Relationship between Russia and Hong Kong: historical perspective and future opportunities for establishing Russian companies in Hong Kong

Relationship between Russia and Hong Kong: historical perspective and future opportunities for establishing  
Russian companies in Hong Kong

Tamara Gracheva

What is Hong-Kong?

On July 1, 2007 Hong Kong celebrated the important date in its history − 10 years of return under the jurisdiction of the PRC (People's Republic of China) on the basis of the principle "one country − two systems". This statement had removed many of the fears both of the British and Hong Kong residents. This duality, inherent in the very formulation of the above mentioned principle, is visible even to those who first find themselves in Hong Kong. And the first thing that comes into picture is that the official and business Hong Kong speaks English, almost without any accent. Till 2047 Hong Kong has the right of autonomy in all matters except international and military affairs, Hong Kong is governed locally, it has its own special legislation, applies its own system of taxation and has a separate currency (the Hong Kong dollar is tied tightly to the U.S. dollar in the ratio 7.7 to 1) and visa regulations. ¹

Thanks to this policy the economy of Hong Kong was the first among the Asian economies that managed to overcome the severe consequences of the financial crisis that has spread over the region in 1997-1998. Besides, the locals do not seem to feel that they are fully Chinese, as they say with pride: "We are the Hong Kong Chinese”. Hong Kong has already chosen its own path of development and become one of the world's largest financial centres. This city, which has neither any minerals nor raw materials, where practically everything, including drinking water, is imported from mainland China, reached the level of GDP per capita of $ 30 thousands in 2009.

Why Hong Kong?

It is impossible to identify any single factor of Hong Kong success in financial and economic development. Rather, we must speak about several factors together: the years of British governance left its legacy in Hong Kong in the form of solid institutional framework, transparent legislation, flexible market, tradition of entrepreneurship, and almost total absence of corruption. The Chinese are fond of figurative poetic names. They call Hong Kong as "the gateway to China." Indeed, for foreign companies it is much easier to do business via Hong Kong, especially with China (in 2009 there were more than 109 thousands of newly registered companies and about 772 thousands of already existing companies). ²

Russian position in Hong-Kong

The overwhelming majority of Russian people, I think, has a very peculiar impression of Hong Kong. If you make a survey on the streets, you can find out that after twelve years after the removal of United Kingdom’s flag, many of Russians do not have the idea about Hong Kong’s actual uniqueness and consider it to be the capital of usual Chinese province.

But, as the former General Consul of Russian Federation in SAR Hong Kong says, “in today's world with its trend of fragmentation of the once unified states, China’s focus on "picking up the lost territories" and tenacity in achieving this goal (in 1997 − Hong Kong, in 1999 − Macau) is truly worth respect”. ³

I must say that Russian people have appeared in "Perfume harbour" (translation from the Chinese name of Hong Kong) immediately after the British people. Along with the establishment in 1857 of the first Consulate of Russian Empire the famous trading firms and companies opened their offices in Hong Kong −  
"I. Churin and Co", the Moscow Association of manufacture "Emil Tsindel", jewellery company "Faberge", subsidiaries of the Russian-Asian bank, insurance societies "Russia" and "Russian Lloyd”. Unfortunately, from December 1920, after Consul W. von Ettingen and the entire old consulate have departed to France, until the early 1990’s there was no any official representation of Russia. In October 1994, under an agreement with London, the General Consulate of Russia has been reopened in Hong Kong and continued to exercise its functions after the handover of Hong Kong to the sovereignty of China. The consular district, by the way, includes another special region of China − the former Portuguese colony of Macau. ⁴

The question I would like to observe is about the position of Russia in Hong Kong during recent years. Did Russian business succeed in Hong Kong? According to official statistics, in 2009 the foreign trade turnover between Russia and Hong Kong slightly exceeded $ 1 billion. For comparison, trade with the province of Guangdong (the most economically developed province in China) comprised $ 3.1 billion. However, other estimates put the real figure of Russia-Hong Kong trade to $ 10 billion, due to the business of leading Russian companies with Hong Kong through its overseas subsidiaries.¹ The potential is obvious. But it turns out that there are not so many Russian companies on the Hong Kong market. Among the representatives of big business there are Nornickel, Alrosa, Magnitogorsk Metallurgical Company, Rusal, Aeroflot, Transaero, Far Eastern Shipping Company, and Smolensk Kristall. ¹ Obviously, it is very few, especially when compared with the total number of foreign companies in Hong Kong. In addition, almost all Russian companies have come to Hong Kong during the past 10-12 years and only one of them is listed on the Hong Kong Stock Exchange.

