians are finally coming face-to-face with the limits of the ‘NO LIMITS’ strategic partnership with China as well as hazards of doing business with the Chinese enterprises. Reports have emerged of growing frustration within the Russian business class over the difficulties of doing business with China.

The most prominent of these reports is the one published by the pro-Kremlin Russian daily, Izvestia, in early August, according to which, around 98% of Chinese banks are refusing payment transfers from Russia, both in the Chinese yuan and the Russian Ruble, due to the fear of US’ secondary sanctions targeting financial institutions that were helping Russia.

Alexey Razumovsky, the commercial director of payments company Impaya Rus, told Izvestia that these payment challenges with Chinese banks could cause supply chain disruptions and inflation in Russia.

The issue of financial transactions was said to be high on the agenda of the Russian President Vladimir Putin’s visit to China in May, and while there were some measures undertaken after this high profile visit, such as using small, regional Chinese banks that could go undetected by the US sanctions radars, payment issues still remain. Moreover, the Chinese companies are also refusing payment from the Russian bank branches in China.

All this has begun to affect Russia’s trade with China, which is essential to supporting the Russian war effort in Ukraine. While Russia’s exports to China help finance its wartime economy, its imports of Chinese industrial goods like the high-precision CNC (computer numerical control) machine tools produced by companies reportedly linked to China’s People’s Liberation Army (PLA), are more important for sustaining its war effort.

China’s official statistics show that Russia’s imports from China declined by more than 1% to US$62 billion from January to July because of the payment problems and this has created problems for Russia’s industrial sector, per a research co-authored by Kirill Babaev, head of the China Institute at the Russian Academy of Sciences.

“In today’s situation, payment problems with Chinese banks particularly exacerbate this challenge, as there are no other major suppliers of many types of industrial equipment besides China at present,” Babaev’s research paper that was published in the previous month stated.

As author had pointed out in his earlier article, majority of China’s exports in 2022 as well as in 2023 went to the countries with which it has very tense bilateral relationships such as the US, which has been the largest importer of Chinese goods so far, followed by Japan, South Korea, Vietnam and India, etc.

This means that while trade with China is critical for Russia to weather the Western sanctions and sustain its war effort in Ukraine, China has to be mindful that economic cooperation with Russia does not affect its other trade interests in the West and the Indo-Pacific which is more important for its export driven economy.

Therefore, Russia and China are contemplating complex measures to try and continue bilateral trade and payments by circumventing restrictions imposed by the US sanctions. For instance, the two countries could conduct deliveries and transactions through “friendly” third-party countries, and per a recent Reuters report citing unnamed sources, some Russian businesses are already using intermediaries in third countries to process their transactions and circumvent the compliance checks run by Chinese banks.

However, there are challenges associated with this method too, such as an increase in the cost of processing transactions to as much as 6% of transaction payments, from nearly zero before involving the third party intermediaries, Reuters reported citing unnamed sources.

Moreover, financial institutions in countries friendly to Russia are also said to have begun refusing Russian payments after the US President Joe Biden signed an executive order on secondary sanctions in December 2023. Latest instance of this is the refusal of Russian payments by banks in the United Arab Emirates (UAE), as reported by Kommersant, a Russian daily newspaper, on August 28.

In early August, the Emirati banks began blocking Russian payments for Chinese equipment being delivered directly from China to Russia. However, according to Russian ‘market participants’ cited by BFM.ru, a Russian business news website, it is China that has initiated this blocking due to the fear of secondary US sanctions. Chinese banks are reportedly asking for data on the origin of incoming funds and a customs declaration from organizations in Dubai.

Likewise, BFM.ru reported that even Turkey and a couple of Central Asian countries have also begun refusing payments from Russia.

That said, China and Russia appear to be committed to maintaining bilateral trade, and there are also reports of good old-fashioned barter trade being discussed by the government of the two countries as a way to get around Western sanctions.

However, there are other problems emerging in the Sino-Russian bilateral economic relationship that have nothing to do with the Western sanctions.

Imports Of Cheap Chinese Goods Are Hurting Local Russian Businesses

Of late, many Russian industrialists have been complaining about the Russian market being flooded by cheap industrial goods from China. Among these industrialists is Maxim Sokolov, president of a major Russian automobile company AvtoVAZ, who in a press statement in April stated that Chinese brands are not interested in localizing their cars in Russia and are pursuing aggressive expansion.

