Honey, you can make my Motor (Sich) run

The US-China geopolitical rivalry is unfolding in different parts of the world. In Ukraine, it’s centered around Motor Sich, a leading local aviation company. The stakes are so high that the issue is being resolved at the highest level – with participation from the President of Ukraine, and envoys and advisers to the US President. According to Ukrainian diplomats, no talks with the Americans have been held recently without the company being mentioned.

But let’s start at the beginning.

Motor Sich is one of the largest companies in the world producing aircraft engines and gas turbines. Its products are used in more than 120 countries. Its main facilities are located in the city of Zaporizhia in the south-east of Ukraine, with over 30,000 employees.

Motor Sich motors still have the edge on world markets. Source: 112.international

After the collapse of the USSR, this former flagship of Soviet aviation and helicopter construction reduced its output significantly, but the company managed to stay afloat thanks to long-term contracts for repairs and supply of spare parts. Production at Motor Sich was rescued by a controversial 2005 deal with another local company, Ivchenko-Progress State Design Bureau. The latter granted its partner free access to design and operational documentation for dozens of aircraft and propeller motors for a term of 60 years.

The Ukrainian manufacturer is crucial to the aviation fleet of post-Soviet countries, including military aircraft and helicopters. “Motor Sich is one of the companies on which both the Russian aviation fleet and all of our Ukrainian aviation depend,” says Hlib Kanevsky, an expert at State Watch, an NGO which closely monitors developments unfolding around the aviation manufacturer.

Ukrainian motors and parts are crucial for post-Soviet military aviation. Source: uprom.info

Since 1991, virtually throughout the entire history of independent Ukraine, Motor Sich was run by Vyacheslav Boguslayev – first as CEO, and later as chairman and actual owner of the enterprise he privatized. Boguslayev is a “red director”, a former deputy of the (Ukrainian Parliament) Verkhovna Rada, an active supporter of the pro-Russian Party of Regions of ex-President Viktor Yanukovych and a multimillionaire.

The 2014 Ukraine-Russia conflict and the introduction of anti-Russian sanctions cut Motor Sich off from its main market, Russia (its share in the company’s orders was 50%). Shady attempts to circumvent the economic ban using third countries didn’t play well, and the Ukrainian government basically turned its back on the enterprise. Vyacheslav Boguslayev rushed to find a strategic investor and found him. In China.

Motor Sich, Ukraine’s prize aviation manufacturer. Source: motorsich.com

In 2015, Boguslayev signed a memorandum of cooperation with China’s Beijing Skyrizon Aviation Industry Investment Co Ltd. The document envisaged the construction of an aircraft engine manufacturing plant at the Chongqing Technopark and the relocation of some Ukrainian specialists along with company plans and technical documentation.

Throughout 2016, the Chinese side purchased more than half of Motor Sich’s shares in small packages (up to 10%) using numerous shell firms with residency in different jurisdictions, from Cyprus to Panama. The real buyers were Chinese companies Beijing Skyrizon Aviation Industry Investment Co., Ltd. and Xinwei Technology Group, which concentrated 56% of the company’s shares and gained actual operational control.

“I could have shut down the plant, I could have cut the number of employees. This was a problem that lay ahead of me. We decided to find an investor. We were told who the investor was, we went and talked to China. The stock owners sold their shares through our stock exchange. And I sold my shares,” said Vyacheslav Boguslayev, confirming the closure of the contract with the Chinese.

Under a loan agreement, on April 6, 2016, Skyrizon Aircraft Holdings Limited, a subsidiary of Skyrizon Aviation Industry Investment Co., Ltd. from the British Virgin Isles granted Motor Sich a $ 100 million loan at 0.3% pa for 10 years. According to Boguslayev, the Chinese investments will total $ 250 million.

Ukraine’s leadership viewed the implementation of the agreement as a threat to national security. One of the real dangers was China’s close cooperation in aviation technology with Russia – in particular, their plan to create of a new generation of military helicopters equipped Motor Sich engines. The matter was immediately investigated by the Security Service of Ukraine (SBU). Criminal proceedings were filed against the company’s managers who were accused of “diversion”. A court froze all Motor Sich shares, effectively halting ownership transition. On April 23, 2018, two days before a shareholder meeting scheduled to replace the company’s management, SBU agents rushed in to search the company.

For Ukraine, the greatest threat posed by this sale is the loss of valuable aviation know-how, in particular that used by the military, and the country’s status as an aviation state. Experts believe that China is not interested in the development of its partner and after setting up its own production will easily rid itself of its Ukrainian competitor.

“Motor Sich is a matter of geopolitics. The issue was discussed by the National Security and Defense Council of Ukraine under (former President Petro) Poroshenko. The risk of losing technology in favor of Russia pushed Poroshenko to take more decisive action, involve the SBU, the Antimonopoly Committee, and involve (Ukraine’s state military manufacturer) Ukroboronprom as a shareholder to guarantee at least some type of control and insider information. Although Ukroboronprom is legally only a statistician,” says Hlib Kanevsky.

