China’s Em­brace Of Rus­sia Trou­bles Kyiv

Kyiv Post - - Front Page - (AFP)

Rus­sian Pres­i­dent Vladimir Putin toasts his Chi­nese coun­ter­part Xi Jin­ping as they taste pan­cakes they cooked while vis­it­ing "The Far East Street" ex­hi­bi­tion on the side­lines of the East­ern Eco­nomic Fo­rum in Vladi­vos­tok, Rus­sia, on Sept. 11. China says that it re­spects the sovereignty, in­de­pen­dence and ter­ri­to­rial in­tegrity of Ukraine, yet con­ducts joint mil­i­tary ex­er­cises with Rus­sia, which has seized the Crimean penin­sula and parts of the east­ern Don­bas since the start of its war against Ukraine in 2014.

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. 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. 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 sta­te­owned 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 Nor­we­gianowned 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.”

A man walks past Statue Square with the sky­line of the city's fi­nan­cial district in Hong Kong on April 10. Ukraine's re­la­tion­ship with China started to gain mo­men­tum af­ter a 2017 visit to Ukraine by Chi­nese Vice Prim­ier Ma Kai. (AFP)

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