Chinese Economic Footprint in Ukraine

Over the past five years, China’s total foreign direct investment in Ukraine has increased fivefold, from $50 million to $260 million. The amount is small in absolute terms (0.5% of total FDI in Ukraine) but the growth rate is much higher than the overall FDI growth rate. The surge in investments from China should be taken into account, because, as in the case with Russia, such investments are often made by state-owned enterprises and pursue not only commercial but also political goals. These conclusions are revealed in the study by the Centre for Economic Strategy, prepared with the support of the Center for International Private Enterprise (CIPE).

Although China has been Ukraine’s largest trading partner for the second year in a row, the Chinese are in no hurry to invest in local assets due to political variability. The current increase in investment was not a strategic intention. “Mostly Chinese state-owned enterprises invest in state-owned enterprises in Ukraine,” said Dmytro Goriunov, study’s author and senior economist at Centre for Economic Strategy.

For example, the Chinese state-owned enterprise CNBM became the owner of the largest share in the field of renewable energy for debts. And thanks to the acquisition of the international corporation Noble Agri, Chinese COFCO, another state-owned enterprise, has become one of the largest investors in infrastructure in the Ukrainian agricultural sector. “To date, there are new principles of cooperation with China. We are not talking about Chinese projects in Ukraine, as was the case under Viktor Yanukovych. China is an international player and Chinese companies can participate in Ukrainian projects on generally transparent terms. Working with China is not a political vector, as Ukrainian society thinks, but economic and humanitarian cooperation,” said Taras Holub, adviser to the Deputy Prime Minister for European and Euro-Atlantic integration.

“China’s strategic investments are usually made through their state-owned enterprises. They are aimed at creating a monopoly position in the sector, which will allow China to influence the market from the outside. Ukrainians need to be careful when attracting such investments and seek transparency in agreements signed by state-owned enterprises,” said Eric Hontz, Deputy Regional Director for Europe and Eurasia programmes at CIP.

More investment could be made. Every year, representatives of government authorities or business report on the prospects for large-scale investments in certain sectors of the Ukrainian economy, construction of new industrial facilities, and restoration or modernisation of existing ones.

Main findings:

1. China is the largest trading partner of Ukraine. The total turnover increased from 2% of the Ukrainian GDP in 2001 to 11% in 2020. Since 2004, Ukraine has been a net importer. However, the trade structure is highly uneven. Ukraine exports primarily raw materials and imports mainly processed goods, including hi-tech ones.
2. At the same time, Chinese FDI (foreign direct investment) in Ukraine is insignificant. As of early 2021, only $47 million came from mainland China and $60 million more from Hong Kong. Some other investments were channeled through Singapore, the Netherlands, and other offshores. This is a usual Chinese practice and is rather linked with Chinese domestic investment policies unrelated to sanctions evasion or any tax optimisation strategy.
3. China is a heavy user of debt instruments, and Ukraine as a debtor is not an exception. Many projects undertaken with China’s help involved a considerable amount of borrowed money.
4. The largest investors are state-owned enterprises (SOEs) because investments pursue not only commercial but also political goals. Loans are usually also provided by state-owned banks. Chinese companies most often work with Ukrainian state-owned enterprises, primarily in energy and agriculture.
5. Chinese investment is risk averse. Most deals involved the Ukrainian government participation and state guarantees. In some cases, the guarantees were partly executed. Direct involvement in heavily regulated industries is also generally avoided.
6. Most Chinese investments are tactical and create little added value. Few new projects create jobs and expand value chains. The largest Chinese assets were created and scaled up by other businesspeople and later purchased or acquired as debt collateral.
7. Many previously announced projects and deals were never implemented. This could imply that some special conditions were demanded but never granted. Where projects were implemented, such conditions were indeed provided (such as bypassing public procurement laws). Another possible explanation is the lack of skills to work under such volatile conditions.
8. As part of hi-tech export contracts, China often allegedly attempts to include a clause on the intellectual property transfer. Even if no such provisions are assumed, Chinese companies often try to do reverse engineering and construct a device/machine/vehicle themselves.

Source: Centre for Economic Strategy