Ukraine war: one possible casualty may be Beijing's economic relationship with Kyiv

Fri, April 8, 2022

A new metro line in Kyiv. A US$50 million revamp of a shipping port in Mariupol. A large wind farm on the Black Sea coast.

Since Ukraine signed on in 2017 to Beijing's Belt and Road Initiative (BRI) - a sweeping trade and investment plan to bolster China's economic ties with the rest of the world - Chinese contractors and lenders have embarked on numerous ambitious infrastructure projects in the eastern European state.

Shelling has taken a heavy toll in the southern Ukraine city of Mariupol, raising uncertainty over the status of a China-sponsored US$50 million upgrade of the port. Photo: Reuters alt=Shelling has taken a heavy toll in the southern Ukraine city of Mariupol, raising uncertainty over the status of a China-sponsored US$50 million upgrade of the port. 

Those projects are in keeping with Ukrainian President Volodymyr Zelensky's ambition for his nation to serve as a "bridge to Europe" for Chinese investment, as he told Chinese President Xi Jinping last year.

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Russia's invasion of Ukraine has now thrust that future into doubt, according to economists and BRI experts.

Not only has the conflict disrupted projects in Ukraine and threatened Russia's role as a critical BRI artery, Beijing's refusal to condemn Russia's invasion - or even recognise the attack as an invasion - has frustrated Kyiv and led some in Ukraine to question whether Beijing should remain its primary economic partner.

"We believe that China, as one of the most potent global leaders, should play a more noticeable role in bringing this war to the end," Andriy Yermak, head of Zelensky's presidential office, said recently at a virtual event organised by Chatham House.

China has abstained from or sided with Russia in all United Nations votes about the war. And while it has pledged neutrality, China's state media and diplomats have blamed Washington and Nato for the conflict.

China's nominal neutrality was "de facto" support for Russia, argued Vasyl Yurchyshyn, director of economic and social programmes at the Razumkov Centre, a leading think tank in Kyiv.

Ukrainians were "disappointed", Yurchyshyn said, suggesting that such frustrations may translate to public opposition to future BRI agreements.

"At the beginning of the initiative, we welcomed it," he said of the BRI. But as for the future? "We'll see."

"We believe that China, as one of the most potent global leaders, should play a more noticeable role in bringing this war to the end," said Andriy Yermak (right), shown with President Volodymyr Zelensky on March 16. Photo: Ukrinform/dpa alt="We believe that China, as one of the most potent global leaders, should play a more noticeable role in bringing this war to the end," said Andriy Yermak (right), shown with President Volodymyr Zelensky on March 16. 

Ukraine was now at a crossroads where it had to "clearly identify its main partner", said Yurchyshyn. "Of course, there should be no doubt here - the viability of Ukraine today definitely depends on the United States."

Yurchyshyn acknowledged that a pivot risked sacrificing the economic benefits of Ukraine's China ties, including those of the BRI. But Ukraine's shift from Russian markets after Moscow annexed Crimea in 2014 offers a guide. Ukraine moved swiftly to ramp up trade ties with the European Union, and Russia soon lost its status as the country's top trading partner.

Today, China occupies that spot, importing huge amounts of corn, seed oil and iron ore from Ukraine, with exports to China in 2021 totalling some US$8 billion, according to Ukrainian government data.

Ukraine's exports have cratered amid the conflict, sending shock waves through the global food market - the UN's World Food Programme sources half its supplies from the country, prompting fears of worsening famines in Africa and the Middle East.

But when agricultural exports eventually resume, Ukraine may be able to find other markets beyond China for goods, said Yurchyshyn. With global food demand expected to grow over the next decade, "Ukraine's reorientation to new markets - in particular, to the highly dynamic countries of Southeast Asia - may bring long-term benefits", he said.

Liu Pengyu, a spokesman for the Chinese embassy in Washington, did not respond to questions about whether Beijing was preparing for a fraying of its economic ties with Kyiv. But he insisted that China would "carry out normal trade cooperation with Russia and Ukraine in the spirit of mutual respect, equality and mutual benefit".

The Ukrainian ministry of foreign affairs did not respond to a request seeking comment on whether Kyiv anticipates any economic shift away from Beijing.

Political considerations aside, analysts said that any BRI agreements with Ukraine are now likely to have been put on ice amid the fighting.

Over the past five years, Chinese firms have taken part in more than 30 investment projects in Ukraine, according to Janes, an open-source intelligence firm that tracks Chinese investments.

Among the highest-profile projects was an agreement between a Chinese state-owned agricultural company and Ukrainian seaport authorities for China to pump US$50 million into the expansion of port facilities in Mariupol.

