On China, the president, and the budget

“China will not give money to Yanukovych as the latter is threatened by a revolution,” the New Ukraine website reported on December 4 citing Espresso TV’s own source in the presidential administration. It added that “China does not trust the Ukrainian leadership, and considers it an unreliable partner.” The website alleges that distrust has caused a number of documents on cooperation in energy, aviation, agriculture, and humanitarian affairs to be replaced by a single agreement, the purely formal Treaty of Friendship and Cooperation between Ukraine and China which places no specific obligations on the parties, thus making Ukrainian president’s visit a ceremonial affair only.

The Day’s correspondent who is now in China sent us on December 2 a photocopy of the treaty’s text, and it is indeed very formal. However, a few other documents that the parties intended to sign were highly substantial indeed, but at the time of this article going to the press we did not know whether they would be signed and whether any changes would be made to the versions we have obtained.

The Day asked the chair of the Committee of Economists of Ukraine Andrii Novak what the presidential visit to the Middle Kingdom signaled and what might be the consequences of such cooperation between Ukraine and China.

Whom is Yanukovych trying to influence with his visit to China? What is he signaling with it? What he tried to show Ukrainians with it?

“I think that the visit of our president to China is an urgent business trip, aiming only to borrow the money Ukraine needs now very much. After the failure to sign the Association Agreement with the EU he has no hope of receiving financial support from the EU, restarting cooperation with the IMF promptly, or getting new investors to buy into Ukraine.

“Russian Federation promised all the gold in the world to Ukraine only to get our country to backtrack on the Association Agreement. Now, with the signing failed, Russia also will not provide any financial assistance. It has fulfilled its political objective. Thus, Yanukovych has to tour the world looking for money. Currently, China is the most realistic source of money, as its economy grows rapidly and it has a lot of capital available.

“Ukraine needs to borrow at least 5 billion dollars to close the fiscal year, that is, pay salaries and pensions, and possibly even top up its Forex reserves. Of course, this sum would do a lot now, but when we talk about the prospects for 2014, it definitely amounts too little for the country. Ukraine’s economy is now shrinking and to propel it to even a low growth, the government needs to stimulate producers via public spending, but its resources are very limited. Thus, they need to look for external money infusions into the economy to stimulate industrial growth and support further expansion in agriculture which has shown good results this year. The priority, though, is getting industry growing again, even if slowly, as some of its branches are currently in the red and pulling down the GDP. Therefore, the visit to China is just a fundraiser, as the president is looking for credit.

“There is a problem with it: China usually provides trade credit only, requiring the debtor to buy its products of any kind, so it will be very difficult for our president to get unencumbered funding from China.”

Was it the reason behind the Minister of Agriculture of Ukraine’s participation in the visit?

“To get money, a prospective borrower needs to demonstrate what they will be used for, as no nation may realistically ask for money just to cover their budget shortfalls. Therefore, the presidential delegation has to demonstrate that Ukraine has investor-friendly, promising economic sectors. To date, the most promising area is agriculture, which has grown by 10 percent in the first 10 months of this year just as industry showed a decline of 5 percent. Against the background of these indicators, the president and his Minister of Agriculture Mykola Prysiazhniuk will try to convince China that they really have to pour their money into our agriculture.

“I really hope that the president will be able to return with funding secured, because, first of all, the government needs to cover welfare expenses of the budget. I think that Yanukovych now has a good argument for it in the tense political situation in the country. He can present it as a time of crisis forcing the nation to appeal for financial assistance. I think that, given the common communist past of our two countries, the post-Soviet Ukraine and post-Maoist China will be able to reach certain agreements and Ukraine will receive a certain amount of funding.”

In your opinion, how will Euromaidan affect the economy of Ukraine?

“Industry will not suffer too much, but the hryvnia’s exchange rate can be adversely affected by Euromaidan. I worry about possible use of these hot political times for a large speculation by our bankers or their Russian colleagues. Four large Russian banks have entered our market, having between them over 20 percent of it. At the Kremlin’s orders, they can provoke a devaluation of the hryvnia. Massive speculations in hryvnia are a direct threat coming from Euromaidan.

“Also, should the protest fail to bring any positive result, the people’s frustration may induce them to protect their hryvnia incomes by exchanging their savings into the hard currencies.”