Outbound investment in Russia: Learning from Jinbei's JV
September 07, 2012 | BY
clpstaff &clp articles &Chinese car maker Jinbei has set up a joint venture in Russia. David Tring spoke with the lawyer who advised Jinbei about the complexities of the deal about why companies are looking across the northern border
“When foreign investors are first evaluating an acquisition in Russia, one of the most important considerations is whether there is a possibility that the target's business activities could be considered to be of strategic importance under Russian law,” said Simmons & Simmons' partner Eric Lin, who led the team advising Jinbei.
Shenyang Jinbei Vehicle Manufacturing is the light commercial vehicle subsidiary of Brilliance Auto Group. It is one of the largest Chinese manufacturers of trucks and is part of a growing number of Chinese companies who are looking to tap into Russia's expanding manufacturing market.
The deal was completed on August 28 and is worth $25.25 million. Jinbei holds 60% of the shares in the joint venture through a Hong Kong holding company. Jinbei's Russian partner holds the remaining shares and together they will manufacture Jinbei-brand light-duty trucks in Ulyanovsk, Russia.
|Strategic companies
Russia places legal restrictions on foreign investment in industries it deems as strategic companies. These industries include military, telecoms, television and media, and in particular for Sino-Russian investment, mining, oil and gas.
One of the legal restrictions for investment in a strategic company involves pre-approval of the transaction by the Government Commission for Foreign Investment Control (GCFIC), which is headed by the Russian prime minister, Dmitry Medvedev.
Jinbei was fortunate, as they were able to confirm early in the due diligence process that there was no risk of their target being considered a strategic company. They were also lucky to avoid further restrictions that apply to areas or zones of federal significance, depending on where the company is located, which can create additional layers of approval.
Lin is working on a mining project in the eastern region of Russia for another Chinese client. He said that if a mining project involves using land plots of federal significance, the investment would be regarded as investment in a strategic company, which will require an approval from the GCFIC.
|Anti-monopoly reviews
Russia also has low thresholds for triggering Anti-monopoly reviews. If the target company has an annual turnover of around $8.5 million or greater, it will be subject to a review. This is much lower than the EU, where €150 million usually triggers a review or even in China where acquisitions of US$60 million to US$70 million trigger a review.
Lin recalled a recent joint venture project involving Beijing Automotive Group, where the Russian authorities took almost a year to complete its review. They even went to Beijing to meet with management and obtain information about the Chinese investor, which was one of the reasons for the extended timeline.
|Language barriers
For the Jinbei deal, three languages were used in parallel documentation streams. Negotiations were in English and then translated into Chinese to show the Chinese clients. Documents also had to be translated into Russian to show the sellers. “Do not underestimate the significance of language barriers when doing business in Russia,” said Lin.
Chinese companies should also be aware of the delays these language barriers can create. There are further complexities as all documentation for the Russian authorities have to be translated and notarised by Chinese counterparts. However, maintaining constant channels of dialogue avoids mistrust and misunderstandings.
|Gateway to Eastern Europe
One of the attractions Russia has to offer for Chinese investors is proximity to Eastern Europe for exports. This is particular true for the Jinbei deal, as the location of Ulyanovsk is close to Russia's eastern borders.
“Many Chinese automotive producers are exporting to Russia, but as the market matures, more Chinese companies may manufacture locally,” said Lin. A local base grants direct access to the market and the ability to set up their own distribution market, he explained.
Considering the Beijing Automotive deal, which involved a total investment of $176 million along with registered capital of $20 million and the Jinbei deal, there is a growing trend for manufacturing companies to invest in Russia. Given Russia's proximity to China, it is also a good location when looking to expand.
Previously investment had focused on energy and mining, but an increasing number of Chinese companies are looking for M&A opportunities in Russia within the manufacturing sector, often through a joint venture with a local partner.
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