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And what of China in Ukraine?

February 25, 2015

Little has been written here about China and its activities in Ukraine for some time.  That is in part due to China doing what it does in its usual quiet and unassuming way – despite the Chinese Consulate in Odessa being by far the largest and best presented of the almost 30 consulates situated in the city.

Over the past few years, aside from China and Ukraine agreeing to conduct bilateral trade in national currencies (up to 30%) annually, China has been steadily investing in Ukraine.  Apart from R&D, space, weapons, fertilizer and chemical production, not to mention and raw materials, Eximbank has also invested $10 billion in Ukrainian agriculture, setting up a permanent working group to identify suitable projects in Ukraine.  An on-going theme since 2011.

China, it appears, is now about to assist Ukraine in breaking its dependency on Russian gas too.

The Ukrainian delegation that has just returned from China has managed to secure a $3.6 billion line of credit from the China Development Bank via the Chinese Ministry of Commerce specifically to do just that.

Upon his return from China, Volodymyr Demchyshyn, Minister of Fuel and Energy of Ukraine  stated “Our delegation has just returned from China, where we had a meeting with the representatives of the Chinese Ministry of Commerce and China Development Bank. The representatives of both organizations confirmed the readiness to open a credit line for our projects.

The projects identified being the modernization of thermal power stations, heating networks and, perhaps, for the construction of coal gasification plant in Odessa.  Whether the proposed coal gasification plant in Odessa will be built the European standards, and whether it will run on coal from the occupied territories of Ukraine, that of Ukraine, that of Chinese owned Ukrainian assets, or perhaps Polish coal, remains to be seen.  Questions for another day.

Whatever the case, there will be no Kremlin reaction to the Beijing decision, unlike the reaction to the Polish announcement to resume gas supplies to Ukraine of 23rd February, which met with the immediate Kremlin response of banning Polish cheese products that very day.

Simply put, The Kremlin is in no way capable of threatening or coercing China to change its decision – despite any assistance to help Ukraine escape from its Russian gas dependency obviously being seen as irksome/somewhat hostile by The Kremlin.  In any Kremlin-China relationship, now or in the future, it is not going to be a marriage of equals.  All the numbers are on the side of the Chinese, as both sides know.

The question, however, is why China has decided to finance and facilitate a further step toward Ukrainian energy independence from Russia?  Ukraine, to be blunt, would have accepted $3.6 billion across an entire range of commodity and/or infrastructure development.  There is a clear political dimension to this Chinese decision over and above “business” and monetary ROCE.  Why invest in/finance a sector that will knowingly irritate The Kremlin more than almost any other?

It is also clear that the Europeans have now got the message regarding such heavy reliance on Russian gas as well.  It seems almost certain that a reduction in – although there is no desire to remove – Russian gas from the energy mix and supply chain will occur over the next decade.  One of the side effects of Kremlin actions in Crimea and eastern Ukraine has been to cause the Europeans to focus upon, and speed up, the planning to reduce dependency upon a Kremlin that clearly sees the EU as a regional adversary.  That adversarial relationship now being realised in numerous European capitals, with thoughts of meaningful partnership duly being shelved under current Kremlin management.  A transactional relationship, with the lacking of goodwill to be anything more, will prevail for many years to come within some major European nations.

All in all, a net gains, directly or indirectly, for China in Ukraine continue to quietly accrue – as does Chinese strength vis a vis Moscow.  Is China, aware of the newly found European momentum to reduce Russian gas imports, viewing the investment in Ukrainian energy independence as mechanism to help force The Kremlin into a very asymmetric relationship with China?

The net winner of the current mess within the European continent will be China – (and quite probably Iran, but that’s another story).

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