China, at first glance, looks like a great big, easy-to-hit target for Ukraine to do business with.
The Asian giant of 1.4 billion people has the second largest economy in the world — a $12 trillion engine. While the country has for the past couple of decades acted as the world’s factory floor, churning out cheap consumer goods that it sells around the globe, its growing wealth and massive population are now making it a tempting market for other countries’ exports.
But there’s a catch: China’s economy is so heavily integrated with the state that companies who want to do business with the country effectively end up doing business with the Chinese government.
That means there are usually strings attached to deals — even if they’re not initially obvious.
Ukraine’s relationship with China only started to gain momentum after the 2017 visit to the country by Chinese Vice Premier Ma Kai, who announced plans for $7 billion in joint projects, although that amount has not been realized yet.
Check the list of Chinese projects in Ukraine here.
One area for further cooperation is China’s Belt and Road Initiative, spearheaded by Chinese President Xi Jinping.
The project’s vision is to connect China with Europe, the Middle East and Africa through modern infrastructure and free trade zones.
“China has its ‘16+1’ project. And it would like to see it become ‘17+1,’” the 17th being Ukraine, Hanna Hopko, an independent member of Ukraine’s parliament who chairs the Verkhovna Rada’s Committee on Foreign Affairs, told the Kyiv Post.
The current 16 countries in the project are mainly from Central and Eastern Europe — ones with weaker economies compared to their Western neighbors: Albania, Bosnia-Herzegovina, Croatia, Macedonia, Montenegro, Serbia, Slovenia, Bulgaria, Romania, the Czech Republic, Hungary, Poland and Slovakia, Latvia, Lithuania and Estonia.
Ukraine’s conspicuous absence from that list is probably due to Russia’s war: Beijing has kept relations with Kyiv distant ever since Russia, its proclaimed “strategic partner,” started invading Ukraine’s Crimean peninsula and launched its war in the eastern Donbas in 2014.
And while China presents the initiative as a purely economic project, experts say that its main purpose is to wield greater geopolitical influence.
“It’s a global initiative that is affecting Europe and Asia,” said Andrey Goncharuk, board member of Ukrainian Association of Sinologists. “We’re basically the first big European state on the road to Europe from China. That’s why it is absolutely obvious that China needs Ukraine, and it needs it from a geopolitical point of view. And China perfectly understands that without Ukraine, the Russian empire cannot exist.”
Sensitive business
When it comes to assets, China is not simply interested in Ukraine’s railways, ports and access to Europe. It is eyeing sensitive technologies as well, Hopko said.
One case involves the Ukrainian state-owned enterprise Motor Sich, which produces engines for planes and helicopters, including military ones. Currently, the Security Service of Ukraine, known as the SBU, is searching the company under a criminal investigation into the 2017 sale of a controlling stake in Motor Sich to a Chinese company.
“Here Ukraine has to be very smart (about) who are we partnering with, and in which area,” Hopko said.
Western media have already pointed fingers at China’s government for using its Belt and Road Initiative for spying, stealing trade secrets and cyberattacks, especially as it is promoting its companies within the telecommunications sector, building fiber-optic cables, mobile infrastructure and e-commerce links. China also offers cheap loans as an instrument of soft power.
Compared to the International Monetary Fund’s $17.5 billion loan program for Ukraine, which comes with reform conditions, China’s cheap loans might seem attractive. But they also come with political aims.
Tools of influence
For example, in 2017, Ukrainian officials gave up on a $3.7-billion Chinese loan offer that targeted Ukraine’s energy sector. The credit line — initially agreed in 2012 under Ukraine’s ousted President Viktor Yanukovych for coal gasification projects — was offered by the state-owned China Development Bank.
But the agreement has withered since the EuroMaidan Revolution that drove Yanukovych from power on Feb. 22, 2014, and the start of Russia’s war against Ukraine.
Hopko says that there is always a cost for Ukraine in accepting cheap loans, from wherever the source.
“What we’ve seen from different European countries, especially post-communist ones — all these former Soviet-bloc countries where there’s lots of Russian and Chinese investment — is that this is another way of influencing decision-making,” she said. “And we have to learn from our Chinese cooperation experience during the Yanukovych era, and how costly it was for ordinary taxpayers of Ukraine, Ukraine’s reputation and Ukraine-Chinese relations.”
Geopolitical interests
Other project agreements struck during Yanukovych’s presidency included the construction of the Shchelkino steam-gas plant in Crimea, the leasing of a drilling platform for Black Sea shelf exploration, and sales of jet engines for China’s L‑15 warplane. In 2013, there were reports that Ukraine was prepared to lease three million hectares of the country’s farmland for the next 50 years to China.