If it is so simple just to go and establish a company in Hong Kong to develop business relations with China, then what prevented Russia's entrepreneurs to expand their presence in the region during the last decade? Objectively speaking, the situation with the positioning of Russia's business in this market is much more complicated than in Beijing or Shanghai, the north-western provinces of China, where close Russia-China business contacts have been established during long period, and the image of Russia's business is already created via joint projects. Hong Kong sees Russia as a very remote country itself. And what is so far supposed to be unknown and incomprehensible. According to the words of General Consul of Russia in Hong Kong, Sergei Grits, the problems for Russian companies mainly arise from the lack of objective and reliable information about Russia in Hong Kong. Quite often the impression is limited by the outdated stereotypes about bears, vodka and crime. Of course, this is not about a sharply negative attitude towards Russia. However, in Hong Kong (as distinct from mainland China), the Russians have to enter virtually as beginners, and not as the successors of the Soviet-Chinese friendship, as is often happens in mainland China. ¹

The former General Consul of Russian Federation in SAR Hong Kong said: “I remember a few years ago one of my peer economist argued that Russia has nothing to do in Hong Kong because the market is already divided between transnational companies and banks, and that local people themselves live well enough with no having any business with Russians”. ³ But he reminded also that in the 1990's, when the Soviet Union dissolved and the trade with most countries and regions fell drastically, the Russia-Hong Kong trade grew annually by 40% and reached in 1997 a record level of $ 1.2 billion. Unfortunately, soon the financial crisis in Asia struck up and then the Russian default in August of 1998 reduced this volume significantly. Only in 2000’s, with regard to stabilizing economic situation, Russia managed to overcome the negative trend of falling trade and ensured 30% increase. An important role was played by the accelerated development of the trade with the "big" China, because the share of China's re-export and re-import trade via Hong Kong on some positions is ranging from 75 to 90%. ⁴

What is it there for Russian companies?

Now I would like to stress the main point – what particular needs can be satisfied by going to Hong Kong. First, let us consider the trade with China. In 2009 China took the third place on the list of Russia’s foreign trade partners (after Germany and Netherlands) with the total amount of $ 39.5 billion turnover, including the first place in respect of Russia’s import ($ 22.8 billion). ⁵ More and more Russian companies are involved in this big trade cooperation with Chinese suppliers.

Most of the problems faced by Russia's businessmen, who decided to start with China, can be divided into 5 major groups. ⁶

1. The first difficulty is the language barrier. Gradually, more and more people, who can decently speak English, appear in China. But still, if we talk about the scale of a country such as China, this is like a drop in the sea. And if in coastal south-eastern China (the most developed region in the country) you will likely have no problems with understanding when referring to potential business partners, in fact, if your counterpart is located in central China (and it is not a large company), you should be prepared for a long time search of someone among the staff who understands you.
2. Second difficulty is low level of management and ordinary workers. Unfortunately, this is a serious problem for many Chinese companies. Firms, who work with foreigners, are lacking not only the front managers who understand how to work with foreign firms, but also middle and senior managers. And for the next 5-10 years, given the rapid increase in the number of companies in the PRC it is unlikely that they will become more skilled employees as a percentage to the total number of employed people. So it happens that your employee does not understand the difference between the conditions of delivery FOB and EXW, or do not even know what the Export Declaration is.
3. The third difficulty is referred to difference from the Western behavioural model. I must say that the Chinese way of thinking and methodology of decision-making is very different from the Western ones. For example, many Chinese, by reason of psychology, often cannot directly say "no" or speak sharply, even when necessary, for fear of "losing face" or just hurt a partner. Such differences often lead to the misunderstanding and the inability to establish and develop the relationships with potential partners in China.
4. Fourth challenge is connected with the great role of various mediators. Such brokers generally possess the necessary skills, knowledge, licenses and connections for the implementation of export-import operations. In some ways it can be truly helpful for the start, but as the business grows it might become uncomfortable to give other people some part of your profit.
5. And the last point is the special legislation of the PRC. In fact it has a lot of challenges for new businesses to fight with and generally if you want to open a subsidiary or joint venture in China, without the profound knowledge of PRC law it would be impossible.

