Office of External Relations
December 3, 2019

This article is over a month old but its subject and issues are critical to Ukraine’s future

Neither Kyiv nor Washington may be analyzing the situation accurately

This is huge!

THE EPOCH TIMES
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)

Chinese Bid for Ukraine’s Aerospace ‘Jewel’ Could Knock Kyiv Out of NATO’s Orbit
 
 
BY TOM OZIMEK
 
November 2, 2019   Updated: November 6, 2019

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 . [ Ukraine cannot afford to make a mistake here. RAM ]

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. [ Not to speak of the “strategic alliance” with the United States. How can there be a strategic alliance if China is allowed to buy Motor Sich? Two points: (a) Given the timing – think Ukraine and the preeminent current discussions in Washington - it is beyond belief a possible sale to the Chinese could even be under discussion in Ukraine; (b) Given Washington’s legitimate concerns about China’s military growth and intentions, why is not the United States fully engaged in this matter? Hello! RAM ]

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. [ If the U.S. is fully engaged where is the evidence? If I am missing something I am not missing it for lack of trying. Protecting Motor Sich from China – and Russia, if it is really in the running – should be a Washington priority. There is no question a situation like this presents many challenges and nuances to the United States but Washington can manage challenges and nuances when it needs to do so. It needs to do so. RAM ]

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.

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. [ And expand its growing footprint in Ukraine! Is Washington paying attention? Isn’t the Trump Administration avowedly concerned about China? Here the threat of China and the geopolitical importance of Ukraine to Americans interests converge – in a big way - hello! RAM ]

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. [“Considering” - time is of the essence. It is time to act! RAM ]

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.” [ Well, this might be a really good time for Washington to help the new president and do so quite openly. RAM ]

What makes Motor Sich particularly prized is that it 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. [ Ah, there were so many “messy” privatizations. But our American interests must get past that for our own sake. RAM ]

“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. [ This is a strange bit of reporting. Putin hopped the border to help – really. How about Putin “hopped” the border to recruit “separatists” and get them to provide cover for his troops’ invasion of Ukraine? RAM ]

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.

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 Zaporizhzhya, 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. [ This is certainly not news in Washington. The question is what are we doing about it.  We have a chance with Motor Sich. It is time to act like a strategic partner. The U.S. needs to act and Ukraine needs to make sure nothing happens before the U.S. acts. RAM ]

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. [ So, the U.S. needs to act. RAM ]

“We would just as soon keep the Chinese from mastering that technology,” a senior U.S. administration official told The Wall Street Journal. [ How senior? Senior enough to get things moving? RAM ]

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 .

Former National Security Advisor John Bolton lays flowers at a memorial for those killed in the war with Russia-backed separatists [ Killed in Russia’s war against Ukraine – saying it any other way is to buy into Kremlin propaganda. RAM ] in the Donbas region, Kyiv, Ukraine, on Aug. 27, 2019. (Sergei Supinski/AFP/Getty Images)

“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. [ One has a bad feeling reading quotes from anyone associated with Ukroboronprom – as in "former" officials of the defense giant. We wouldn’t want Motor Sich to be involved in any way with Ukroboronprom, certainly not now. RAM ]

In 2018, concerns around the anticipated sale of a block of 50 percent of Motor Sich shares to Skyrizon sparked a raid of its Zaporizhzhya 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.

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. [ But as best I know neither Zelenskyy or President Trump mentioned this in their conversations. It would seem it should have been a priority at least for Trump. It should also be for President Zelenskyy. RAM ]

“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. [ Maybe Putin invading Ukraine could be assigned some of the blame. Ukraine didn’t start Putin’s war. RAM ]

“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.

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 Zaporizhzhya.”

Over 800,000 people live in Zaporizhzhya. 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 Zaporizhzhya, the regional center, will simply die.”

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

[ It must be a huge concern in Washington. RAM ]

Follow Tom on Twitter:  @OZImekTOM

Bob McConnell
Coordinator, External Relations
U.S.-Ukraine Foundation’s Friends of Ukraine Network

Robert A. McConnell is a co-founder of the U.S.-Ukraine Foundation and Coordinator of External Relations for the Foundation’s Friends of Ukraine Network. He is Principal of R.A. McConnell and Associates. Previously, he has served as head of the Government Advocacy Practice at Gibson, Dunn & Crutcher, Vice President – Washington for CBS, Inc, and Assistant Attorney General in the Department of Justice during the Reagan Administration. rmcconnell@usukraine.org
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