How to sell and invest in China? How to make a profit and what to be cautious about there? Those were some of the questions that the participants of RBC's 14th international business conference held in Shanghai in November tried to find the answers for.

Around three hundred businessmen, officials and experts from Russia, China, and a number of other countries (Ukraine, among others), took part in the second "invasion" of RBC's friends and partners to the Celestial Empire (the first one was held a couple of years ago in Hong Kong). Those arriving included senior managers of companies and banks that had already established ties with China (Vneshtorgbank, Ernst&Young, Norilsk Nickel, the Moscow Interbank Currency Exchange, Wimm-Bill-Dann, and the asset management company Bazis), and those that were only looking on with eagerness at the immense neighbor (Alfa Capital, Amtel-Vredestein, Renaissance Capital, and Metropol Asset Management). Some of the VIPs included Russian Deputy Prime Minister Alexander Zhukov, Russian Ambassador to China Sergei Razov, Federation Council members Vladimir Gusev, Dmitry Mezentsev, and Igor Rogachyov (formerly, Russian Ambassador in Beijing between 1992 and 2005), YUKOS Board of Directors Chairman Viktor Gerashchenko, and First Deputy Chairperson of the Central Bank of Russia Tatyana Paramonova.

Yuan vs. dollar

The conference started on a memorable day for the global economy: On November 6, China's gold and foreign currency reserves exceeded $1 trillion for the first time. Never in history has any country had so much money! This news was amplified by growing signals that the Chinese were seriously thinking about what to do with their tremendous gold and foreign currency reserves, most of which were kept in dollars and US treasury bonds. "From what I've been reading in the press lately, China is thinking about a way to withdraw money from dollars and buy more gold," Viktor Gerashchenko told Profil. "You know what will happen as soon as they start selling off dollars. Its value will drop so severely…" he stopped half-way through the sentence, "… it will hurt," were the words Mr. Gerashchenko did not utter, probably not wishing to affect foreign exchange rates. Meanwhile, Tatyana Paramonova was another person in Shanghai who raised concerns about the possibility of countries with the largest gold and foreign currency reserves selling off foreign governments' securities. The audience listened to her speech attentively. "Is it possible that the Chinese yuan will soon become a new international currency?" a businessman from the audience asked. The Bank of Russia's First Deputy Chairwoman soothed his worries by saying that it was not quite the time yet to exchange dollars for the yuan.

Shanghai "well worth a Mass"

Chinese businessmen and China connoisseurs within the Russian delegation captured the attention of conference participants when they spoke about a truly limitless potential for the development of bilateral economic relations between the two countries. Shanghai alone is "well worth a Mass"! China's largest metropolis raised a total of $44bn in foreign investment in 2005, creating over 1.5 million jobs! Shanghai itself is investing increasingly abroad: four Shanghai companies have agreed to invest $1.3bn in the hotel complex Baltiyskaya Zhemchuzhina (Baltic Pearl) currently being built in St. Petersburg. Granted this, our business representation in this city with a population of 17 million people is, to put it mildly, quite modest. According to Russian General Consul in Shanghai Alexander Sharonov's data, Russia's cumulative investment in the city's 35 small projects amounted to $29m.

Is it possible that our investors have simply not made it to Shanghai yet, being too preoccupied expanding to other regions? The answer is no, as we invested a total of just over $0.5bn in China over the past few years. Do we have nothing to offer the country's market? Are we so unfamiliar with China's ways and business practices? Is competition from the west too strong? There is a little bit of all these three factors. But some gradual changes are taking place. Alexander Zhukov spoke about them at the conference. He said that he was under the impression that not only had the countries matured, but they have also started to shift from simply trading to getting involved in industrial cooperation. In Zhukov's opinion what prevents further development in bilateral business relations is a lack of familiarity with each other. Hence, he stressed the importance of large-scale exhibitions (like the Russian national exhibition, which opened in Beijing on November 9), and top-notch business forums. With their help, the target set by the leaders of the two countries to bring mutual trade to $60bn by 2010, will most certainly be achieved, he indicated.

Is there a chance that the share of high technology products in Russia's exports to China will rise back from the current 2-3 to the earlier 10 percent? Zhukov, who was referred to by German Gref as "a big optimist about Russian-Chinese economic relations", answered rather vaguely to this tricky question asked by Profil. He began with the words, "We hope that…" and then listed all the same hopes of the Russian side: that China would sign a contract with Russia for the construction of the second phase of the Tianwan nuclear power plant, that China would continue to purchase Russia's energy equipment and aircraft, etc.

