When East Beats West Go back »

2009-10-02 | Beijing, Shanghai, Southwest China, Nanjing, Shenyang, Tianjin, South China

When East Beats West
Irish Times, 2nd October 2009

INVESTMENT IN THE EAST: After decades of reform, China and Russia have emerged as places to do serious business. But accusations of intervention from Beijing and Moscow, as well as corruption and protectionism, have given international companies pause for thought

RUSSIA

BUSINESSMEN WORKING in Russia can well understand Winston Churchill's remark that trying to comprehend a Soviet power struggle was like watching dogs fighting under a carpet.

Almost 20 years after Russia began its transition from communism to capitalism, it is still fiendishly hard for foreigners - and most locals - to discern shifts in power between political and business clans, never mind to pick an eventual winner.

When Vladimir Putin became president in 2000, he vowed to submit Russia to a "dictatorship of the law", crushing corruption, ending the arbitrary behaviour of Russia's courts and making life more predictable for Russians and foreigners alike.

Putin not only failed, but did not really try to fulfil his pledge. He used the legal system to chase unwelcome "oligarchs" such as Boris Berezovsky and Vladimir Gusinsky out of the country and to jail its richest man, Mikhail Khodorkovsky, while allowing pliable pro-Kremlin tycoons to continue business as usual.

Taming the oligarchs was part of Putin's plan to reassert state control over the Russian economy, and reverse what he saw as the degradation of the 1990s, when entrepreneurs grabbed most of Russia's greatest industrial assets and salted away much of their profits in tax havens abroad.

As a former KGB officer who has lamented the demise of the Soviet Union, Putin has used his power to restore the might of the Russian state and shown his willingness to use any means - war, rigged elections, expropriation of private property - to achieve that end.

Investors in Russia should remember that Putin and his allies appear to believe the national interest is synonymous with whatever strengthens the state, and everything is permitted if it is in the national interest.

Some of Europe's biggest companies have already fallen foul of this central tenet of "Putinism".

Facing a wave of regulatory pressure, for example, Royal Dutch Shell plc in late 2006 ceded control of a $22 billion gas project to Kremlin-controlled Gazprom; and Norwegian telecoms group Telenor has been fighting for years to protect its nearly 30 per cent holding in Russian mobile operator Vimpelcom from what it sees as an illegal encroachment by a tiny Russian shareholder.

The experience of oil giant BP is perhaps the most sobering: this pioneer of foreign investment in Russia became embroiled in a complex and ultimately humiliating power struggle with local partners.

Putin personally approved the 2003 deal that made BP the largest foreign investor in Russia, when it took a 50 per cent stake in a joint venture called TNK-BP. The other half was controlled by a group of holding companies known collectively as AAR, which belong to four oligarchs.

Last year, what had been a profitable but sometimes tense partnership exploded into all-out corporate war, with BP employees accused of spying and subjected to a host of labour inspections, visa delays and refusals, raids by the security services and a raft of court cases.

One senior company official fled Russia in fear of arrest, while another bemoaned Putin's failure to act against Russian tycoons whom he accused of acting like "1990s corporate raiders".

Senior officials issued muted calls for the situation to be resolved, but the harassment continued until almost all senior BP executives had been forced from their posts and AAR had taken effective control of the daily running of the so-called joint venture.

Putin and his protégé and successor as president, Dmitry Medvedev, insist this was merely a banal business dispute aggravated by the fact neither party had a controlling stake in TNK-BP.

The obvious conclusion - coming amid a series of largely forced deals that have raised state control over the Russian oil sector to more than 40 per cent from just 16 per cent in 2003 - is that Moscow's leaders will not tolerate foreign majority ownership of key national assets. And if Russian officials want foreign owners out, no contract or legal code will ultimately protect them.

Days before moving from the Kremlin to the prime minister's office, Putin signed a new law obliging any private foreign company wanting to buy more than 50 per cent of a Russian firm in any of 42 strategic sectors to obtain permission from a board of economic and security officials. Foreign state-controlled companies have to go through the same procedure to acquire more than 25 per cent in a Russian company that is on the "protected" list.

The law not only further strengthens the role of the security services in Russian business, but also forces prospective foreign investors to play the kind of game that so baffled Churchill: trying to analyse and predict the constantly shifting fortunes of Russia's business and political clans.

Adding another layer of bureaucracy to the system can only increase the frustration felt by companies over Russia's reams of red tape and perhaps their biggest bugbear - corruption.

Russia slipped on Transparency International's latest Global Corruption Barometer survey to tie with Bangladesh, Kenya and Syria for 147th place out of 180 countries, and a senior prosecutor has said corrupt Russian officials are pocketing an estimated $120 billion each year.

Angered by corruption, Swedish furniture retailer Ikea - which blazed a trail for foreign firms by opening shops in the Russian provinces - has now frozen further investment in the country.

Russia holds huge attractions for the foreign investor: it is the world's largest country, its biggest gas exporter and its second-largest exporter of oil, and home to 140 million people who crave a better standard of living and all the cars, furniture, appliances and services which that entails.

But while its leaders are now secure in office, they can still spring an unpleasant surprise, such as last year's war with Georgia or their seemingly tacit approval for the attack on BP. As much as ever, it is wise to tread carefully in Russia, and beware a nasty bite from those dogs under the carpet.

