China is a global player that sets its priorities for both the short and long terms. The country’s strategic vision is reflected in the One Belt One Road (OBOR) initiative announced in 2013 by Chinese President Xi Jinping. In the press, OBOR is often referred to as “the Silk Road.”
The Chinese government has already made huge allocations to OBOR through the mechanisms of the Asian Infrastructure Investment Bank ($100 billion) and the Silk Road Fund ($40 billion). When private investments are added, total investment could easily reach $1 trillion. The initiative is still being clarified, but it’s already obvious that many Asian and European countries are eager to be included in the Silk Road. For China, as a global power, its presence in as many countries as possible is a tool by which it can exert quiet influence (by making the countries dependent on China’s trade routes and economy).
Some countries are of particular interest to China. Among them is Ukraine, where China’s interest is driven by several key factors. These factors include Ukraine’s geographic location and its potential to become a major transit hub within OBOR, in addition to the Deep and Comprehensive Free Trade agreement between Ukraine and the EU, and Ukraine’s agricultural industry.
Geography Matters: Transit Hub Potential
First, simply by looking at the map, it is clear that Ukraine’s is strategically located along the land route from China to the EU, which a priori makes Ukraine’s territory an attractive spot for a major transit hub. Though Ukrainian infrastructure is not as well developed as that of Poland or Turkey, this is a deficit easily corrected in the medium term. Precisely because of this view, in December 2013 during the visit of Ukraine’s former President Viktor Yanukovych to China a range of agreements were signed, among them a memorandum on the construction of a new deep-sea terminal in Crimea and the reconstruction of Sevastopol sea fishing terminal. Crimea was scheduled to become a large transit hub, and China was ready to invest $13 billion. Russia’s annexation of Crimea put paid to those plans, but they could reemerge in the south of Ukraine, specifically in the Odesa and Mykolaiv oblasts, which enjoy access to the Black Sea.
China is the second most important EU trading partner behind the U.S., accounting for 14 percent of total extra EU trade in 2014. The EU import of goods from China has significantly increased over the last decade, from €129.2 billion ($141.7 billion) in 2004 to €302.5 billion in 2014. Exports have more than tripled in 2004-2014, to hit €164.7 billion in 2014. This trend will continue since both the EU and China are eager to deepen their trade relations. In this context, even if just some of the goods that make their way to and from China and the EU were to pass through Ukrainian territory, Ukraine would be able to leverage its unique geographical position and become an important new cargo transit link in the Silk Road.
A Free Trade Area With the EU
Second, on January 1 this year Ukraine and the EU signed the Deep and Comprehensive Free Trade Agreement (DCFTA). The EU is Ukraine’s largest trading partner: Over the first 9 months of 2015, 32.9 percent of all Ukrainian exports of goods went to the EU, which in turn provided 39.1 percent of Ukraine’s imports. Ukraine’s main shipments to the EU are ferrous metals, iron ore, electric machinery and cereals. It’s principal imports from the EU are machinery, transport equipment, chemicals, textile and clothing, and agricultural products. While the trade volume between Ukraine and the EU was €20.4 billion for the first nine months of 2015, it has considerable scope to increase under the DCFTA.
For China, there are two elements of importance here: geographic proximity to the EU and potential for investment. Ukraine has oriented its foreign and domestic policy towards Europe. As it reforms, Ukraine will offer improved transparency, democratic accountability, and the rule of law. In playing by the rules, Ukraine will attract Chinese business hoping to invest in manufacturing for export to the EU.
Ukraine’s proximity to the EU market has already been sufficient for some Chinese companies to take the plunge and do business in Ukraine, ignoring the presently unfavorable investment climate. Ukraine’s embassy in Beijing estimates that as of October 1, 2015 the volume of Chinese investment in the Ukrainian economy was $22.6 million, 31 percent in industry, 23 percent in agriculture, 15 percent in transport, and 14 percent in retail and wholesale trade. According to the CEO of Chinese Commerce Association Ruslan Osypenko, “the current level of cooperation between Ukraine and China is based on the signed in 2011 Declaration on Strategic Partnership between the two states. China is observing certain success of the reforms that are being performed by the Ukrainian government. That is why Chinese companies do not leave Ukraine and quite opposite, they decided to get united and established a Chinese Commerce Association that is a platform and a bridge for business circles of both countries.”
The third factor behind China’s interest in Ukraine is the latter’s transit hub potential. In particular, this has strategic meaning for the future of cargo trains from Europe to China and back.