“When choosing investors, we have to think about the geostrategic motives, and for us, when we are at war with Russia, we have to see what (is the state of) Chinese-Russian relations in military and other (spheres), what visits Chinese and Russian ministers are making to each other.”
If Ukraine strikes a deal with another country, it must demand that the country supports the geopolitical interests of Ukraine as well, such as sanctions against Russia, and support a peaceful settlement in eastern Ukraine and the return of Crimea to Ukraine, Hopko said.
“Have the Chinese (representatives) ever voted to support Ukraine’s territorial integrity, or for other resolutions at the United Nations level supporting Ukraine?” Hopko said.
China voted against the latest United Nations General Assembly resolution declaring Russia an occupying power in Crimea, on Dec. 19, 2017. Seventy nations voted for, 26 against, and 76 nations abstained.
Ukraine must also pay attention when it comes to security issues, and whether particular deals negatively influence relations with “confirmed partners,” Hopko added.
As China is a U.S. adversary in many aspects, and as the United States has been providing military and financial support to Kyiv, striking deals with Beijing may not be worth the trouble for Ukraine.
“Partnering with the Chinese could put a strategic partnership of Ukraine with the United States, Japan or others, at risk,” Hopko said. “So we have to understand what we’re getting in return.”
Chinese investment
All the same, interest from Chinese companies in investing in Ukraine is growing.
For example, BOHAI Commodity Exchange, which privatized the Ukrainian Bank for Reconstruction and Development back in 2016, is now seeking to capitalize on its investment.
“They’re very actively looking into creating… a hub for all Chinese companies to enter the Ukrainian market,” Yuliya Kovaliv, head of Ukraine’s Office of the National Investment Council, said.
In July, the Office of the National Investment Council met with a delegation from China that included representatives of China Railway Construction, China Communications Construction, and Industrial & Commercial Bank of China. The total market capitalization of the companies represented was over $600 billion.
The companies showed interest in public-private partnership projects in transport infrastructure, in the energy sector and renewables.
Chinese energy equipment manufacturer Power Construction Corporation of China Limited signed a 372-million-euro contract on Sept. 6 with Norwegian-owned SyvashEnergoProm, which is working on a windfarm project in Ukraine.
And back in January, China Harbor Engineering Company finished work to deepen the Yuzhny seaport in Odesa Oblast, Ukraine’s busiest international port, which handled more than 31 million tons of cargo in 2017.
Chinese companies such as Huawei and ZTE have also been penetrating the telecommunications industry: Huawei has been supplying equipment for 3G and 4G infrastructure in Ukraine, and is setting up research and development centers in Ukraine.
Ukrainian exports
But for Ukrainian policymakers, attracting Chinese investment is only half of the problem — Ukraine also has to boost its exports to China.
Maryana Kahanyak, head of the Economy Ministry’s Export Promotion Office, says China is a priority country for the government’s export strategy. China plans to import $10 trillion worth of goods and services over the next five years, and there’s no reason why Ukraine can’t get a share, she said.
According to the ministry, during the first five months of 2018, Ukrainian exports to China were worth $855 million, or 14 percent more compared to the same period of last year.
In an attempt to boost those modest figures, Ukraine will attend in 2018 for the first time the China International Import Expo, one of China’s biggest international trade shows.
This is a step forward for Ukrainian companies interested in the Chinese market. Many Ukrainian businesses don’t understand their product niche or how to invest in the Chinese market, and simply focus on trying to find a partner in China, said Weijian Zhou, the president of the Chinese Commerce Association (CCA) and the former general manager of Lenovo Ukraine.
Election shadow
Meanwhile, Chinese businesses that have invested in Ukraine haven’t all had an easy time of it.
Mariupol-based oil extraction plant Satellit — owned by Chinese COFCO Agri, the Ukrainian subsidiary of China’s largest food trade COFCO — is going through a legal battle with the State Fiscal Service and the General Prosecutor’s Office. In April 2017, state agencies launched a criminal investigation into a large-scale tax evasion scheme allegedly run by the plant’s director and chief accountant.
The company’s lawyers claim that Satellit doesn’t have any tax debts, and the tax police exceeded the limits of their legal powers. The company also reported a number of violations by tax police officers and investigators during the search of Satellit’s office in Kyiv last August.
Such cases sour bilateral relations, and many are skeptical that the “Year of China” for Ukraine in 2019, which Prime Minister Volodymyr Groysman announced in December, will see a business breakthrough.
Instead, during 2019 the Chinese will be looking more at the results of the presidential and parliamentary elections, Goncharuk said.
“Everything else will depend on that. That’s why all the statements of Ukrainian politicians should be seen through that prism.”
