A recent extension of Russia economic sanctions by the EU did not get much reaction from the market. Three years since western restrictions were first imposed, Russia appears resilient. The Finance Ministry forecasts that the economy may grow between 1.5-2.0% this year. Did the much talked about Russian ‘Pivot East’ have a role to play in creating such optimism?
The statistics show that Russia-China relations are strengthening. Chinese companies invested over $100 mln in Russia between January and April this year. Over the recent years, they have spent $2.4 bn in development projects in Russia’s Far East, the closest region to China. The Russia-China Investment Fund has over 19 projects valued at $1bn under development and 20 more in the pipeline with a total value of more than $2 bn.
Government-to-government business links are expanding and private companies follow their lead. In May, Fosun, a Chinese conglomerate and investment company, agreed to pay $900m for a 10% stake in Polyus. According to the latest EY survey, 92% of Chinese entrepreneurs consider Russia to be an attractive market. However, there is a growing frustration among Russian companies that many deals and projects are simply not getting through.
Western sanctions = global sanctions
A senior Hong Kong based investor said that Western sanctions have had a massive impact on transactions made in this part of the world. The number of deals with Russian companies went down from 10 to 1 immediately after restrictions were introduced. For local or international investors in Hong Kong, dealings with Russian companies still represent a career risk: “We would only deal with a familiar name or look at extremely attractive returns”, says a representative of a major investment bank.
Not all of the investors have taken such a cautious approach. “In late 2014 we played on fears of those who were offloading Russian stocks and got very good deals,” says a Chinese investor.
The Chinese like risk, but they want a great reward in return so now they see fewer opportunities: “The issue is that most of the Russian deals at the moment are priced very tightly so we go for local names with better returns,” the investor says.
You would ’t be able to borrow the money from a neighbour you had only just met, would you? All Russians know that gaining trust involves sharing a cup of tea or “something stronger”. “Sanctions made us look East but we have realised that we should have been doing this much earlier,” admits a senior manager of a large Russian company.
Lately, education on Russia has been a key element of corporate activity for some of the big companies and their efforts have not gone unnoticed. One investor shared with me how he was impressed by Gazprom’s efforts to send its most senior management on the Asian roadshows. While another investor agrees with this approach, he admits that there might be limits to it: “The big names should come out and educate more often, similar to what Gazprom is doing.”
How to get a dragon
These “get to know each other” meetings should definitely include major Chinese security firms such as CICC, CITIC and Haitong, which work with institutional investors, and Huatai which looks after retail.
Chinese investors are sophisticated and there is no such thing as easy money. Before giving you cash they will be interested in how the proceeds will be spent with a standard - “for corporate needs” - answer being a no winner. Having a high quality gold mine is not enough. You have to clearly demonstrate how that gold will reach its final destination in the future.
Chinese like big names and big brands. Where else would you see people queuing outside of Prada or Hermes boutiques on a very ordinary non-sale day? Therefore, you have to try to get a big name on board in order to promote the business.
Your business proposition has to be relevant. The Chinese angle in any business operation is the key.
Very active retail investors are an outstanding feature of the Chinese market but understanding their behaviour is extremely difficult. The younger generation are obsessed with online resources and will make their decisions to trade based on a WeChat activist group recommendation about a stock rather than on a bank’s recommendation or from a good article published by respectable media. One clever person in a village could lead a whole crowd. Given that an ordinary Chinese village might account for a million people, it does make a difference in the market.
There is business going on between Russia and China, and there always will be. There will be more deals happening between the two neighbours, but both sides are too pragmatic to shift their focus in only one direction. Interestingly enough, many Russian companies still view themselves as Western and are simply waiting for the sanctions to be lifted to resume their pivot to the West.