Chinese Bid for Ukraine’s Aerospace ‘Jewel’ Could Knock Kyiv Out of NATO’s Orbit

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Chinese Bid for Ukraine’s Aerospace ‘Jewel’ Could Knock Kyiv Out of NATO’s Orbit
By: Tom Ozmek - The Epoch Times - 11-2-19
RE: https://www.theepochtimes.com/chines...t_3133261.html

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A model of an Antonov An-188 plane, with engines made by Motor Sich, is seen at the "Arms and Security" expo in Kyiv, Ukraine, on Oct. 10, 2018. (Genya Savilov/AFP/Getty Images)

The fate of Motor Sich, one of the world’s top makers of helicopter and airplane engines, hangs in the balance. And with it, the very future of Ukraine.

A stalled Chinese bid to buy a privately-held but strategically important aerospace firm in Ukraine could, if green-lighted, boost Beijing’s military capability and geopolitical aspirations, while throwing whatever hopes Ukraine has to join NATO and the European Union into a tailspin.

Svetlana Kushnir, a Ukrainian political consultant and co-founder of the NGO ReputationLab, calls Motor Sich a “national jewel.” She told The Epoch Times the company is a hot item, with China, Russia, and the United States—and Ukraine stuck in the middle—all in contention.

The three rivals—the resurgent superpower, the rising superpower, and the established superpower—want to either import from Motor Sich, buy it, or keep a rival from buying it.

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Former president of Ukraine Viktor Yushchenko (L) examines a turbo-jet engine while talking to Motor Sich CEO Vyacheslav Boguslayev, at the company’s plant in Zaporizhzhia, Ukraine, on Feb. 1, 2006. (Mykola Lazarenko/AFP/Getty Images)

China has offered to buy 50 percent of Motor Sich for a reported $100 million, using it as an opportunity to acquire top-tier technology, expand its footprint in Europe, and get a leg up in defense.

Beijing Skyrizon Aviation, one of the bidding companies with links to the Chinese Communist Party, has already built a Motor Sich factory in China, according to a Motor Sich official cited by The Wall Street Journal. The facility, located in Chongqing, remains inactive.

The United States, which is trying to block its sale to China, is considering Motor Sich for funding by a new investment vehicle designed to counter China’s Belt and Road Initiative (BRI) push.

Ukraine, meanwhile, wants to keep its aerospace jewel, and various authorities, including the anti-monopoly bureau and the courts, have blocked the sale.

Bohdan Ben, a Ukrainian journalist and researcher, told The Epoch Times that Ukrainian President Volodymyr Zelensky—the final arbiter to the deal—has said that “our priority is that the enterprise remains in Ukraine.”

What makes Motor Sich particularly prized is that is one of the few companies around that can build a world-class aircraft engine from scratch and propulsion is a known bugbear of the Chinese airforce and missile systems. With the sale, Beijing could substantially boost its military capability.

RAGS TO RICHES

Motor Sich CEO Vyacheslav Boguslayev, a Soviet Army assistant engine driver turned wealthy oligarch, acquired his stake in the company in 1991 as the Soviet Union was collapsing in what has been described as a messy privatization.

“Another issue is whether this enterprise had to be privatized at all,” Ben said. “Many strategic enterprises were unreasonably privatized at a time when oligarchy emerged in Ukraine and society did not yet understand the rules of capitalism.”

Perhaps Boguslayev sees the deal with the Chinese as a way to save the company he built now that times are tough and business with Russia is bad. Or, perhaps, at 80 he is ready to divest his stake in the company, cash out, and retire.

“There are no international sanctions that would prohibit Ukrainian companies from such partnerships with China,” he told The Wall Street Journal in a statement.

Motor Sich, once the most-valued company on Ukraine’s stock exchange, employs around 20,000 people.

“You can blame Boguslayev—the owner—for wanting to sell his company to the Chinese,” said Ben.

“You can argue it’s not patriotic,” he told The Epoch Times. “I agree that he should not be praised. Yet, from a purely business perspective, the enterprise could not work as it used to work. It either needed foreign investments and new markets, like the Chinese, or state protection and intervention. Also orders from the Ukrainian government, as well as Western and American markets.”

Ben, who has written about Motor Sich in the publication Euromaidan, said it was in his country’s best interest that “the state should not only ban the sale to the Chinese but, first of all, arrange enough orders for the enterprise to survive.”

