It’s one of independent Ukraine’s dominant paradigms: being pulled between more powerful forces.
For a quarter-century, Kyiv swung between Russia and the West. In 2019, U. S. President Donald Trump tried to use it as a political bludgeon against his Democratic competitor, former Vice President Joseph Biden.
Now, Ukraine finds itself at the center of a battle for Motor Sich, a strategic aircraft engine manufacturer. A Chinese company wants to buy it. The United States opposes that sale.
The Ukrainian government has blocked the deal for over three years, but has few good options to extricate itself from this confrontation.
The country now faces a $3.5-billion arbitration brought by a group of Chinese investors in their renewed effort to claim Motor Sich. Backed by a local partner, Chinese firm Skyrizon launched international arbitration in early December, accusing the Ukrainian authorities of expropriating its investment and violating its rights by arresting shares of Motor Sich and freezing its acquisition.
This may be Skyrizon’s best chance to take hold of the troubled aerotech company. The sale’s most vocal critic, the U.S., is in the midst of a presidential transition. Once Biden, who won election last month, takes office, he will have other urgent priorities.
Ukrainian leaders have not yet responded publicly. But they are in a difficult position.
Continuing to block the deal will anger China, Ukraine’s largest trading partner, and could incur enormous losses to the Ukrainian budget.
But allowing it could be worse. Ukraine could lose its engine technology to China, thereby spoiling its relations with the U.S., a vital ally against Russia.
Blocked deal
In May 2017, the deputy prime minister of Ukraine touted Motor Sich and Skyrizon’s plan to build a plant in the Chinese city of Chongqing and jointly manufacture engines. Soon, however, the Ukrainian officials learned that this was not simply international cooperation. Rather, a majority stake in Motor Sich, hidden behind a flurry of offshore companies, had been sold to the Chinese.
The Security Service of Ukraine, better known as the SBU, began to investigate what it alleged was a conspiracy to destroy a strategic enterprise by transferring technology abroad.
Chinese investors are still trying to unfreeze the 56% of Motor Sich that a Ukrainian court arrested in 2017 at the SBU’s request. The arrest was renewed in September, although no one has been charged in the case so far.
Moreover, the Anti-Monopoly Committee blocked the acquisition of 56% of shares. The investors attempted to unblock it last year by offering a 25% share to state defense conglomerate UkrOboronProm. That failed. UkrOboronProm pulled out, citing “too many unanswered questions about the conditions of the Chinese.”
A Ukrainian anti-monopoly official, speaking on condition of anonymity as he was not authorized to talk to the press, said this was likely an excuse to draw out the stalemate.
Then, in August 2020, the Chinese investors found a new, vocal partner, Kharkiv magnate Oleksandr Yarovslavky and his DCH Group, and adopted a more aggressive and public strategy.
Lawyer Oleksiy Zadoenko (2nd right) speaks in front of judge Vitalii Tsyktych (C) in the Shevchenkivskyi District Court in Kyiv on Nov. 4, 2020 during a hearing held to cancel arrest of the shares of Zaporizhia-based aerospace manufacturer Motor Sich. (UNIAN)
China’s chances
After unsuccessfully prodding the Anti-Monopoly Committee for action this fall, the Chinese investors launched arbitration proceedings, claiming $3.5 billion in damages.
The Ukraine-China bilateral investment treaty lets investors appoint their own arbitrators who have free reign over how to run the procedure, according to the law firm Vasil Kisil & Partners partner Oleg Alyoshin and associate Vsevolod Mazurenko.
Before arbitrations decide whether Ukraine is in violation, Skyrizon will have to prove it is a private company, that it owns the shares, and that they were legally acquired.
“In some investment disputes, Chinese investors were so closely affiliated with the Chinese government, that the claims brought by such investors were held to be disputes between two governments,” they wrote to the Kyiv Post.
Proving the chain of Motor Sich’s ownership may be messy as well, as neither former owner Vyacheslav Bohuslayev nor state enterprises have been eager to reveal the company’s arcane offshore holding structure.
If the Chinese investors overcome these hurdles, they potentially have a strong claim for expropriation, Vasil Kisil wrote. But the damages claimed are “likely exaggerated” as Motor Sich is not in great shape, they added.
Private business?
The Chinese investors argue that this is a private business deal — the investors are private businesspeople and Motor Sich is a privately owned enterprise that was removed from the list of strategic enterprises. Therefore, the actions of the Ukrainian regulators and security services are unlawful, they wrote in a letter sent to Ukrainian lawmakers on Sept. 16. They asked the parliament to create a commission to protect their rights as investors.
