Chinese economic activity in Ukraine — business or politics?

The Silk Road (re-imagined) (Clive Varley, CC BY 2.0)

The authorities in Kiev have had high hopes associated with China's economic presence in Ukraine for many years. However, the official declarations are rarely followed by real actions. For China, Ukraine is still primarily a large market for Chinese goods.

In the Q1’19, China was ranked the first in terms of the volume of trade exchange with Ukraine. According to the State Statistics Service of Ukraine (Ukrstat), the total value of trade between the two countries reached the amount of USD2.6bn, which accounted for more than 10 per cent of the overall volume of Ukraine’s international trade. In this way China overtook Russia, which had traditionally been Ukraine’s main trading partner.

“China is Ukraine’s strategic partner, and the value of trade is constantly growing. Recently, Ukraine and China agreed at the highest level that trade between them would reach USD 10 billion a year,” said the Ukrainian Deputy Prime Minister Stepan Kubiv at the beginning of the year. If the trends recorded by Ukrstat are maintained, then the levels of trade volumes assumed by the authorities could actually be achieved. However, the situation is worse when it comes to the implementation of Ukrainian-Chinese joint economic projects.

Ukrainian appetite for the Chinese cake

China plans to invest more than USD800bn in the One belt, One road project connecting China with Europe, and Ukraine wants to get some of that cake. “We offer our Chinese colleagues a joint project portfolio: development of port infrastructure, alternative energy facilities, construction of highways and bridges, development of railway and airport facilities, high technologies, cooperation in the aerospace sector, processing of agricultural products,” stated Mr. Kubiv in a speech during an international conference devoted to the One Belt, One Road project, which was held this spring in Beijing.

“Ukraine is ready to offer cost-effective transport routes on its territory to connect China with the countries of Europe. In fact, this involves establishing the foundations for the development of a trade and industrial corridor between China, Ukraine and the EU,” emphasized Mr. Kubiv. However, Ukraine ultimately failed to attract any part of the USD64bn worth of contracts signed during the Beijing conference.

Ukraine’s plans for participation in Chinese great international project are not new. A railway-ferry connection advertised as the “Ukrainian branch of the New Silk Road was launched in January 2016. The route runs across the Black Sea, from the Ukrainian port of Chornomorsk near Odessa to the Georgian port of Batumi, and then continues as a railway link through the territory of Georgia and Azerbaijan, to the port in Alat. From there the route includes a ferry trip across the Caspian Sea to the port of Aktau in Kazakhstan, and another railway link to the Dostyk station on the Kazakh-Chinese border.

When the connection was first launched, the authorities claimed that the transport of cargo along the new route would take a maximum of 14 days. In the initial period a total of 20 thousand tons of goods was supposed to be transported each month, and the overall volume of cargo was ultimately supposed to reach up to 1.5 million tons per year in each direction.

In April, Ukrainian authorities informed that talks with the representatives of the European Commission concerning Ukraine’s inclusion into the One Belt One Road project were held in Brussels. The Ukrainian government requested the country’s participation in the EU-China negotiating group. Kiev wants to convince its EU partners that a branch of the New Silk Road running through the territory of Ukraine is faster and could be less expensive than a route running through Belarus and Russia. They are pointing to the possible construction of a high-speed railway connection, which could be used to transport goods to and from the Ukrainian ports on the Black Sea. However, these efforts have not yielded any results so far.

In an analysis of the prospects for the implementation of that project, the experts from the Ukrainian Centre for Transport Strategies identified some serious difficulties. In theory, Ukraine could try to take over some of the trade in goods between the EU and China. But the fundamental obstacle to that is the existence of the EU-Ukrainian customs border, which is associated with the necessity of additional clearance of goods (this is not the case with goods delivered to ports in Romania and Bulgaria). Moreover, the port fees in Ukraine are approximately one third higher than those charged by the competitors. Another factor is the lengthy customs procedure in Ukraine. Taken together, all these elements are clearly not working in Kiev’s favor. Furthermore, it is also difficult to transport goods out of the Ukrainian ports, as the roads in the south of Ukraine are virtually non-existent.