Tough Times

“Motor Sich is a strategically very important enterprise both for Ukraine and for the military-industrial complex of the Russian Federation, because the aircraft engines that are made at the Ukrainian company are in demand by the Russian military,” Svetlana Kushnir said.

Russia was the company’s biggest client until Putin—who argues he’s just protecting Russian minorities—invaded Crimea in 2014 and his troops (“little green men”) secretly hopped the border into eastern Ukraine to help pro-Kremlin separatists fight a civil war.

Kyiv imposed sanctions on Moscow as punishment, inadvertently cutting off half of Motor Sich’s financial lifeblood. Output of the company, which supplies engines for both civil and defense aircraft, fell 40 percent as its Russian market shriveled.

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An MI-8 helicopter is seen in the background, with engines of joint Ivchenko-Progress and Motor Sich production, as Ukrainian soldiers carry their wounded comrade on a stretcher, in a field near Zaporizhzhia, Ukraine, on July 31, 2014. (Alexey Kravtsov/AFP/Getty Images)

According to a state report cited by newspaper Ukrainska Pravda, over 80 percent of all Russian helicopters once packed Motor Sich engines.

China, meanwhile, has had a business relationship with Motor Sich since the 1990s. It now sells around 40 percent of its products to China, according to Alexander Paraschiy, an industry analyst at Kyiv-based Concorde Capital, speaking to Radio Free Europe.

Besides building BRI infrastructure and expanding its global economic footprint, China is also looking for opportunities to use acquisitions of key technologies to boost its military capabilities.

Beijing is eager to get its hands on advanced aircraft propulsion technology, the lack of which is a well-known weakness of Chinese aeronautics.

“For China, aircraft engines are the biggest problem in upgrading their air might,” Vasily Kashin, a senior research fellow in the Institute of Far Eastern Studies of the Russian Academy of Sciences, told The Wall Street Journal. “Helicopter engines are a weak spot.”

Denys Kalachov, a board member of the Association of Ukrainian Defense Manufacturers, told Radio Free Europe that China’s military may be more interested in using Motor Sich technology to give its fledgling missile propulsion arm a boost.

Both prospects are ones the United States would prefer not materialize.

“We would just as soon keep the Chinese from mastering that technology,” a senior U.S. administration official told The Wall Street Journal.

NATO Hopes Dashed?

In August, former national security adviser John Bolton traveled to Ukraine, where he argued against the potential sale of Motor Sich to a “potential enemy” on grounds of security.

Experts argue that if the firm goes to the Chinese, it will doom Ukraine’s prospects of joining the European Union and the trans-Atlantic defense pact.

“If this deal [to the Chinese] happens, we will never be in NATO,” Denys Hurak, a former Ukroboronprom executive, told Radio Free Europe.

“Ukraine would be strategically deprived of integrating itself into the Western defense context,” Denys Gurak, a former deputy general director with Ukrainian defense conglomerate Ukroboronprom, told The Wall Street Journal.

In 2018, concerns around the anticipated sale of a block of 50 percent of Motor Sich shares to Skyrizon sparked a raid of its Zaporizhzhia headquarters by Ukraine’s Security Service on grounds of national security.

Wang Jing, Skyrizon’s chairman, is said to have close ties to the Chinese Communist Party and People’s Liberation Army, Nikkei Asian Review reported.

“Our security service was well aware that Motor Sich has unique technologies that are neither in China nor in Russia and possibly not even in the USA,” said Kushnir. “And this is a national treasure.”

A Ukrainian court blocked the transaction and Ukraine’s anti-monopoly authority also found reason to slow-roll the sale.

“The shares were sold without coordination with and approval of the Antimonopoly Committee of Ukraine, which must sign off on the concentration of a given block of shares,” Svetlana Kushnir said. “This was not done, and from a legal point of view it is possible and necessary to challenge this sale.”

Bohdan Ben said that, as of an Oct. 19 statement from the head of the anti-monopoly committee, the sale of Motor Sich remained under review.

“No decision has been announced yet,” Ben said.

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Ukrainian President Volodymyr Zelensky delivers a speech in Kyiv, Ukraine, on Aug. 19, 2019. (Genya Savilov/AFP/Getty Images)

The Wall Street Journal reported in August that Ukraine’s National Security and Defense Council would be the final institution to adjudicate a sale by issuing a recommendation to Zelensky, who has ultimate authority to give it a thumbs up or down.