“Unfortunately, we continue to observe extremely aggressive price expansion on the part of imported cars of Chinese brands, which are not interested and do not see any incentive in localizing their production in Russia, which would load the Russian component industry with additional orders,” said Sokolov.

Following the withdrawal of western manufacturers from Russia after its invasion of Ukraine, Chinese car manufacturers, consumer-electronics producers and other manufacturing enterprises have been left with a near monopoly over the Russian market.

In 2023, Chinese automakers sold a total of 553,000 cars in Russia, accounting for 49% of the Russian auto market. In 2024, this market share is estimated to reach 60%, according to the president of the Russian Automobile Dealers Association (ROAD) Alexey Podshchekoldin.

Shortly after Sokolov’s remarks, Sergei Chemezov, the CEO of Rostec, a Russian state-owned conglomerate, also called for limiting the number of Chinese cars on the Russian market.

“Here, some restrictions need to be made by the government anyway. There is no other way,” Chemezov said in an interview with RBK, a Russian business newspaper, when asked about the issue of surplus of Chinese cars on the Russian market and its impact on the sales of Russian automakers.

Similar concerns have emerged in other sectors of the Russian industry. In the heavy engineering sector, for example, local Russian oil and gas engineering equipment producers are facing tough competition from Chinese manufacturers.

Majority of purchase orders from Russian enterprises in the fuel and energy complex (FEC) are given to the Chinese contractors, according to Nikita Voronin, Sales Director of Npo Natek-Neftekhimmash ZAO, a Russian heavy engineering company, who noted that Chinese contractors are able to sell their equipment at half the prices of those set by Russian manufacturers.

Also, despite their low cost, Chinese equipment is not inferior to the Russian ones, and sometimes is even at a comparable level to the European and American ones. Moreover, the analogues of Russian developed equipment are also being imported from China at cheaper rates. This is made possible due to the huge support the Chinese equipment exporting companies receive from the government in the form of tax and credit benefits, as well as various subsidies.

Furthermore, there is another rather expensive dimension to this cheaper Chinese-made equipment that Voronin pointed out in an interview with a Russian media outlet, citing the example of Uzbekistan, which also purchased all its fuel and energy equipment from China, and when the time came for the repair and servicing of this equipment, Chinese contractors raised their prices sharply.

Gennady Masakov, an expert on oil and gas sector who heads the analytical center at Yakov and Partners, a Moscow-based consulting firm (formerly McKinsey in Russia), explained to a Russian media outlet that servicing Chinese equipment can be more expensive than Western equipment due to lack of skills to work with it and the need to actively involve representatives of manufacturing companies to carry out repairs, including transportation to China.

That said, the Russian government is working toward increasing the share of indigenous equipment used in the oil and gas sector. The Russian Ministry of Energy expects the level of independence of the industry to grow up to 65% by the end of 2024, up from 62% in 2022.

Unethical Business Practices Of Chinese Enterprises

Several Russian entrepreneurs have also voiced grievances about the unethical business practices adopted by their Chinese competitors to sell their products on Ozon, an online marketplace, sometimes referred to as ‘the Amazon of Russia’.

On Ozon, Chinese sellers are not just competing with the help of lower prices but also by counterfeiting Russian brands. Konstantin Belyaev, Director of Marketing and Dealer Sales at Brodeks, a technological workwear making company, told a Russian media outlet in April that many Chinese sellers were copying product photos from Russian sellers, and often even entire product cards that give information about the products to the customers.

“They simply took our entire collection of photos, somehow registered, created product cards, reduced prices, for example, by 20% and with a waiting period of plus one month offer buyers to buy our products, under our brand,” Belyaev was cited as saying by BFM.ru. The only way to figure out that the product is not in Russia is through a small inscription on the product card stating that it is delivered from abroad.

Other than counterfeit products, technological cloning by Chinese enterprises is also becoming a challenge for Russian businesses, as brought out by Pavel Vodyankin, the CEO of Perfecto Group that sells electronics.

“This is not just my personal story, this is probably the story of almost all sellers on Ozon. The platform actively launched the Chinese on the Russian market, gave them some preferences. The Chinese automatically, through a program or something, simply clone all the intellectual property, lower the price a little, and that’s it. I’m not the only one, there are thousands of people, there are general chats, you name it, there are tens of thousands of requests, Ozon gives template answers, just formal replies – and that’s it,” Vodyankin is cited as saying by BFM.ru.

PLEASE TURN OVER