Chinese Investments in Ukraine

By Lisa May, Alumna of The Fletcher School at Tufts University

Key Takeaways:

• Sino-Ukrainian trade relations are heavily tilted in favor of the former. In 2019, Ukraine exported $3.59 billion in goods to China and imported $9.2 billion.
• Chinese direct investment in Ukraine does not match the expanding bilateral trade. Chinese companies remain largely reluctant to invest in Ukraine because of the country’s unfavorable business climate.
• Chinese lending practices are often non-transparent and result in hidden debt. Chinese companies focus mainly on large infrastructure projects in Ukraine, such as railways, ports, roads, etc.
• Beijing has been actively pursuing deepening ties within the defense sector. Ukraine is the second largest supplier of weapons to China after Russia. For several years now, Chinese Skyrizon has been attempting to acquire stakes in Ukrainian aircraft manufacturer Motor Sich.
• Ukrainian authorities recently announced its Asian Strategy, in which China will play one of the key roles. Some experts and activists, however, are wary about closer Sino-Ukrainian cooperation, pointing out that rapprochement between China and Ukraine might negatively affect relations between Kyiv and its Western partners.

China seeks to improve its relative position in the global balance of power, and Europe has become one of the key regions to ensure the success of this pursuit.[1] As Beijing strives to drive wedges between the United States and its closest allies, building relationships with every European country matters to China. Situated on the crossroads of major transportation routes from Europe to Asia, Ukraine is not an exception.

Bilateral Trade Relations

Ukraine is an important logistical hub between the European and Chinese markets within the Belt and Road Initiative (BRI). The Eastern European country became a member of the BRI is 2017, and in 2018 the “Belt and Road” Trade and Investment Promotion Center was established in Kyiv.[2] Besides Ukraine’s strategic location, China is interested in its natural resources, agriculture, renewable energy, construction, and transportation sectors.[3] For instance, in 2019, Ukrainian exports to China were dominated by the following supplies: ore, slag, and ash – 32.8 percent; grains – 23.9 percent; oils – 20.6 percent; residues and waste from the food industry – 7.6 percent; boilers, machines – 4.9 percent.[4]

Even despite the ongoing pandemic China remains a major importer of Ukrainian corn and sunflower oil.[5] Since 2015, Ukraine has been the lead exporter of corn, accounting for 75 percent of China’s corn imports.[6] By importing form Ukraine, China is reducing its traditional dependence on the United States for agricultural products.[7] Back in 2012 the two countries signed a $28 billion agreement, according to which Ukraine would supply agricultural products to China in exchange for the purchase of Chinese fertilizers and farming equipment.[8]

Sino-Ukrainian trade relations are heavily tilted in favor of the former, which is consistent with the overall world trade realities. For instance, in 2019, trade turnover between the two countries amounted to $12.79 billion, of which exports of goods from China to Ukraine totaled $9.2 billion, while exports from Ukraine to China constituted $3.59 billion.[9] The trade turnover in 2019 grew by 30 percent in comparison to that in 2018.[10] Such expansion of bilateral trade has several explanations. First, it can be attributed to the U.S.-China trade war. Second, the ongoing conflict between Ukraine and Russia has led to a 65 percent drop in Ukraine-Russia trade, “from a total of $31 billion in 2013 to $11.6 billion in 2018,” which consequently resulted in an increase of Chinese exports to Ukraine.[11]

Investment Cooperation between China and Ukraine

According to data published by the Embassy of Ukraine to the PRC, as of January 1, 2020, China invested $40 million into Ukraine’s economy, while Ukraine’s investments to China amounted to $0.6 million.[12] Overall, Chinese companies are reluctant to invest in Ukraine because of the country’s unfavorable business climate, which is characterized by corruption, the inability to withdraw funds or exit the project without significant financial losses, ambiguous tax legislation, lack of stable institutions, as well as lack of qualified personnel.[13]

