Russian machine builders again blame the Chinese

02.03.2011 — Analysis

Russian Prime Minister Vladimir Putin has lobbied for the Uralmash Machine-Building Corporation. The Ministry of Economic Development has been entrusted with the task to protect the Russian market for drilling equipment against low priced import products. Experts expect that the anti-dumping measures will also affect home manufacturers, as many Russian companies make drilling and oil-field equipment in Southeast Asia. As the "RusBusinessNews" columnist has found it out, machine-building manufacturers feel quite comfortable in China; therefore, the Russian government should focus its efforts on improvement of business environment in the country.

It is not the first time that the issue about imposing of duties on import drill rigs has appeared on the Russian agenda. Not long ago the government concluded that the domestic manufacturer needs protection, and approved import duty rates equal to 5-15% of the customs value of equipment. Later, they were slashed to zero due to demands from the oil-and-gas lobby asserting that home manufacturers do not take into account requirements of drilling companies and do not make user-friendly and efficient drill rigs.

The cancellation of duties gave certain results: now Russian companies are manufacturing drill rigs entirely by customers' specifications, completing them with the components preferred by oil companies. However, another problem came up: being of similar configuration, Russian rigs turned out to be much more expensive than Chinese equipment and just slightly cheaper than German rigs. The reason was not only in annually increasing rates for gas, electricity, gasoline, metal and rail transportation, but also in the Chinese approach to industrial management. Cheap labor, low taxes and costs put Russian manufacturers at a disadvantage.

At one of the forums, Igor Kolesnikov, the Technical Director of the Volgograd Drilling Machinery Plant, LLC, said that "ruthless exploitation" of personnel allows Chinese companies to sell machine-building products for the oil-and-gas sector at prices that are by 26% lower. The top manager offered to remedy the situation by using duties: based on his information, in the USA import duties for different groups of products from Celestial China amount to from 60 to 250%. Other Russian manufacturers of oil-and-gas equipment went well beyond the duties and offered to launch an anti-dumping program: to tie up renewal of development licenses with the requirement that oil and gas companies should use home-made equipment, refuse from tied loans when purchasing import machinery, compel joint ventures to manufacture up to 75% of components for drilling rigs in Russia, etc.

It looks like that the government has understood the machine-building manufacturers: during his meeting with Sverdlovsk Region's governor Alexander Misharin, Russian Prime Minister Vladimir Putin offered to protect Uralmashzavod, which used to be a leading manufacturer of drilling rigs in the USSR, against dumping. "Some of our partners attempt to sell at dumping prices on our market, - the prime minister told the governor. - It needs response. You, together with the plant management, should prepare the adequate proposals. I have already given relevant instructions to the Ministry of Economic Development".

Experts' attitude to the idea of market protection is very skeptical. Iosif Shrago, a senior programmer of AMT CJSC, thinks that due to import duties domestic manufacturers of low-quality equipment will be able to increase prices for their products. The dependence of issuance of development licenses on exploitation of Russian equipment will give similar results. The attempts aimed to ban tied loans made for purchasing of import equipment are also self-defeating: according to the expert, when the government wants to get billions, but they are available only as tied loans, the government descends to the pickpocket's techniques. The 75% localization cannot be achieved, as Russian drill rigs have imported motors, hydraulic systems, pumps, and electronics, which can be manufactured in Russia only if the high level of innovations is achieved. However, the country is still vulnerable in this respect; therefore, all obligations will be to the detriment of quality.

Yevgeni Sukhov, the Commercial Director of the HMT Machine-Building Group, which supplies drill and oil-field equipment, does not see any sense in protection of the domestic market, as the Chinese manufacturer initially has a substantial economic advantage over Russian companies. It is explained not only by attractive loan rates and low business costs, but also by the fact that business is protected against willfulness of officials. The entrepreneur states that he has never heard about the government's taking over private business, which is very typical of Russia. Chine is also attractive due to its notification system: you do not have to wait for solution of simple issues for months or even for years, and give bribes for this. Due to absence of exactions and kickbacks, manufacturing of any equipment in China is at least 1.5-2.5 times as cheap as in Russia.

Andrei Korzhubayev, an authorized representative of the Siberian Department of the Russian Academy of Sciences for liaison with China, states that Celestial companies have to deal with similar amounts of certificates and approvals, as officials handle business "without gloves"; however, foreign companies can do well there: they should just pay to "the person responsible for liaison with government authorities" and have their quiet enjoyment.

Yevgeni Sukhov is sure that oppression of the domestic business can be proclaimed for years, however, without political progress there will be no result, because today's system serves the bureaucratic apparatus rather than society. As no one is going at least to even the chances of Russian and Chinese manufacturers, Ye. Sukhov sees relocating business to Southeastern Asia as the only way out. The HMT Group set up an engineering center in Shanghai, which employs highly skilled Russian, German, and Taiwanese engineers and managers. The center develops, assembles and then delivers oil-and-gas equipment to Russia. This type of competitors might be the target to hit by lobbyists of Uralmashzavod, as it is efficient companies that prevent disbursement of money from government banks and corporations.

The experts say that the "brazen Russians", who snapped their business out of the greedy officials' hand, can be punished. But it will not help Uralmashzavod. Iosif Shrago is sure that as long as the Chinese is twice as cheap as Russians, while producing four times as much, not yielding in quality, the prospects of the Ural factory are very "gloomy": "The operational efficiency in our machine-building sector is so low that it cannot be explained by an immediate crisis. As long as it is as negligible - no one will give money to machine-building manufacturers, and will be doing right. If anyone still makes an attempt, then this anyone will receive the same products that were produced 30 years ago".

Vladimir Terletsky