EBRI Q3 2021 results: Ukraine is primed to gain from China’s engagement

Despite the fact 39 of the 68 countries in the Euromoney Belt & Road Index (EBRI) improved in Q3 2021 relative to Q2, many countries in eastern Europe and central Asia are lagging in tier 4, with index values less than 100.

An index value below 100 describes a deteriorating investor environment, according to its constituent factors. They are GDP and the various economic and political risk indicators included in Euromoney’s country risk survey providing guidance to the business environment.

Azerbaijan, Belarus, Kazakhstan, Russia and Ukraine all moved up from tier 5 before the pandemic struck, but remain mired in tier 4, behind countries with stronger growth rates and business climates. Many of these are EU members, or are aspiring to join, and are in receipt of substantial financing as a result.

According to Nicolas Firzli, director of the G20 Pensions Forum and advisory board member of the World Bank Global Infrastructure Facility, the southeastern European countries, such as Albania, Bulgaria, Montenegro, North Macedonia and Slovenia have improved in the EBRI, reflecting their positive macroeconomic outlooks and “newfound investment attractiveness of these once peripheral countries”.

“The accelerating Sino-American rivalry along the New Silk Road, triggered by Beijing’s Belt and Road Initiative (BRI) and the belated financial response by the Biden White House and G7 policymakers – at Carbis Bay in June – known as Build Back Better World (B3W), have changed the geo-economic equation for good,” he says.

“Skopje, Sofia, Belgrade and Podgorica are now at the very centre of the Eurasian continuum, attracting billions in foreign direct investment (FDI) every quarter from both western investors (US, UK, EU) and Chinese state-owned enterprises (SOEs), thus ensuring solid growth prospects for that strategically located region.”

The question is whether other countries will catch up and how China views them strategically from the Belt and Road perspective.

Lagging behind

Take Ukraine, with which China has engaged more systemically this year in the light of worsening relations with the west and central and eastern Europe, highlighted by Lithuania pulling out of the crumbling 17+1 bloc, an initiative devised by China to foster business and investment relations.

Ukraine is seen as important for diversifying the northern corridor of the new Silk Road, with Kiev eyeing up the opportunities of bridging the east-west divide by way of lucrative export opportunities and improvements to its transport infrastructure.

Yet, according to Iikka Korhonen, head of research at the Bank of Finland Institute for Transition Economics, “Ukraine has been reluctant to sell agricultural land, and the privatization of state-owned companies, which could be attractive targets for the Chinese companies, has been very slow”.

Furthermore, he states that much of the transport and energy infrastructure, for example, is owned by local oligarchs.

“Their power – both financial and political – stems from owning these assets,” says Korhonen. “So, they are very unlikely to sell.”

He also makes the point that when the Chinese are looking to invest in “something sensitive”, roadblocks are often put in the way, noting that at the insistence of the US, China was prevented from taking over the Ukrainian military aircraft engine manufacturer Motor Sich.

Spanning the region

Whereas Tajikistan, Turkmenistan, Moldova and Uzbekistan are all riding high in the EBRI’s tier 2, with index values close to 200, Ukraine and other countries in the region are far lower – and in that respect they still offer considerable opportunity for development driving fast-paced growth.

Constantin Gurdgiev, a professor at the Middlebury Institute of International Studies, argues that the weaker gains for countries such as Russia, Kazakhstan and Azerbaijan are supported by a “myopic view of these economies as lacking growth momentum before the onset of the pandemic and, correspondingly, witnessing a slower recovery since the stabilization of the pandemic in mid-2021”.

All three, he says, face substantial tailwinds from rising energy prices and the acceleration in demand for primary materials in Europe and Asia.

“The ongoing supply-chain chaos engulfing much of the world puts forward stronger incentives for China, as well as Russia, to develop alternative shipping-route infrastructures to counter the migration of production hubs away from Asia, and to mitigate the risk that existent shipping lines can be weaponized by the US,” adds Gurdgiev.

From China’s point of view, he says, the current supply-chain crisis in international trade requires a strategic response aimed at mitigating similar disruptions in the future.

“One pillar of such a response would be to complete the central Asia-Russia-Europe leg of the Belt and Road Initiative,” says Gurdgiev. “Another pillar is to identify suitable counterparties that can serve as assembly, manufacturing and logistics hubs for supplying European markets – in a way, entrepôts into the EU.”

From both points of view, Ukraine and Belarus, he argues, offer China excellent opportunities for inward investment aimed at developing transport and logistics systems linked with the BRI.

Of the two, Belarus, with an index value of just 85.26 in the EBRI, is more promising in terms of its demographics and its links to Russia and central Asia.

However, the recent political unrest in Minsk has de facto cancelled any serious chances of large scale Chinese FDI flowing into the country.

This explains why, he says, that after years of watching the sustained depreciation of Ukrainian assets, Beijing is starting to show interest in moving into Ukraine.

The question is how far Kiev will go in cooperating with Beijing. The BRI could prove the game changer. 

EBRI Q3 2021 Index