The status of that project is now uncertain, after weeks of sustained Russian attacks on Mariupol killed almost 5,000 civilians and damaged 90 per cent of the buildings there, according to city officials. Port infrastructure was reported to have been affected.

"It would be completely normal for China to take a pause, especially if there's active fighting, but even well after the fighting" as Chinese firms re-evaluate the commercial viability of projects in Ukraine, said Matthew Mingey, a senior analyst at the Rhodium Group.

An aerial view on April 3 of residential buildings damaged by shelling in Mariupol. 

Citing industry insiders, the Chinese state-owned Global Times tabloid has reported that following warnings from the Chinese embassy in Kyiv, large state-owned companies operating in Ukraine are making contingency plans and bracing for the prospect that future projects may get put on ice.

But Ukraine's need to rebuild after the war is a potential opportunity for BRI contractors to restart engagement, analysts said.

"Regardless of the outcome of the war, it seems likely that Chinese companies that already had a presence in Ukraine would directly transmit humanitarian assistance to affected communities," said Courtney Hulse, an analyst at Janes.

If the swift international response to punish Russia is any indication, the field is likely to be packed, with lenders like the European Bank for Reconstruction and Development already lining up to assist Ukraine's rebuilding efforts.

Nations looking for development financing have often turned to BRI financing when there "wasn't a good option" from another multilateral development institution, said Michael Bennon, a research scholar at Stanford University specialising in global infrastructure policy.

"It's really just a function of the number of options. And my prediction would be that in a post-conflict scenario here, Ukraine is going to have a lot of options."

The US is also eyeing the war's potential economic fallout, which may present opportunities to its agency, the US International Development Finance Corporation (DFC) - Washington's alternative to the BRI.

Beyond the humanitarian cost, the Kremlin's actions had caused "acute economic shocks felt across the global community, particularly in the energy and agricultural sectors", Algene Sajery, DFC's vice-president for external affairs, said.

Sajery said that the DFC's strategy for Europe was focused on "breaking the grip of coercive economic relationships like those that Russia and the PRC employ".

Given the pace at which the Russia-Ukraine conflict has unfolded, analysts cautioned that a picture of the war's broader impact on the BRI would take time to come into focus.

For now, they said, it appeared that China's refusal to align itself with the West in condemning Russia has not yet affected its standing with its other BRI partners.

The EU's top diplomat said discussions last week with Chinese President Xi Jinping and other Chinese leaders were a "dialogue of the deaf" when it came to Ukraine. 

"Although China's strategic partnership with Russia preceding and during the current war in Ukraine certainly puts stress on the already intense scrutiny that Chinese investment has received in recent years, many governments will prioritise their countries' economic security and prosperity over other issues," Hulse said.

But it was likely to cause policymakers in other countries that have taken a more hawkish approach to China's ambitions to double down on their critique of the BRI, Mingey said.

"If you were worried about Chinese influence, or you believed the 'debt-trap diplomacy' myth, it is fodder for you to see what you want to see, which is the spectre of a malign Chinese influence," he said. China's response to the invasion had already "poured gasoline" on existing China-EU tensions, he added.

On Tuesday, the EU's top diplomat, Josep Borrell, called talks last week with China a "dialogue of the deaf", chastising Beijing for refusing to weigh in on the crisis in Ukraine.

If the EU - which last year put the brakes on an investment deal with Beijing - decides to take an even harder line, that could pressure European BRI partners to re-evaluate their agreements, Bennon said.

One other area of concern: the war's impact on Russia as a primary rail freight conduit connecting China with its BRI partners in Eastern Europe.

US and EU financial sanctions on companies like the state-owned Russian Railways do not necessarily preclude businesses from using their services, but indications suggest that Moscow's political and economic isolation is already diminishing freight flows through the country.

A China-Europe freight train from Chengdu, arriving in Vienna, Austria, in 2018. The Ukraine war has already begun to affect such traffic, as freight companies reroute around Russia, and some companies stop sending goods by rail. 

And citing "ethical" reasons, the Dutch freight company Rail Bridge Cargo said it would halt all rail routes through Russia, shifting them southward to pass through countries including Kazakhstan, Georgia and Turkey.

Jacky Yan, a China-based freight industry professional whose company, New Silk Road Intermodal Co, specialises in shipments along BRI corridors, said there was already a noticeable shift in volume from rail freight through Russia to sea routes.

As for the major logistics businesses that had already sent "a signal to the market" by suspending service through Russia, Yan told a webinar hosted by RailFreight, an industry monitor: "I'm afraid that more companies will follow their steps."

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