Main Image Credit Courtesy of flickr.com/Colin Cooke/CC BY-NC-SA 2.0
A leading Ukrainian company is being drawn into the global confrontation between China and the US.
Ukraine’s relations with China have changed dramatically since the 2014 crisis: China is now Ukraine’s biggest single trading partner, accounting for 14.4% of its imports and 15.3% of its exports. That is still a far cry from the position enjoyed by the EU, which accounts for 44% of Ukraine’s imports and 38% of its exports. Still, China’s position is significant, for it now dwarfs Russia’s trade with Ukraine.
But while economic relations may be flourishing, Ukraine’s political relations with China are stagnating. A major reason for this state of affairs is China’s decision to vote with Russia at the UN against resolutions condemning the annexation of Crimea and further threats to Ukraine’s territorial integrity. It seems that in this case China’s anti-Americanism trumps its otherwise hypersensitive approach to territorial integrity questions, which should have argued for Chinese support for Ukraine.
US–Ukrainian relations were not always good during Donald Trump’s presidency, a fact that China exploited by attempting to purchase one of the ‘crown jewels’ of Ukraine’s military-industrial complex inherited from the former USSR. Motor Sich, the biggest manufacturer of aircraft engines in Eurasia, produces 28 different engines in MI and KA designations, as well as military helicopters and Antonov AN transportation planes. After the 2014 war, Motor Sich was banned from trading with Russia and sought new markets, including China.
A Record of Militarily Significant Sales
The approach of Trump administration diplomats and now President Joe Biden’s national security advisers toward Chinese investments in strategic Ukrainian sectors has been simple. First, the US sought to avoid another fiasco like the sale of the Varyag (English: Varangian/Viking), a Soviet-era aircraft carrier which was purchased by Chinese investors in 1998. Ukraine sold the Varyag, which had been left rusting in the Mykolayiv shipyard since 1992, after Moscow stopped making payments for construction of what the Wall Street Journal called the ‘crown jewel of the Soviet fleet’. Reports on the sale price of the Varyag ranged from $20 million to $30 million, with total expenses for transporting the ship to China nearing $120 million. Ukrainian officials believed the ship would be used as a floating entertainment centre and casino in Macau, a story which the Chinese themselves encouraged. But Beijing ultimately transformed the Varyag into the Liaoning, commissioned in 2012 as the first aircraft carrier of the People’s Liberation Army Navy. While media reports downplayed the national security risk of Ukraine handing the Varyag over to China, calling the ship an engine-less ‘rusted hunk of junk’, an investigative report determined it had ‘complete, intact engines’.
10 years after former Ukrainian Minister of Defence Oleksandr Kuzmuk told the media that Ukraine should not regret the sale of the Varyag to China, Beijing’s Liaoning is now deployed in the South China Sea in a Cold War-style standoff with a US Navy expeditionary strike group. A showdown between US and Chinese forces over Taiwan could result in technology originating in Ukraine being used against the US. US national security officials are determined to prevent Beijing from acquiring any additional defence hardware that could result in the US military facing off against Chinese forces armed with the technology of Washington’s partners.
The Motor Sich Story
Washington first became concerned about China’s interest in Motor Sich in 2015 at a time when Ukraine was led by pro-Western President Petro Poroshenko. Then, a memorandum of understanding was struck between Motor Sich, headed until 2014 by pro-Russian Party of Regions Parliamentary Deputy Vyacheslav Bohuslayev and Beijing Skyrizon Aviation, a subsidiary of Beijing Xinwei Technology Group. Strapped for cash after losing 75% of its sales from exports to Russia – which were barred after the 2014 crisis, Crimea’s annexation and the onset of the Russian-Ukrainian war – Motor Sich took out a $100 million, 10-year loan from the China Development Bank. A default on the loan would have led to Beijing acquiring Motor Sich, the usual method deployed by Chinese entities in such cases.
The Trump administration’s national security officials became increasingly concerned over the prospects of Motor Sich technology falling into Beijing’s hands in 2017, when Beijing Skyrizon Aviation increased its holding in the aeronautics company to 41%. A Ukrainian court blocked the transaction soon thereafter. This led to a saga lasting over three years, which culminated in US Secretary of State Mike Pompeo warning newly elected Ukrainian President Volodymyr Zelenskyy about ‘malign’ Chinese investment and former US National Security Adviser John Bolton intervening to ‘scuttle’ the pending Chinese acquisition. Toward the end of the Trump presidency, Beijing seemingly attempted to exploit weakened US–Ukraine ties by seeking a takeover of Motor Sich through a joint bid with DCH Group, owned by Kharkiv oligarch and former owner of UKRSIBBANK Oleksandr Yaroslavskyy, who would take over from Bohuslayev as the principal Ukrainian promoting the deal with China.
