U-turn to the east: what awaits Russian business in China
Yelena Petrova, Natalia Seibil
THE FIRST BREACH IN THE CHINESE WALL: THE PARTNER IS TRIED BY TOUCH
Marina Vladimirovna K. – MSU teacher, Candidate of Sciences. And 33 years ago, she, a 21-year-old student, was miraculously brought to China.
"A housemate suggested something that had no name in the USSR. Like a business tour", - says Marina.
Of course, the Soviet student could not have any dollars or yuan. The first shuttles were sent to China with goods purchased at home for rubles. Zenit and Smena cameras, gold jewelry and even men's hats, which had long gone out of fashion in the USSR and were gathering dust on the half-empty shelves of selmags, were in particular demand. All this was easily exchanged for our scarce down jackets, leather raincoats and jackets, jeans and skirts. For example, for two hats of 7 rubles each, they gave a pair of men's shoes, and they, in turn, cost two thousand rubles in Russia.
"The most inconvenient thing was to pass the boundaries in three raincoats or down jackets for one body. – Marina recalls. – It was very hot, uncomfortable and... ashamed! But she also dragged three striped trunks. The customs officers laughed at us, but let us through".
However, the shame passed when two hundred people dressed up like cabbage boarded one plane at once. And everyone has bags, trunks, suitcases…
When asked if the business tour was profitable, Marina answers that yes. I managed to dress myself, mom and dad, and also sell a dozen extra wardrobe items to my friends. She doesn't remember exactly how much she earned, but she remembers the Chinese with horror:
"It turned out that many Chinese have never seen white people and especially young girls. For three days I was constantly surrounded by crowds of curious people, discussing something out loud, pointing fingers, and the most brazen ... pinched (!) for causal places!!
So I had to leave literally plucked".
Well, the total language barrier became the nightmare of the whole enterprise. I had to explain myself on my fingers, all the information was in hieroglyphs with the partners completely ignorant of either Russian or English.
However, the trade savvy of both peoples broke through the first breach in the wall of socialist prohibitions on private business and foreign trade activities.
Marina K. did not go to China anymore, but about 10 million other Soviet people laid stable routes there. The markets of all Russian cities were flooded with goods from China. But at the same time, the turnover of shuttles took place mostly outside of state statistics and taxation.
Gradually, such trade became less and less profitable: states introduced new customs rules, airlines limited the weight of luggage, and the city authorities tried to take control of market trade - crime and unsanitary conditions flourished there.
In the early 2000s, shopping malls began to appear in Russian cities, including large foreign chains, trading companies took the place of "shuttles", and markets gradually began to be demolished.Today, the baton of the first shuttles was successfully picked up by market places - AliExpress, Alibaba, 1688, Gearbest, DHgate, Taobao.
According to intermediaries from logistics companies who want to sell Chinese goods in Russia, they guarantee the search for reliable suppliers, the consolidation of cargo and its shipment by four modes of transport to anywhere in the country.
And what is the result? Can any Russian do business with China?
DON'T TRUST AND CHECK: WHY ARE THEY DECEIVING US?
Entrepreneur and economist Dmitry Potapenko is skeptical about the increased imports from China instead of European supplies.
"We have now rewound to the late 80s - early 90s, when I really went abroad with a bag, today I go to Dubai and Astana and arrange everything in containers", – says Potapenko.
Before you start trading in the East, Dmitry Potapenko recommends reading "The Art of War" by Sun Tzu and von Clausewitz "About War". The difference in mentality is huge. 90% of Russian merchants who are now rushing to Beijing, worked in European markets. They worked according to European standards and are very surprised why they are being deceived all the time.
"I can give you an example: there are hooks on which shelves in stores are hung. So, the contract for their production and supply consists of 250 pages, because it specifies what material they should be made of, its chemical composition, the place where this material should be purchased, what kind of paint the hooks should be painted (with all the details concerning the paint). Otherwise, you will get something that you cannot use".
In other words, sitting on your couch in Moscow or Vologda and relying only on the honesty of distant suppliers and intermediaries, it is impossible to organize an effective business.
Dmitry Potapenko believes that it will be impossible to establish cooperation with the eastern neighbors. Trade – yes, buy raw materials in Russia – please. But partnerships cannot be built. We are a different culture, a different civilization for them.
And besides, this is a big propaganda myth – that the Chinese economy is vitally interested in some incredible relations with Russia. In China's foreign trade turnover, the northern neighbor occupies a modest 9th place with 2.7 percent. Russia is inferior not only to the USA, the EU, but even to Vietnam and Malaysia.
Nevertheless, we have found an example of quite effective cooperation between Russian and Chinese entrepreneurs.
IVAN AND ZHANG: 20 YEARS IN THE SAME BOAT
In this amateur photo taken in the harbor of New York, the partners in the manufacturing business are the CEO of the holding "Chemagregat" Ivan Kruglov and the director of the Chinese machine-building plant Zhang. Both were brought to the United States by the desire to expand their business and enter a new market.
And it all started 20 years ago.While other Russian businessmen were beating European thresholds, Ivan went to look for entrepreneurial happiness to the east, to China. His company "Himagregat" is engaged in the production of chemical and petrochemical equipment. They themselves develop, design and produce pumps, tanks, pipeline elements for the chemical industry and the oil industry.
"The idea was to introduce our engineering and design developments into the "world factory". Simply put, the brains are ours, and the hands are Chinese. Well, and to ensure quality control of the products on which we put our brand", - says Ivan Kruglov.
"It was necessary to look for a partner. There are companies that are engaged in the selection of partners in China, as we did in 2003. We needed a specific list of equipment. The agency has provided us with about 20 companies on this list that are engaged in this. Then you come to the factory and start watching", - Ivan says.
