China is a growing superpower with a substantial impact on every economy in the world. With its shifting political landscape, Ukraine has not fallen into the Chinese orbit as some other Eastern European countries did. Still, over the past seven years, China has substantially expanded trade with Ukraine, acquired significant assets in energy and agriculture sectors, and attempted to get stakes in aircraft engine construction. This report investigates significant developments of the Ukrainian-Chinese bilateral economic relations and summarizes Chinese business practices in Ukraine.
- China is the largest single nation trading partner of Ukraine. The total turnover increased from 2% of the Ukrainian GDP in 2001 to 11% in 2020. After 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 equipment.
- At the same time, Chinese FDI to Ukraine is scarce. As of early 2021, only $47 million came from mainland China, and $60 million more came from Hong Kong. However, some other investments were channeled through Singapore, the Netherlands, and other offshores. This is a usual Chinese practice and is rather driven by Chinese domestic investment policies unrelated to sanctions evasion or any apparent tax optimization strategy.
- 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.
- The largest investors are state-owned enterprises (SOEs). Investments are made not for solely commercial reasons but to secure access to resources or pursue other non-market agendas. State-owned banks often provide debt and Chinese SOEs and state-adjacent companies tend to work with Ukrainian SOEs, primarily in energy and agriculture.
- 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.
- Most Chinese investments are tactical and create little value-added. There are few greenfield projects that create jobs and expand value chains. The largest current Chinese assets were created and scaled up by other businesspeople and later purchased or acquired as debt collateral.
- 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.
- 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 back-engineering and construct a device/machine/vehicle themselves.
Тhis publication was produced with support from the Center for International Private Enterprise (CIPE) in Washington D.C. The document does not reflect CIPE’s opinions or any employee thereof. CIPE is not responsible for the accuracy of any of the information included. With the information support of the analytical system YouControl.