In July, the Deputy Minister of Infrastructure Viktor Dowhan said in an interview that the notion of a “Ukrainian branch” is a strong exaggeration. Two ferries carrying 150-200 wagons of goods depart from the port of Chornomorsk to Georgia each day. Then there are also the commercial vessels carrying the same amount of goods. This route is used, among others, for the transport of goods that cannot be transported by land through the territory of Russia due to sanctions introduced by that country. However, the authorities in Kiev have noted that, contrary to the original plans, the goods transported along this route are not heading to China, but mainly to Kazakhstan. Meanwhile, the Chinese are not using the new corridor. Additionally, there is nothing to be imported from the countries of Central Asia. As a result, on the return trip the trains are frequently empty, which drastically increases the cost of transport. “Regardless of the constant discussions with the Chinese, the New Silk Road simply isn’t working. And for them it is still only a backup option. They use it as an argument in their talks with the Russians, in order to negotiate lower tariffs,” commented Mr. Dowhan.

Constant declarations of cooperation

In July, a meeting between the Ukrainian President and the representatives of Chinese companies was held in Kiev. The Ukrainians tried to encourage the Chinese to explore possibilities of investment in the Ukrainian infrastructure, including a construction of Kiev’s ring road, as well as country’s agricultural sector, and the extraction of natural gas from the Ukrainian deposits. Meanwhile, the Chinese inquired about the possibility of entering Ukraine’s military sector, declaring that they could even develop it at their own expense. According to the official statement issued by the administration of the Ukrainian President, the Chinese banking sector is interested in investing in infrastructure, agriculture, energy efficiency and financial services. In total, the initial list of Chinese-Ukrainian projects with the participation of both private and state-owned investors from China is valued at USD10bn.

The Chinese also visited Kryvyi Rih. A delegation of representatives from the company MCC talked with the local authorities about the modernization of the regional airport, the construction of municipal waste treatment plants, modernization of the city’s tram network, the establishment of a KrivBass technology park, the construction of a logistics infrastructure, as well as investments in the local industry.

The problem is that Chinese economic presence in Ukraine has so far been limited to declarations that are not followed by actions. In 2016, China informed that USD10bn had been allocated for infrastructure projects in Central and Southeast Europe. Out of that, as much as USD7bn was supposed to be spent in Ukraine. In reality the declarations of “large-scale investments” only resulted in some construction works carried out in the ports in Yuzhne and Chornomorsk.

The same was true with earlier Chinese projects. The high-speed train line, which was supposed to connect the center of the Ukrainian capital with the Boryspil airport, was never completed. Last year, the Ukrainian Railways launched their own train connection on that route. The project for the construction of a modern port in Crimea, with a capacity of 140 million tons per year, also failed to materialize — the plans for its development were shattered by the Russian annexation of the peninsula in 2014.

In 2016, the Ukrainian aircraft manufacturer Antonov and the Aerospace Industry Corporation of China reached an agreement on the joint construction of the giant transport aircraft An-225. The Ukrainians were supposed to finish the construction of a single unit for the Chinese, and then a joint serial production was supposed to be launched. Unfortunately, nothing happened.

In 2017, there were reports that the China Road and Bridge Corporation was planning the construction of a bridge over the Dnieper River in Kremenchuk. Sławomir Nowak, the head of the State Road Agency (Ukravtodor), even signed a letter of intent with the Chinese. However, the construction works still haven’t been launched. At the same time, Chinese companies, that were awarded contracts in Ukraine, botched the construction of several roads of national importance.

However, China is exhibiting genuine activity in the Ukrainian gas sector. In the spring the Chinese company Sinosure and the state-owned gas company Naftogaz of Ukraine signed an agreement on the insurance of export credits for the amount of USD1bn. This deal would allow Ukraine to attract investment from China in its gas sector. Last year, as part of a similar agreement, the state-owned company UkrGasVydobuvannya purchased drilling rigs for USD140m.

Meanwhile, new problems are emerging. In late June, the Ukrainian government decided to impose anti-dumping duties on corrosion-resistant, coated steel sheets imported from China. They are supposed to remain in force for five years.

As a consolation for the Chinese, similar duties were also introduced for the same imports from Russia. However, the duty for Russian imports was more than twice as high (47.57 per cent in the case of Russia and 22.78 per cent in the case of China). It is still unclear how China might respond to this move.

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