Ukraine will nationalize defense company, keeping China out in a nod to the US

If carried out, the acquisition of the state would end more than three years of disputes that put the company and Ukraine in an increasing confrontation between Washington and Beijing.

It can also save relations between the Biden government and Ukraine after the government became involved in U.S. domestic politics during Donald Trump’s presidency, weakening support for the country in Washington.

The nationalization of Motor Sich shows that Ukraine “is on the side of the United States, even at considerable cost,” said Anders Aslund, a Swedish economist and senior member of the Atlantic Council, a study group in Washington. “This was an excellent step that the United States should appreciate very much.”

The White House and the State Department did not respond to requests for comment. American officials in the Biden and Trump governments said Ukraine must understand China’s ambition to acquire and master vital defense technologies and stop buying. The Ukrainian government did not respond to requests for comment.

In 2019, President Trump asked the President of Ukraine, Volodymyr Zelensky, to initiate investigations into the trade negotiations of Hunter Biden, son of the then alleged presidential rival Joe Biden, while young Biden served on the board of a Ukrainian gas company, Burisma Holdings. The phone call between Mr. Trump and Mr. Zelensky led to the first impeachment of Trump by the House; he was acquitted by the Senate. President Biden and his son denied any wrongdoing.

Almost two months after Biden took office as president, he has not yet spoken to Zelensky on the phone. This, said a Ukrainian official, caused anxiety in Kiev, which sees the United States as a vital partner in facing Russia.

“They are trying to please Americans and get their attention,” said Oleksandr Lemenov, founder of the non-profit civil society group StateWatch, which lobbies for transparent economic practices in Ukraine and has received funding from the US Embassy in Ukraine, among others.

Kiev is also thinking of creating a body to review foreign investments in strategic companies – a goal of the United States.

Motor Sich, once a key player in the Soviet Union’s defense industry, has supplied engines for Russia’s military helicopter fleet for decades. This was halted in 2014, when Ukraine and Russia went to war over Russia’s incursion into eastern Ukraine and its annexation of the Crimean peninsula.

Ukraine then banned exports of military equipment to Russia, paralyzing Motor Sich’s business and providing a spot for China, a Motor Sich customer since the 1990s. Beijing Skyrizon Aviation, a privately held company, led a group of companies that in 2017 completed a $ 3.6 billion purchase to control Motor Sich from shareholders led by the company’s president, Vyacheslav Boguslayev.

The United States pressured Kiev to annul the agreement, mainly motivated by concerns that Chinese ownership would increase China’s efforts to build a fifth-generation fighter plane and a fleet of heavy cargo helicopters, according to American and Ukrainian officials.

A Ukrainian court froze the Chinese transaction in April 2018, and the government’s anti-monopoly committee opened an investigation into possible unfair competitive practices. Both actions effectively suspended the deal, with Washington and Beijing continuing to lobby Kiev.

Then, last week, Oleksiy Danilov, secretary of the Ukrainian government’s Security and National Defense Council, said that Motor Sich would “be returned in the near future to the Ukrainian people, to the property of the Ukrainian state in a constitutional way”.

Danilov said companies considered strategically important would be legally returned to the state and their investors would be compensated. He did not provide a timeline or other details, nor did he use the word “nationalize” in his comments.

“This is being done for the national security of the country,” said Danilov.

China’s Foreign Ministry spokesman, Zhao Lijian, demanded on Friday that the issue be properly resolved and that Ukraine “take into account the legal rights of Chinese companies and investors”.

A Skyrizon employee said the company is preparing to file lawsuits in Ukraine and other countries. “We will vigorously defend and protect the legal rights of Chinese investors,” he said.

The US has tried to find a buyer for Motor Sich, according to American and Ukrainian officials, but the decision to nationalize may come at a high price, given the purchase price of $ 3.6 billion.

Concern about the Motor Sich transaction persisted in the transition between the Trump and Biden administrations. In January, Motor Sich signed a $ 800 million contract with Aviation Industry Corporation of China, a supplier to the Chinese People’s Liberation Army, to build engines for its JL-10 training jet fighter.

At that time, the Trump administration put Skyrizon on a black list of sanctions. Ukraine did the same, freezing Skyrizon’s assets in Ukraine.

US officials have advised Ukraine to establish an entity similar to the US Foreign Investment Committee, which reviews foreign investments in American companies, to have a legal basis for denying transactions such as the Motor Sich business, said a US official who participated. talks with Ukraine on the subject.

The Ukrainian parliament initiated the debate on legislation to establish such a body. Separately, Alexander Kornienko, the deputy head of Zelensky’s parliamentary faction, said in a recent interview that he would present a bill in the coming weeks to deal with Motor Sich.

“It is not just the United States telling Ukraine what to do,” said a Ukrainian official. “It is important for Ukrainian national security to keep these companies locally owned.”

A reaction from China is likely to be costly for Ukraine, which is in financial trouble. In recent years, China has bought tank engines, destroyer turbines, aerial refueling tanks and landing craft from Ukraine and has also been a major buyer of Ukrainian agricultural products.

Last week, while Danilov announced the nationalization of Motor Sich, a delegation of Chinese businessmen met with Russian-backed government officials in Crimea, the Ukrainian Black Sea peninsula annexed by Russia in 2014 and a sore spot for Kiev.

Write to Brett Forrest at [email protected] and Alan Cullison at [email protected]