CHINA

WITH AN enormous market of 1.3 billion people emerging from 30 years of economic reform - many of them with money in their pockets for the first time - China is a market international companies are taking seriously.

In the last year since the onset of the recession, China has become a Shangri-La for foreign firms seeking to make their fortunes in a major market that continues to grow strongly while the rest of the world remains mired in the economic doldrums.

"A range of foreign governments and corporations will be watching this case with interest and will be watching it very closely, and will be drawing their own conclusions as to how it is conducted," was the stern reading of the case from the Australian prime minister Kevin Rudd, a noted Sinophile who worked at the Australian embassy in Beijing and speaks Mandarin, and who is keen to keep the Sino-Australian relationship sweet.

The Chinese government has made huge efforts to free up the economy and make it an attractive place to do business. As the world's fastest-growing major economy, few firms with international perspectives, including Irish firms, can afford to ignore China as a major opportunity for growing markets.

However, recent events regarding the treatment of foreign investors in China, combined with reminders that much needs to be done in the way of reform, have made some foreign investors cautious about dealing with the Chinese market. The arrest in July of Rio Tinto's senior iron ore executive in China - the Tianjin-born Stern Hu, who holds an Australian passport - and three Chinese colleagues on charges of industrial espionage and bribery during fraught iron-ore negotiations has investors rattled.

The economic crisis has prompted China to reverse some market-opening reforms and impose new barriers, the European Union Chamber of Commerce in China said this month. The chamber believes in some cases this has led to new certification rules and technical regulations aimed at limiting market access to foreign firms.

"The Chinese government has started intervening and coming up with restrictions when it comes to access to this market. Our members note a slowdown and even a reversal of the reforms of recent years," said chamber president Joerg Wuttke.

Foreign companies are closely watching the case of the "Rio Four", he said, urging the government to be more open about what it considers secret.

The background to these accusations is a nationwide clampdown on graft in China. Corruption, especially by Communist Party cadres, is regularly cited as the chief source of unrest, and the Chinese president Hu Jintao has led a campaign to punish officials on the take. However, private foreign companies are suffering.

The chamber called on Beijing to better define its "national interests" following the arrest of Stern Hu. Wuttke said European businessmen have concerns they could end up in trouble with the authorities simply by not understanding Chinese law. "It would be helpful to get a more candid definition of what 'national interest' is," he said.

The chamber cited the case of a European company that was a top supplier of encryption products for Chinese banks and other companies. It was forced out of the market after Beijing imposed a requirement for government certification and failed to approve any foreign suppliers.

The EU is not alone in finding fault with policies. The American Chamber of Commerce in China said in April that it saw "signs of protectionist policies" and appealed to Beijing and Washington to avoid hampering trade and economic growth.

Some analysts say China is taking its revenge for the collapse of a bid by the Chinese state company Chinalco to buy a $19.5 billion (€13.5 billion) stake in Rio Tinto, which was subsequently abandoned by the Australian company in favour of a link-up with its fellow Anglo-Australian miner, BHP Billiton.

The Chinalco deal was the latest setback to China's image as a place to do business. In March, China rejected Coca-Cola's $1.6 billion (€1.1 billion) bid to buy China Huiyuan Juice Group under an anti-monopoly law.

The EU chamber said the Chinese failed to adequately explain its decision to reject this deal. The blocking of the bid was a blow to foreign businesses hoping to make big acquisitions in China, who felt it would have a longer-term impact on foreign investment in China.

And there has been trouble on the ground, too.

In August, the government called off the takeover of state-owned Linzhou Steel Corporation by a private firm, Fengbao Iron & Steel, in central Henan province, after workers protested and trapped an official in the factory office for four days.

This followed an incident in July where a crowd assaulted and killed an executive who was managing the acquisition of state-owned Tonghua Steel in northeast Jilin province.

Australian foreign minister Steven Smith said the detention of Stern Hu was one of the difficulties in Australia's relationship with China right now.

Australia needs China, the world's biggest consumer of iron ore and its biggest trading partner. But China also needs Australia, and ultimately it needs foreign markets to start growing again and buying Chinese goods.

The leadership in Beijing is clearly unhappy about the possible global damage to its reputation and it now looks like the government is trying to save face in the affair. But at the same time, it is keen to make the point that companies operating in China have to follow the same rules as Chinese companies.

"China has been dealing with the Rio Tinto case in strict accordance with China's law and the China-Australia consular agreement. I believe it is in the long-term interest of foreign companies in China that the Chinese government handles the case according to law to safeguard the rule of law, and a fair and sound business environment," government spokesman Jiang Yu said.

He added he had not heard of a "single case" of a European firm reconsidering its China presence following Stern Hu's arrest.

China has promised to avoid protectionism in response to the global downturn. The consensus is protectionism could hamper a global recovery.

However, Beijing is also alert to signs from abroad of similar impulses. Beijing criticised Washington for proposing "Buy American" provisions in its stimulus plan and complained in August that a US trade complaint about Chinese tire imports was protectionist.

By showing foreign companies are also liable to prosecution on corruption charges, the Beijing government is making a political point for domestic consumption that no one is above the law. However, the lack of transparency in the Rio Tinto case has clearly irked the international community, and has not helped China's image as a place to do business.

Source: http://www.irishtimes.com/newspaper/innovation/2009/1002/1224255636863.html