Chinese bid to buy Motor Sich could jeopardize Ukraine’s chance to join NATO

William Taylor, the outgoing top U.S. diplomat in Ukraine, has said that “serious American” companies are studying the possible purchase of Motor Sich, one of the world’s top makers of aircraft engines.

The United States, which has provided Ukraine with more than $1.5 billion in military aid over the past five years, has lobbied against the possible sale of the strategic company and its advanced technology to China.

Despite pressure from both the Ukrainian and US governments, the sale of the Zaporizhia, Ukraine-based aeroengine production association Motor Sich to China continues to move forward. The latest statements came on 13 December during a press tour of the company’s production facility given by the company’s president, Vyacheslav Boguslayev.

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On June 7, the government proposed that Ukroboronprom and the state-owned Chinese companies Beijing Skyrizon Aviation and their junior partner Xinwei could jointly manage between 25% and 50% of Motor Sich shares in a joint management and control arrangement of the enterprise. Competition regulators confirmed to the Kyiv Post that they have the final say on the deal.

On June 19, the main package of agreements was signed, but it still requires the approval of the AMCU. On Dec. 13, the president and majority owner of Motor Sich Vyacheslav Boguslaev, a former pro-Russian lawmaker, confirmed the sale of his shares to Chinese companies during a media trip to his factory in southeastern Ukraine.

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According to Boguslayev, along with the purchase of shares, the Chinese have pledged to invest a further $150 million into production over two years. Earlier reports from 2018 had suggested that at least some of Motor Sich production, research and development may be outsourced to China.

Records show that Skyrizon tried to acquire the controlling stake by buying $100 million worth of shares. Skyrizon initially said it planned to invest more in Ukrainian factories but move some of the manufacturing to China. Court documents show Skyrizon used a subsidiary company in the British Virgin Islands to acquire the 56% stake in Motor Sich.

Chinese businessman Wang Jing, second from left, pushed projects of strategic interest to Beijing, including a deep-water port in Crimea and a canal spanning Nicaragua. Photo: mario lopez/European Pressphoto Agency
A helicopter made by Motor Sich is seen at the manufacturer’s helipad in Ukraine. For years the most-valued company on Ukraine’s stock exchange, the company recently reduced shifts on its production floor, signaling cash-flow problems. Photo: Dmytro Smolyenko/Zuma Press

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In recent years, China has purchased tank engines, turbines for destroyers, aerial refueling tankers and landing craft from Ukraine. China has been a Motor Sich client since the 1990s. According to the Ukrainian embassy in Beijing, trade between the two countries amounted to $10.1 billion in 2018.

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At the same time, a Motor Sich sale to China would doom Ukraine’s efforts to join the North Atlantic Treaty Organization and the European Union—as neither body would countenance admitting a member beholden to Chinese defense interests, said Denys Gurak, a former deputy general director with the Ukroboronprom defense conglomerate.

The sale of Motor Sich, which manufactures aviation technology as well as industrial gas turbines, has been opposed by the United States, which argues it could boost China’s military forces. In particular, Motor Sich produces the ZMBK Ivchenko-Progress D-18 turbofan which powers variants of the An-124 and An-225 freighters. China has been linked to the purchase of the program from Antonov Design Bureau (ADB, Gostomel) through the Aerospace Industry Corporation of China (AICC) which aims to restart the An-225’s production.

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Motor Sich’s subsidiary Motor Sich Airlines (M9, Zaporizhzhia) operates scheduled and charter passenger and cargo services. According to the ch-aviation capacities module, its four scheduled routes link Kyiv Igor Sikorsky with Zaporizhzhia (12x weekly), Lviv and Odesa (each 6x weekly), as well as Zaporizhzhia and Minsk National (4x weekly).

Boguslaev claimed the Chinese had pledged to invest USD250 million in the plant over two years: “They gave us USD100 million. Another USD150 million will come next year. If we hadn’t found it, you would not be standing here and I would not be talking to you,” he told Ukrinform.

Skyrizon Aircraft and Xinwei Technology Group have reportedly already acquired more than 50% of Motor Sich’s shares, according to Ukrinform. In the event of approval by the purchase by the Anti-Monopoly Committee of Ukraine (ACMU), the investors have pledged a grant of USD100 million.

More than 25% of the shares remain with the state-owned defence group UkrOboronProm, whose chairman confirmed that Chinese investors had bought shares in Motor Sich and that the deal was currently under review by the anti-monopoly committee.

But in September 2017, the authorities in Ukraine launched an investigation into the Zaporizhia-based aerospace company. Ukraine’s State Security Service, or SBU, launched a criminal investigation and made allegations of an “enemy plot” and “preparations for sabotage” before asking the courts to freeze that initial $100 million transfer.

The U.S. has been searching for a buyer and other support for Motor Sich, which is privately held and publicly traded. The Trump administration has also discussed a Motor Sich purchase with Max Polyakov, whose Austin, Texas-based Firefly Aerospace manufactures and operates space-launch vehicles, according to a U.S. official. “It’s premature to talk about buying Motor Sich shares now,” Mr. Polyakov said.

The company, the successor to a linchpin in the Soviet Union’s defense industry, has for years supplied engines for the bulk of the Russian military’s helicopter fleet. After war broke out between Russia and Ukraine in 2014, Kyiv outlawed military exports to its neighbor, which crippled Motor Sich’s business.

On Oct. 3, officials from the Departments of Commerce, Defense, and State and others met with defense contractors at the National Defense Industrial Association, a nonprofit group in Arlington, Va., to discuss defense sector opportunities in Ukraine, including Motor Sich.

A Skyrizon representative declined to comment. Asked previously about the U.S. effort, Skyrizon’s Mr. Wang noted unspecified uncertainties about the purchase and said he hoped it could go ahead.

Mr. Prince is the brother of Trump administration Education Secretary Betsy DeVos. He has worked with Chinese-backed entities; Frontier Services Group provides logistical and security support to Chinese businesses in Africa and its largest shareholder is CITIC Group Corp., a Chinese state-controlled investment fund.

“There are some serious American and other companies interested in Motor Sich,” Taylor said in an interview on December 26 in Kyiv with Ukrainian media as he gets set to leave his post on January 2.

“They’re doing some due diligence, checking balance sheets, visiting the plant, talking to the owners. They’re doing some serious evaluation,” Taylor said.

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