A costly grey area

By Li Qian in Moscow Source:Global Times Published: 2011-9-29 22:45:00

Demolition of the Cherkizov market is under way on August 18, 2009. Photo: IC

Two years after a controversial raid and closure of Russia’s largest wholesale commodities market, tens of thousands of Chinese merchants are struggling to remain in business as they continue to wait for Moscow to straighten out the country’s customs regulations.

The Russian government shut the Cherkizovsky Rynok market in June 2009, citing substandard hygiene, fire hazards and rampant tax evasion. The sprawling 40-hectare market was the biggest in Eastern Europe. More than 100,000 merchants operated thousands of stalls and shops and more than 60 percent were from China. 

Many Chinese merchants believe the gates to the market were padlocked and the foreign wholesalers’ merchandise was confiscated because of the way their goods entered the country. The controversial “grey customs channel” allowed wholesalers to import their products through shady channels that had been condoned for years.

While the Russian government has targeted Chinese merchants and accuses them of evading taxes, the merchants insist the problem is Russian customs procedures and confiscating goods that have been cleared to cross the border won’t resolve the issue.

Merchants also believe the true intent was to expel cheaper Chinese products in order to give a bigger market share to Russian manufacturers.

While the Chinese government has tried to save business opportunities in Russia for Chinese merchants by investing in a giant new trade center, everyone is still waiting for Russia to implement standardized customs procedures.

The China Chamber of Commerce in Russia estimates more than 60,000 Chinese merchants had been operating in the Cherkizovsky Rynok market since the early 1990s. Most were selling imported clothes, shoes and handcrafts made in China.

Police officers check documents of vendors after the shutdown of the Cherkizov market. Photo: IC

Russia’s biggest trading partner

A look at bilateral trade statistics from the Ministry of Commerce shows that China is Russia’s biggest trade partner, while Russia is China’s 11th largest.

China sold $34.66 billion worth of goods to Russia in 2008. However, experts estimate that more than $8 billion worth of Chinese goods are not included in statistics as they entered Russia after receiving “grey custom clearance.”

A Chinese merchant surnamed Lin, 63, from Wenzhou, Zhejiang Province, easily gets worked up when asked about the difficulties of doing business in Russia. Lin’s shoe shop was forced to close when the Cherkizovsky Rynok market was shuttered.

“I lost 40 million yuan,” Lin said, adding that his losses were not the biggest.

Chinese merchants estimated that more than $7 billion worth of goods were confiscated during the raid on Cherkizovsky, although many wholesalers were able to pull string and have their goods returned to them by local police.

For thousands of Chinese merchants without connections or resources to absorb delays, the crackdown meant overnight bankruptcy, after years of trading in Russia.

Lin has since set up his shoe shop in another Moscow free market that opened after the closure of Cherkizovsky.

About two thirds of the Chinese merchants who had their stalls closed in 2009 have also reopened in the new market.

Chinese merchants say they are still living on the edge and worry they might be again caught up in Russia’s ambiguous customs regulations and again be accused of tax evasion.

Not about smuggling

The so-called grey customs channel doesn’t involve clandestine smuggling where cargo is sneaked across the border. All merchandise is inspected and registered at the Russian customs office.

Chinese merchants say Russian customs clearance companies that have connections with customs officials set up a two-tier clearance process. If the Chinese employed the Russian companies they would have their goods taxed at only 5 or 6 percent. If they attempted to clear customs on their own, the duties could come to 15 to 20 percent.

“No one could afford to miss out on the tax saving and so everyone was doing it,” Lin said, adding that Russian customs brokers could also deliver their goods in three or four days, while it would take two weeks to clear customs without a broker’s help.

It’s widely believed that Russian customs brokers were run by local gangster organizations that paid off corrupt officials. All those involved had turned a blind eye to the obvious irregularities for more than a decade, while the Russian government lost billions in tariffs.

No protection in law

Grey-channel customs clearance doesn’t always go smoothly for Chinese merchants. Russian transport companies don’t always provide customs permits or other certificates that would make the merchandise legal for sale. Without proper ownership documents the Chinese merchants have no recourse in law if their cargo simply failed to show up at their warehouse or is confiscated at the border.

There had been sporadic crackdowns on grey channel imports prior to 2009, when some warehouses were occasionally forced to close and goods were confiscated.

“It’s like a house where the entrance is closed but the backdoor is wide open. People want to get in so of course they use the backdoor. The risk is you don’t know when the owner will ask ‘Hey, how did you get in?’” said Zheng Zhiwei, 63, the representative in Russia of the giant Chinese clothier Bosideng.

Zheng says Chinese merchants made huge profits and all benefited from grey-channel customs clearance.

“If all the regulations were up to the standard, how could there be a grey channel? Customs agents are letting in the goods. They know full well what’s happening,” said Zheng, who has represented Bosideng in Russia for more than a decade.

“We use every means to cut costs. It’s unfair to only blame us for imperfect Russian laws,” said shoe shop owner Li Shuxian who had moved to the new Lyublino market. Li sells shoes made in Guangdong Province.

While shady customs practices and legal loopholes point to flaws in Russian laws and law enforcement, Chinese merchants say they are bearing the brunt of the attempted cleanup of a corrupt system.

Abandoned mannequins at the market. Photo: IC

Chinese investment delayed

Zheng says Bosideng has delayed a planned investment in Russia because of the issues surrounding Russia’s customs system and policies and regulations that are not fixed in law.  He said his company is large enough to be able to avoid using grey channel customs clearance.

“In 2000, the Russian government announced it wanted to join the World Trade Organization, and that gave me hope. The customs system has to change if it’s going to be admitted and I thought improvements would be made in two or three years. Ten years later, I’m still waiting,” Zheng said. “What a pain.”

Zheng said he has noticed some improvements in recent years but not enough.

“It’s hard to predict changes in Russia’s policies, but we have to be prepared. Once there are positive changes, we’ll seize the opportunity and lead the race,” he said.

In May Zheng’s company became one of the first to set up shop in the Greenwood Park, a trade center built with investment from China’s State-owned Chengtong company. It bought the commercial complex for $350 million and offers space to both Chinese and Russian merchants.

The trade center only accepts companies that follow government sanctioned customs procedures, and the center’s management helps companies with tax and customs procedures, said Greenwood manager Chu Da.

The Chinese government has thrown its weight behind the Greenwood market, which it sees as an opportunity to reestablish the image and foothold of Chinese merchants in the Russian market and to help spur trade. Last month, Wu Bangguo, Chairman of the Standing Committee of the National People’s Congress, officially inaugurated Greenwood during his visit to Russia.

Legitimate imports

“Greenwood will attract Chinese companies to settle down and import Chinese goods legitimately,” Chu said.

“With normalized custom procedures, the grey channel for custom clearance should dwindle,” said Zheng.

Ling Ji, the Chinese embassy’s Commerce secretary in Moscow said the Russian government’s slow pace in accommodating foreign investment is because the country wants to develop its own natural resources and manufacturing capability.

“Foreign companies in Russia will never enjoy the same treatment national companies receive,” said Ling.
Although the number of Chinese merchants doing business in Russia has declined, Sino-Russian trade is growing. Ling said that last year a record 6,000 Russian merchants participated in the Guangzhou Trade Fair held in Guangdong Province.

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