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


Ukraine plans to nationalize a major aerospace manufacturer and cancel its acquisition by China after the United States opposed the deal to keep critical defense technology out of Beijing’s grasp.

The Ukrainian government’s national security council last week announced the decision on Motor Sich, a manufacturer of advanced engines. The decision infuriated China, which demanded Ukraine to respect the rights of Chinese investors, and the plans have yet to be approved by the Ukrainian legislature and could face legal challenges from rejected Chinese suitors.

If carried out, the state takeover would end more than three years of disputes that had thrown the company and Ukraine into a growing confrontation between Washington and Beijing.

It could also save relations between the Biden administration and Ukraine, after the government became embroiled in US domestic politics during Donald Trump’s presidency, weakening support for the country in Washington.

Motor Sich’s nationalization shows that Ukraine “supports the United States even at considerable cost,” said Anders Aslund, a Swedish economist and senior fellow at the Atlantic Council, a think tank in Washington. “This was an excellent step that the United States should greatly appreciate.”

The White House and the State Department did not respond to requests for comment. US officials from the Biden and Trump administrations have 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.

Ukrainian President Volodymyr Zelensky, shown in October 2019, got caught up in US domestic politics during Trump’s presidency.


Photo:

Efrem Lukatsky / Associated Press

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

Almost two months after Biden’s inauguration as president, he has yet to speak by phone with Zelensky. That, a Ukrainian official said, has caused anxiety in Kiev, which sees the United States as a vital partner in dealing with Russia.

“They are trying to please the Americans and get their attention,” said Oleksandr Lemenov, founder of the nonprofit civil society group StateWatch, which is pushing for transparent economic practice in Ukraine and has received funding from the US Embassy. United States in Ukraine, among others. others.

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

Once a lynchpin in the Soviet Union’s defense industry, Sich motor supplied engines to Russia’s military helicopter fleet for decades. That stopped in 2014, when Ukraine and Russia went to war over Russia’s incursion into eastern Ukraine and its annexation of the Crimean peninsula.


“They are trying to please the Americans and get their attention.”


– Oleksandr Lemenov of the civil society group StateWatch

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

The United States lobbied Kiev to cancel the deal, particularly over concerns that Chinese ownership would boost China’s efforts to build a fifth-generation fighter jet and a fleet of heavy-lift helicopters, according to US and Ukrainian officials. .

A Ukrainian court froze the Chinese transaction in April 2018, and the government’s antitrust committee opened an investigation into possible unfair competitive practices. Both actions effectively suspended the agreement, and Washington and Beijing continued to pressure Kiev.

Then, last week, Oleksiy Danilov, secretary of the Ukrainian government’s National Defense and Security 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 manner.”

Mr. Danilov said that companies deemed strategically important would be legally returned to the state and its investors would be compensated. He did not provide a timetable or other details or use the word “nationalize” in his comments.

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

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

A Skyrizon official 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 United States has tried to find a buyer for Motor Sich, according to US and Ukrainian officials, but the decision to nationalize could come at a high price, given the purchase price of $ 3.6 billion.

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

Around that time, the Trump administration placed Skyrizon on a sanctions blacklist. Ukraine followed suit, freezing Skyrizon’s assets in Ukraine.

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

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

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

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

Last week, as 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 lasting sore spot for Kiev.

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

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