Ukrainian motor Sich Motor Sich sells to Chinese companies worries the United States

Ukrainian media reported on August 24 that Chinese companies Skyrizon and Xinwey Group had acquired more than 50% of the shares of the Ukrainian aircraft engine producer Motor Sich and asked the anti-monopoly committee to confirm the transaction. Additionally, Chinese companies promised the committee to provide $100 million in financing to Ukraine's aviation sector. The determination of the Chinese is visible since they have committed to leaving the Ukrainian state with 25% of its shares while paying more in order to prevent criticism of the government. 

However, as reported The Wall Street Journal the American authorities are not satisfied with such a development of the situation. National Security Advisor John Bolton, firmly opposed to this agreement, even decided to personally go to kyiv on August 28 to address this problem[efn_note]B. Forrest, “US Aims to Block Chinese Acquisition of Ukrainian Aerospace Company,”Wall Street Journal, August 23, 2019[/efn_note]. The source of the site Strana.ua claims that the US official not only demanded the cancellation of the transaction, but also the nationalization of Motor Sich. The informant specifies that the current round of technological rivalry between Beijing and Washington is currently being played out in Ukraine[efn_note]ЛюдмилаКсенз, “500 million dollars. КакСШАдобиваютсясрочнойотменысделкипо “MotorСичи” спредприятием”, Strana.ua, August 27, 2019[/efn_note].

Indeed, Motor Sich is one of the world's largest producers of aircraft engines and industrial gas turbines. In 2018 the company made a net profit of 1,9 billion grivnas ($71 million), but recorded a net loss of 420 million grivnas ($16 million) in the first half of 2019. This negative trend was predictable. As we explained in the article on import substitution in the Russian defense sector, Ukrainian sanctions have put an end to lucrative trade between the Ukrainian manufacturer and Russian military helicopter producers. Worse, former customers were forced to develop their own solutions in order to continue manufacturing the manufacturers' helicopters. MIL et Kamov, and would be in the process of becoming completely independent in this area.

MI28MN Defense News | Conflict in Donbass | Industrial consolidation Defense
The Mil Mi-28, like many Russian helicopters, suffered the effects of the embargo on Ukrainian engines

The sanctions imposed by kyiv against Russia would not have been absolutely disinterested since for certain commentators on Ukrainian political life Petro Poroshenko had tried to seize Motor Sich on several occasions, first in 2005 and then during his presidency between 2014 and 2019. The latter is said to have put pressure on director Bogouslaev by canceling state orders and inciting the SBU to take legal action against the company. The CEO declares that everything would have been done by the government to “kill” this strategic company. 

The Chinese interest in the Ukrainian manufacturer is justified according to experts by the Middle Kingdom's quest for the technologies held by the company, China having set itself the objective of becoming the leading technological power. It is not only a question of Beijing obtaining know-how in the construction of aeronautical engines, but also in the field of cruise missiles, that is to say military technologies. Ukrainian expert Viacheslav Konovalov explains that Motor Sich provides motors for the training interceptor Iak-130, engine AI-222 for family helicopters Mi-8, engine TV 317 operating at record altitudes and finally has the technologies necessary for the production of the largest helicopter in the world, the Mi-26. The Chinese, having previously tried without success to copy this equipment, decided to proceed with the outright purchase of the technologies and specialists capable of implementing them. 

The American desire to prevent the sale nevertheless comes up against a harsh economic reality; in the event of cancellation of the transaction, compensation ranging from 500 million to 2 billion dollars will have to be paid to Chinese companies. The new Ukrainian authorities are thus in a delicate position, the slogans of President Zelensky's electoral campaign clearly announcing a non-interventionist and liberal line in the economic field. In addition, the transfer of state assets is a notable resource for the Ukrainian budget, which has never yet managed to achieve its privatization objectives. A cancellation of the sale would thus imply, instead of a revenue, substantial additional expenses and a diplomatic crisis with a commercial partner and an important investor. 

Whatever the outcome of this incident, it is clear to Ukrainian experts that the United States wants to “euthanize” Motor Sich slowly. The plan would be to guarantee the manufacturer minimum orders for a period of 10 to 15 years. These will be enough to keep the company afloat and prevent Chinese predations, while obtaining the essential time to make the technologies of Motor Sich obsolete[efn_note]Андрей ГАЦЕНКО, « Могут ли США помешать продать “Мотор Сич” Китаю”, KP in Ukraine, August 29, 2019[/efn_note].


Oleg Lypko - Russia and CIS analyst

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