The Dragon in the Room.

VT Tyndall Global Select Fund

The Dragon in the Room.

While all eyes are focussed on the horrific attacks and retaliations between Russia and Ukraine, it is easy to ignore tensions in other parts of the world. It was noticeable that China, who cuts off relations to any company who refuses to recognise Taiwan as a part of China, abstained from voting on the UN security council resolution condemning Russia’s invasion of Ukraine, and have been unusually quiet about its views on the topic.

Both Ukraine and Russia have strong economic ties with China, and President Putin met with President Xi Jinping only days before ordering his troops to cross the border, so questions remain as to whether the Chinese authorities had prior notice of his intensions. Ukraine, however, is of strategic importance to China and trade between the two nations has increased over recent years.

China is the Ukraine’s largest trading partner, accounting for 14% of all exports, in comparison Russia only accounts for 5.5% of Ukrainian exports. Although in terms of overall Chinese imports, Ukraine is insignificant, accounting for 0.42% of all imports (Russia accounts for 3.1% of imports and is China’s 10th largest supplier), it supplies 29.07% of China’s overall corn imports and the growing relations have been cemented by Ukraine being a key hub on China’s belt and road initiative.

Ukraine, colloquially known as ‘the breadbasket of Europe’, is one of the top three corn producers worldwide, supplying 23.86 million tonnes of corn worldwide according to data from MySteel, which is the equivalent of 13.3% of global production; it also supplies about 12% of global wheat exports. With exports from Ukraine being stifled by the ongoing tensions, the ramifications are not only felt in China but worldwide. Russia and Ukraine combined account for one third of global wheat exports, a fifth of corn exports and 80% of sunflower oil production, and as such wheat prices have risen by over 20% since the start of the year and corn prices by over 15%.

Global agriculture also is likely to be impacted by the supply of urea, which is important for fertiliser. Russia is the world’s largest exporter of fertiliser and thus can respond to international sanctions by restricting supply, leading to crop prices to rise further; Russia has already imposed a ban on exports of ammonium nitrate, the other main source of nitrogen fertiliser in a move to keep more of the supply at home and controlling domestic prices.

The effectiveness of global sanctions on Russia, rely in part on the Chinese authorities’ stance towards Russia with which it has recently signed a $100 billion deal to buy gas from. China remains Russia’s largest export market at 8.6% of all exports and bilateral trade has risen to $150bn from $80bn in the past four years.

Thus far China has avoided answering questions on its stance towards relations with Russia and its views on the invasion of Ukraine. The Foreign Minister Wang Yi reiterated the official line of “China sees a complex and unique historical context on the Ukraine issue, and understand Russia's legitimate security concerns”, and their long-standing position that: “The sovereignty, independence and territorial integrity of every country must be safeguarded”. On the recent meeting between the two leaders, however, there was an agreement that “friendship (between China and Russia) has no limits and there are no forbidden areas of cooperation”, so the international community is no clearer as to whether China will or will not become an escape valve for internal pressures in Russia, although it is likely to be wary of inflaming relations with its largest trading partner on the other side of the Pacific Ocean.

2nd March 2022
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Data source (unless otherwise stated): Bloomberg
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