As we can see it is vital for most businesses working on the China market to discover the way to overcome these obstacles. The tiny Hong Kong became a huge window of opportunity for those who want to invest in the Chinese economy or to trade with China. It offers very clear and practical advantages for Russian entrepreneurs, companies, organizations, who already work or are only coming to the Chinese market and markets of South East Asia as a whole.

First, it is objectively simpler to work in Hong Kong than, for example, in Beijing or in Shanghai because the question of speaking the Chinese language is becoming not an urgent issue. Of course, it is safer to possess some knowledge, but in principle people can do business pretty well in English.

The second point is the Hong Kong open economy. There is virtually no barriers to transactions that are legal and do not contradict the legislation.

Hong Kong has a very liberal business law and it is very easy to establish a company or to open a bank account.

Hong Kong has a huge number of thematic exhibitions; it became the capital of the exhibition not only for China but also for South East Asia. The main Chinese exhibition event − an exhibition in Guangzhou − is directly linked to the Hong Kong exhibition season.

A number of organizations operate in Hong Kong to help the international business to come to China and to establish contacts with Chinese partners.

And lastly, Hong Kong, in fact, is the only place in the world, where you can convert the Yuan into other currencies outside of mainland China.

Of course, the whole complex of factors attract to Hong Kong not only Russia's business, but also business from around the world as a base to work with South East Asia.

How Russian company can organize its business in Hong Kong?

Russian company may choose between two models to work in Hong Kong: to conduct business on the local market or to take an offshore status. Officially, this territory is not a tax-free zone, but it can become such, if the company does not plan to earn income in Hong Kong (i.e., does not get earnings from residents who are liable to pay taxes). Having an offshore regime, the company is exempt from income tax (app. 17.5%) ⁷ ‒ in fact, the only tax that applies to trading companies with limited liability. In this case, the cost of servicing a registered company will be only about $ 3-5 thousand per year (registration, opening accounts, renting of a registered office address and payments for company’s secretary, preparation of annual report and audit) ⁸. After that the process of operational and financial management can be realized from anywhere in the world.

Of course, some direct costs of locating in Hong Kong will be somewhat higher compared with, for example, Beijing – these are staff salaries, office rent. But in practice, if we compare it for long-term period on an annualized basis, this difference is smoothed out. Therefore, in recent years an increasing number of companies have taken roots in Hong Kong.

Large companies can appreciate Hong Kong as a platform for carrying out the IPO. Access to the Hong Kong Stock Exchange is particularly relevant for the oil, gas, metallurgy, banking and other industries that are of interest for mainland China. In this case, the development of Hong Kong's direction seems to be a logical step for making additional investment in Asian projects.

Russian people were able to see the range of opportunities in late September 2007 during the week of Hong Kong Style in Moscow, which was related to the Year of China in Russia.

How the profile of Russian companies coming to Hong Kong can be identified?

Or if we formulate this question in another way, which types of businesses may be interested to use the specific nature of Hong Kong as a springboard to work with China? In my view, Hong Kong appears to be very convenient especially for medium and large businesses. That is true, for example, for companies which have their own brands or intellectual property, for those that have their own domestic network or operate under licensing agreements; and perhaps for companies that are trying to develop franchising projects. And accordingly to this, I am doubtful that small Russian companies can benefit from working in Hong Kong or moreover from starting their business there. I think it is much easier to go to mainland China and find a manufacturer if you need a volume of only several thousand pieces.

But if a firm has a particular production program to which all the processes are adjusted, of course, it is much more convenient to work in Hong Kong, because here you can find partners who will be responsible for providing your production program ‒  for any period you require. Here you will find financial institutions that clearly understand what exactly do you need, and will serve your production and procurement program. And here you will be given a full set of legal tools that allow you to securely protect your business ‒ even the acute problems with intellectual property arise ‒ not only in Hong Kong, but throughout the PRC.

Related links (downloaded from 20.02.2010 till 28.02.2010):

¹  - http://www.informchina.ru/Article.aspx?article=3236

²  - http://www.kommersant.ru/doc.aspx?DocsID=861723

³  - http://world.ng.ru/letter/2001-06-21/6_russians.html

⁴  - http://china-com.ru/ru/topday/full/?id=56

⁵  - official data from the Federal Customs Service of Russia

⁶  - http://china-com.ru/ru/topday/full/?id=55

⁷  - http://www.chinawindow.hk/?/hk_company/index

⁸  - http://www.chinaruslaw.com/RU/OffshoreCom/200572501229_284466.htm