Yet, experts argue that economic figures do not reveal the complete picture, and most of Chinese involvement in Ukraine stays under the radar. Chinese state-owned companies focus on infrastructure projects in the country offering low interest loans and attaching no conditions regarding improving scores on human rights or good governance.[14] Such lending practices are usually non-transparent, and the loans are often much higher than the amounts officially reported, which subsequently results in hidden debt.[15] For example, back in 2013 China National Complete Engineering Corporation was selected as the main contractor to build a high-speed railway connecting Kyiv and Kyiv Boryspil International Airport, for about $375 million.[16] The construction was scheduled to begin in May of 2013. Yet, in 2017 the project was stalled following corruption scandals.[17] In 2017 Vitali Klitschko, the Mayor of Kyiv, signed an agreement with two Chinese companies to build a new metro line for $2 billion.[18] Also in 2017, construction company China Road and Bridge Corporation signed a memorandum of cooperation to build a road between the port cities of Odesa and Mykolaiv.[19] In January 2018, China Harbor Engineering Company finished its work aimed to deepen Ukraine’s largest commercial port, the Yuzhny international sea port.[20] In addition to the aforementioned projects, Chinese Huawei has a significant presence in Ukraine, accounting for about 15 percent of the mobile market share, and the company is reportedly training its Ukrainian staff in China.[21]

Besides having interest in Ukrainian infrastructure, Beijing has been actively pursuing deepening ties within the defense sector. Ukraine has been the second largest supplier of weapons to China after Russia since 2017.[22] Chinese aviation industry investment company Skyrizon has been attempting to acquire stakes in Motor Sich, which is a Ukrainian aircraft engine manufacturer responsible for building engines for the world’s largest transport aircraft – the An-225 Mriya.[23] According to some reports, a group of Chinese individuals already own more than 80% of Motor Sich since 2016-2017, when they bought the shares in portions each less than 10% of the company. However, for better manageability, Skyrizon filed an application for concentration, which means the company would be purchased by one Chinese entity from a group of Chinese persons.[24] Ukrainian antitrust authorities have been delaying the deal as they fear that should Skyrizon succeed in taking control over Motor Sich, the company will start doing business with Russia, thus compromising Ukraine’s national security.[25] Chairman of the Antimonopoly Committee Yuriy Terentyev said the following regarding the ongoing investigation: “Currently we are effectively investigating two issues: the market consequences of this transaction, and the second – we are investigating the fact that the Chinese side may have illegally acquired control over Motor Sich as of the beginning of 2017.”[26] In September, Chinese investors sent a Notice of Investment Dispute to the Ministry of Justice of Ukraine stating that the Ukrainian authorities expropriated their investments and violated their other rights under the current Agreement on the Promotion and Reciprocal Protection of Investments, signed on October 31, 1992 between the governments of Ukraine and the People’s Republic of China.[27] Chinese investors are demanding $3.5 billion from Ukraine.[28]

Chinese attempts to purchase Motor Sich have alarmed the United States. The Trump Administration sent Erik Prince – founder of the Blackwater security firm – to Ukraine in an attempt to acquire Motor Sich and later tried to solicit interest from a Texas-based aerodynamics firm.[29] However, these efforts have not been successful thus far.

Ukraine’s Asian Strategy

The Ministry of Foreign Affairs of Ukraine announced the development of the Asian Strategy back in spring. The strategy focuses on trade development, investment, and attracting more students from Asia.[30] Ukrainian authorities also decided to invest more resources and assign more staff to diplomatic missions in Asian countries.[31] According to the country’s Minister of Foreign Affairs Dmytro Kuleba, however, Euro-Atlantic integration will remain the key direction of Ukrainian foreign policy.[32]

