Investments into Russia and Kazakhstan from China

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Ulf Schneider, Anna Bayda and Chris Devonshire-Ellis discuss China-Russia-Kazakhstan trade and related laws and taxes

Nov. 9 – Dezan Shira & Associates hosted their second Russia forum in Beijing yesterday with the assistance of the firms Beiten Burkhardt of Moscow and Kazakhstan Consulting of Almaty.

Presentations on the legal structures for establishing operations in both Russia and Kazakhstan were given by Anna Bayda and Ulf Schneider. They also touched on the structuring of contracts for trade in and with Russia and Kazakhstan and details of the tax regulations in both countries.

Comparisons between the Russian and Kazak legal and investment structures with China were made by Chris Devonshire-Ellis, who noted greater flexibility of operations of representative offices in Russia over China, and the provision of branch offices, which are not available in China other than as a subsidiary of an existing China entity. He also noted the difference in shareholding structures between Russian, Kazak and Chinese joint ventures, although recognizing that the legal structures of each had been derived from the old Soviet system and strong similarities remained.

The seminar, attended by about 100 senior, mainly Chinese, CEOs, then moved onto the demographics of trade from China with Russia and Kazakhstan.

Russia fast facts

  • Population (2010): 141.95 million
  • Nominal GDP (2009): US$1.23 trillion
  • Nominal GDP per capita (2009): US$8,693
  • Value of imports from China: US$33.07bn
  • Total value of exports to China: US$23.83 billion
  • Total value of trade with China: US$56.90 billion

The panel described the main crossings with Russia as follows:

Heihe/Blagoveshchensk

  • 500 kilometers north of Harbin
  • Population: 500,000
  • Free trade zone
  • Daily visa-free passage for Russian and Chinese residents

Manzhouli/Zabaykalsk

  • Inner Mongolia, trisection of China, Russia and Mongolia
  • Population: 200,000
  • Major lumber processing center
  • Daily visa-free passage for Russian and Chinese residents
  • 60 percent of all Sino-Russia trade passes through this route, while Manzhouli is China’s largest inland port.

Suifenhe/Pogranichny

  • 40 kilometers east of Mudanjiang, Heilongjiang Province, China; 140 kilometers north of Vladivostock, Russia
  • Good road and rail connections, link through to Hunchen in North Korea and then with access to port at Raijin-Sonborg in East Japan Sea, providing access to Japanese, Korean and United States markets from Northeast China
  • China recently leased the Raijin-Sonborg Port from North Korea for 10 years and are currently upgrading it
  • Russia is extending links to the trans-Siberian railways, providing this crossing with increased strategic importance

A presentation was then provided on China-Kazakhstan trade, with a quick overview of Kazakhstan and the main border crossings being noted as follows:

Kazakhstan fast facts

  • Population: 15.60 million
  • Nominal GDP: US$107.9 billion
  • Nominal GDP per capita: US$6,930
  • Total value of imports from China: US$28.77bn
  • Total value of exports to China: USD43.96bn
  • Total value of trade with China: US$72.73bn
  • Both chairs and hosts World Islamic Economic Forum next year

Alashankou/Dostyk (Alataw Pass)

  • Major road and rail crossing, and the largest Sino-Kazak border port
  • Second only to Manzhouli in size as China’s largest inland port
  • Handles 90 percent of all imports into Xinjiang

Jinmay/Zaisan

  • Road crossing only
  • Bonded zone and warehousing facilities handle about 100,000 tons a year
  • Currently undergoing major upgrade

Special mention was made of the new Khorgos Special Economic Zone at Yili in China, which has recently been granted this status by the State Council and has consequently seen trade double in the last 12 months.

Khorgos Port, Yining City SEZ

  • Total area: 30 square kilometers
  • Three agricultural/industrial parks
  • Functions of SEZ: agricultural/industrial processing base; light, electromechanical processing and assembly for export; and exhibition and tourist center
  • Serves as midpoint for China, Kazakhstan and Eastern Europe
  • Import/export trade volume for January to August 2010: US$3 billion
  • Total GDP: US$82.5 million (12.5 percent increase over 2009)
  • Fixed asset investments: US$17.1 million
  • 1,721,600 tons of goods through customs
  • Import and export trade volume totaled US$1.95 billion, an increase in trade of 91.4 percent over the same period last year
  • Tax breaks, VAT rebates and low overheads are making Khorgos a regional hub for investment directly into China and Kazakhstan

Noting that the GDP per capita in both Russia and Kazakhstan were higher than that of China, it was commented that the markets of Almaty in Kazakhstan, and Moscow and St. Petersburg in Russia provided high value consumers. It was also noted that increasing wealth among the rural populations in Russia and Kazakhstan were resulting in a greater flow of goods from China into these countries and that this would become increasingly sophisticated in product and wealth over time. Noting also that Kazakhstan was developing as a moderate Islamic state and was home to a large number of Muslim traders, the influence of Turkish businesses especially in the region would continue to develop and inter-Muslim trade would also increase. Almaty was developing as a secure hub for the peaceful development of Islamic trade and finance.