In their rare comments on the issue, top Ukrainian officials have been vague, saying that, indeed, the state can’t interfere in a private business deal, but Motor Sich is a strategic enterprise, so it’s good for the national interest if the company develops.
The letter to lawmakers was signed by Wang Jing, Xu Changsun, and three other Chinese shareholders, and did not mention any company names.
The key investor, Wang, has been known all along.
Wang Jing is a chairman of the Beijing Xinwei Technology Group and its subsidiary Skyrizon Aircraft Holdings Ltd. (AFP)
Wang, the chairman of Xinwei telecommunications corporation and its subsidiary Skyrizon Aircraft Holdings Limited, is said to have military and Chinese Communist Party connections that played a role in his rapid ascent. However, he appears to be trying to distance himself from the Chinese government by insisting he is a private businessman.
Wang is best known for his ambitious project to build a canal in Nicaragua and a plan to build a seaport in Crimea. The canal never materialized, while Wang dropped the seaport idea after Russia annexed the peninsula in 2014.
“If a company is successful and actively promotes its interests on the international scene, it likely has connections to the Communist Party,” says Temur Umarov, a China expert at the Carnegie Moscow Center. “The fact that Wang headed projects in Nicaragua and Ukraine indicates such connections. Large international projects like these can’t be independent from politics.”
Moreover, Chinese leader Xi Jinping has sought greater control over the private sector by ordering it to strengthen its ties with the ruling party in a united effort for economic recovery.
Wang long avoided the media spotlight. But, lately, he has grown more outspoken about Motor Sich and his interviews have appeared on Ukrainian news websites.
“We never even had thoughts about closing the plant, let alone plans to hypothetically move the production,” he said in one interview with the RBC news site. “Motor Sich will always be a Ukrainian enterprise on the Ukrainian land.”
Kharkiv businessman Oleksandr Yaroslavsky says he can protect Ukraine’s security interests with a 25% stake. (Aleksandr Indychii)
In his Nov. 26 letter to the Ukrainian president, prime minister and the parliament speaker, Skyrizon’s new partner Yaroslavsky urged them to save Motor Sich from “a slow death without investment and from technological degradation,” and Ukraine from “severe damage to its financial position and international reputation.”
“I believe that this chance will be taken, while double standards and politically motivated prosecution of legitimate businesses will be a thing of the past,” he said in the letter.
Addressing concerns that the deal could harm Ukraine’s national interests, Yaroslavsky said that, by acquiring 25% of Motor Sich, his DCH Group would become the guarantor that those interests would be protected.
Ukrainian partner
Hlib Kanievsky, head of State Watch, a Kyiv-based reform and transparency watchdog in defense and healthcare, believes that Yaroslavsky is just a frontman to make the deal more palatable.
“To Ukrainians, it now looks like (Motor Sich) is being bought by a Ukrainian who has relations with the Chinese,” he said. Meanwhile, Yaroslavsky will be presented to the Americans as “a private businessman, and the government can’t control what he does. If he wants to buy Motor Sich, he can do so within the bounds of the law.”
Little known outside of Ukraine, Kharkiv businessman Yaroslavsky gained prominence in the last decade. He grew his business empire by selling to or buying assets from some of the biggest Ukrainian and Russian oligarchs. Despite being officially sanctioned by the Kremlin, Yaroslavsky is friendly with Russian billionaire Oleg Deripaska.
Today, Yaroslavsky’s DCH group renovates airports and controls a diverse portfolio of businesses in Kharkiv and Dnipropetrovsk oblasts that includes tractor and steel plants, a bank and a five-star hotel, among others.
In 2020, Novoye Vremya magazine ranked Yaroslavsky 15th in its list of the top 100 wealthiest Ukrainians, with an estimated net worth of $434 million.
It remains unclear how Yaroslavsky got involved in the Motor Sich deal. But his Chinese ties and being in President Zelensky’s good graces might have played a role.
Through his press secretary, Yaroslavsky declined to comment for this story.
Yaroslavsky boasts a friendship with China’s richest man, Alibaba founder Jack Ma. At his invitation, Ma visited Kharkiv last November to deliver a lecture for students. During his trip, he also met with Zelensky.
When the coronavirus pandemic reached Ukraine in March, Yaroslavsky arranged for a plane to deliver a full load of rapid tests, masks and other medical supplies, which he said were procured by Ma. Zelensky publicly thanked Yaroslavsky and Ma.
In May, Chinese telecom corporation ZTE became the first resident of Yaroslavsky’s new business park in Kharkiv. And, in August, DCH announced it was partnering with Skyrizon. Shortly thereafter, Yaroslavsky expressed his interest in investing $1 billion in the Kharkiv Aviation Plant.
