Russians are obsessed with cars. They are a status symbol, a hobby and the subject of many a joke.
But China’s Great Wall Motors is far from amused at some of its initial experience of operating in the Russian market. According to a filing made to the Hong Kong Stock Exchange earlier this month the company lost at least $50 million in a murky deal with a Russian distributor back in 2015.
In the grand scheme of things it’s not a huge amount – equivalent to 6.3% of Great Wall’s net profit in 2018, the company said. And since incurring the loss, Great Wall has gone on to build a $500 million factory near Moscow to produce 150,000 of its Haval brand SUVs a year for sale in Russia and neighbouring countries such as Kazakhstan.
Yet the case is still instructive for the thousands of Chinese companies now doing business in Russia. Russia scored 0.47 out of 1 in the World Justice Project’s Global Rule of Law Index this year, less than China’s 0.49 and much lower than Germany, Sweden and Canada which all scored over 0.8.
According to data from the Centre for Protection of Chinese Entrepreneurs Rights in Russia – a new organisation set up in May – there are over 5,000 Chinese businesses registered there. The Great Wall case is the largest that has come to its attention but there are plenty of other disputes, including at least 12 involving CC-7 a Chinese chemical engineering company building an oil refinery in the Siberian city of Omsk (note that is the same CNCEC subsidiary that has won the $5 billion contract to build a plant to process Arctic oil; see WiC459).
The dozen cases were brought by various Russian suppliers which claimed that CC-7 hadn’t paid them for goods. For its part CC-7 maintained the goods were faulty.
In Great Wall’s case, the chances of recovering any funds were looking bleak until Boris Titov – Russian leader Vladimir Putin’s Ombudsman for Entrepreneurial Rights – intervened.
Until that point Great Wall had had no luck in getting its case heard at lower levels of government .
Great Wall began working with Irito, a Russian distributor, in 2009, exporting its car parts to an assembly plant near Moscow.
The brand didn’t win a massive following – in 2013, its best year, it sold about 20,000 cars – but its sales volumes were growing slowly.
In 2014 Irito stopped paying. For a while Great Wall continued to supply it, believing that the Russian dealership had short-term cashflow problems due to Western sanctions. But when Irito and its web of subsidiaries began to declare bankruptcy in 2015, Great Wall moved to recoup its losses through the arbitration courts.
Part of the problem was that Great Wall had been sending its car parts to various Irito subsidiaries – possibly to avoid customs duties or in the hope that lower shipment volumes would expedite customs clearance.
This resulted in the court finding that Irito only owed Great Wall $1 million. So Great Wall went to the prosecutor’s office, which uncovered enough evidence to suggest that it had been “intentionally defrauded on a large scale”.
But in 2018 the case was dropped on the grounds that investigators “could not establish an individual who could be identified in the category of accused” – a reason that even the Russian media found strange.
Last month, after the new Great Wall factory had opened, Titov wrote to the chief prosecutor in Moscow asking him to take the case “under his personal control”.
As Titov put it: “Great Wall came to Russia with a real desire to invest for the long term and, in my opinion, the company deserves a more interested attitude from the state. I hope that the investigation of the criminal case on fraud will get off the ground.”
The timing of the request may be no coincidence, coming at a similar moment to President Xi Jinping’s visit to Russia in June, where he praised Putin as his “best friend”.
In fact, the case almost certainly came up in conversation when the two men visited the new factory and signed the bonnet of one of the newly-made Havals together.
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