May 8, 2014 | 09:45 GMT

5 mins read

Chinese Investment May Venture Into Crimea

Chinese Investment May Venture Into Crimea
(Igor Russak/Host Photo Agency via Getty Images)

As Russia seeks Chinese investment in Crimea, it will try to make sure that such backing does not come at too high a price. Recently, Russian leaders and media reports claimed that China could invest more money in Crimea. Specifically, Chinese companies may help build a bridge across the Kerch Strait, creating a new link between Crimea and the Russian mainland. The Chinese may also help expand various Crimean ports, build solar power facilities, create special economic zones for manufacturing or even participate in other energy and transportation infrastructure projects.

Although nothing is confirmed, Russian President Vladimir Putin's trip to Beijing in late May will provide an opportunity for signing memoranda and launching negotiations over the financing and feasibility of various Crimean projects — even as China and Russia negotiate over much more consequential energy deals.

Russia has plenty of reasons to invite Chinese investment in Crimea, but ultimately Moscow wants to create a sense of strategic solidarity. Some Russian commentators have expressed obvious economic doubts about the proposed projects, which, in some cases, may not yield financial returns. In other cases, Moscow may seek to protect its own companies from Chinese competition, seeing as Russia will want to benefit from exports to the region and from heavy industry and construction contracts there. Commentators have also raised familiar complaints about Chinese quality standards and the prospective inflow of Chinese construction workers.

The Russians appear most interested in using Chinese investment as a means of lightening the costs of developing the peninsula, signaling that Crimea is indeed part of Russia. With Chinese cooperation, Moscow can also show the West that other states cannot be intimidated out of investing in areas under Russian control.

Attracting Chinese Attention

China has limited but significant interests in Ukraine. Ukraine supplies more arms to China than any other European country except France (Russia is the biggest supplier overall). The commercial trade picture is less inspiring: The vast majority of China's imports from Ukraine consist of iron ore, which China can source elsewhere, and sunflower seed. Of course, no export market is too small for China's attention, and Beijing will position itself to sell more goods, such as electronic equipment, machinery and vehicles, to Ukraine if and when its economy recovers from its ongoing crisis. China has also sought to take advantage of Ukraine's agricultural potential; for example, it has supplied drip irrigation equipment in exchange for priority access to farm goods.

Ukraine is a part of China's regional investment strategy but not a particularly important one. Since 2005, Beijing has committed roughly $2.4 billion in investment, slightly less than what it has invested in Belarus and far less than its investment in Hungary (though more than Poland or the Caucasus countries). Nevertheless, Ukraine's size, resources and key position as a portal to Eastern and Central Europe will always attract some Chinese attention.

China's Black Sea Interests

China's Black Sea Interests

Beijing's interests are heavily concentrated in maritime trade, due to China's economic structure and its desire for trade routes independent of Russia. The Black Sea region serves as an extension of China's Mediterranean interests, which is a critical component of Beijing's broader effort to develop markets throughout its projected maritime Silk Road and its rail-based Iron Silk Road. Beijing will ultimately continue to invest in Ukraine proper and may proceed with projects such as coal gasification, though it will move cautiously during this period of conflict and instability.

In this broader context, Crimea is a marginal player. It is not a compelling end point for Chinese exports, nor is it an important transit point for China's vast Iron Silk Road ambitions. Odessa remains the more significant Ukrainian port leading to Europe, and any unrest there is of greater concern to China. Crimea offers a more constricted route to Ukraine than Odessa. Now that Russia controls the peninsula, Moscow can interfere with China if Beijing wants to use Crimea to eventually access Europe. China does not need to build a bridge across the Kerch Strait to access southern Russia.

Beijing probably will invest in Crimea and deepen its footprint — it does not tend to pass up such opportunities, especially if Russia offers special incentives — but Crimea will ultimately remain a small part of China's Black Sea interests. Strategic relations with Russia, however, give greater impetus to cut deals on Crimea, especially as Beijing looks to manage Russia while maintaining ties with Ukraine proper and the rest of the Russian periphery.

The Price of Cooperation

China's rising economic presence in the region will require strategic negotiations with Russia. This very fact points to the frictions arising from Russia's recent moves. Russia's acquisition of Crimea, and its campaign of destabilization in Ukraine, Moldova, Georgia and the Baltics, threaten to impose new, Russian-influenced limitations on Chinese economic access, both directly and indirectly. Reverberations continue to be felt in places like Romania, Hungary, Bulgaria and the Caucasus. Turkey is largely exempt and better positioned to balance Russia and China. Russia's desire to broaden its influence in its periphery includes improving the playing field for its companies. Given these factors, China will continue to trade, seizing investment opportunities around the Black Sea rim. One thing China will not do, however, is approach negotiations with a view of Moscow as a politically convenient piggy bank.

Rather, Beijing will enter talks — particularly over the major Russo-Chinese natural gas project and other trade and investment — with the advantage of knowing that Moscow needs growing Chinese demand both for its own sake and as a substitute for Western demand, which is gradually diversifying away from Russia. Beijing wants to secure infrastructure and supply arrangements that will establish it as the arbiter of Russia's outreach to the Far East for the long term, both for its own energy security and to minimize competition with other Asian consumers such as Japan. This way, China will strengthen its energy economy while preserving its freedom to work with any partners of its choosing, fending off U.S. pressure to shame or punish Moscow. Moscow's primary challenge lies in preventing the Chinese from driving up the price of their cooperation to unacceptable levels.

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