Global problem
But the sale of Motor Sich is now about more than Ukraine and China. It has become a major geopolitical issue, with the Ukrainian government torn between its allies and donors, the U.S. and Japan, and its largest trade partner, China.
Japan and the U.S. have advised Ukraine against the sale, wary of China’s growing power and its military buildup in the South China Sea. Additionally, China has increased its defense cooperation with Russia amid the two countries’ worsening relations with the U. S. Under the most recent agreements, Russia’s Roctec corporation will build helicopters for China.
There are concerns that Motor Sich helicopter engines may end up being used by Russia.
The aerotech patents belong to Ivchenko Progress, the state-owned sister company of Motor Sich. Motor Sich licenses Ivchenko’s technology for a nominal fee.
Ivchenko’s director Ihor Kravchenko reassured the public that this unique technology would remain the intellectual property of the state enterprise and would not be sold to the Chinese with Motor Sich shares.
However, under Chinese control, the company could again do business with Russia, which is now banned. That could prompt U.S. sanctions against Motor Sich and the banks that lend to it under the Countering America’s Adversaries Through Sanctions Act (CAATSA), according to the Center for European Policy Analysis and other analysts.
Should Ukraine allow the Chinese to acquire Motor Sich, it could be very damaging to relations with Washington, according to Tim Morrison, a former top Russia adviser on the White House’s National Security Council and a senior fellow at Hudson Institute.
“There are few things that align the Republicans and the Democrats right now. China is one,” he said. “It’d be highly unfortunate if Ukraine wasn’t able to work with an ally like the U.S.”
Former U.S. national security adviser John Bolton came to Kyiv in August 2019 to warn Ukraine’s government of security risks if Chinese investors acquired Motor Sich, a manufacturer of aircraft engines based in Zaporizhia. (Volodymyr Petrov)
No alternative
In August 2019, John Bolton, then the national security adviser to the U. S. President Donald Trump, visited Kyiv to openly warn the authorities about these risks.
Soon, Trump fired Bolton. Later, he was impeached for his attempts to pressure Zelensky to investigate Biden. Now, the impeachment scandal overshadowed U.S.-Ukraine relations, and Motor Sich fell from the agenda.
A year later, U. S. Secretary of State Mike Pompeo urged Zelensky in a phone call not to allow the sale of Motor Sich to China.
However, the true position of the State Department, much weakened under Trump, remains unclear. A knowledgeable U.S. source in the business community told the Kyiv Post that American involvement was mainly Bolton’s initiative. The Ukrainian anti-monopoly official also said that, if the U.S. really wanted to keep Motor Sich out of China’s hands, it would be more active than it currently is.
For the U.S. to help, there needs to be an American buyer willing to overlook the company’s many problems.
Earlier this year, the U.S. government backed an alternative buyer, Oriole Capital Group, a company created to invest in Ukrainian assets, that had previously announced it wanted to invest $150 million into the Kharkiv Aviation Plant in 2017. Its principal, Jordanian-American Nabil Barakat, is also the head of Wamar International, a service provider in aviation, oil and gas and other fields in the Middle East and North Africa. Another U. S. private equity firm, Trive Capital, would also participate in the deal, Buzzfeed news reported in February.
But the two companies have been quiet and reluctant to comment in recent months. Oriole’s investment in the Kharkiv Aviation Plant never materialized either, raising questions about the investor among local officials and businesses associations.
Finding an alternative buyer is difficult. Motor Sich faces numerous open court cases alleging ties to corrupt officials. Its financial compliance is also in question.
When the Kremlin illegally annexed Crimea and invaded the Donbas, Motor Sich was forced to abandon its main market, Russia. Financial difficulties then forced its owner to look for foreign investors.
In the first three quarters of 2020, Motor Sich reported a net profit of Hr 926.5 million ($33 million) compared to over $19 million in losses during the same period last year.
It also takes time to get potential buyers interested, Morrison said.
“Just because the U.S. government says ‘Hey, this is important to us’ does not mean that private investors’ money is going to come in and do as we say. That’s what the Chinese do,” he said.
China’s involvement with the company is also off-putting to potential Western investors.
Still, the company has value.
“The tech that Motor Sich has is top notch. In some ways, it rivals our own, in some ways it may be better,” said Morrison.
Editor’s Note: This report is part of the Investigative Hub project, within which the Kyiv Post monitors investigative reports in the Ukrainian media and brings them to the English-speaking audience, as well as produces original investigative stories. The project is supported by the National Endowment for Democracy.
