Foreign Investors Are Using Their China Investments To Establish Branches In Russia

By Chris Devonshire-Ellis

A new Russia investment trend is beginning to emerge with foreign investors, especially those close to the action in Asia, starting to use their China investments to access the Russian market. This includes businesses from countries whose governments are deemed ”unfriendly” to Russia.

Foreign investments into Russia from a Chinese entity can be made provided the foreign investor has established a limited liability company in the country. This is because such businesses, which could be a trading company, WFOE or Joint Venture, are considered separate legal entities and despite the foreign investment, are still classed as a Chinese legal business. However, this does not apply to China Representative Offices, which are not limited liability companies.

With China-derived profits subject to a repatriation tax, some foreign investors are instead earmarking these funds to set up and pay for a Russian business entity. At this stage, most of these are Russian Representative Offices, which carry little expense to establish and can also be shuttered relatively quickly. In this way, foreign investors in China can establish a branch in Russia, owned by the China business, and use the Russian entity to examine new potential business in both Russia itself and the Eurasian Economic Union (EAEU). Russia, along with Armenia, Belarus, Kazakhstan and Kyrgyzstan are members of the EAEU, which permits regional free trade.

This is highly relevant for five main reasons:

• Numerous Western companies have pulled out of Russia, leaving some market entry opportunities to replace them;
• Western sanctions have made Russian companies look East for new suppliers and markets, with Russia-EAEU trade up 9% in Q1 this year, and intra-EAEU trade a record highs;
• The EAEU free trade agreement allows foreign entities in Russia access to the full EAEU bloc, in addition to EAEU FTA signatories such as Vietnam;

• China’s recent Central-Asia summit has introduced a series of business and trade incentives between the Central Asian five – Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan. Details of these can be seen here. These include big ticket opportunities in infrastructure and sales of products related to the operations of these multiple pipelines, highways, ports, airports and railways.
• China-Russia trade was up 38.7% in Q1 this year, illustrating significant demand. Non-energy trade figures also showed significant increases as Russia moves away for European manufactured white goods and automobiles.

At the very least, international investors in China with an eye on Central Asia and Russia should be considering the establishment of at least a marketing office with a remit to establish what opportunities are available where. Only non-sanctioned goods of course should be considered for entry into Russia.

Dezan Shira & Associates has multiple offices across China and can assist with advising as to the nature of sanctioned goods, in addition to the required documentation, apostille and related legal administration procedures required to establish a presence in Russia or the EAEU.

Please contact Maria Kotova at russia@dezshira.com for assistance.

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