Chinese investments or expansion – all the facts behind sale of top Ukrainian aircraft company Motor Sich

Image: The center for Transport Strategies 

Ukraine

In June this year, a Chinese company proposed to pay Ukraine $100 mn over market prices for the right to buy 50% of the stocks of Motor Sich — one of the leading companies in the production of airplane and helicopter engines. These additional 100 million, which the Chinese company proposed to pay to the Ukrainian state budget in addition to the price of the factory in an attempt to placate Ukraine’s Anti-Monopoly Committee which blocked the transaction, prove how important this deal is for China.

Holding the factory, China may attain leading technologies for military engine building — a possibility widely discussed in the context of John Bolton’s visit to Kyiv to secure US interests in its rivalry with China. Also, recently the US announced a revision of US military support for Ukraine, to check whether it is used properly. Although the Pentagon confirmed that the result of revision is positive and Ukraine will attain military support, many journalists wondered whether this procedure was caused by the possible sale of Motor Sich to the Chinese.

So, how can this sale influence Ukrainian-American relations? Is it possible to stop the deal now – and if so, how?

Why is there a need to sell a successful company in the first place?

Motor Sich is one of the most important Ukrainian strategic enterprises. 30,000 people work there and the factory produces engines for helicopters and planes of the highest class. As well, it launched its own mass production of helicopters.

However, most of the engines were built for export, and Russia was the leading customer. According to the state report republished by Hlib Kanevskyi, over 80% of all Russian helicopters had engines from Motor Sich. After 2014, after Russia occupied Crimea and fostered a war in eastern Ukraine by providing weapons and soldiers to support the “DNR” and “LNR” proxy republics, sanctions forbid to sell such engines to Russia and the company found itself in a crisis.

The state made at least two mistakes that led to the current problem.

The first one happened in the 1990s, already when Motor Sich was subjected to privatization policies and was privatized mainly by Viacheslav Bohuslaiev, who can be called a pro-Russian micro-oligarch of Ukraine.

Being Russian by origin, Bohuslaiev as an owner remained indifferent to the ongoing conflict between Ukraine and Russia. The Bihus.info project collected evidence that the factory continued to sell engines to Russia illegally after 2014, using Belarus as an intermediary.

From 2006 till the summer of 2019, he was an MP, most of the time – as part of exiled President Victor Yanukovych’s Party of Regions. He used this influence to lobby for the interests of his company. In that way, he contracted the state design and construction bureau Ivchenko-Progress for 60 (!) years.

Bohuslaiev near his engines. Source: wing.com.ua

Ivchenko-Progress, being bound by a long-term contract with Motor Sich, provides design and operational documentation for the majority of engines and propellers. De-facto, it serves as the brain of contemporary Motor-Sich. Due to the privatization of Motor-Sich and then because of allowing that contract with Ivchenko-Progress, the state delivered technologies important for national security to private hands. These technologies are the most valuable component of Motor-Sich now, not the factory itself.

The second mistake of the state happened after 2014. Banning exports to Russia, the government had to facilitate alternative markets for such an important company as Motor Sich, including the provision of state military orders for Motor Sich.

According to Valentyn Badrak, director of the Center for the research of the army, Motor Sich lost more than two-thirds of its orders after the war began. Having created the National Helicopter of Ukraine program, the Ukrainian government did not care about Motor Sich. In 2018 Ukrainian authorities bought 55 French helicopters which were almost identical to those produced by Motor Sich.

As a result, after 2015, China became Motor Sich’s main new customer instead of Russia. Year after year, the cooperation of Motor Sich with China increased.

Chinese interests and Ukrainian choices

Already in 2015, Viacheslav Bohuslaiev signed a memorandum on cooperation with the Chinese holding Beijing Skyrizon Aviation Industry Investment in order to launch the production of engines in the Chinese city of Chongqing. In 2016, according to the Security Service of Ukraine, 56% of Motor Sich were already controlled by China through offshore companies.

De jure, such a massive purchase of a strategic Ukrainian company by one entity should be agreed with the Anti-Monopoly Committee of Ukraine. As there was no such consent from the committee, all purchases of the company’s stocks were frozen. The Security Service of Ukraine conducted several searches in the company in 2017 and 2018.

Leading Russian combat helicopter Mi-17B5 equipped by engines from Motor Sich. Source: ipress

Yet, these restrictions didn’t impede the Chinese companies Skyrizon and Xinwei Group from buying more than 50% of shares of the company in the summer of 2019. The transaction was already done, but the Chinese Companies don’t have ownership rights yet. These new purchases should also be approved by the Anti-Monopoly Committee of Ukraine. The Committee makes the final decision on whether to allow the purchase.

