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Sale of Motor Sich to China – Ukraine to lose $3.5 billion because of the US

The failure of the Motor Sich sale to China, following pressure from the United States, could cost Ukraine $3.5 billion in compensation to Chinese investors. After months of waiting and promises from Kiev that everything would be resolved, China is going on a legal attack and has hired several large law firms to enforce its rights, which Ukraine has totally violated in the name of its bid to the US.

Motor Sich company sacrificed on the altar of russophobia

Motor Sich, based in Zaporozhye, Ukraine, manufactures and repairs engines for aeroplanes, helicopters and cruise missiles, as well as gas turbine engines.

After the fall of the USSR and privatisation, the company managed, thanks to the actions of its managing director, Vyacheslav Boguslayev, not to lose its scientific and technical potential and its production tools. The export of Motor Sich’s products mainly to Russia, but also to China and India, provided the company with very important revenues.

But after the Maidan coup of 2014, the new Ukrainian authorities blocked all cooperation and sales of military equipment to Russia, which represented 80% of Motor Sich’s exports. Despite the fact that China took advantage of the situation to negotiate a contract for the sale of aircraft engines at an unbeatable price with Motor Sich, the company’s exports have fallen by 70% in five years, from one billion to 300 million dollars in 2019.

To save his company from bankruptcy, Boguslayev negotiated with a Chinese company to acquire a majority stake of more than 250 million dollars (56% of Motor Sich’s shares). In exchange, China began building a factory in Chongqin to produce engines based on Motor Sich technology. A deal that suited the Chinese, who lacked the technology to produce their own engines.

But given the strategic importance of Motor Sich, the Ukrainian Anti-Monopoly Committee (UAMC) had to validate this agreement. So China sent a request to UAMC in 2017, and that’s when the trouble started.

Sending the request alerted Kiev and then Washington, because Motor Sich not only produces engines for civilian, but also for military aircraft. The SBU then launched legal proceedings against the export of Motor Sich’s production equipment to the Chinese-built plant and froze 41% of the company’s shares, which blocked the deal. Subsequently, a court also froze the shares held by foreign investors.

Ukraine then dragged things out, promising the Chinese that everything would work out, so as not to lose a trading partner that had become so important after Kiev ruined its trade relations with Russia.

But the United States didn’t hear it that way. In order to force Kiev to completely scuttle the deal, Washington froze a $391 million military aid programme for Ukraine and threatened to impose sanctions against Motor Sich. As they say in Russia, whoever pays for the orchestra chooses the music.

After Bolton visited Kiev, the SBU added charges of “preparation of sabotage and high treason” against Motor Sich, and UAMC finally issued a negative opinion under a bogus pretext, definitively burying the sale.

China demands $3.5 billion in compensation from Ukraine

The problem for Ukraine is that China’s patience has run out. Unable to win its case with the Kiev government or the Ukrainian justice system, Beijin decided to take the dispute to an international arbitration court.

In early September 2020, Chinese investors wrote to the Ukrainian government about their intention to request international arbitration regarding the situation with Motor Sich. They claimed that Ukraine has violated its international obligations under the 1992 Agreement between the Ukrainian and Chinese governments on the mutual encouragement and protection of investments.

Under this agreement, both sides must prevent the expropriation of investments and treat foreign investors equally. The Chinese qualify Ukraine’s actions as expropriation of their investments, and have estimated the damages at $3.5 billion.

In October, the Ukrainian ambassador was summoned to the Chinese Foreign Affairs Ministry, where it was made clear to him that China will no longer tolerate any refusal to allow the Chinese to use Motor Sich as they want under the pretext that the Anti-Monopoly Committee does not give permission. China then gave Ukraine until 10 November to resolve the problem. Unsurprisingly, Kiev did not react, so China pulled out the heavy artillery and launched the arbitration process.

To defend its interests, the Chinese company turned to three major law firms: WilmerHale, DLA Piper and Bird & Bird. Another renowned law firm, Arzinger, will act as Ukrainian legal counsel.

The law firms hired by the Chinese are considered to be the best in the field of arbitration and law. Their services are very expensive and the losing party will have to pay their fees. And considering the law firms involved, we are talking about several million dollars, which will be added to the 3.5 billion dollars that Ukraine is sure to have to pay, as it has no chance of winning the dispute against the investors.

Indeed, Ukraine had no legal grounds to prevent investors from taking possession of their property, as Motor Sich is a private company that can dispose of its shares as it wants.

To put it plainly, the SBU acted completely illegally, since Ukrainian laws prohibit the state from interfering in the affairs of private companies.

And in view of Ukraine’s catastrophic financial situation, it is hard to see how Kiev is going to find enough money to reimburse Chinese investors for their losses. Especially since Ukraine will not be able to ignore the verdict of the international arbitration, as this would put it in the position of a rogue state, leading to its economic and political isolation and totally cutting off access to any Western investment and loans. Without money from the West, Ukraine will cease to exist.

Kiev will therefore surely have to beg for a new IMF loan to repay this new debt. A new loan for which it will be necessary to pay the interests, but also the counterpart which will hurt the whole Ukrainian population. There is no doubt that the IMF will once again demand increases in the tariffs for communal services (gas, electricity), or another law like the one authorising the sale of agricultural land, in order to finish pillaging Ukraine so that it can pay back China.

That’s what it’s costing Ukraine to bid for the US. But apart from that, according to the russophobes in Kiev, all of Ukraine’s misfortunes are Russia’s fault…

Christelle Néant

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