The last link in the Belt and Road Initiative? Chinese Investment in Ukraine

Returning from a fascinating week in Kiev I felt something missing from my visit, so obvious in other nearby countries but in Ukraine I did not detect an obvious Chinese presence. During my visit I did not hear any Chinese bar a couple of tourists or see much evidence of investment from Beijing in the capital.

Looking at maps of the Belt and Road Initiative Ukraine is rarely displayed prominently and neighbouring countries appear to be attracting more investment, but this is rapidly changing as Chinese firms back new highways and roads being built across the country. The Black Sea ports of Chornomork, Odesa and Nikolayev have or are being upgraded by Chinese construction firms in the expectation they will be soon carrying more China bound cargos.

What scared the Chinese away?

The lack of Chinese engagement in Ukraine can be partly attributed to the conflict in Crimea and Donbass, which has put off many firms, even many Chinese businesses who are famed for their political risk tolerance.

There was also the matter of the US$ 3 billion lent by a Chinese banks in 2012 which was allegedly embezzled, the funds were supposed to pay for crops but mysteriously disappeared which eventually led to a case at the Arbitration Court for Grain and Feed in London, which found in favour of Chinese Import Export Bank. This was not of course a matter which would build trust between the two nations, but now this has receded into the past Chinese commercial and diplomatic interests are warming up again.

China’s growing interest in Ukraine

Chinese firms have been named as the builders of Kiev’s next metro line and there are a spate of other Chinese backed construction projects on the drawing board including a light rail line connecting Borspil airport with the capital and a major renewable energy programme.

China is also very interested in Ukraine’s rich agricultural produce, and of course there are plenty there willing to sell. Chinese investors have breathed new life into some remote corners of Ukraine, bringing funds to revive cattle farms in Koryukovka, Northern Ukraine which went from dead end village to revived production centre thanks to major investment from Fanda who can now supply Chinese consumers with premium products, so much Chinese land has been ruined through pollution and urbanisation high quality food is increasingly something has to China import.

Ukraine has some advantages for investors namely cheap well educated labour as well as proximity and access to the EU which makes it a rather useful manufacturing and logistics hub.

Military Technology

Ukraine also has a lot of expertise in military engineering which Beijing is looking to tap as it upgrades its armed forces. While other countries in Europe are unwilling to share sensitive technology, Ukraine might be more open. In a highly controversial development an unknown Chinese firm Skryrizon took a majority stake in Motor Sich a Ukrainian firm will a long history which makes engines for cargo planes and helicopters.

However the deal was frozen a month after signing the details are murky but there appears to be infighting within the Ukrainian authorities, some of whom are unwilling to see a strategic asset like Motor Sich fall into foreign hands. Other factions see it as an opportunity to seize this prize asset for themselves. The Chinese are clearly interested in technology transfer – a common theme with their overseas purchases particularly in Europe. Intellectual theft is a major problem for Russian and Ukrainian engineering firms who have seen a lot of their designs copied in China.

The China Development Bank has committed over US$ 3 billion to build power plants in Ukraine but delays caused by infighting between the government and Naftogaz have put this deal in jeopardy, further delays could finish it for good.

Diplomatic Dilemma

The crisis is Donbas and Crimea proved to be a diplomatic headache for China which it ducked through some mild condemnation of Russia’s land grab, while it did not want to approve of any actions (like invasion) which impinged on territorial integrity, Beijing also did not want to upset a major energy and commercial partner not to mention neighbour like Russia.

Greater Chinese clout in Ukraine will squeeze EU and Russian influence further potentially making Beijing the premier foreign power in Kiev. In order to attract further investment Ukraine may have to accommodate Chinese interests such as letting their firms have a free rein in sensitive areas such as military technology, it remains to see whether the Kiev government consider that a price worth paying.



Categories: China Goes Global, climate finance, Country Investment Analysis

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