When it comes to China specifically, the Ukrainian authorities identified it as one of the key states to enhance cooperation with in the future. In 2019 Ukrainian President Volodymyr Zelensky appointed Serhii Kamyshev as an Ambassador to the People’s Republic of China,[33] and Chinese tourists have been granted visa-free travel to Ukraine.[34] Earlier this year, Kuleba commented that Ukraine sees a huge potential in the BRI and anticipates taking a more active role in its projects.[35] There are, however, experts and representatives of the Ukrainian civil society who are highly skeptical about prospective rapprochement between Ukraine and China. The critics argue that closer partnership with Beijing might pose risks when it comes to Kyiv’s relations with Washington and Brussels.[36] Additionally, there is fear that China will use trade and investment as a lever to influence decision-making within Ukraine. For instance, in 2019 it was reported that representatives of the Chinese Embassy in Kyiv were lobbying lawmakers from Servant of the People party to take measures against Ukrainian civil society groups that support pro-democracy activists in Hong Kong.[37] Other concerns voiced by the activists had to do with China’s violations of intellectual property rights as well as the country’s human rights record, specifically when it comes to treatment of Uighurs and pro-independence protesters in Hong Kong.[38]

Conclusion

Although Ukraine is in a dire need of new investments, Ukrainian policymakers should approach the emerging strategic partnership with China with caution. While there is a great economic potential, there are also some risks associated with Sino-Ukrainian rapprochement, such as hidden debt, interference into Ukraine’s domestic affairs, and deterioration of relations with Western allies. Therefore, Ukrainian decisionmakers will have to work hard to strike a sustainable balance between maximizing economic profits and avoiding the aforementioned risks.

This piece is republished from ERA Institute.

References

[1] “2020 Report to Congress.” U.S.-China Economic and Security Review Commission, December 2020, p. 39, https://www.uscc.gov/annual-report/2020-annual-report-congress.

[2] “Ukraine Establishes Center to Promote Belt and Road Trade, Investment.” XinhuaNet, July 6, 2018, http://www.xinhuanet.com/english/2018-07/06/c_137304440.htm.

[3] Demchenko, Inna, and Alexey Oleynikov. “Ukraine – China: Investment Horizons.” InVenture, accessed December 10, 2020, https://inventure.com.ua/en/analytics/articles/ukraine-china:-investment-horizons.

[4] «Торговельно-економічне співробітництво між Україною та Китаєм.» Посольство України в Китайській Народній Республіці та в Монголії (за сумісництвом), 27 жовтня 2020, https://china.mfa.gov.ua/spivrobitnictvo/186-torgovelyno-jekonomichne-spivrobitnictvo-mizh-ukrajinoju-ta-kitajem.

[5] “Ukraine May Become Main Exporter of Food Products to China – Expert.” Ukrinform, April 4, 2019, https://www.ukrinform.net/rubric-economy/2677829-ukraine-may-become-main-exporter-of-food-products-to-china-expert.html.

[6] Zeneli, Valbona, and Nataliia Haluhan. “Why China Is Setting its Sights on Ukraine.” The Diplomat, October 4, 2019, https://thediplomat.com/2019/10/why-china-is-setting-its-sights-on-ukraine/.

[7] “Ukraine: Coronavirus Is not Disrupting Grain Exports to China.” Reuters, February 5, 2020, https://www.reuters.com/article/us-china-health-ukraine-grains-idUSKBN1ZZ1DF.

[8] Mykal, Olena. “Why China Is Interested in Ukraine.” The Diplomat, March 10, 2016, https://thediplomat.com/2016/03/why-china-is-interested-in-ukraine/.

[9] “Trade and Economic Relations between Ukraine and China.” Embassy of Ukraine to the People’s Republic of China, July 6, 2020, https://china.mfa.gov.ua/en/partnership/186-torgovelyno-jekonomichne-spivrobitnictvo-mizh-ukrajinoju-ta-kitajem.

[10] Trade and Economic Relations between Ukraine and China.” Embassy of Ukraine to the People’s Republic of China.

[11] Zeneli, Valbona, and Nataliia Haluhan.

[12] Trade and Economic Relations between Ukraine and China.” Embassy of Ukraine to the People’s Republic of China.

[13] Demchenko, Inna, and Alexey Oleynikov.

[14] Zeneli, Valbona, and Nataliia Haluhan.

