While there is no denying that the potential for China-Russia two-way investment levels to dwarf all others in the Asia-Pacific, the situation thus far has been anything but large. According to Russia’s Federal Customs Service, trade with China accounted for just 9.6 percent of Russia’s foreign trade during January to November in 2010, or $53 billion, up from 8.4 percent in the same period a year earlier. This is a far cry from the figure of 49.6 percent, the European Union’s share of Russia’s foreign trade.

This figure, admittedly, does not take into account the billions of dollars in direct investment that each has made into their respective energy, resources and mining sectors or large one-off deals such as the Hong Kong initial public offering of UC Rusal in 2010.

But the consensus is that on the trade front at least, things are set to take off on the back of high-level trade talks between the two countries.

Earlier this year at the ongoing St. Petersburg International Economic Forum, Russia launched the Russian Direct Investment Fund (RDIF), whose main aim is to facilitate Russian investment into China.

“The establishment of the fund will open up opportunities for closer collaboration between Russia and China…it will become a key part of Russia’s foreign investment strategy over the next few years,” said Maxim Alekseyev, the managing partner of Russia’s ALRUD Law Firm.

The launch of the fund, which has been five years in the making, will not place limits on foreign investment into politically sensitive areas such as energy and raw materials, setting the scene for increased Chinese involvement in both sectors.

Infrastructure projects is another area where there is believed to be plenty of potential. “Infrastructure development such as port projects offer investors steady investment returns and is being spoken of an area of great potential for Chinese investors,” said Alekseyev. “In addition, there is also lots of interest in information technology and life sciences.”

The desire to increase cross-border investment flows is also evident from Chinese regulators.

Under the auspices of the seventh Baikal International Economic Forum, the topic of increasing China-Russia bilateral trade was high on the agenda as was making investment in Russia more appealing to Chinese capital.

“Since Chinese companies could make more money at home, why should they run the risk of investing in the Russian economy?” asked Wang Huajiang, a member of China’s National Development and Reform Commission, citing the stalled port construction projects along the Russia-China border as cases in point.

Luan Zhengming, a partner with the aptly-named Beijing Rainmaker Law Firm, believes that one of the reasons that China-Russia bilateral trade have flattered to deceive over the last few years is because of their investment habits.

Whereas Korean, Japanese and companies from other Asian countries have been operating in the Russian market on a strict diet of small and medium–sized projects, “the majority of the Chinese investors we represent in Russia are only interested in huge projects,” he said. “They are usually not so willing to invest in small or medium-sized projects. And even if they do, they usually want a major stake in that project and this is something that Russian parties are not willing to give up,” he said.

The risk appetite of Chinese investors is also a factor. “Some Chinese investors in Russia simply do not have the tolerance for the risks of investing in Russia, or are not as willing to account for this in their project agreements as Japanese and Korean investors are,” he said.

While this can be fixed through a mixture of commercially sound legal advice and legislative reform, the latter may take some time to be corrected.

“I believe that risk tolerance can be built up over time, especially for greenfield Chinese investors,” said Alekseyev. “As Chinese investors become more accustomed to operating in Russia, they should become more comfortable in dealing with these risks and mitigating them through various project structures.”

The task confronting regulators is to ensure that Sino-Russian bilateral investment in areas such as projects, infrastructure, construction and others, are able to reach the lofty levels set by bilateral investment in the energy and natural resources sectors.

Energy security

In energy and resources in particular, levels of two-way investment between Asia and Russia are conspicuous. Over the past two years, Russia has signed over $50 billion worth of energy and resources supply contracts with various countries in the Asia-Pacific, to which China has claimed the largest stake.

Alekseyev sums this up most succinctly: “Russia is the world’s second largest exporter of oil and China needs it; it’s a perfect match.”

However, projects like the recently signed $25 billion loan package from the China Development Bank to Russian energy companies Rosneft and Transneft, or the construction of the 1,700 mile China-built crude oil pipeline linking Taishet and Skovorodino did not materialise overnight, despite China’s eagerness to guarantee its energy security. Rather, they are the product of two decades of perseverance on the part of companies on both sides of the border.

Future developments

Despite the anecdotal evidence cited above, most projections say that Sino- Russian investments will increase substantially, across the board, in the years ahead. Although investment in Russia has only accounted for a fraction of China’s total outbound volumes to-date, it is worth noting that it has grown year-on-year and is becoming a mainstream area of practice of Chinese law firms.

“The last few years have seen an increase in interaction between China and Russia, and while this has not resulted in a huge amount of work so far, we believe it will in the future… we’ve decided to take a more active role in this development,” said Alekseyev.

The firm has represented several Chinese companies in relation to mergers and acquisitions, joint ventures, direct investment as well as competition law and trade regulations. Alekseyev has been actively visiting major Chinese law firms with a view to cementing relationships in addition to working out the details of a secondment program which will see the firm send its lawyers for short-term placements on the mainland. A number of other toptier Russian law firms are also engaged in similar business development activities in a number of Chinese cities. S&K Vertical and Nortia Law Offices are among the smaller corporate boutiques to have launched China desks over the last few years.

Chinese firms are also busy striking alliances and cementing relationships in Russia. In addition to the activities of major players such as King & Wood, Deheng Law Firm, YingKe Law Firm and others, a number of corporate boutiques are making solid gains in the Russian market.

Luan is considered one of the pioneers in the nascent China-Russia area of practice and operates the Sino-Russia Legal Practice Research Centre. The centre — runs in association with the Beijing University of Political Science and Law, The Russian Legal Research Centre, countless lawyers and government agencies in both countries — focuses on comparative analysis of the two countries’ legal systems and judiciaries which is designed to assist Chinese companies in navigating the sometimes opaque Russian legal infrastructure.

“The research centre has already been very successful for us,” Luan said. “As China-Russia investment grows in the years ahead, we expect many more large and small law firms will be looking to increase their profile in Russia.”

To read the entire report, please click here. ALB

Follow us on Twitter: @ALB_Magazine.