Ukraine - China to the Rescue ?

Ukraine prior to the crisis:

• Aging industrial sector, eastern Ukraine, primarily engaged in manufacturing of steel for Russia
• Elephant size debt of USD 35 billion
• A politically and ethnically divided population
• The private sector mainly or fully controlled by oligarchs
• Endemic Corruption
• Massive Inequality (the rich are too rich and the poor too poor)
• Energy Crisis
• Low foreign reserves mainly due to poor export figures

The US and IMF has offered billions of dollars, contingent on energy subsidies & opening up the economy. Ending energy subsidies is to ensure that the loan amount facilitated by the West does not end up in Russian banks as Ukraine is reliant on Russia for its energy needs. However, ending energy subsidies also means close to double increase in price of energy, which means many Ukrainians would freeze next winter and the aging industries would go out of business. The EU bloc will not do a favor buying not so competitive goods.

Ukraine was the fourth largest corn exporter in 2012-2013, behind Brazil, the US and Argentina. It is also the sixth biggest supplier of wheat and exported 7.1 million tons in 2012-2013. The financial crisis may affect the production of crops with farmers having trouble to pay for fertilizer, after the Ukraine’s currency decline against the dollar.

In the current scenario, the survival for Ukrainians lies in the production and export of grains. The country which has expressed interest in Ukraine’s grains is China. Ukraine is expected to become China’s largest overseas farmer in 3 million hectare land (i.e. 7% of Ukraine’s land). China cannot grow enough grain to feed its billion+ population. The good thing about the Chinese is that they don’t mingle with the internal affairs of the countries where they develop infrastructure. Their funding and support is not contingent on beneficiary countries engaging in the sort of austerity that the IMF, Europe and the US prefer to impose on any country who goes them for financial support. For China, food security for the future generations is critical and it will be ready to pay a premium for the same.

Ukraine has got two core issues; one is debt and the other is inequality. The West will not allow a massive restructuring on default of debt & yet rain dollars. Ukraine cannot even afford to cut its ties with the Russians as it is heavily reliant upon Russia for its energy needs. Ukraine will have to maintain friendly ties with Russia to secure gas supplies at discounted rates. Ukraine will have to turn to China and improve its productivity and head to become the biggest exporter of grains.

Let me summarize the above in a manner where it becomes easier to understand the dynamics surrounding Ukraine post Crimea annexation. Ukraine’s western back government will soon have to put more focus in diplomacy with Russia and furthering ties with China than relying on Europe and the IMF who have no history of pulling out ordinary men from unemployment and poverty.