“I do think a government operating in its own sovereign sphere has the right to protect its defense industries and to look out for the well-being of the Ukrainian people,” Bolton told Radio Free Europe in Kyiv on Aug. 27. “I think President Zelensky’s new government obviously has that as its highest priority, and he’s going to make sure before some transaction is allowed to go through that it is really the Ukrainian people who benefit.”

The Way Forward?

Bohdan Ben told The Epoch Times that by cutting off Motor Sich’s market while doing little to find alternatives, the Ukrainian government is partly to blame.

“Unpleasant to say, but the main guilt lies with the Ukrainian state,” Ben said, explaining that Motor Sich thrived by exporting to Russia.

“Naturally, since the war started, no such export to Russia was possible anymore, especially regarding military vehicles,” he said.

“The problem is that during the last 6 years, the Ukrainian state, particularly the Ministry of Defense and Ukroboronprom, didn’t manage to arrange alternative markets for Motor Sich and they failed to stimulate internal consumption—they didn’t order many vehicles for the Ukrainian army.”

Instead, Ben said, while Motor Sich was struggling, the Ukrainian government “successfully bought dozens of French helicopters.”

But while the sale of Motor Sich to China has perturbed U.S. officials, Washington has struggled to come up with an alternative.

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A medium-range transport aircraft Antonov An-70, jointly developed by Ukrainian and Russian companies and using Motor Sich engines, performs at an air show in Zhukovsky, near Moscow, on Aug. 28, 2013. (Vasily Maximov/AFP/Getty Images)

A consultant who wished to remain anonymous told Radio Free Europe that the corporate culture at Motor Sich—what he called “Soviet DNA”—would be a challenge for a U.S. company to integrate.

“Regardless of what the U.S. government would like them [American companies] to do—if they have a couple hundred million dollars, I am not sure Motor Sich would be in the top 10 of their lists,” he told the news outlet.

An official told The Wall Street Journal that Motor Sich is being considered for funding by the Overseas Private Investment Corporation (OPIC), an entity that seeks, in part, to counter China’s geopolitical push.

“This is an issue that I think is significant for Ukraine, but [also] significant for the U.S., for Europe, for Japan, for Australia, Canada, other countries,” Bolton told Radio Free Europe in Kyiv on Aug. 27.

Bolton said China is using its “trade surpluses to gain economic leverage in countries around the world, to profit from defense technologies that others have developed.”

China’s Ukraine Bet

China is furthering its expansionist agenda in Europe via the Belt and Road infrastructure scheme, an aspect of which is a grand shopping spree for resources and strategic industries.

According to a $7 billion joint project announced at the end of 2017, China is building a port and highway in Ukraine as a speedway into Western Europe.

“Ukraine is ready to offer cost-effective transport routes on the territory of Ukraine to connect China with the countries of Europe, and also to establish cooperation between the enterprises of Ukraine and China, with the further sale of products in the markets of the EU,” said Ukraine’s First Deputy Prime Minister Stepan Kubiv in April in Beijing, according to a statement.

Kubiv, who spoke at the Second Belt and Road Forum for International Cooperation, said the project lays “the basis for building a trade and industrial corridor China-Ukraine-EU.”

Ukraine is China’s strategic partner in Europe, with trade between the two countries in 2018 amounting to $10.1 billion, according to the Ukrainian Embassy in Beijing.

Kushnir said that, while Ukrainian dealmakers sign contracts with China worth billions, there’s the livelihood of individuals employed at Motor Sich to bear in mind.

“What else is Motor Sich?” Kushnir asked rhetorically. “It’s a company that created the city of Zaporizhzhia.”

Over 800,000 people live in Zaporizhzhia. Many depend on Motor Sich, which directly employs around 20,000 people but contributes to many more livelihoods through a network of suppliers.

It is also more than just engines and military technology. Motor Sich also makes industrial goods for agriculture and runs an airline. Apparently, the most reliable in Ukraine.

“Motor Sich has, over the past month, turned out to be the best air carrier in Ukraine among domestic companies,” Kushnir said, “with 98 percent of its flights on time.”

She worries that, if sold to the Chinese, Motor Sich’s new owners might exfiltrate its valuable technology and move production to China, driving nails in the coffin of a key local industry.

“This means that the city of Zaporizhzhia, the regional center, will simply die.”

“In other words,” she says, “its fate is of huge concern.”