On November 7, Kyiv announced it had taken control of five strategically important companies, citing powers granted to Ukrainian President Volodymyr Zelenskyy under martial law following Russia’s invasion of Ukraine.
Reuters called the move “the government's most dramatic intervention of the war into big business, touching companies linked to tycoons whose political power Zelenskyy's team has long sought to curb.”
The move has sparked more controversy by bringing China into the fray.
The Chinese company Beijing Skyrizon Aviation is engaged in a legal battle over control of Motor Sich, one of the nationalized firms. Motor Sich happens to be among the world’s largest makers of engines for missiles, helicopters and jets.
In a statement in Russian media, Beijing Skyrizon Aviation reacted harshly:
“We strongly oppose the shameless behavior of the state of Ukraine regarding the politicization of normal business processes, the forcible nationalization of the Motor Sich company and the unjustified plundering of the legitimate rights and interests of Chinese investors.”
Russian-state broadcaster RT framed the takeover as: "Chinese investors decry Kiev’s ‘plunder’.”
Both statements are misleading. There's a lot more to the circumstances of Motor Sich and China’s involvement with the company.
Prior to Ukraine’s decision to nationalize, Beijing Skyrizon Aviation filed a lawsuit against the Ukrainian government in the Hague. This came after Ukraine blocked the Chinese firm’s attempt to acquire Motor Sich on national security grounds.
The head of Motor Sich, Vyacheslav Boguslayev, who oversaw the deal with Beijing Skyrizon Aviation, was detained on treason charges last month for allegedly supplying Russia – an invading force – with plane and helicopter parts.
Some evidence suggests Chinese investors orchestrated the sale to skirt Ukraine’s anti-monopoly laws.
China first showed interest in Motor Sich in 2009, and by 2015 Motor Sich had signed a memorandum of understanding with Beijing Skyrizon Aviation to set up an aircraft engine manufacturing plant in Chongqing, China.
Alla Hurska, an expert at the International Center for Policy Studies (Kyiv) and researcher at the University of Alberta, reported that this deal included a $100 million loan from China’s state-run development bank to be repaid over 10 years.
The loan “meant that if Skyrizon went bankrupt, the Chinese government would gain control over the Ukrainian aerospace giant,” Hurska wrote in a November 2020 account for the Center for European Policy Analysis in Washington, D.C.
Hurska wrote that Russia had accounted for an estimated 75 percent of Motor Sich’s exports until 2014, when the Kremlin annexed Crimea and instigated a war in eastern Ukraine. That created pressure on Ukraine to help Motor Sich find other markets, Hurska said, “inadvertently playing into China’s hand.”
In 2016, she wrote, Boguslayev sold a controlling stake in Motor Sich to companies controlled by Chinese entrepreneur Wang Jing, the wealthy founder of Beijing Xinwei Technology Group, a telecommunications company:
"Jing is renowned for spearheading China’s global ventures into developing countries with high levels of corruption and strong military connections to China (e.g., Myanmar, Cambodia, Ukraine, Nicaragua). He ‘gave an oath’ to serve Chinese national interests and uses his company to expand China’s global influence.
“The Chinese businessman is also known for his ties with Russia, through his telecom business with Russian partners, dealings with Kremlin officials such as Vladislav Surkov (once Russia’s deputy prime minister and the force behind Russia’s war in the Donbass [eastern Ukraine]), and proposed business with Russia around the Nicaraguan Canal.”
The Organized Crime and Corruption Reporting Project (OCCRP), a global network of investigative journalists, reported in October 2021 that a U.S.-based law firm helped orchestrate the deal via “a maze of offshore firms” and proxies, “seemingly to avoid antitrust laws.”
OCCRP said that media reports indicating Motor Sich “was directly sold to Skyrizon” did not reflect what actually happened.
Citing leaked documents from the Pandora Papers expose about secret offshore financial deals, the OCCRP report said that DLA Piper helped structure the acquisition via a complex web of shell companies, allegedly to avoid running afoul of Ukraine’s anti-trust laws:
“DLA Piper proposed structuring the transaction so that several shadowy companies acquired large shares of Motor Sich, with the owners of these offshore vehicles used as apparent proxies for Beijing Skyrizon’s real owners. No company would have more than the 25 percent needed to trigger an anti-monopoly review.”
OCCRP reported the documents it reviewed showed that Beijing Skyrizon only acquired 9.99 percent of Motor Sich’s shares via the British Virgin Islands registered subsidiary Skyrizon Aircraft Holdings. (DLA Piper told OCCRP it could not comment on client matters and follows the highest industry ethical standards.)
Antitrust expert Agiya Zagrebelska, who was a member of the Anti-Monopoly Committee of Ukraine (AMCU), told OCCRP that regulators would have to approve any one entity’s acquisition of 25 percent or more of Motor Sich.
Despite the complex web of buyers, the state-run China Development Bank, “a channel for the Chinese government’s economic strategy,” provided all of the funding for the $500 million deal, the OCCRP said:
"The China Development Bank lent the money to yet another company, Hong Kong Skyrizon Holdings Limited, which loaned it on to its subsidiary ... Skyrizon Aircraft Holdings, as well as ... one of the offshore companies owned by an apparent proxy. Both of them pledged their Motor Sich shares to the China Development Bank as collateral.“
Japan’s Nikkei Asia reported that China has sought to upgrade China's engine manufacturing capabilities and become a “world class” manufacturer of “military and commercial jets as well as missiles.”
The Motor Sichs sale also set off alarms in Washington.
In January 2021, the U.S. Commerce Department added Skyrizon Aviation to its Military End User list, which identifies foreign parties prohibited from acquiring technologies and intellectual property “to advance key military capabilities that threaten U.S. national security.”
Ukraine’s Security Service ultimately blocked the deal. Beijing Skyrizon Aviation, however, later teamed up with Oleksandr Yaroslavsky, the president of Ukraine’s privately-owned conglomerate DCH, to unfreeze the sale of Motor Sich.
According to Ukrainian military expert Valentin Badrak, Yaroslavsky’s business interests intersect with those of Oleg Deripaska, a Russian industrialist and aluminum magnate with close ties to Russian President Vladimir Putin. The United States has sanctioned Deripaska for his role in “malign activity” around the world.
In January 2021, Zelenskyy sanctioned Beijing Skyrizon Aviation. He later declared: “We have no right to sell the controlling stake of shares of Ukraine’s strategic-scale defense enterprises to any country.”
That prompted Beijing Skyrizon Aviation to sue at the Permanent Court of Arbitration in the Hague, seeking $4.5 billion in compensation.
Weeks before Kyiv announced it would nationalize the five firms, Motor Sich head Boguslayev was detained on treason and other charges.
Boguslayev is accused of selling engines and spare parts for military helicopters to Russia – before and after Russia’s full-scale invasion of Ukraine in February.
Alleged surveillance recordings of Boguslayev indicate he accepted a Russian missile strike on on Motor Sich’s factory in the Zaporizhzhia region as understandable, given the need for a Russian victory in Ukraine.
On October 25, the U.K.‘s Guardian reported Bobuslayev as saying in one of the alleged recordings:
“If Putin is finished off, then the nationalists will finish us off … an Iskander-M [missile] fell on the territory of the factory. We have absolutely no negative feelings about it. We completely understand.”