It turned out that in a country where it is impossible to read a single sign on the street, where people live, speak and think differently, it is possible to do business, although the differences are huge. For example, in Russia, Ivan Kruglov's company with a turnover of 2 billion rubles is considered a medium-sized business. In China, it refers to small businesses.
Property in Russia and China is a blurry matter. Here were the owners of McDonalds, Ivan grins, but when force majeure occurs, your property can be taken away at any second, regardless of what seals you put, who signed it. The more important is the trust between partners.
And what, do relationships do without conflicts and misunderstandings?
Anyone who has been to China knows that it is impossible to feel at home, Ivan Kruglov laughs. In Paris, the word "Hotel" will be read by everyone, and the toilet will be found by two cherished letters. In China, you must have a card with the name and address of the hotel in your hands, otherwise you will have to spend the night on the street. If in Shanghai you may come across someone who speaks English, then after driving 100 km, you will certainly need an interpreter. But that's not all.
"This is a country with a completely different mentality, with completely different values besides money. They are people, but they are different".
Ivan Kruglov says that he thought for a long time why his partner sometimes cheats on him. The Russian asks to deliver his equipment by the deadline, he answers him: Don't worry, Ivan, we'll do everything!
"The main problem is that they don't say no. I've been trying to figure out what's the matter for a long time. They don't cheat, they're afraid of losing face. They can't make a mistake. To do this, they twist out, twist out, try to write to you that, they say, the tsunami has passed here, the train has stopped… That is, everyone is to blame, while he did not lose face".
We are Europeans, Ivan Kruglov agrees with Dmitry Potapenko's idea. The story that we are turning to the East in the direction of our spirituality is absurd.
"I disagree with our government here, with our few experts. We are Europeans. Our culture, cinema, and music are completely different".
However, significant differences do not prevent families from being friends, visiting each other and even being honored guests at children's weddings. The question is, will thousands of other Russian entrepreneurs be able to repeat Kruglov's positive experience and thereby ensure the desired turn to the East in the face of anti-Russian sanctions? The answer largely depends on... the actions of the collective West.
PENALTIES FOR PARTNERSHIP: WILL SANCTIONS GET CHINA?
Turning to the East is not a dream or a myth, it is today's reality, says Igor Nikolayev, Doctor of Economics, Professor, Chief Researcher at the Institute of Economics of the Russian Academy of Sciences. This is evidenced, for example, by the increased load on the Trans-Baikal and Far Eastern railways. Over the past year, trade and foreign economic relations with China, India and Turkey have shown significant positive dynamics. Thus, the trade turnover of Russia and China in 2022 increased by almost a third and exceeded 190 billion rubles. Russian exports to China increased by 43.4% over the year to 114 billion dollars. Imports from China also increased by 12.8%. Compared to 2021, the surplus has tripled. Even before the military actions in Ukraine, President Putin and President Xi announced a goal to increase the volume of trade in services and goods to $ 200 billion in 2024. Now this figure does not seem utopian.
"It is clear that after the well-known events, the process was greatly intensified, but far from over. Against the general background, the prospects are not bad, but China is no longer growing by a dozen and a half percent a year, now GDP growth is indicated by completely different figures. Last year it was 3%, this year it may be 4% - 5%. We are turning to the East, to China, when China itself has slowed down significantly. These are additional risks for us", - Igor Nikolayev warns.
Other risks are the same export structure. 70% is accounted for by energy resources - oil and gas. The rest is as always: wood, mineral resources, seafood.
Both American and European sanctions bring uncertainty. And we are not talking about how carefully China or India will behave, bypassing the sanctions regimes. As a well-known Ukrainian proverb says, he would eat, but who will give him.
"It depends not only on them how careful they will be, but on those countries, primarily the United States, which impose sanctions, whether they want to take measures so that there are no circumvention mechanisms. As far as they want secondary sanctions to be comprehensive. But the fact that for Russia, for cooperation with China and India, these are risks – yes, these are significant risks".
Kirill Babayev, Head of the Basic Department of the Institute of China and Modern Asia of the Russian Academy of Sciences, does not share these concerns:
"Today we hear more threats than real steps to establish secondary sanctions against our counterparties in Asia. Therefore, the volume of cooperation continues to grow. According to our conversations with our partners in Asia, today they are much less afraid of sanctions pressure from the West than in the spring and summer of 2022. The fear has passed. Our contractors in China, India and Vietnam see that our cooperation is beneficial to both sides, and therefore they are ready to expand it.The development of knowledge-intensive sectors of the economy with the help of eastern neighbors is not an easy task for experts".
It is well known that China is good at "mastering" other people's secrets, in other words, stealing everything that is bad. There are many examples of how Russian scientists found themselves in places not so remote. However, the Celestial Empire is in no hurry to share its secrets.
Kirill Babayev sees the lack of Asian experience among entrepreneurs and officials as not only a linguistic and cultural, but also a structural problem:
"In our country, until recently, 10 times more students studied German than Chinese. Today it has become obvious what a serious imbalance this is. Over the past six months, the number of vacancies requiring Chinese has doubled. This suggests that there are not enough specialists, specialists are required. Those who are going to learn the Chinese language, Chinese economy, Chinese business culture today will find themselves in the trend and will be in demand in the market".
BY THE WAY
While economists and politicians are arguing whether it will be possible to provide Russia with imports from the West or the East, entrepreneur Kruglov is building a plant near Voronezh, believing that import substitution will be in demand today and tomorrow as never before. And Ivan's childhood friend, the owner of an AI plant in the Moscow region, says that in just one "sanctions" year, when the main competitors left the market, the volume of orders and profits tripled.
So, let's hope for the foreigners, but certainly don't be bad yourself!