At the end of January 2016 China lent its official support for a freight train from Ukraine to Kazakhstan and China, bypassing Russia. The train departs the Black Sea port of Illichivsk near Odesa, bound for Georgia, Azebaijan, Kazakhstan and eventually China. It includes ferries across the Black Sea and Caspian Sea (Illichivsk-Batumi and Alat-Aktau Port) and is part of the Trans-Caspian International Transport Route. The entire route to China is 5,475 km. The first trial run left Ukraine on January 15 this year and in 15 days it reached the Kazakh-Chinese border. Specialists acknowledge that it will be possible to reduce delivery time to between nine and ten days.
From March 8 freight trains will begin operating on the route. To ensure that the train is competitive with other routes (especially via Russia), all participating states (Ukraine, Georgia, Azerbaijan and Kazakhstan) have signed a protocol on preferential tariffs. As Minister of Infrastructure of Ukraine Andriy Pyvovarsky said, the train will go to China without examination and on a single rate basis.
Liu Jun, an official in China’s embassy in Ukraine noted that “we [China] support it. If there are market demands and it is economically feasible, suppliers of China and other countries should be interested. They might choose this route. Chinese exporters are more concerned with transportation cost and delivery time. It is especially important when comparing it with the sea trade route. Chinese exporters should be interested in the project, but so far their viewpoint is not known… When cargo fees and delivery time become competitive, we can expect Chinese companies to react.”
Last month, Beijing not only welcomed the launch of a train bypassing Russia, but also jointly with the Ukrainian government established a commission on functioning of the “Silk Road” to agree on a package of transport infrastructure projects to increase the transit capacity of Ukraine.
Osypenko acknowledges that “according to the information available from the Ministry of Infrastructure of Ukraine, European companies, particularly Austrian ones, expressed their interest in the trade route from Europe to China and back via Ukraine.” It is especially promising because after the completion of the reconstruction of Beskyd tunnel (financed by the European Investment Bank) and improvements to the transportation infrastructure between it and the sea port of Illichivsk near Odesa, loads will have a direct route from Vienna via Bratislava up to the border with Ukraine. “The Beskyd tunnel is a strategic infrastructure facility because it is the section of the fifth Pan-European transport corridor, which passes through the territory of Italy, Slovenia, Hungary, Slovakia and Ukraine,” said Nikolai Ostashuk, an associate professor at the Institute of Mechanical Engineering and Transport.
While the tunnel is seen as a major link to connect Asia with Western Europe, there is also tremendous untapped potential for expanding the Silk Road northwards. The port of Illichivsk, which serves the rail line running between Ukraine and China, also has direct cargo train links with countries in Northern Europe. For instance Lithuania has already signed a preliminary memorandum on cooperation on the cargo train to China from Ukraine.
The train has a strong chance to succeed, given that it can reach its destination in ten days, which is highly attractive for the companies; benefits from a transparent, optimized and unified tariff for all countries involved; and has attracted the interest of suppliers in both Europe and Asia.
Supplier of Agricultural Products
The fourth attraction for China is Ukraine’s agricultural sector. In 2015, Ukraine overtook the U.S. as China’s number one corn supplier. Traditionally heavily reliant on U.S. agricultural products, China is reducing this dependence with the help of Ukrainian agricultural produce. In 2012 Ukraine and China signed a $28 billion contract under which Ukraine would supply agricultural products to China in exchange for the purchase of Chinese fertilizers and agricultural equipment. In 2015 China became the largest importer of Ukrainian agricultural products. In nine months of 2015 Ukrainian exports of grain to China increased 6.6 times, according to information from Ukraine’s embassy in China. In the same year, China granted market access to 18 Ukrainian dairy producers.
China’s Noble Agri, wholly owned by COFCO (China National Cereals, Oils and Foodstuffs Corporation), has two assets in Ukraine. The first is located in Mariupol. It is a sunflower seed processing complex with a daily crushing capacity of 1,500 metric tons and storage capacity of 180,000 metric tons. The second facility is a newly built Mykolaiv grain port terminal, which boasts transshipment capacity of 2.5 million tons per year and storage capacity of 125,000 tons. Ukraine is the only European country where Noble Agri has a presence, and is competing with such large US companies like Cargill, Monsanto, and Bunge. Moreover, Noble Agri sources bulk commodities from low cost regions and supplies them to high-growth demand markets, particularly in Asia and the Middle East. For instance, it is the leading supplier of corn and soybean meal in Saudi Arabia. Hence, in addition to securing agricultural products to China, the Noble Agri is also competing on the global market with other, mainly American companies.
Clearly, China has a strategic interest in Ukraine. This interest is based on a long-term perspective that views Ukraine as a key link to Europe. As China pursues its grand strategy for Eurasia, Ukraine is poised to be a major beneficiary.
Olena Mykal is Assistant Professor in Political Science at National University Kyiv-Mohyla Academy. Her main areas of expertise are foreign policy of Ukraine, bilateral relations of Ukraine with East Asian countries. She received her PhD at Waseda University in Tokyo.