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Why China is Setting its Sights on Ukraine

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Why China is Setting its Sights on Ukraine

Beijing’s bid for geopolitical influence in Kyiv is increasing.

Why China is Setting its Sights on Ukraine

Ukraine’s then President Viktor Yanukovych, third from left walks with Chinese President Xi Jinping during a welcome ceremony at the Great Hall of the People in Beijing, China, Thursday, Dec. 5, 2013.

Credit: AP Photo/Ng Han Guan

As China continues to assert itself as an emerging world power, Europe remains a very important target. While Chinese investment has significantly increased, by 50 times in the last decade, the current figures underestimate the true scope of Beijing’s ambitions in the old continent. To achieve its goals, every European country is important for China: economically, geographically, or politically. Ukraine is no exclusion from the rule.

Beijing’s multifaceted interests in Ukraine mainly relate to its strategic geographic location. It is highly attractive as a logistic transit hub within the Belt and Road (BRI) initiative that links China with European Union (EU) markets. Other attractive factors are its rich natural resources, opportunities for new infrastructure projects and its agricultural industry.

These factors are all in line with the Chinese expansionist agenda in Europe. A member of OBOR since 2017, the business community and political leaders in Ukraine have shown increased interest in deepening cooperation with China. To serve this purpose, the “Belt and Road” Trade and Investment Promotion Center was established in Kyiv, seeing BRI as a tool to improve infrastructure, attract foreign investment from China, invest in energy projects and modernize agricultural technology.

To date, there has been a lot of conversation, but projects are not clearly defined, nor transparent. Being attracted by the promises of the BRI as an opportunity for their country to unlock the potential of it being an “entrepot” to Europe, Ukrainian politicians had earlier expressed their willingness to deeper institutionalize relations with Beijing in offering to join the “16+1” mechanism, a platform created by Beijing to increase trade and economic relations with Central and Eastern Europe.

China, Ukraine’s Single Largest Import Partner

Bilateral trade relations between China and Ukraine have grown dramatically over the past few years. China has become the largest, single nation trading partner, bypassing Russia. Needless to say, total trade relations remain heavily tilted in favor of China, a reality that is dominating world trade patterns.

The EU remains Ukraine’s largest trading partner, and in 2018, 43 percent of Ukraine total exports went to the EU countries for a value of more than $18 billion, with main trading partners Italy, Poland, and Germany. Since the signature of the Deep and Comprehensive Free Trade in January 2016, trade with the EU has been increasing at almost 30 percent a year.

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 had led a 65 percent decrease in the trade values with Russia from a total of $31 billion in 2013 to $11.6 billion in 2018. As a result, a sizable increase of Chinese imports in the Ukrainian market has followed.

In 2018, China was the 2nd biggest import partner for Ukraine ($7 billion), 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 6th 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 3rd largest export partner for Ukraine ($1.3 billion) and share of 6.2 percent of total exports. Ukrainian agriculture exports towards China have contributed to this trade boost. Since 2015, Ukraine has been among the five biggest exporters of agricultural goods in the Chinese market, and the lead exporter of corn, supplying 75 percent of China’s corn imports.

Foreign Direct Investments?

The Chinese presence in Ukraine through direct investment does not match the expanding trade patterns, despite the hopes of securing China as a source of financial support. From this perspective, Beijing remains a relatively minor player, with a small footprint of foreign direct investment (FDI) of less than $18 million in 2018, or just 0.06 percent of the total FDI in Ukraine.

Ukraine’s relatively large market of 40 million consumers, geographical proximity to the EU and the DCFTA have not been sufficient for Chinese companies to take the plunge and seriously consider Ukraine as an investment target. This mainly is due to the country’s unfavorable business climate.

But, economic figures underestimate Beijing’s ambitions in Ukraine. In reality, most Chinese involvement is under the radar, focusing on loans, and putting Ukraine in the front row of hidden Chinese debtor nations. With its accustomed patterns, 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 Harbor Engineering Company Ltd. has already completed the first stage of the renovation project at the Sea Port Pivdennyi (Yuzhny), and won a tender for Black Sea port of Chornomorsk, Another example is the $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, but real numbers are not clear, nor transparent.

Recently, Beijing has seriously set its eyes on the defense industry of Ukraine. Since 2017, Ukraine is the second biggest supplier of weapons to China, after Russia. The 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 well-developed aircraft company, which has built engines for the world’s largest transport aircraft the An-225 Mriya, would give Beijing vital defense technology and boost Chinese military buildup and civil aviation capacity, at a time when in the United States and in Western Europe the regulatory backlash against Chinese investment in strategic R&D companies is increasing.

China’s geopolitical bidding in Ukraine

China’s bid for geopolitical influence in Ukraine is increasing. At the same time a dilemma is emerging. While supporting Russia as a political player in Ukraine, Beijing wants to increase its economic and diplomatic influence in the country, as part of the broader strategy for increased influence in Europe.

In Ukraine, anti-Russian sentiments have skyrocketed since the seizure of Crimea in 2014 and ensuing conflict in the eastern parts of the country, while China is viewed very positively as a “strategic partner.” Despite the Chinese economic ambitions, Russia’s invasive presence in Ukraine remains the essential factor to influence future Chinese-Ukrainian relations.

Moscow wants to weaken Ukraine economically, politically, and institutionally to prevent its Euro-Atlantic integration. Beijing is careful to openly support and not antagonize the Kremlin’s political interests in Ukraine, yet it also prefers political measures that do not impact its economic interests and the commercial viability of the BRI. In this framework, 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 at the moment Sino-Russian relations are diverted over Ukraine, yet. At the end of the day, China and Russia are in a diplomatic alliance, founded on a common aversion of the Western, U.S. led world order, underlined in a common statement between Xi Jinping and Vladimir Putin in July 2019. In fact, Russia might view the Chinese economic investment in Ukraine as preferable, allowing Kremlin to keep Ukraine away from democratization and reforms and minimize Western influence.

President Xi Jinping’s signature project, BRI, to increase Chinese influence in the global economy, does not require exclusive membership, it welcomes overlapping economic projects that complement each other, to make the most of the profit. To achieve its objectives, Beijing is also increasingly interested in combining its investment efforts with the EU, taking advantage of future infrastructure projects, as mentioned also in the EU-China Summit in June 2015.

Ukraine is a target piece in this puzzle, in desperate need for money and investment, and China is ready to spend. But cheap money, always comes at a high price. In viewing China as a strategic partner, one should be cautious in striking the right balance between maximizing economic relations, while simultaneously hedging against its long term risks, and in marrying interests with Beijing in parallel with the European integration ambitions of the Ukrainian people. This is easier said than done.

Dr. Valbona Zeneli is the Chair of the Strategic Initiatives Department at the George C. Marshall European Center for Security Studies.

Ms. Nataliia Haluhan is the Chief Consultant, National Institute for Strategic Studies (Ukraine). 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.