Chinese companies confronted with quandary over Russia operations

The U-turn by China’s top ride-hailing app was swift and decisive, reflecting the delicate balancing act Chinese businesses must grapple with concerning their Russian operations.

Didi Global said late last month that it would exit Russia on March 4 due to poor earnings, only to reverse course less than a week later in response to an online backlash.

Beijing has officially come out against economic sanctions imposed on Russia, leaving Chinese companies with an uncomfortable decision over what to do with business operations there.

Chinese businesses “aren’t going to express an opinion that conflicts with the government,” said a source close to a Chinese tech giant. “They also want to avoid making Russia-friendly statements that would spark purchasing boycotts in Western markets.”

A long list of current and former executives of well-known companies serve as delegates to the National People’s Congress, which opened Saturday. This includes the one-time head of China National Petroleum Corp., along with managers from Xiaomi, Great Wall Motor and Geely.

China’s companies have remained silent on the impact the sanctions will have on Chinese operations in Russia. Nikkei sent questionnaires to multiple enterprises and business managers with connections to Russia. Only one company, the appliance maker Haier, returned with a response as of Tuesday.

“There is no impact,” said the Haier representative.

During a virtual summit on Tuesday with France and Germany, Chinese President Xi Jinping slammed the punitive measures taken against Russia, advocating instead for “maximum restraint” and dialogue.

China is Russia’s largest trading partner and Russia is one of China’s biggest sources of energy. The two sides are said to share a honeymoon relationship.

While China chiefly imports petroleum resources from Russia, Chinese companies export goods to their northern neighbor. Xiaomi sells its smartphones in Russia, while automakers Great Wall and Geely have distributorships in the market.

In recent years, Chinese state-owned enterprises have vastly expanded their footprints in Russia. China National Petroleum Corp., or CNPC, operates a large liquefied natural gas project in the Arctic region. CNPC and a Chinese sovereign wealth fund own a combined 30% interest in the project, which began production in 2017.

CNPC and China National Offshore Oil Corp. have invested jointly in a separate LNG megaproject in the Arctic, with production due to start next year. Last month, CNPC decided to import natural gas from Russia’s Far East island of Sakhalin via a new pipeline.

To date, Chinese state enterprises have not mentioned any changes to these projects. But some privately owned companies have started to make their move.

TikTok, the video app launched by Chinese startup ByteDance, said Sunday that it will suspend service in Russia, while Geely-owned Volvo Cars has ceased delivering vehicles there.

Automotive glass maker Fuyao Glass Industry Group, which has a factory in Russia where 40% of its products are exported, has now decided to make those exports at facilities in China, according to Chinese media.

It is believed that Fuyao relocated production to mitigate the risk of disruptions in international logistics and payment settlements.

Angel Yeast is taking action now that its Russian factory has been impacted by current developments, according to Chinese media. Few details have been divulged, but the extract maker is reportedly considering wiring funds through a third nation.

Moreover, Chinese business operations in Ukraine have been forced to adapt in the face of the invasion.

On Tuesday last week, contract resource miner Xinjiang Beiken Energy Engineering announced it will halt a natural gas project which employed about 100 Chinese nationals and is responsible for roughly 30% of the company’s revenues.

The war in Ukraine “will certainly exact a negative impact on the global economy,” Zhang Yuyan, an economist at the Chinese Academy of Social Sciences, told Chinese media. “If Japan and the West grow closer in the medium- to-long term, it will significantly impact multilateral cooperation,” he added, referring to China and Russia.

Chinese companies have accelerated their global expansion under the government’s banner and have steadily built up a track record in Russia. Zhang appears to believe that China Inc. will not be able to avoid the fallout of key Japanese and Western corporations making major adjustments to Russian operations.

The Chinese government is in a poor position to side completely with Russia. For one, the U.S. is China’s biggest trading partner. Trade with the U.S. jumped 30% by value in 2021, reaching an all-time high.

China depends on U.S. companies for semiconductors and other leading-edge technology. Deep down, government officials wish to avoid a direct collision with Washington, and the majority of the Chinese business community is conjoined with the state.

Author: SHUNSUKE TABETA, NIKKEI Asia