BY: DR. VALBONA ZENELI AND NATALIIA HALUHAN
As China continues to assert itself as an emerging world power, Europe remains a very attractive and important target. To achieve its goals, every European country may be deemed as important for Beijing: economically, geographically or politically. Ukraine is no exception from the rule.
Beijing’s multifaceted interests in Ukraine mainly relate to its strategic geographic location, particularly attractive as a logistical transit hub within the One Belt One Road (OBOR) initiative that links China with the European Union (EU) markets. Other attractive factors are its rich natural resources, opportunities for new infrastructure projects and agricultural industry. Taken together, Ukraine represents an important entry point for China, in line with the Chinese expansionist agenda in Europe. Conversely, a member of OBOR since 2017, and in desperate need of foreign investment, both the Ukrainian business community and political leaders have shown increased interest in deepening cooperation with China. For these reasons, Ukraine could be a low hanging fruit for Chinese interests in Europe.
China is officially Ukraine’s single largest trading partner
Bilateral trade relations between China and Ukraine have grown dramatically over the past few years. While the EU remains Ukraine’s largest trading partner constituting 41 percent of its trade in 2019, China has become the largest, single nation trading partner, bypassing Russia. Needless to say, that total trade relations remain heavily tilted in favor of China, a reality that is reflective of world trade patterns.
A few reasons explain the flourishing Sino-Ukrainian bilateral trade relations. Ukrainian crop exports to the Chinese market have expanded because of China’s need for agricultural products, a direct result of the U.S.-China trade war and the increased tariffs for American products. In addition, the tense geopolitical and economic Ukraine-Russian relations have led to a sizable increase of Chinese imports in the Ukrainian market.
In 2018, China was the second biggest import partner for Ukraine (7 billion USD), constituting 13.3 percent of total imports. In the first half of 2019 (January-May), the share of Chinese imports reached almost 14 percent outpacing Russia. When it comes to exports, in 2018 China was the sixth largest partner for Ukraine, with 2.2 billion and a share of 4.7 percent of total Ukrainian exports. In the first half of 2019, China moved up the ladder to be the third largest export partner for Ukraine (1.3 billion USD) and share of 6.2 percent of total exports. Ukrainian agriculture exports towards China have contributed to this boost in trade. Since 2015, Ukraine has been among the five biggest exporters of agricultural goods to the Chinese market, and the leading exporter of corn, supplying 75 percent of China’s corn imports.
Foreign Direct Investments?
In contrast, Chinese direct investment in Ukraine does not match the expanding trade patterns, despite the country’s hopes of securing China as a source of financial support. Beijing remains a relatively minor player, with a small footprint of foreign direct investment (FDI) of less than 18 million USD in 2018, or just 0.06 percent of the total FDI in Ukraine.
But, economic figures underestimate Beijing’s ambitions in Ukraine. In reality, most of Chinese involvement is under the radar, focusing on concessional lending, thus putting Ukraine in the front row of hidden Chinese debtor nations. Chinese companies (mainly state owned) are focusing on infrastructure projects in Ukraine, and competing aggressively with Ukraine’s Western partners for a strategic foothold. Beijing’s ability to compete in tenders that come in under budget, offering low interest loans and without conditions concerning good governance practices and fiscal stability rules, is well-known.
For example, China Harbour Engineering Company Ltd. has already completed the first stage of the renovation project at the Sea Port Pivdennyi (Yuzhny), and won a tender for the renovation Black Sea port of Chornomorsk. Another example is the USD 2 billion deal of China Pacific Construction Group for the construction of the new metro line of Kyiv. Chinese state-backed or state-owned companies have been investing millions of dollars in an effort to improve rail, road, river and sea infrastructure that will enhance trade with Ukraine and Europe. However, the actual numbers are not entirely clear, nor transparent.
Recently, Beijing has also set its sights on Ukraine’s defense industry. Since 2017, Ukraine is the second biggest supplier of weapons to China, after Russia. China’s attempt to acquire the Ukrainian giant Motor Sich, a leading helicopter and airplane engine maker, has raised eyebrows among Kyiv’s Western partners, and is being pursued despite an ongoing investigation since 2015. Using the practice of mergers and acquisitions to secure access to R&D is a repeat story of what happened back in 1998 when China acquired the Ukrainian aircraft carrier, formerly known as Varyag. The acquisition of the Ukrainian aircraft company, which has built engines for the world’s largest transport aircraft the An-225 Mriya, would provide Beijing with vital defense technology and enhance Chinese military buildup and civil aviation capacity, in the midst of a regulatory backlash against Chinese investment in strategic R&D companies by the United States and Western Europe.
China’s geopolitical bidding in Ukraine
As a result of its interest in Ukraine, China’s bid for geopolitical influence in the country is also increasing. However, this presents a dilemma. While acknowledging Russia as a political player in Ukraine, Beijing wants to increase its economic and diplomatic influence in the country, as part of its broader strategy to gain leverage in Europe. Beijing is careful to openly support and not antagonize the Kremlin’s political interests in Ukraine, yet it also prefers policies that do not impact the Chinese economic interests and the commercial viability of OBOR. In this context, Beijing has lent political support to the transportation route (freight train) that goes from Ukraine to China (Ukraine-Georgia-Azerbaijan-Kazakhstan), bypassing Russia, although the route is not yet economically competitive.
However, while Chinese and Russian interests in Ukraine are expressed in different forms, it does not seem that Sino-Russian relations are diverted over Ukraine, yet. In fact, Russia might view the Chinese economic investment in Ukraine as preferable, allowing the Kremlin to keep Ukraine away from democratization and reforms and minimize Western influence.
Ukraine is a target piece in this puzzle, in desperate need of money and investment, and China is ready to spend. But cheap money always comes at a cost and often with string conditions attached. In viewing China as a strategic partner, countries should be cautious in striking the right balance between maximizing economic relations, while simultaneously hedging against long-term risks. In this context, marrying interests with Beijing in parallel with the European integration ambitions of the Ukrainian people is easier said than done.
Click here to read the blog on The Diplomat.
Dr. Valbona Zeneli is the Chair of the Strategic Initiatives Department at the George C. Marshall European Center for Security Studies.
Nataliia Haluhan is the Chief Consultant at the Department for Economic Strategy and Security at the Ukrainian Institute for Strategic Studies. She is a former Marshall Center scholar.
The views presented are those of the authors and do not necessarily represent views and opinion of the Department of Defense or the Marshall Center
The views expressed in this publication are solely those of the author and do not necessarily reflect the views of the EastWest Institute