[15] Tan, Weizhen. “China’s Loans to Other Countries Are Causing ‘Hidden’ Debt. That May Be a Problem.” CNBC, June 11, 2019, https://www.cnbc.com/2019/06/12/chinas-loans-causing-hidden-debt-risk-to-economies.html.

[16] ««Повітряний експрес» до Борисполя будуватимуть китайці майже за $400 млн.» Finance.Ua, 24 квітня 2013, https://news.finance.ua/ua/news/-/300888/povitryanyj-ekspres-do-boryspolya-buduvatymut-kytajtsi-majzhe-za-400-mln.

[17] ««Повітряний експрес» до Борисполя будуватимуть китайці майже за $400 млн.» Finance.Ua.

[18] “Ukraine Looks to China for Financing.” The Economist, March 22, 2018, http://country.eiu.com/article.aspx?articleid=1026548286&Country=Ukraine&topic=Economy&subtopic=Recent+developments&oid=1106315694&aid=1.

[19] “Ukraine Looks to China for Financing.” The Economist.

[20] “Chinese Company Completes First Dredging Project at Ukraine’s Black Sea Port.” XinhuaNet, January 31, 2018, http://www.xinhuanet.com/english/2018-01/31/c_136937155.htm.

[21] Kraemer, Richard. “Beijing’s Military Industry on the Move in Ukraine.” Middle East Institute, September 10, 2020, https://www.mei.edu/publications/beijings-military-industry-move-ukraine.

[22] Zeneli, Valbona, and Nataliia Haluhan.

[23] “China’s Investment Company Targets Ukraine Aeroengine Giant Motor Sich.” Unian, July 17, 2019, https://www.unian.info/economics/10620537-china-s-investment-company-targets-ukraine-aeroengine-giant-motor-sich.html.

[24] Gorchinskaya, Katya. “Ukraine Prepares to Snub China in Aerospace Deal with U.S. Help.” Forbes, February 17, 2020, https://www.forbes.com/sites/katyagorchinskaya/2020/02/17/ukraine-prepares-to-snub-china-in-aerospace-deal-with-us-help/?sh=40d64a27328c.

[25] Gorchinskaya, Katya.

[26] Gorchinskaya, Katya.

[27] «Інвестори «Мотор-Січ» з Китаю вимагають від України 3,5 млрд доларів.» Український Мілітарний Портал, 19 листопада 2020, https://mil.in.ua/uk/news/investory-motor-sich-z-kytayu-vymagayut-vid-ukrayiny-3-5-mlrd-dolariv/.

[28] «Інвестори «Мотор-Січ» з Китаю вимагають від України 3,5 млрд доларів.» Український Мілітарний Портал.

[29] Kraemer, Richard.

[30] Ерман, Георгій. «Величезні можливості. Як Азія може змінити долю України.» BBC News Україна, 20 грудня 2020, https://www.bbc.com/ukrainian/features-55173910.

[31] Ерман, Георгій.

[32] Ерман, Георгій.

[33] Serhii Kamyshev served as Ambassador of Ukraine to the People’s Republic of China in 2004-2009. “Serhii Kamyshev.” Embassy of Ukraine to the People’s Republic of China, accessed December 12, 2020, https://china.mfa.gov.ua/en/governance/sefhii-kamyshev.

[34] Ерман, Георгій.

[35] «Україна і Китай зацікавлені у розвитку стратегічного партнерства – МЗС.» Укрінформ, 1 квітня 2020, https://www.ukrinform.ua/rubric-polytics/2909880-ukraina-i-kitaj-zacikavleni-u-rozvitku-strategicnogo-partnerstva-mzs.html.

[36] Ерман, Георгій.

[37] Laurenson, Jack. “Chinese Agents Pressing Ukrainian Lawmakers to Act against Civil Society Groups, Whistleblower Alleges.” Kyiv Post, October 8, 2019, https://www.kyivpost.com/world/chinese-agents-pressing-ukrainian-lawmakers-to-act-against-civil-society-groups-whistleblower-alleges.html?cn-reloaded=1.

[38] Ерман, Георгій.