The Americans have also repeatedly expressed reservations about the deal. According to observers, the US has nothing against the sale of Motor Sich as such but opposes its takeover by the Chinese. Washington fears that Ukrainian aviation technology will help Beijing make a quality leap in aircraft and helicopter construction, including military-grade.

The topic of Motor Sich became central during President Trump’s National Security Advisor John Bolton’s visit to Kyiv. The US did not hide its intention to block the sale to keep the Chinese from obtaining modern aviation technology. Following talks with Ukraine’s newly elected President Volodymyr Zelensky, Bolton stated that the United States is concerned about China’s policy and harmful diplomacy to create debt in other countries when an allegedly lucrative agreement with third countries is concluded involving certain businesses. But then those who agree end up with debt. He also stressed that China has a habit of stealing other people’s technology.

John Robert Bolton, United States National Security Advisor in Kyiv on Aug. 27, 2019. Source: kyivpost.com

Chinese Ambassador to Ukraine Du Wei called Bolton’s words “clear cut slander” and assured that the Chinese state nas not interfered in the deal between Motor Sich and the Chinese companies. During a special press briefing, he stressed three key messages, “First, commercial activity must comply with market rules. Second, Chinese businesses operating abroad must comply with the laws of the countries in which they operate. And third, the rights and interests of Chinese companies operating abroad must be protected.”

Kanevsky does not believe in the sincerity of the Chinese. “International Chinese business always coordinates its activities with its government and will never act against its interests. This is a tradition of Chinese politics. Business is a continuation of government action,” he says.

Observers have many questions about the Chinese companies behind the deal. Beijing Xinwei Technology Group Co. is facing serious financial problems. It implements its ambitious plans through loans from state-owned Chinese banks. In case of bankruptcy, that’s where all its assets will be transferred to. No less disturbing is the figure of Beijing Skyrizon Aviation’s CEO Wang Jing, suspected of having close ties to China’s military-industrial complex.

Nevertheless, this direct clash of US and Chinese interests in Ukraine is a precedent. “Americans have expressed more than deep concern. I don’t remember senior American leadership ever stepping in to stop a trade deal. They really understand the risks. This arm-wrestling between the Americans and the Chinese is ongoing,” says Kanevsky.

Experts say that Kyiv is caught between a rock and a hard place and is unlikely to escape the situation without some losses, both political and economic, and the consequences of the conflict will be felt for many years to come. On the one hand, Ukrainians are afraid to lose the affection of the Americans who have supported Kyiv in its conflict with Moscow in the east of the country and have provided it with considerable military assistance. On the other hand, they don’t want a squabble with Beijing, which has recently become Ukraine’s main economic partner and is steadily increasing its investments here.

The Americans and Chinese continue to exert pressure on Kyiv. They are using both brute and soft force. For instance, China has offered to transfer 25% of the company’s shares to the Ukrainian state defense concern Ukroboronprom, and promised to invest $100 million into the Ukrainian aviation industry. Ivchenko-Progress has issued a statement claiming that the technologies patented in Ukraine and other countries will remain the company’s intellectual property and will not be sold along with Motor Sich shares.

At the same time, the US is searching for a new buyer for Motor Sich. There have been reports in the media about Erik Prince from Blackwater and the Oriole Capital Group. In December 2019, William Taylor, US ad interim chargé d’affaires in Ukraine, reiterated his hope that Motor Sich would not be sold to China.

The future decision of the Antimonopoly Committee of Ukraine will be decisive for resolving this complex knot. In June 2019, the Chinese companies Skyrizon and Xinwei Technology Group together with Ukroboronprom submitted a joint statement to the Antimonopoly Committee of Ukraine on the concentration of Motor Sich shares (50% and 25%). The AMCU has repeatedly postponed the analysis of the application citing the need for an “in-depth study” of the case. There has been no verdict yet.

“They are looking for a way out. They don’t want to upset America and they need to end this deal. On the other hand, they need to keep the Chinese happy. China may be offered something in return. There will be very significant concessions,” Kanevsky says.

Meanwhile, Forbes and Buzzfeed say that Kyiv is ready to snub Beijing. The $100 million from the Chinese for the development of the aviation industry, pledged in last year’s budget of Ukraine, have already disappeared from this year’s budget.

However, a negative AMCU decision will also hurt Motor Sich. Violators of the antitrust law can be fined 5% of their turnover. Motor Sich’s finances are already on a steady decline. In the first 9 months of 2019, the company earned $ 256 million and suffered losses of $ 21 million. And while Washington and Beijing continue to play their geopolitical games, where Kyiv acts as a frightened subject, the gem of Ukraine’s aviation industry could simply disappear leaving nothing to quarrel about.

 

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