The new face of Chinese companies in Russia

The European Commission’s 11th sanctions package announced on 8th May targeted several Chinese companies involved in supplying Russia with dual-use components. Among those companies are several semiconductor producers that have already been sanctioned by the United States, such as 3HC Semiconductors and King-Pai Technology.

International sanctions regulators are likely to increase scrutiny this year, particularly towards Chinese companies, many of which continue to operate in Russia unlike their Western counterparts. The exodus of more than 1,000 multinationals since February 2022 in protest of Russia’s invasion of Ukraine was mainly driven by reputational concerns rather than sanctions. While some high-profile Chinese companies facing sanctions pressure have limited their exposure to Russia, most Chinese companies already working in Russia have kept quiet about the war, with some even increasing their presence.

Chinese companies seem to be following the same pattern they learned during the previous eight years of working under Russian sanctions. Whenever possible, they take advantage of the short-term of the Russian market, while striving to comply with international sanctions.

In some unsanctioned sectors of the Russian market, Chinese brands are taking advantage of less competition. Unlike Western companies, Chinese companies do not face significant reputational pressure to pull out. To the contrary, two Chinese tech giants, Lenovo and DiDi, faced backlash on Chinese social media after their plan to leave Russia in 2022 was reported. As a result, certain segments of the Russian consumer market saw a clear increase in the share of Chinese products in 2022.

The Russian car market has been dominated by Chinese brands since last year, when only 14 of the previous 60 car brands remained on the Russian market: 11 were Chinese and three were local. In March 2023, the creation of an Association of Chinese Automobile Manufacturers was announced to help systematize its entry into the Russian market. According to Boris Titov, chairman of the China-Russia Friendship Committee, the association is also expected to help lower non-tariff barriers to imports for Chinese producers and make it easier to locate their production in Russia.

In 2022, Chinese models accounted for 20% of new car sales (in units) in Russia – a significant increase from 6% in 2021. According to some estimates, the share of Chinese car sales in the Russian market could reach 40 percent in 2023, despite the increase in its prices for Russian consumers. At least two new Chinese car brands – Hongqi, a luxury car brand originally produced only for the Chinese nomenklatura, and Omoda, a subsidiary of the Chery car brand created specifically for the Russian market – will arrive in Russia this year.

By the end of 2022, major Russian retailers reported that Chinese home appliance producers now led the segments for washing machines, refrigerators, personal laptops, and smartphones. These reports are consistent with Chinese export data, which shows a 35.5% increase in washing machine exports and a 6.4% increase in refrigerator exports to Russia in 2022 compared to the previous year.

Some Chinese companies continue with their plans to locate in Russia. Haier, one of the leading producers of home appliances, has confirmed its intention to complete the delayed construction of its fourth factory in Russia. In June 2022, Haier received concessional financing worth 250 million rubles (about $3.1 million) from VEB, a Russian state-owned development bank that was sanctioned in February-March 2022. Meanwhile, the Haier’s existing refrigerator factory in Russia seems to have met the demand, as the brand accounted for more than 20% of the refrigerator market in Russia last year.

After Apple and Samsung withdrew from the Russian market, Chinese smartphones became the dominant force in sales, accounting for 70 percent of the market by 2022. According to data from the largest retailers, the leaders were Xiaomi, Realme and Tecno, though not Huawei, one of China’s largest technology producers.

Like other Chinese companies, Huawei has been silent on the war in Ukraine. However, some reports suggest that the company effectively left the Russian market as early as March 2022, shortly after the first sanctions were imposed on Moscow. Without commenting on the matter, Huawei simply stopped honoring its supply contracts with Russia.

In May 2022, Russia’s Ministry of Digital Development expressed concern that Huawei – one of Russia’s largest base station providers with a market share of around 30% – had stopped communicating with its customers. clients in Russia. That same summer, Russian media reported that Huawei had started to close its retail stores in Russia, both offline and online. Some shopping center operators have filed lawsuits against the Chinese giant, alleging violations of rental agreements. Huawei said it had closed stores due to lack of products, but gave no official explanation for cutting off supplies to Russia.

