How Ukraine’s instability could affect China

China’s resource deals in Ukraine – like its investments in other unstable regions – are politically and ecologically vulnerable

In September 2013, the Ukraine agreed to a plan to lease 5% of the country’s land to Chinese state-owned companies for agricultural production. Will this threaten food security in China given Ukraine’s political turmoil? The answer is no, but.

China imports less than 3% of strategic cereals like wheat. However, it faces significant challenges to sustain its goal of food self-sufficiency. Large imports of livestock feed, on the other hand, are likely to continue to grow as these commodities are taken off the list of strategic commodities; so China’s foreign land investments create other economic impacts on Chinese importers and the domestic market.
The Earth Security Index 2014 identifies the converging factors that may cripple China’s ability to produce all the food it needs to maintain food security: more than half of the groundwater in China is categorised as polluted. This results from a combination of untreated industrial wastewater, the organic pollutants of livestock and the overuse of agricultural inputs. China’s Ministry of Land and Resources estimates that pollution from heavy metals destroys 10 million metric tonnes of grain and contaminates another 12 million metric tonnes annually.
Chinese officials recognise that water scarcity and pollution, rapidly transforming diets and the migration of farmers to cities, may combine to jeopardise China’s grain self-sufficiency goals. Chinese agricultural investments abroad and trade partnerships like the one with Ukraine are expected to grow.
Places like Ukraine may have fertile land, but badly need the modernisation of its agricultural sector. They stand to win from commercial agriculture contracts with China, provided that agricultural intensification is done sustainably.
As countries rely more on each other for supplies of food, water and energy, China’s understanding that ecological stability is pivotal to its long-term security needs to translate to its investment and trading agreements, so that sustaining its resource base allows China to manage potential import disruptions.
The shape of Ukraine’s territorial integrity after the crisis will define much of the legal and political prospects of sustaining land deals made in 2013. But even if parts of the Ukraine were to be annexed by Russia, this would not change the reality that land and local populations need viable agricultural investments in order to thrive, and China has a role to play there too.
It is uncertain how much of the Ukraine-China land lease deal has materialised. Official sources say it had only reached the stage of a letter of intent. In the meantime, China is said to be seeking compensation for a US$3 billion loan to Ukraine for the breach of a loans-for-grain contract signed in 2012; this is according to Russian media, assuming Russian media news can be impartial in the face of current events. Under the deal, it is reported that the Export-Import Bank of China provided the loan to Kiev in exchange for supplies of grain. So far, Chinese importers are said to have only received US$153 million worth of Ukrainian grain.
Other countries have been running operational investments in Ukraine for several years. Of the 11 deals included in the Land Matrix, a database that is documenting land investments, a Luxembourg-based fund investment in 400,000 hectares and Cyprus-based funds for deals totalling 440,000 hectares are operational.
China’s global pragmatism is likely to play a positive influence in the current political events. While China faces serious ecological constraints to the prospects of its own food self-sufficiency, it must also realise that the same ecological principles apply to its suppliers. Ensuring that its trade and investment relationships with other countries, like Ukraine, can be drivers of sustainable development, must be seen by China as a strategic investment in the long-term stability of its supplies. This may, in turn, become a virtuous aspect of international relations in an era of greater resource insecurity.