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Up in arms: Ukrainian aircraft-engine plant caught up in US-China rivalry

Motor Sich Airlines (Alex Beltyukov/WikiCommons)

This article was originally published by Radio Free Europe/Radio Liberty and is reprinted with permission.

Ukrainian tycoon Vyacheslav Boguslayev is having a hard time parting with the company he has controlled for the past three decades, and it’s not just because it is close to his heart.

The 80-year old is caught up in the global rivalry between the United States and China as he seeks to sell his defense company, Motor Sich.

At stake for Ukraine is potentially billions of dollars of investment from China, thousands of jobs, and eventual membership in NATO, analysts say.

The possible sale of Motor Sich — a maker of engines for missiles, helicopters, and jets — to the Chinese provoked a raid of its Zaporizhzhya headquarters by Ukraine’s Security Service in early 2018 and the seizure of its shares.

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The issue has become so important to Washington that U.S. national-security adviser John Bolton said he will raise his “concerns” about the sale during his current visit to Ukraine.

“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 RFE/RL in Kyiv on August 27.

China is using its “trade surpluses to gain economic leverage in countries around the world, to profit from defense technologies that others have developed,” Bolton said.

Ukrainian media reported on August 19 that two Chinese firms had reached an agreement with state-owned military concern Ukroboronprom to jointly purchase the engine maker. No price was disclosed. Ukroboronprom Chairman Aivaras Abromavicius declined to comment.

Controlling Stake

The Chinese companies would receive a controlling stake, while Ukroboronprom would receive at least a 25 percent blocking stake, according to Ukrainian media. The Chinese firms are believed to be close to the government in Beijing.

Motor Sich, which employs more than 20,000 people in the southwestern city of Zaporizhzhya, is one of the world’s largest makers of helicopter and airplane engines. Its products are used to fly the Mi family of choppers, as well as Antonov cargo jets.

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It is one of the few plants in the former Soviet Union that can build an entire aviation engine from scratch and offers a wide variety of products that “fit the Chinese requirements really well,” said Reuben Johnson, a military analyst based in Kyiv.

China would be able to significantly enhance its air defense capabilities with domestic production of the engines, Johnson said.

But China may be more interested in the company’s engine for cruise missiles, said Denys Kalachov, a board member of the Association of Ukrainian Defense Manufacturers. China has developed missile capabilities over the past decade that rival those of the United States, and the acquisition of Motor Sich could potentially help it advance its program.

Boguslayev was running the plant as the Soviet Union collapsed in 1991 and scooped up its shares through the messy privatization of state assets that ensued.

His Motor Sich later received the right to export its products, a rare privilege for private Ukrainian defense companies and a sign of Boguslayev’s power. Shares of Motor Sich are owned by several onshore and offshore holdings, so it is hard to say how much Boguslayev owns, analysts said.

Plenty Of U.S. Leverage

Despite the importance of the company to Ukraine’s defense industry, no laws prevent him from selling his stake, Alexander Paraschiy, an industry analyst at Kyiv-based Concorde Capital, wrote in a note last year.

Bolton, though, is hoping Kyiv will block the sale, and Washington has plenty of leverage to apply. The United States has been by far Ukraine’s biggest supporter since Russia annexed its Crimean Peninsula in 2014 and backed separatist formations in parts of eastern Ukraine.

The United States has given Ukraine more than $3 billion in aid, including $1.5 billion of military goods over the past five years and has promised to increase the annual allotment.

Ukraine’s Antimonopoly committee is currently reviewing the proposed Motor Sich sale.

“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. So, I think President Zelenskiy’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,” Bolton told RFE/RL.

The United States is advising Ukraine on the reform of its military, a necessary step before it would be eligible to join NATO, which Kyiv has said is its goal.

“If this deal [to the Chinese] happens, we will never be in NATO,” said Denys Hurak, a former Ukroboronprom executive.

Officials ‘Freaking Out’

Earlier this month, a U.S. defense industry consultant, who asked not to be named, told a small gathering at a Washington-based event dedicated to Ukraine that U.S. officials were “freaking out” about the sale.

Boguslayev told RFE/RL he was on vacation and declined to comment further. A spokesman for Motor Sich also declined to comment.

Under former Ukrainian President Petro Poroshenko, state authorities took steps to derail the sale and plans to build a factory in China, which were first announced three years ago.

Ukraine’s SBU security service raided the company’s headquarters in April 2018, citing as state sabotage the firm’s plans to transfer technology by opening a plant in China. The nation’s stock exchange announced the same day that it would halt all trading in the company’s shares.

Boguslayev defended his decision to consider the Chinese offer, saying he stood to lose significant business. Concorde’s Paraschiy estimates Motor Sich generates as much as 40 percent of its revenue from China.

Paraschiy said the SBU raid may have been an attempt to force Boguslayev, who had been a member of parliament from the pro-Russian Party of Regions, “to surrender his control to well-connected individuals.”

Motor Sich was valued at nearly $500 million when it ceased trading on the stock market. Only a handful of people in Ukraine could afford to buy it at that valuation.

‘Soviet DNA’

Washington too may struggle to find a buyer for Motor Sich, said the American defense industry consultant. U.S. defense companies capable of making such large purchases are publicly owned, and management must answer to shareholders, he said.

Motor Sich has “Soviet DNA” that would be hard to integrate with an American company, while part of its sales is to China and other countries with which a U.S. defense company may not be allowed to do business, the consultant said.

“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 said.

Sikorsky, a U.S.-based helicopter maker, approached Motor Sich in 2012 to install Ukrainian engines in its S-61 helicopter, Boguslayev said at the time. The cooperation never materialized. Jet-fighter maker Lockheed Martin bought Sikorsky three years later.

When asked about interest in Motor Sich, Lockheed spokeswoman Leah Foley said the Maryland-based company does not comment on any potential or future business transactions.

Pratt & Whitney, an aircraft engine-maker, expressed interest in Motor Sich in the early 2000s, but Boguslayev believed the company’s future was tied to Russia, then its largest market, and not the United States, Johnson said.

Jenny Dervin, a spokeswoman for Connecticut-based Pratt & Whitney, said the company doesn’t comment on potential business activity or possible past negotiations.

Motor Sich declined to comment on any talks with other potential partners.

Johnson said Washington has taken “too long” to act and needs to quickly figure out what Motor Sich “can do well for us and our allies” if it wants to come up with an alternative to a Chinese takeover.

Hurak said Washington has woken up to the immediacy of the situation.

“The strategic importance of Motor Sich was known for a long time, but until now, no one was treating it so seriously,” Hurak said. “I think the U.S. is finally serious.”