The event concluded with a piece on Urumqi developing as a hub for Central Asia, with Chris Devonshire-Ellis making the point that while it was not typically included as a Central Asian city, the trade demographics dictated that it was an excellent location from which to manage and develop Central Asia trade with daily connecting flights and increasing rail connections linking the city ever more to the markets of Central Asia.

Noting that Urumqi also has several development zones, namely the Urumqi Economic and Technological Development Zone, the Urumqi New and Hi-Tech Industry Development Zone and the Shihezi Economic and Technological Development Zone, he pointed out that the city, like many others in Xinjiang, is a beneficiary of Beijing’s ongoing “Go West” campaign, and depending upon the type of industry and size of the investment, attractive incentives can still be obtained for investing here that have long since disappeared elsewhere in China.

Urumqi

  • Average monthly salary: RMB2,449 (US$360)
  • Total minimum employer contribution: 35.8 percent

The event concluded with a cocktail party and networking session, at which the latest issue of Russia Briefing was also introduced.

Recent Sino-Russia Investments

  • UC Rusal (world’s largest aluminum manufacturer) became the first Russian company to list in Hong Kong, raising US$2.2 billion in an over-subscribed IPO, followed by Petropavlovsk (gold mining) who debuted their IPO last month raising US$240 million
  • Tencent Holdings bought 10.26 percent of Russia’s Digital Sky Tech for US$300 million in June
  • China purchased Russian coal for US46 billion for supplies of 15million tons per year for 25 years
  • US$12billion private sector funded agreement signed in coal/infrastructure/technology investments
  • EuroSibEnergo and hydropower producer China Yangtze Power Co signed deal on developing hydropower plants
  • China-Russia Gas Pipeline completed

Recent Sino-Kazak investments

  • CIC purchased 11 percent of KazMunaiGaz for US$1 billion in June
  • CNPC invested US$2.6 billion in JV with KazMunaiGas in purchase of Kazak Mangistar Munai Gaz
  • China Gezhouba (infrastructure) signed US$728 million deal to build hydropower plant
  • CGNPC (Guangdong Nuclear) purchasing 24,200 tons Kazak Uranium between now and 2012, deal size undisclosed

Dezan Shira & Associates can assist with introductions to their partner firms in Russia and Kazakhstan for businesses interested in these markets. Please contact russia@dezshira.com for assistance.

Related Reading

Russia Briefing: Understanding Russian Accounting Principles
Russian & US GAAP standards compared
Russian Chart of Accounts explained
Transforming Russian accounts to US GAAP
Trade Opportunities with Kazakhstan
(Complimentary download)

Russia Briefing

Daily news and commentary on investment and trade in Russia

Communist Tax Lawyer

Daily news and commentary on trade and investment in communist and ex-communist states

Investment Tips for Xinjiang, Urumqi and Kashgar

Manzhouli: China’s New City of the Steppes

Russian Investment Bankers Targeting China

2 Responses

  • Zhao Chrisy says:

    Dear Chris, It was nice to attend event and my pleasure to meet you. Our company-Panalpina, is one of largest freight forwarding company worldwide. Headoffice in Basel, Switzerland. We do have regular shipments to central Asia and Russia by rail, and rail product is one of our strategy in next 3 years. We already ship through Manzhouli and Mudanjiang a lot, the interesting also in Khorgas. It is really interesting to meet company like yours knows these things. I am quite positive that, we do have chance to cooperate in near future.
    Cheers!
    Best Regards,
    Chrisy Zhao

  • Chris Devonshire-Ellis says:

    Thank you Chrisy and nice to meet you too. I noticed a number of logistics companies there and we’re well aware that Sino-Russian and Sino-Kazak trade is significantly increasing – which is why we hold these events! Hopefully we’ll see more China based businesses expanding into these neighboring markets and more Russian and Kazak investment tcoming to China. We understand China business is rather more than standard media attention of the US and Europe, and we need to service our alternative clients from Russia, Central Asia and beyond. We will be providing China Briefing in Cyrillic and Arabic editions from next January.
    I’m glad you enjoyed the event. Thanks – Chris

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