Ukraine turns to Chinese
cash By Oleg Varfolomeyev
China has preliminarily agreed to lend
more than US$7 billion to Ukraine. In addition, an
agreement has been signed between the two
countries’ central banks on a currency swap worth
$2.4 billion.
Although it is likely to
take months of talks to agree on the details of
the projects to be financed by China, this can be
roughly compared in scale to the volume of loans
that Ukraine received from international financial
institutions in 2008-2010, which helped the
country survive the global financial crisis (see
below).
Beijing will benefit from further
internationalizing its currency and increasing
exports to Ukraine. Kiev, on the other hand,
expects to be able to save its reserves, which
have been shrinking as the
International Monetary
Fund (IMF) froze assistance last year, improve its
balance of payments, as well as receive additional
leverage in its ongoing gas dispute with Russia
since some of the projects Ukraine has discussed
with China are aimed to cut gas imports.
While the West has been increasingly
reluctant to lend to Ukraine's weakening economy -
both due to its own financial problems and the
slow reforms and problems with democracy in
Ukraine - Kiev has indicated that it will look for
funds elsewhere. Last fall, Deputy Prime Minister
Serhy Tyhypko said on national television that if
Ukraine failed to come to terms with the IMF, it
would seek loans from the BRIC countries (Brazil,
Russia, India and China). Ukrainian Foreign
Minister Kostyantyn Hryshchenko, in an article
published last spring, praised China as "a quiet,
non-interventionist" power, called for "making up
for leeway" regarding the country, and even
suggested that Ukraine could become an "investment
El Dorado" for China.
After virtually
ignoring China's economic potential for many
years, Ukraine proclaimed China one of its
economic priorities in the wake of Viktor
Yanukovych's election as president in early 2010.
Yanukovych promised a deluge of investment from
China when he visited Beijing in September 2010.
Later, Chinese President Hu Jintao came to Ukraine
in June 2011 to spend time in Yanukovych's company
in Crimea and sign a number of documents. Chinese
money did not start to come to Ukraine until this
summer as it took the two countries' bureaucracies
much time to finalize details of cooperation.
Ukraine received the first loan under the
Yanukovych-Hu agreements this past June, when
China Development Bank issued the first tranche of
an $85 million loan to upgrade a coal mine in
Luhansk Region. All in all, Ukraine hopes to
receive some $1 billion in loans for its coal
mines from China.
Also in June, the
National Bank of Ukraine signed a $2.4 billion
currency swap deal with China's central bank for
three years. The deal should allow Ukraine to
spend less from its currency reserves on imports
from China, with which Ukraine runs a chronic
trade deficit. China has signed similar agreements
with several countries thus far, including such
important players as Japan, Brazil and Turkey in
an effort to internationalize its currency, the
yuan.
On June 28, Ukraine's Agriculture
Ministry and China's Eximbank preliminarily agreed
that China would lend up to $3 billion for
agricultural projects in Ukraine for 15 years at
6% interest. Under the agreement, Ukraine will
boost agricultural commodity exports to China,
while using Chinese money to buy pesticides and
equipment from the Asian country. Ukraine's
parliament promptly passed a bill to allow the
government to accept the loan.
On July 13,
the Ukrainian Energy and Coal Ministry and the
China Development Bank signed an agreement
according to which China will issue loans totaling
almost $3.7 billion to finance a transition from
expensive Russian gas to coal at Ukraine's
municipal heating plants and for building a coal
gasification plant.
The Ukrainian
government hopes that if the projects are
implemented, Ukraine will be able to cut Russian
natural gas imports by 11-12 billion cubic meters
(bcm) per annum. This is very important for
Ukraine, which has set out to cut its import of
Gazprom's gas from 40 bcm last year down to no
more than 27 bcm this year, in line with its
stated strategy to escape Ukrainian dependence on
Russian gas by 2025-2030. Kiev is sure to use the
agreement with China as a bargaining chip in its
ongoing gas talks with Moscow.
Also this
July, the Chinese government ratified a $372
million 15-year loan for a railroad link from Kiev
to the international airport in Boryspil. Ukraine
expects the first $15 million tranche by early
August. China will export its technologies under
the deal. Those may be inferior in quality to
Western technologies, but it would have been very
difficult for Ukraine to find domestic sources to
finance this infrastructural project. Ukraine
already spent billions of dollars on preparing its
infrastructure for the Euro-2012 soccer
championship, which it co-hosted with Poland early
this summer.
High-level exchanges and
increasing economic relations are not set to
plateau yet. In mid-July, Foreign Minister
Hryshchenko spent several days in China preparing
Yanukovych's upcoming visit there. Indeed, this
may become a breakthrough year for Kiev's
relations with Beijing. And as Ukraine continues
to seek alternatives to Russian economic coercion
and dwindling Western assistance, Chinese loans
and joint projects could serve as an important
lifeline for the Ukrainian economy.
Oleg Varfolomeyev is a
journalist based in Kyiv, Ukraine. He covers
economic and political developments in Ukraine and
Belarus for analytical network CEEMarketWatch and
also writes regularly for a number of other
Western sources. He received a Master's degree in
Political Science from Central European University
in Budapest, Hungary.
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