Meanwhile, behind the scenes of the conference, one very knowledgeable Russian politician and big friend of China said, "Everything is going very rigidly, the Chinese have not yielded on almost any points." An intergovernmental commission meeting for preparing regular meetings between the leaders of Russia and China took place at the same time as the RBC conference in Shanghai. There, Deputy State Council Chairwoman Wu Yi made it clear that Moscow should not harbor hopes to improve the structure of Russia's exports to China through various connections. She advised to achieve this by way of competition through a) advancing the qualitative characteristics of Russian equipment; b) establishing enterprises with Russian capital on Chinese soil.

At this point, the trend is quite the opposite, where China's investment in Russia is growing at a much faster pace than Russia's in China. The former is already approaching $1bn, so the 2020 target of $12bn has now been moved up to 2010, according to statements made at the Russian-Chinese investment forum in Beijing (to which RBC conference participants were not invited). "And can do so sooner, if we give them our oil and gas fields," said one of the participants of the Beijing forum sitting behind me, with some desperation in his voice.

Viktor Ishayev, Governor of the Khabarovsk region, spoke about what Chinese investors needed. The region signed six investment projects worth $357m with China over the last two years. However, China's actual financing on these projects has only reached $2m so far. "Russian participants in such agreements have noted that one of the reasons why project implementation was so reluctant was an abrupt loss of interest on the part of their Chinese partners once they realize that they would not be entitled to hold exclusive rights for access to the mineral resources as part of the deal," Ishayev conveyed.

Strike while the iron is hot

"It's true, we live here because Russia exports raw materials in exchange for China's readymade goods," a Russian wholesaler veteran of the early 90s, who settled in China a long time ago, told me. "We are becoming a raw-material appendix of China, and will ultimately turn into one if nothing changes."

Alexander Shokhin, the head of the Russian Union of Industrialists and Entrepreneurs, agreed with this assessment. He told Profil in an interview, "Without a change in the cooperation paradigm, it will be impossible to overcome the fuel and raw-material nature of Russia's exports to China. How will this be done? Russian companies will need to, among other things, relocate their operations to China, using the latter as their "assembly line." They could also promote high technology in the Celestial Empire (though many things are still up in the air with the protection of intellectual property rights). It is important to find ways to cooperate in this sphere, particularly in nano- and biotechnology. And, of course, they must continue to implement energy, nuclear power, and aviation projects. There is an idea to launch joint exploration of coal resources in Mongolia.

"It's true that at this point the Chinese are primarily interested in us as an energy supplier, but we should take advantage of the situation and put our interests up against theirs, engaging them in joint projects in other spheres."

But still, will it work? As it was stated at RBC's conference and the Beijing investment forum, in order to play "smart" economic games and promote our interests, we must first create a thoroughly defined and consistent strategy in relation to China. This is because when we propose fantasyland projects, such as joint exploration of the moon (helium-3 production), the Chinese unavoidably remember our prior faults. For example, Russia's inconsistency in determining the route of the long-suffering oil pipeline from eastern Siberia: first it was a pipeline to China, then it wasn't, then again we promised it would extend to China, shortly after - not again. "I wish we didn't promise anything at all from the start," a government official confessed.

Staying clear of the gray

Russia and China should keep away from shady schemes in their cooperation and export/import operations, Mikhail Beynshteyn, the General Director of Dalk LLC, a Russian national customs broker, told the conference. "Gray imports are as unfavorable for Russia as they are for China: Russia is loosing customs duty proceeds, while Chinese suppliers are unable to receive an official proof of tax and duty payment, being forced to carry out foreign economic activities at their own risk. Compliance to the requirements of the Customs Code and all the rules established by Russian law will help reduce business risks tremendously."

It is just as important to learn to bridge understanding and confidence gaps between the senior managers of companies of both countries. "From what I have heard at the conference and in conversations with Russian and Chinese businessmen during the visit, I have learned that in cooperating with China it is especially important to set up and develop personal ties," Snezhana Veinberger, General Director of the asset management company Bazis, told Profil. "You cannot just come a couple of times, hold negotiations and then sit back and relax, hoping that everything will just go with the flow. It will take a lot of time and hard work to build mutual trust, so that our partners and we can say with confidence: yes, we need each other, we can be useful to each other not just for a couple or three deals, but for the long term."