What’s at Stake for China’s Economic Relationship With Ukraine?

What economic interests does China have in Ukraine?

Over the three decades of Ukraine’s independence, the country’s natural resources, defense industry, and location have formed a growing share of China’s strategic interests. By 2019, China had replaced Russia as Ukraine’s largest trading partner, becoming the top importer of Ukrainian barley and iron ore, while Ukraine overtook the United States as China’s largest corn supplier. Ukraine is also a major arms supplier for China, second only to Russia, and China is the largest buyer of Ukrainian arms. China’s first aircraft carrier, Liaoning, is a refurbished Soviet aircraft carrier purchased from Ukraine.   

Ukraine’s free trade agreement with the European Union (EU) makes it an attractive transit point for Chinese goods, especially in light of growing European hesitancy toward trade relations with China. The European Parliament halted ratification of an EU-China investment deal last year, and countries such as Lithuania have backed out of the China-led “17+1” mechanism for greater cooperation with Eastern Europe.

Infrastructure and energy have also been major points of emphasis. In 2016, COFCO Group, China’s largest agricultural conglomerate, built a $75 million grain and oil transfer terminal at the Mykolaiv port on the Black Sea. In 2017, Chinese engineers finished upgrading Ukraine’s busiest international port, the Yuzhny port near Odesa. That same year, two Chinese firms won the contract to build a fourth subway line in Kyiv, with a provision to raise funds for the $1.3 billion project from Chinese financial institutions.

Ukraine’s promising wind and solar power markets have attracted China’s renewable energy giants. Major plans include PowerChina’s $1 billion wind farm project, which will be Europe’s largest onshore wind facility when completed, and a solar power array led by China Machinery Engineering Corporation that will be Europe’s third largest. The China National Building Material company has already built ten solar power plants in Ukraine, accounting for half of the country’s total installed solar power capacity. Meanwhile, Ukraine’s rich oil and gas reserves have been a major source of revenue for Chinese energy firms such as Xinjiang Beiken Energy Engineering.

What role has China’s Belt and Road Initiative (BRI) played?

Ukraine joined BRI in 2017, seeking to leverage its relationship with China to accelerate its transport modernization, especially for railways and roads. Ukrainian policymakers have also sought to position the country as a gateway for China’s access to Europe. In his first phone conversation with Chinese President Xi Jinping in 2021, Ukrainian President Volodymyr Zelenskyy called China “Ukraine’s no. 1 trade and economic partner” and said he hoped Ukraine would become “a bridge to Europe for Chinese business.”

The two countries have so far signed BRI-related construction contracts worth nearly $3 billion in sectors such as transportation and energy, and China has used BRI leverage to influence Ukraine’s position on disputed issues. In June 2021, Beijing and Kyiv signed a broad infrastructure deal days after Ukraine withdrew from a joint statement signed by more than forty countries that called for an independent investigation into human rights abuses in China’s Xinjiang region.

Ukraine has also become an important market for Huawei, the Chinese telecommunications giant. After developing Ukraine’s mobile network, Huawei won a contract in 2019 to build a build a 4G network for the Kyiv subway. In 2020, Huawei and Ukraine’s technical security agency agreed to cooperate on cybersecurity and cyber defense.

What is China willing to do to protect its interests in Ukraine?

As in the Libyan civil war, the China’s response to war in Ukraine is likely to be limited to evacuating Chinese citizens, suspending ongoing projects, and eventually having Chinese companies absorb the loss of assets. Beijing evacuated nearly thirty-six thousand Chinese nationals during the Libya crisis; evacuating the roughly six thousand Chinese citizens in Ukraine would likely be less challenging.

Regarding the broader conflict between Russia and Ukraine, China has sought to maintain its neutrality between two important trade partners. With Moscow’s military actions coming just a few weeks after a joint China-Russia statement affirming their bilateral alliance, Beijing could feel blindsided by the invasion. While China is unlikely to condemn it, this dynamic could be driving its openness to facilitating cease-fire negotiations.

Could sanctions push China and Russia closer together?

Yes. An unintended consequence of stringent sanctions on Russia, which include blocking its access to hundreds of billions of dollars of currency reserves, could be accelerating de-dollarization, or efforts to build alternative financial arrangements that don’t depend on the U.S. dollar. Although Chinese state-owned banks have a good track record of complying with U.S. sanctions, existing de-dollarization mechanisms could provide some relief for Russia. These tools emerged in 2014, when China-Russia currency swaps helped Moscow bypass U.S. sanctions imposed after it annexed Crimea. Russia has used the swap lines multiple times since then, and some $77 billion of its reserves are in assets denominated in the renminbi, China’s currency.

Beijing would support deepening these efforts, including by broadening the financial infrastructure based on the renminbi, which currently consists of its Cross-Border Interbank Payment System (CIPS) and UnionPay bank card network. This could boost the renminbi’s reserve currency status and strengthen China’s financial autonomy. 

Sanctions could also propel China and Russia to push for a broader de-dollarization coalition in multilateral institutions, including the grouping of emerging economies Brazil, Russia, India, China, and South Africa, or BRICS, and the Shanghai Cooperation Organization (SCO), a Eurasian security pact. BRICS has already become a platform for efforts to build an alternative financial system, with the group’s development bank raising funds in local currencies as part of its goal to “break away from the tyranny of hard currencies.” SCO members have discussed measures to de-dollarize their trade and development finance to help members bypass sanctions, efforts that could accelerate in the case of a protracted standoff between Russia and the West.