The Anti-Monopoly Committee of Ukraine is jointly controlled by the president of Ukraine, prime minister, and parliament. However, only the president has the right to dismiss the highest staff of the Anti-Monopoly Committee. As Volodymyr Zelenskyy’s party has a majority in the parliament, the president is de-facto is personally responsible for the acceptance or rejection of the deal with the Chinese. Therefore, it’s reasonable to suppose that John Bolton’s conversation with Zelenskyy on 28 August was centered around the Chinese deal.

John Bolton himself in his interview to Radio Svoboda confirmed this:

“The issue is important not only for Ukraine but also for the USA, Europe, Japan, Australia, Canada, and other countries. The issue concerns the attempts of China to use its economic leverage tp defense technologies from other countries. We in the USA have mechanisms to protect those branches of the economy that are important for national security. Ukraine should also consider the long-term effort of China to increase its impact on the world-scale. We willd discuss this issue with different Ukrainian authorities.”

How China deceives other countries to exploit their technologies

Yet, more important is that Motor Sich is not the only case of China buying highly technological enterprises and solutions while promising that the manufacturing will remain in the country of origin. However, the technologies de facto leak to China. As soon as the more powerful production starts in China, the old company back home fails to compete on the market.

Mykhailo Honchar, President of the Center of Global research “Strategy XXI” is among the many analysts who confirm such strategy of the Chinese:

“China will do everything so that all technological achievements of the Ukrainian enterprise becomes Chinese, and the ‘shell’ is simply discarded over time. The production of engines will be integrated into the Chinese defense industry, and this will not take long. The Motor Sich enterprise will either disappear as such altogether, or be transferred to the production of something minor, but the main production will be in China. We already have experience of such ‘cooperation’ with China, or to be more precise – deception. It was pure fraud and, I think, corruption worked there, too.”

John Bolton has also confirmed another corruption-related aspect of Chinese deals in the interview:

“We know well how Chinese companies work. At first, the deal with them seems to be quite profitable. However, later the illusion evaporates. The Сhinese have used outright corruption in a number of countries around the world to ensure the success of their companies worldwide.”

Notorious was the example of the old combat carrier cruiser “Varyah.” Its construction in Ukraine was unfinished because of the economic crisis in the 1990s. As the country had no money to finish the construction of the carrier, a decision was made to sell the unfinished ship. A Chinese company bought it for only $23 mn. An agreement was concluded with the Chinese to sell it not as a combat carrier but as an unfinished ship that was to serve as a floating hotel and center of entertainment.

It took Chinese companies nearly two years to tow the carrier to China. However, after modernization, the “floating hotel” was finished as the first Chinese aircraft carrier. It was put into service in 2012 and named Liaoning.

Unfinished Varyah being towed to China. Source: wikipedia.

China had no capacity to launch its own production of aircraft carriers, but in such a hybrid way it attained not only the first carrier but also a ship for “research and training,” according to the Ministry of National Defence of China.

Right now, China similarly has no power and knowledge to produce its own engines for combat aircraft and helicopters in particular, and buys them from Motor Sich. It’s not hard to understand why China needs this company, its experts and operational documentation from the state company Ivchenko Progress.

One more aspect is the Russian interest. Not only China is interested in the engines from Motor Sich. In 2012, Chinese billionaire Wang Jing, who now wants to buy Motor Sich, had a meeting with Russian vice Prime Minister Vladislav Surkov regarding the development of Xinwei Group project in Russia. Their close business ties allow supposing that Wang Jing can easily sell either the engines or technologies to Russia. Therefore, Russia obtains no fewer advantages than China if Motor Sich is sold.

China is interested in Ukrainian technology beyond Motor Sich, hiring Ukrainian engineers and bringing them to China,” the Washington Post states with references to some experts, including those from Motor Sich.

The conditions are more than favorable. The Chinese propose to build entire small towns for Ukrainians with separate kindergartens and churches if they go to construct planes to China.

To resist the temptation?..

The main entrance of Motor Sich today. Although the company produces good engines, it’s still Soviet by its “interface” and requires innovation. Source: Bihus.info

The price China offers is indeed enough to renovate Ukrainian aircraft engineering and several important factories, not only Motor Sich. The Skyrizon company and the Xinwei Group assumed several social and manufacturing obligations to approve the deal to acquire more than 50% of Motor Sich, according to the Center for Transport Strategies. This includes preserving jobs in Ukraine, investing in the development of new engines, modernizing engines, and indexing wages to safeguard against inflation.

Not bad, but does the Chinese contract have any credibility after all the cautions described? The position of John Bolton was quite clear regarding this question. At the same time, there is no confirmed link between the story of Motor Sich and the recent revision of the American military support to Ukraine (which is a normal procedure for that type of support). As no more clear comments where given by politicians from any side, it’s useless to guess their thoughts.

Meanwhile, Zelenskyy continues coming up with various surprising initiatives. However, the decision regarding Motor Sich, and the reactions of the USA and China that will follow, promise to be the first practical result and marker of the policy of the new authorities.

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