May 7, 2015

Chinese Investors Show Interest in the North Caucasus


Valery Dzutsev, May 4, 2015 

China has found an unlikely ally in the North Caucasus—the region’s smallest republic, Ingushetia. The Ingushetian government has announced that a large Russian-Chinese forum will take place in the republic and contracts worth millions of dollars will be signed. The republic’s government has agreed to rent out 100 hectares of land to Chinese investors, who plan to invest about $400 million in several projects. Chinese businesses seem to be interested in agricultural projects to produce food to export back to China. Investors are also planning to establish a large logistics center and take advantage of Ingushetia’s central position in the North Caucasus to reach out to the other nearby regions. Another major part of the Chinese economic interest in Ingushetia is oil (Kavkazskaya Politika, April 28). Specifically, Chinese companies have proposed reopening old oil wells and renewing extraction using new technologies. Ingushetia has about 200 old oil wells that were shut down, which Chinese investors plan to reuse in cooperation with the Russian oil corporation Rosneft (Evkurov’s Blog, April 10). 

China’s interest in Ingushetia and the North Caucasus in general is puzzling. The region is not known for particularly extensive agricultural resources or energy, with the exception of Dagestan with its Caspian shores. On the contrary, land scarcity is endemic throughout the North Caucasus, although there are certainly underused land resources. However, in comparison to the rest of Russia, the North Caucasus is certainly not a lucrative region for foreign investors since the risks are relatively high due to political violence and corruption, while the expected gains are relatively low. 

This is not the first foray into the North Caucasus by Chinese investors. During the first wave of economic crisis in Russia in 2008–2009, Chinese companies expressed increased interest in assets of the region and explored areas in which to invest. In 2010, the Chinese company Norinco International Cooperation Ltd. planned to build a large resort in Pyatigorsk, worth an estimated $250 million (RIA Novosti, March 9, 2010). The same Chinese company was involved in building a truck assembling plant and a cement-producing facility in Dagestan. Another Chinese company Dalian Tiangong Architectural Design worked on the project of building a new suburb of Makhachkala, Dagestan’s capital (Expert, June 6, 2011). The Russian government has given the Chinese investors’ activities in the region a mixed reception. On the one hand, Moscow must have encouraged Chinese companies to come to the North Caucasus, but Russia has, in some cases, refused to provide government guarantees for Chinese investments. None of the many Chinese projects has materialized so far. 

Perhaps the worst misfortune for Chinese investors in the North Caucasus took place in Dagestan on March 7, 2014. A group of young Dagestani men in the Khasavyurt village district of Sivukh attacked Chinese workers at a Chinese greenhouse plantation and burned down the entire facility, which grew tomatoes and represented a $2 million investment by China. Residents of the village were reportedly angered that the Chinese company had received land they wanted and used chemicals that were harmful to consumers and the environment. The attackers of the Chinese workers were not punished, which suggests that the republican government tacitly supported the assault (Kavkazsky Uzel, March 15). 

Despite this incident and other problems, Chinese investors still show interest in Ingushetia and are ready to launch several ventures even though investment conditions in the region have not improved in the past several years. The threat of violence may have subsided slightly, but corruption, political instability and low returns on investment remain. In the past, the Russian government could provide sizeable insurance against losses for investors. That, however, is now harder because Moscow’s coffers have dwindled so significantly that the outlook for the economy is negative. One of the less emphasized objectives of the Chinese companies is to use their investment as a vehicle for marketing Chinese goods. Even using investment as a marketing mechanism does not fully explain China’s activities in the region. The North Caucasus is relatively densely populated, but by Russian standards it is nowhere near the wealthiest part of the country.

The most likely explanation for China’s activities in the region is that Moscow and Beijing have cut a deal. First of all, the very fact that Chinese investors came to the North Caucasus means that they received approval from the Kremlin. Moreover, Moscow may have made investing in the North Caucasus a condition for Chinese companies to be eligible for more lucrative deals elsewhere in Russia. Similar pressure was applied to several Russian oligarchs in the past. With Moscow increasingly feeling the squeeze of the economic downturn, it to some extent sees foreign investors as a substitute for state investment in the North Caucasus. China is a good candidate for investment in the North Caucasus since it is regarded by Moscow as a country that does not try to spread its ideology. However, some moves against Chinese investors in the North Caucasus indicate that Moscow is still unsure how “safe” a Chinese presence in the region is: If China contributed to creating a more stable and economically viable environment in the North Caucasus, it would exacerbate latent separatism in the region. So Moscow is trying to navigate a fine line between averting a social explosion in the region and promoting an overly healthy economic environment for the North Caucasus.


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