Blocked Chinese takeover of Ukrainian aerospace firm no closer to being resolved

On April 23, masked agents from Ukraine’s Security Service (SBU) raided the offices of aerospace company Motor Sich in Zaporizhzhia as part of a criminal investigation into the company’s bosses.

After jumping over the compound’s gates, SBU agents clashed with security guards.

An SBU spokesman said the raid was part of a probe into “preparations for sabotage”, claiming a planned takeover by a Chinese company represented an “enemy plot”.

Motor Sich issued statements describing the raid and searches as illegal.

Ukrainian authorities insisted their concerns about Beijing Skyrizon Aviation’s multimillion dollar move on Motor Sich were justified.

The company is considered strategically vital to Ukraine as it is one of the world’s largest manufacturers of turbine engines and engine parts for civilian and military aircraft.

The courts claim a Chinese takeover could cause severe damage to the country’s defence industry and intervened in Skyrizon’s attempt in September 2017 to buy a controlling stake.

Some observers described it as an overreaction, while others praised authorities for protecting a vital state industry.

Skyrizon tried to acquire the controlling stake by buying US$100 million worth of shares. It said it planned to invest a further US$250 million in Ukrainian factories and move additional manufacturing to China.

Court documents show Skyrizon used a subsidiary company in the British Virgin Islands to acquire a 56 per cent stake in Motor Sich.

Under the initial agreement between Motor Sich and Skyrizon, some Ukrainian engineers would move to the south-western Chinese province of Chongqinq to help assemble state-of-the-art engines for planes and helicopters.

But Ukraine’s highest courts have indefinitely delayed the plan by freezing the Chinese shares and authorising a criminal investigation.

They cited serious national security concerns and fears that vital and sensitive Ukrainian technology could be lost to China, resulting in the “destruction” of Ukraine’s aerospace industry.

Vyacheslav Boguslayev, a veteran member of Ukraine’s parliament and co-owner of Motor Sich, called the court’s decision a politically-motivated “hostile state takeover” of his publicly listed company.

Boguslayev earlier told reporters he had only sold 15 per cent of the company for US$100 million and knew nothing about any more shares being sold.

Investigators and the courts are not convinced. They say if any deal was made then it was not approved by Ukrainian authorities and the sale bypassed the country’s Anti-Monopoly Committee.

Last week, Ukraine’s National Agency for the Prevention of Corruption announced it planned to audit Boguslayev’s financial declarations.

Ukraine’s defence and aerospace industries have been on the rocks since the country pivoted away from its traditional ally Russia and towards the West.

Ties with the European Union and North America have strengthened, but these markets are not interested in Ukrainian aircraft or weapons. So Asian clients – notably China – have become more interested.

Bilateral ties between Ukraine and China have grown while trade and investment from Beijing have risen, including plans to pump at least US$7 billion into Ukrainian infrastructure.

But it’s the aerospace sector that has caught Beijing’s eye, with the People’s Liberation Army (PLA) possibly the driving force behind the interest.

Despite concerns about the possible reverse-engineering and mass reproduction of the aircraft, China and Ukraine have formalised a deal for two Ukrainian Antonov An-225s – the world’s largest cargo planes – to be shipped in parts to state-owned factories in Chengdu and Shaanxi for assembly.

The Antonovs are expected to end up in the hands of the PLA. It would not be the first time defence equipment has been repurposed by China for military use.

In 1998, the Soviet cruiser Varyag was sold by Ukraine to Chinese businessmen supposedly to be used as a floating hotel and casino. Today, it is the Liaoning aircraft carrier.

Skyrizon – jointly owned by businessmen Wang Jing and Du Tao – has strong connections with the Communist Party and is considered by some to be a proxy for the PLA.

At least one of the subsidiaries that form Skyrizon’s network of aerospace companies – Chongqing Skyrizon – is 45 per cent owned by trusts and Chinese government entities, according to company filings and court documents. Ukrainian approval of Skyrizon’s acquisition of a majority stake in Motor Sich would create a new company: Chongqing Motor Sich Skyrizon Aviation – a firm that would be partly Chinese state-owned.

Wang’s foreign business moves – including a failed US$10 billion deep water port in Crimea and a US$50 billion Nicaraguan shipping canal to compete with Panama have often been seen as heavily aligned with Beijing’s foreign policy objectives.

“His access to financing and the fact that his projects are often in line with Chinese government objectives have led to speculation that, in some of his ventures, he may be acting on behalf of the state,” Bloomberg BusinessWeek reported in a recent profile of Wang.

Professor Usha Haley of West Virginia University, who has testified before the US Senate about Chinese corporate takeovers, is unsure about Wang’s motives.

“It’s hard to say whether Wang is a proxy for the Chinese state or just good at aligning with Beijing’s interests,” he said.

In Ukraine, criminal investigations and court proceedings can be dropped as quickly as they appear.

With few countries able to match China’s spending power, Beijing has lots of leverage in Kiev.

In May, Chinese officials told Ukrainian ministers that they want a quick resolution to the situation, citing the importance of continued cooperation between the countries.

Officials including trade minister Stepan Kubiv met China’s Ambassador to Ukraine Du Wei and representatives from Skyrizon.

Speaking to Interfax Ukraine news agency after the meetings, officials said they were confident Skyrizon planned to continue its “cooperation” with Motor Sich.

“I think that in the near future the situation around Motor Sich will be solved … taking into account the interests of Ukrainian-Chinese cooperation in the aviation industry,” one minister told reporters. The SBU said its criminal investigation is still going on.

Motor Sich could not be reached for comment.