Throughout, Ukrainian officials have communicated to their US counterparts that even if Motor Sich’s plant for manufacturing engines was purchased by Chinese investors, Kyiv would continue to control research and development. Successive US administrations have not believed this, citing a rise in forced technology transfers with Chinese investors which would have ultimately led to Ukraine’s technology falling into China’s hands. Having borne witness to previous forced technology transfers, Washington continued pressuring the Ukrainian government to veto the transaction.
Washington has been most concerned about Beijing upgrading its air capabilities and reverse-engineering helicopter engines designed by Motor Sich. As a former Trump administration official noted during an August 2019 Wall Street Journal interview, ‘we would just as soon keep the Chinese from mastering that technology’.
In a parting shot toward Skyrizon Aviation and perhaps President Zelenskyy in the hopes of complicating any attempts by Kyiv to appease all stakeholders involved in the Motor Sich drama, the Trump administration added Skyrizon to the US Commerce Department’s Military End User list less than a week before Biden’s inauguration, barring US exports to the Chinese company. The US Embassy in Kyiv posted a statement on its website announcing the designation, writing that ‘Skyrizon’s predatory investments and technology acquisitions in Ukraine represent an unacceptable risk of diversion to military end use in the PRC [People’s Republic of China]’. Former US Commerce Secretary Wilbur Ross said, ‘Skyrizon – a Chinese state-owned company – and its push to acquire and indigenise foreign military technologies pose a significant threat to US national security and foreign policy interests’.
A Kyiv court ruled on 21 January that Motor Sich shares, which had been frozen since April 2018 pending an investigation by the Security Service of Ukraine (SBU), would remain frozen. Between 19–22 January Oleksandr Yaroslavskyy, oligarch and part-owner of the company, was summoned by the SBU for interviews pertaining to charges of ‘criminal offence preparation’, ‘high treason’ and ‘subversive activity’. Just over two weeks after Skyrizon’s blacklisting and right after US President Joe Biden was sworn in, the SBU also raided Motor Sich’s headquarters and halted a ‘shareholder’ meeting between Chinese investors and Yaroslavskyy.
Yaroslavskyy and his Chinese allies have not given up the fight and plan to take the Motor Sich case to international arbitration with a claim against the Ukrainian government of $3.5 billion. China is claiming that Ukraine has violated its obligations under a 1992 China–Ukraine agreement by blocking the use of Chinese assets in Motor Sich since 2017–2018.
The arbitration case will be controversial for three reasons. Firstly, Yaroslavskyy and his Chinese allies have to prove Ukraine is in violation of existing agreements. Secondly, Skyrizon has to prove it is a private company not tied to the Chinese state. Temur Umarov, a China expert at the Carnegie Moscow Center, believes this to be difficult because ‘if a company is successful and actively promotes its interests on the international scene, it likely has connections to the Communist Party’. Wang Jing, who was one of the Chinese investors sanctioned by Ukraine, headed large international projects in Nicaragua and Ukraine which Umarov believes ‘can’t be independent from politics’, as major international projects of the Motor Sich kind are always tied to Chinese politics and national security. Thirdly, the court will have to investigate who the ultimate owners of Motor Sich are, which for the post-Soviet region typically include many offshore companies.
On 28 January, President Zelenskyy issued a decree updating his earlier 14 December 2020 one which sanctioned Chinese investors Wang Jing, Du Tao and Chen Hoyshen, the Beijing-based Xinwei Technology Group, and Skyrizon divisions in the British Virgin Islands, Hong Kong and Beijing, all of whom are alleged to have been seeking to purchase Motor Sich. The extensive sanctions have also prevented the removal of capital assets from Ukraine and banned the trading of Motor Sich shares.
In a wide-ranging interview for the media in February, President Zelenskyy welcomed Chinese investments in Ukraine but not in what he defined as ‘strategic’ areas of the economy. Zelenskyy explained: ‘The issue is not about China. The issue is not even how the shares of Motor Sich were bought under the former President Poroshenko. The issue is that we do not have the right to sell a controlling stake in the management of strategic defence enterprises of Ukraine to any country’. Zelenskyy ruled out any changes to this position ‘during my presidency’.
However, it is clear that years of pressure on Kyiv from the Trump administration to enact more robust foreign investment control in Ukraine paid off, resulting in a bill introduced on 20 January (the day of Biden’s inauguration) entitled ‘On Foreign Investments in Companies Having Strategic Importance for Ukraine's National Security’. Modelled after the US Committee on Foreign Investment in the United States, Ukraine’s investment screening mechanism would determine if foreign direct investment in key strategic industries, including aviation and space exploration, would present a national security risk to Ukraine.
Both Presidents Poroshenko and Zelenskyy had little choice but to give in to US pressure to overturn the sale of Motor Sich to China because of the need for US diplomatic and security support at a time when Ukraine and Russia are at war. Time will tell if Ukraine will face losses in the arbitration case.
Taras Kuzio is a professor in the Department of Political Science at the National University of Kyiv-Mohyla Academy, Ukraine.
The views expressed in this Commentary are the author's, and do not represent those of RUSI or any other institution.