AnalyticsFrom China to Ukraine: The new Silk Road
After the Revolution of Dignity in Ukraine, China has become the country’s increasingly important trading partner. Against the backdrop of its slowing economy, China is implementing an ambitious infrastructure project titled "Silk Road", designed to connect Europe and Asia economically. Ukraine could become a strategic part of this initiative.
Economic relations between Ukraine and China in recent years remained in the shadow of Kyiv’s rapprochement with Europe and a trade war waged by the Russian Federation. In 2013, the volume of the Ukrainian exports to the markets of the Celestial Empire 2013 were only comparable to those of Egypt or Poland. However, in 2016, China is the second major destination for the Ukrainian products. Although Ukraine’s exports to China declined in monetary terms because of the unfavorable prices on world markets, China still turned out to be the largest consumer of the Ukrainian agricultural products in 2015. This fact is especially important in light of Ukraine’s loss of its traditional markets – the CIS countries.
China's economy has slowed down to under 7% from a yearly 10% growth recorded over the past decades. This prompted the country's leadership to search for the opportunities to ensure transition from an export-oriented industrial economy to a growth model based on domestic consumption and services.
In 2013, Chinese President Xi Jinping announced a large-scale "One Belt One Road" project that the media dubbed “The new Silk Road”. The project stipulates setting up massive rail connection between the western part of China and Central Asia, stretching further to Europe. In addition, the project provides for the establishment of new port infrastructure, combined with the railways.
China went as far as creating the Asian Infrastructure Investment Bank, to finance the relevant projects.
The desire of Chinese leadership to bind the country tighter with Europe as well as the permanent need for large bulks of food products makes China one Ukraine’s most valuable partners.
"Ukraine's share in China's annual import volumes is 0.18%, while the Ukrainian agribusinesses use only 7.5% of their opportunities in the Chinese market. The prospects are endless. In addition, given that European markets are unable to consume significant amounts of agricultural products from Ukraine, China for two consecutive years has confidently remained the top market for these products,"said the executive director of the China Trade Association (CTA), Ruslan Osypenko.
At the same time, the Silk Road initiative gives Ukraine the opportunity to circumvent the technical limitations imposed by Russia on Ukraine’s transit to the countries of Central Asia. With China’s support, Ukraine on January 15 2016 launched its pilot freight train bypassing Russia to Kazakhstan, via Azerbaijan and Georgia.
At the moment, the route is not in high demand by carriers due to the relatively high cost, but Ukraine is in talks with China on the optimization of tariff policy.
"Today one of our main tasks is to optimize the Silk Road. Besides, the question of reducing the cost of container cargo shipment and rail transportation is also on the agenda. A quality option given the active work in the most important directions is as follows: reducing by 15% by year-end the cost of logistics and by 10% - the delivery time," ex-Deputy Minister of Agrarian Policy and Food Vladislava Rutytska said.
Thus, China could become a strategic partner of Ukraine, capable of providing a way out of the Russian transit blockade. Paradoxically, such partnership will have mutual benefits.
How is China interested in Ukraine
First of all, Ukraine's geographical position makes it a very promising transit hub. The main obstacle here is poor infrastructure. In this regard, Ukraine and China have agreed to develop a roadmap for joint infrastructure projects designed in the medium term to significantly improve Ukraine’s transit potential.
"Within the framework of the intergovernmental commission, we will consider infrastructure projects that we have to prepare together with the businesses in order to increase not only the capacities of the state in terms of transit, but also the capacities of the state, which can provide high-quality service in terms of logistics," said Hennady Zubko, Ukraine’s Minister of Regional Development, Construction, Housing and Utility Services.
The second important factor of Ukraine’s attractiveness is the Deep and Comprehensive Free Trade Agreement with the European Union. EU imports $300 billion worth of Chinese products a year, and the volumes are increasing. A significant part of this flow can go via Ukraine. In addition, Chinese businesses hoping to enter the European market may be interested in the construction of production facilities in the Ukrainian territory, because of the country’s preferential conditions for export to the EU.
However, a key obstacle for Chinese investment remains the negative regulatory field as well as hostilities in eastern Ukraine.
The third factor is Ukraine’s agricultural potential. Given its huge population, China is extremely dependent on food supplies. A key supplier of agricultural products to China remains the United States. However, China's leaders aim at diversifying supplies and reducing dependence.
In 2015 alone, Ukrainian food supplies to China increased sixfold, while Ukraine beat the U.S., becoming China’s biggest supplier of corn.
However, according to Ruslan Osypenko, the window of opportunity will be gradually closing for Ukraine as China has been working hard on its food security program.
However, diversification of food imports remains a very complex task for the country with a population of more than 1.3 billion people, which logically leads Ukraine and China to a common denominator - the development of the Silk Road.
Economic relations between Ukraine and China were traditionally back-shelved by Ukraine’s leadership, because the focus of the country’s foreign economic policy since gaining independence has been maneuvering between Europe and the CIS countries.
In the context of a sharp change in the geographical structure of Ukrainian exports, the official Kyiv was too slow to react.
"We have lost the opportunity of rapid development of the Silk Road," said a source in the Ukrainian government, visibly irritated with the fact.
However, following the September meeting of the Ukrainian-Chinese intergovernmental commission, the prospects for trade and economic cooperation between the two countries look more promising.
"For Ukraine, China is one of the most important strategic partners worldwide, so special attention is given to the trade-economic and investment cooperation between the two countries. In 2015, China ranked second in terms of Ukraine’s foreign trade ($6.17 billion). Ukrainian exports to China amounted to $2.4 billion," said Ukraine’s Trade Representative Natalia Mykolska.
The official has added that China is a huge market for Ukrainian producers of high-tech products and high-quality products of agribusiness. At the same time, strengthening bilateral ties between the businesses is also possible thanks to the cooperation in the services sector, particularly IT.
"As one of the world’s leading software developers, Ukraine has a great potential for selling its IT-services to China. Joining forces of the two countries in this direction (Ukrainian software, Chinese hardware) can lead to the creation of a jointly-made high-quality competitive product," said Mykolska.
At the same time, according to Osypenko, to enhance trade between the two countries, competitive industries need to be strengthened, while cooperation – expanded in the field of communications, logistics, infrastructure, renewable energy, engineering, and finance.
The executive director of the CTA noted that in the framework of the Silk Road cooperation with China, Ukraine has one of the rare opportunities for the implementation of some truly large-scale infrastructure projects that could form the basis for the development of trade.
"The Silk Road initiative has its own basic principles. Countries that join the project have to share them. In particular, for the infrastructure projects to start being implemented in Ukraine, we have to coordinate our policies with China, to ensure the continuity of trade, and free capital movement. Only after that comes the construction of infrastructure and the strengthening of ties between the two countries," said the expert.
Anyway, based on the size of its market and strategic interest, China compensates for the loss of Ukraine's most important sales markets - Russia and the CIS countries.
Since China is interested in the European market, Russia, by definition, cannot be its reliable partner within the framework of the Silk Road, although Moscow is still trying to agree on the development of trade routes in its territory.
In the context of its slowing economic growth, China is actively moving toward reformatting its commercial and industrial relationships in Eurasia. Meanwhile, Ukraine has the opportunity to become one of the main beneficiaries of China's economic expansion.