From Russia, without love

Arboreal arbitration required

History students in Britain might remember 1689 as the year of the country’s Glorious Revolution (glorious for its lack of bloodshed, as well as dealing a hammer blow to the divine right of kings, now you’ve asked) but it was also a landmark year for relations between China and Russia, following the signing of the Treaty of Nerchinsk, the first accord between the two countries.

The agreement assigned a chunk of what is easternmost Russia today to the control of the Qing Empire, where it remained for the next 150 years. The area now known as Khabarovsk is back in Russian hands, but when a private Chinese company from Zhejiang province took over a patch of local forest in 2003, it may have felt that it was restoring China’s historical connection with the region.

Not so. The problem is that the deal has turned sour and the Chinese party is now asking for help from the highest levels of government to retrieve its investment.

In December, businessman Fu Jianhong submitted an application to the Ministry of Commerce, reports 21CN Business Herald. Citing a ‘mutual investment agreement’ signed between China and Russia, Fu is demanding an international arbitration tribunal hear his case, which he says involves stolen forest.

“A local interest group set a trap and illegally took back the timberland we had bought,” Fu told the Global Times.

Nearly 10 years ago, real estate entrepreneur Fu set up Xinzhou Group with a state-owned minority partner from Heilongjiang. The plan was to expand into timber by investing in a Russian forest business.

Using a loan from China Development Bank, Xinzhou acquired Khabarovsk Muxing Forestry, gaining forestry rights for 49 years, reports 21CN.

Over the next few years, the Chinese partners invested heavily in the project. In just three years, the market value of the woodland more than doubled, from Rmb7 billion to Rmb15 billion, reports National Business Daily. But in March 2007 disaster struck, after the Russian police stopped a lumber truck belonging to another forestry company. The problem? Its Chinese driver was illegally logging in a forbidden area but had a visa in his passport that had been registered under Muxing’s name. The driver was arrested but Fu’s project was also deemed to be breaking Russian law. An investigation ensued.

Eventually, the Russian authorities discovered that the signature on the visa was fake and that the driver did not work for Muxing. But by then it was too late to save Fu’s venture. The local procurator had seized all of Muxing’s assets on suspicion of illegal logging, and the company was then declared bankrupt for not paying its taxes, and its lease agreement for the forest was terminated.

Fu believes that he did not get a fair hearing and he has spent the last five years collecting supporting evidence. Now he wants the Chinese government to argue his case. At provincial level he seems to have some sympathy (“The procurator violated the laws. For example, it started an auction for the forest even though there hadn’t been a court ruling in the case” the Heilongjiang Bureau of Commerce complains in a document shown by Fu to the Global Times). But even if Beijing decides to battle on Fu’s behalf, the outcome looks far from certain. Many Chinese are learning that the commercial landscape in Russia can be even less straightforward than in their own homeland.

“Unlike large European companies, most of our Chinese companies are small-sized ones, and we don’t have enough power to protect ourselves in Russia,” a Chinese businessman dealing in vegetables in Moscow told the Global Times.

Unquestionably Fu’s is a cautionary tale. His experience offers a counterpoint to the more bullish story in WiC176 about Chinese acquisitions of Russian farmland.

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