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Jul 06, 2012

China, Ukraine ink billion-dollar deals

Kyiv Post

Two deals worth almost $5.4 billion in just a week have propelled previously limited bilateral relations between Ukraine and China to the spotlight, suddenly establishing the world’s most populous nation as one of Kyiv’s largest creditors.

A currency swap deal between both nation’s central banks worth $2.4 billion and a $3 billion loan from China to Ukraine’s government could ease pressure on the national currency amid falling demand for steel, the top national export. The loan could also boost the domestic agribusiness sector. On the other hand, a lack of details regarding the latter deal raises questions about its real potential impact and purpose.

Ukraine’s Agriculture Ministry and China’s Export-Import Bank signed the 15-year loan agreement on July 2 to finance agricultural projects in Ukraine. In addition to a grace period of five years during which only interest will be paid, the loan comes extremely cheap at a rate of just 6 percent.

By comparison, a recent government bond auction saw i-уеаг dollar-denominated bonds - one of the cheapest ways available to raise money - go for a rate of 9.3 percent.

The loan will go to a state fund that credits farmers and agribusiness companies. It will enable them to purchase crop protection products, seeds, agricultural equipment and support Ukrainian exports to China.

"[The agreement] should promote economic ties between the two countries through boosting external trade," investment bank Dragon Capital wrote in a note to investors. However, the bank added, most likely the money will be used predominantly for the purchase of Chinese equipment and products.

Nonetheless, this would allow farmers to take out credits at annual rates of 10-12 percent, rather than the prohibitive 20-25 percent they currently face, the head of the Ukrainian farmers and land-owners association Vasyl Yaroshovets told business daily Kommersant.

While the loans are said to mainly target individual and small farms, larger firms are also looking to China for expansion.

In April, billionaire Oleg Bakhmatyuk’s Ukrlandfarming signed a memorandum for a $4 billion deal with Chinese machine producer Sinomach to buy equipment and develop infrastructure.

The two deals are surprisingly similar, both in size and purpose, said Bohdan Chomiak, strategic advisor at the sector analysis firm Ukragroconsult. This suggested there could be overlap, he noted.

The other question, Chomiak added, is whether Ukrainian agricultural enterprises will be interested in using the loans to buy Chinese equipment. The latter is good in such areas as chemicals and small horsepower tractors, he said, but less so in the stronger machines, which could limit the credit line’s usefulness.

Meanwhile, the $2.4 billion central bank currency swap inked between both nations last month will allow bilateral trade contracts to be denominated in hryvnias and yuan. This could facilitate trade, experts note. But the main advantage for Ukraine is to cut down on dollarizan’on of trade deals, in turn lowering pressure on the domestic currency and keeping it stable.

Supporting the current exchange rate of about 8 hryvnias to the U.S. dollar has been costly for Ukraine. The central bank has used up almost 20 percent of foreign currency reserves since last August to preserve this peg.

Bilateral trade stood at $8.5 billion in 2011, according to official data, a figure both countries hope to raise to $10 billion this year. The agriculture minister’s plan of selling 3 million tons of corn to China would alone increase exports by $0.8 billion, Dragon Capital estimated.

These moves come amidst a surge of Chinese interest in the Central-East European region.

In April, Chinese Prime Minister Wen Jiabao came to Warsaw close to a quarter century after the last of his predecessors visited the country. There he pledged to double China’s trade with the region to $100 by 2015 (up from $3 billion in 2000), and announced a $10. billion credit line for investments in infrastructure and technology.

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