At the same time, Huawei tried to take advantage of the situation in the Russian labor market. As many skilled professionals had become available after their employers’ departure from Russia, Huawei increased its talent acquisition efforts there in mid-2022, particularly for its R&D department. In other words, while Huawei is no longer commercially exposed to Russia, it still benefits from a pool of engineering talent that is likely to contribute to its innovative development around the world.

The main difference between Huawei and other Chinese tech brands that continue to do business in Russia is that Huawei has long been subject to trade restrictions and sanctions in the global market. In 2019, Washington banned Huawei from buying components and technology in the United States, limiting the company’s access to semiconductors. In addition, major economies, including the United States, Australia, New Zealand, Canada, Japan, Taiwan, the United Kingdom, Germany, and France, have introduced varying levels of restrictions on Huawei’s access to their 5G markets. Huawei appears reluctant to increase international scrutiny by remaining in the Russian market, which made up around 2% of the company’s global revenue in 2021.

Chinese drone maker DJI, which has been subject to US export and investment bans since 2020, also came under international scrutiny in March 2022, when Ukrainian Deputy Prime Minister Mykhailo Fedorov claimed that DJI products were being used by the Russian army in Ukraine. At first, the drone maker rejected those claims, but less than a month later it announced the suspension of its operations in Russia.

Global Chinese financial firms face similar challenges. UnionPay, a Chinese payment system that was seen as a lifeline for many Russians after the departure of Visa and MasterCard in March 2022, reduced its exposure to sanctioned banks in Russia. Two major Chinese banks – ICBC and Bank of China – completely ceased operations in Russia and Belarus in the spring of 2022, while two Chinese-led development institutions – the New Development Bank and the Asian Infrastructure Development Bank – they also reduced Russia’s access to their funding in 2022.

The sanctions are also preventing some Chinese companies from continuing to collaborate in Russia. In September 2022, Weichai Group, a state-owned diesel engine producer, stopped supplies to its Russian partner Kamaz, a truckmaker, which had been sanctioned by the US and the EU in June 2022. Reuters reported that the restrictions on supply followed a warning on secondary sanctions issued by the Chinese government to all state-owned companies working with Russia. In September 2022, the joint venture of the two companies, Kamaz Weichai LLC, was renamed Volzhskiye Industrial Engines LLC, excluding any mention of Chinese involvement.

The risks of sanctions also appear to have deterred the already limited number of Chinese investors in Russia, even state-owned companies that had previously led the way. In 2022, Russia did not see any major new Chinese investment, despite increased funding by Beijing of Belt and Road projects in other countries.

In March 2022, Sinopec, one of the largest investors in the Russian energy sector, froze negotiations over its planned $500 million investment in a petrochemical factory in Russia. Once again, Reuters reported that Sinopec’s decision was prompted by the Chinese government’s instructions to state-owned companies about the risks of cooperation with Russia. Sinopec’s partner in the planned project was to be Sibur, whose minority shareholder Gennady Timchenko has been under US sanctions since 2014, and was added to EU and UK sanctions lists in 2022.

With the mounting pressure of sanctions on Russia, and Beijing’s own tensions with the West, it is going to be increasingly difficult for Chinese companies to continue to fly under the sanctions radar. The trend of some high-profile Chinese companies to limit their exposure to Russia appears to be spilling over to state-owned companies, which have traditionally been seen as less vulnerable to sanctions risks and more willing to invest in Russia.

Others, however, are learning to adapt. In the first quarter of 2023, Chinese exports to Russia grew by a staggering 67.2%. Before 2022, Chinese state energy companies dominated Beijing’s economic engagement with Moscow. Today, it is consumer-oriented private companies and regional producers with limited international exposure that appear to be taking the lead.