Chinese firms face critical choices over Russian market

March 28, 2022 10:00
Photo: Xinhua

Over the next weeks, the directors of three Chinese automakers -- Geely, Great Wall and Cherry -- must take a decision that could decide the future of their companies.

Following Vladimir Putin’s invasion of Ukraine, the biggest auto exporters to Russia, from Europe, Japan and South Korea, abruptly cancelled their sales, leaving a rare and sudden gap in the market.

Should the three companies take advantage and sharply increase their exports to Russia? But, in doing so, will they incur anger from governments and consumers in Western countries that they consider their most important longer-term market?

In 2021, China exported 123,000 cars to Russia, up from 43,000 in 2020, its third largest export market after Chile and Saudi Arabia. The national target for auto exports is five million by 2025, up from two million in 2021.

All over China, banks and companies face the same dilemma. How to do business with Russia under severe Western sanctions?

An early test will be alumina, after Australia on March 20 banned exports to Russia of alumina and aluminium ores. Australia accounts for 19 per cent of the commodity bought by Rusal, Russia’s giant aluminium producer and the second largest in the world outside China. Should companies in China meet Rusal’s shortage of alumina?

Xu Qin, Communist Party chief of Heilongjiang, the northeast province that borders Russia, has no doubt what to do. In a visit to Heihe on the Russian border on March 20, he said that the Sino-Russian east route natural gas pipeline must be secured and construction of new branching lines accelerated. He said that China must take the opportunity to increase imports of oil and gas from Russia.

China imports 70 per cent of its oil supply and 40 per cent of its gas.

On March 11 – more than two weeks into the invasion – the China Coal Transportation and Distribution Association hosted a video conference between 12 Chinese power plants and 20 Russian coal companies to increase bilateral trade. China is the biggest market in Asia for Russia’s coal exports. In 2021, Russia was China’s second largest supplier of coal.

One Chinese company caught in the middle is DJI Technology, one of the world’s biggest producers of drones and a leader in technology that uses satellite navigation to guide drones to precise locations.

Last week Ukraine’s Vice Prime Minister Mykhailo Fedorov called on DJI to stop selling its goods to Russia: “block your products that are helping Russia to kill the Ukrainians,” he said. In response, the firm said that it was “available to discuss these issues” but did not promise to stop exports to Russia.

In 2021, trade between China and Russia jumped 35.9 per cent over 2020 to a record US$146.9 billion, according to Chinese customs data. Russia was a major source of oil, gas, coal and agriculture commodities and ran a trade surplus with China.

Since the West imposed sanctions in 2014 after Russia annexed Crimea, bilateral trade has expanded by more than 50 per cent, and China has become Russia's biggest export destination.

But not all the news is positive. In a recent survey of 322 Chinese exporters by FOB Shanghai, an industry forum, 39 per cent of respondents said that the war had “severely” undermined their Russian business. One reason is the West’s banning some Russian banks from SWIFT, the global financial messaging system. This makes international settlement of payments for trade more complicated.

One way out of this is payment in renminbi. In the first half of 2021, RMB settlements accounted for 28 per cent of Chinese exports to Russia, compared to just two per cent in 2013. As of June 2021, the Chinese currency accounted for 13.1 per cent of the Russian central bank's foreign currency reserves, compared with just 0.1 per cent in June 2017. In the same period, Moscow's U.S. dollar holdings dropped to 16.4 per cent from 46.3 per cent.

So the directors of Geely Auto must consider many factors. In a press statement last November, the firm said it aimed for sales of 3.65 million units by 2025, including 600,000 exported. “We will focus on developing the Eastern Europe, Middle East, Southeast Asia, and South America markets … Lynk & Co (a Geely brand) will expand its global presence by entering Russia, Malaysia, Australia, and New Zealand among others.”

The directors must consider how long the invasion will go on: would Western sanctions be lifted as part of a peace agreement: with the devaluation of the rouble and a fall in Russian GDP this year, how many consumers will be able to buy its cars: if the war is prolonged and China provides financial, material and military aid to Russia, will its companies be sanctioned too? Would it be better to leave Russia all together and concentrate on other less complicated markets?

There are no easy choices.

-- Contact us at [email protected]

 

A Hong Kong-based writer, teacher and speaker.

Most Popular 24 Hrs