Ukraine Taps China for Cash to Duck Vote-Damaging Deal Terms

Ukraine is broadening its business ties with China as President Viktor Yanukovych sidesteps the conditions traditional partners such as Russia and the European Union are demanding to provide loans and investment.

Currency-swap and loan deals agreed since June may reach as much as $9 billion, raising China’s standing in Europe’s biggest iron-ore and corn exporter as the fastest-growing major global economy seeks to secure materials and food supplies.

Ukraine wants foreign cash to buoy growth and ease debt payments as Yanukovych’s ruling party gears up for parliamentary elections in October. The former Soviet republic has so far rejected International Monetary Fund terms to unlock a $15.2 billion bailout, as well as conditions to spur European energy- industry investment and lower Russian fuel-import costs.

“The Chinese have always been willing particularly in the former Soviet space and also in Africa and elsewhere to provide no-strings-attached funding to advance their economic interests,” Alexander Kliment, senior analyst at Eurasia Group in New York, said by phone. “Russia’s intentions are economic but also first of all political.”

Currency Swap

After similar agreements to boost trade with countries such as Argentina and Mongolia, China signed a three-year 15 billion- yuan ($2.4 billion) currency-swap accord with Ukraine in June. Bilateral trade was $8.5 billion in 2011, with China the second- biggest importer into Ukraine behind Russia in the first half of 2012 with an 8.2 percent share, official data show. Germany was third with 8.1 percent.

In addition, Ukraine said July 2 that it will get a $3 billion Chinese loan for as-yet undetermined agricultural projects. It may borrow a further $3.7 billion to help build coal gasification plants that would trim its reliance on natural-gas imports from Russia, according to Ukraine’s Energy and Coal Industry Ministry.

The 15-year agriculture loan has a five-year grace period and carries a 6 percent interest rate, less than the 9.25 percent coupon on $2 billion of Eurobonds Ukraine sold last month. It will also improve the balance of payments, central bank Governor Serhiy Arbuzov said in a July 18 interview.

‘Key’ Partner

The hryvnia, whose exchange rate the central bank keeps within a range to the dollar, has declined 1.2 percent in 2012, data compiled by Bloomberg show. The current-account gap may widen to 6.5 percent of gross domestic product this year from 5.5 percent in 2011, the IMF predicted May 28.

China is becoming a “key” economic partner and can help Ukraine reduce its dependence on Russian energy supplies, Foreign Minister Kostyantyn Gryshchenko wrote Aug. 21 in Ukraine’s Den newspaper.

“The traditional EU-Russia-U.S. triangle has become too narrow for Ukraine, which must accelerate modernization,” he wrote. “Despite the unparalleled importance of EU integration, we’re getting more and more resources thanks to partnerships with the new world’s economic leaders such as Turkey, Israel, Brazil, India, Vietnam and, primarily, China.”

Ukraine will begin to benefit from its deals with the Asian nation this year, Economy Minister Petro Poroshenko said Aug. 1.

‘Trustworthy Friends’

China upgraded its relationship with Ukraine to strategic status when President Hu Jintao visited Kiev last June. The two countries should become “trustworthy friends and reliable partners,” Deputy Foreign Minister Cheng Guoping said in November at the opening of the Chinese consulate in the Black Sea resort of Odessa, the country’s first diplomatic representation in Ukraine outside the capital.

China’s political, economic and cultural ties with Ukraine are “in the best shape ever,” Li Jiping, vice president of China Development Bank Corp., the state bank in helping Chinese businesses venturing abroad, said Aug. 7 in Kiev, the Ukrainian capital. He said his bank “has the capabilities and willingness” to help boost cooperation in energy, infrastructure and agriculture.

China has expanded investments and economic ties in other parts of the former Soviet Union.

The Asian nation has granted state-controlled Russian energy companies OAO Rosneft (ROSN) and OAO Transneft $25 billion in loans to aid exploration and export-capacity construction in exchange for a $1.50-per-barrel discount on crude sales for 20 years. It has also pledged $1 billion to a Kremlin-backed private-equity fund to spur investment in extracting the energy supplies it needs to grow.

Turkmen Loans

Elsewhere in the region, Turkmen state energy company Turkmengaz has won more than $8 billion of loans from China since 2009 in exchange for energy shipments, while Kazakh miner Kazakhmys Plc (KAZ) agreed to borrow $1.5 billion from China Development Bank to develop a copper project.

China may bid for Belarus’s state fertilizer company Belaruskali, which produces 15 percent of the world’s potash, President Aleksandr Lukashenko said last year. The company is worth as much as $32 billion, according to Lukashenko.

Belarusian companies are considering holding share sales in China, Interfax cited the former Soviet republic’s ambassador in Beijing, Viktor Burya, as saying July 10.

China will want economic benefits from its loans to Ukraine, possibly through access to its natural resources, according to Alexander Valchyshen, head of research at Investment Capital Ukraine in Kiev.

More Funds

“China will definitely befriend countries that are global leaders in agriculture and Ukraine is one of them,” he said by phone. “If Ukraine’s government shows Chinese money won’t flow into a hole and will be used to boost China’s economy, then those funds will come.”

Still, such conditions may be more palatable than others on offer as Yanukovych prepares for parliamentary elections on Oct. 28 at which his Party of Regions is neck and neck with jailed opposition leader Yulia Tymoshenko’s, according to a July 27- Aug. 9 poll by the Kiev-based Razumkov Center for Economic and Political Studies. The survey of 10,979 has a margin of error of 1 percentage point.

As the ballot nears, Ukraine has rejected EU allegations that Tymoshenko, a former prime minister, imprisonment for abuse of office is aimed at keeping her at bay. Her sentence has torpedoed a planned Association Agreement that would create a free-trade zone with the 27-member bloc.

Other deals have also veered off course.

Energy, IMF

An EU proposal to help fund a revamp of Ukraine’s gas pipelines has yet to proceed as demands to unbundle sales and transmission at state energy company NAK Naftogaz Ukrainy haven’t been met. Ukraine’s IMF bailout has been frozen since last March as the government won’t raise household fuel tariffs to narrow the budget deficit.

The government has also struggled to find common ground with Russia, which has sought a stake in Naftogaz’s pipeline network and Ukraine’s membership in a customs union with Belarus and Kazakhstan in return for lowering energy price for its neighbor.

That makes China a more attractive partner for the time being, according to Tomas Valasek, foreign-policy and defense director at the Centre for European Reform in London.

“Ukraine is trying to avoid the conditionality that comes with EU, IMF or Russian money,” he said by phone. “Europe wants reform and transparency in the energy sector and Russia wants control of key industries. That creates political difficulties before the elections.”

To contact the reporter on this story: Daryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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