WASHINGTON, D.C. — American officials are warning that Chinese investment in Ukraine is a double-edged sword with financial benefits often offset by potentially calamitous results for Ukrainian industries.
The U. S. this summer sent a Pentagon official to Kyiv with the message that China wants to scoop up know-how by transferring manufacturing to China, importing defense industry production so they can be reverse-engineered and produced in China, acquiring research and development data from Ukrainian companies and hiring Ukrainian brains to work in China.
The U. S. Department of Defense official, who was authorized to speak to the Kyiv Post on condition of anonymity, said Pentagon officials conducted briefings for members of the Ukrainian government, the Presidential Administration and parliament, officials from the foreign and economic development ministries, the Security Service of Ukraine (SBU), the military and the country’s state defense industry UkrOboronProm.
China is Ukraine’s biggest arms sales market with more than $100 million in annual sales. In 1998, Ukraine sold China a partially-completed Soviet-era aircraft carrier which was supposed to be used as a floating hotel and casino but was converted into China’s first modern aircraft carrier.
Much of China’s military hardware is Soviet-era Warsaw Pact equipment from the former Soviet Union. The Moscow-Beijing political relationship has often been volatile and China needed to diversify sources for replacement and spare parts and turned to Kyiv after Ukrainian independence.
The business relationship has flourished with the Ukrainian side providing jet engines for Chinese air force trainer planes, helicopter and tank engines, gas turbines for Chinese naval vessels, air refueling tanker planes, and assault landing craft.
Technology transfer worries
But U. S. concerns sharpened when some Ukrainian businesses seemed willing to transfer their technology or sell a controlling share to Beijing, which Washington now identifies as a strategic competitor and potential enemy in a war.
Motor Sich, a large manufacturer of helicopters and jet engines based in the eastern city of Zaporizhzhya, has had a particularly lucrative relationship with Beijing. It has sold 20 engines for Chinese military trainer jets and has a deal to provide a total of 250 for $380 million.
Washington became alarmed in 2017 when Motor Sich seemed to be on the point of selling a large number of shares to Chinese company Skyrizon with strong links to the Chinese military. Ukrainian courts intervened to block the deal after Ukrainian prosecutors claimed it posed security risks and could case grave damage to the country’s defense industries.
The prosecutors said Skyrizon tried to buy a $100 million controlling stake in the company with promises of $250 million more of investing into a plant in Ukraine but also a transfer of manufacturing to China. They said under the agreement some Motor Sich personnel would move to Skyrizon facilities in China to assist locals in assembling jet plane and helicopter engines.
Ukrainian court documents alleged Skyrizon used a subsidiary company in the British Virgin Islands to acquire a 56 percent stake in Motor Sich.
Vyacheslav Boguslayev, a member of Ukraine’s parliament and co-owner of Motor Sich, told Chinese media he had only sold 15 percent of the company for $100 million and called the court’s decision a politically motivated “hostile state takeover” of his publicly listed company.
In August, a Washington Times newspaper opinion piece lambasted Motor Sich and Ukraine for supplying arms and weapons technology to China, America’s potential enemy. The article suggested Ukraine was stabbing America in the back at the time Washington was providing hundreds of millions of dollars in vital military aid to Ukraine during its war against Russia. Motor Sich responded that it needed Chinese business to protect Ukrainian jobs and accused the news agency of having been duped by Russian disinformation.
Department of Defense spokesman Eric Pahon said that Washington was aware that Ukraine’s defense industry markets had shrunk and that China was one of the few lucrative outlets for Ukrainian products and said that the U.S wants Ukraine to keep alive its defense industry.
China seems particularly interested in Ukraine’s aerospace industry and another deal in the offing is for two Ukrainian Antonov An‑225s Mriya cargo planes, the world’s largest, to be shipped in parts to Chinese plants and reassembled there, offering China the opportunity to “reverse-engineer” the planes and eventually produce its own versions.
Pentagon’s message
The Pentagon source said: “The purpose was to introduce concerns about Chinese investment in Ukraine, primarily from the defense perspective, but long term in terms of economic and industrial base issues for them to understand how the Chinese operate and that in the long run it’s going to hurt Ukraine.
“If you’re not focusing on foreign investments taking your high tech, if you’re not looking at the whole picture, you’re missing what’s happening and you’ll turn around and all of a sudden see that the Chinese have become your competitors and what you were producing they are now producing and you have to buy it from them.”
The Pentagon distributed copies of documents to the listeners that the Kyiv Post has obtained and which listed the potential problems of dealing with massive Chinese involvement and how America is countering its own problems with Beijing after decades in which Chinese have acquired sensitive U.S know-how by means ranging from buying companies to spying.
“In the US CIFIUS, the Committee on Foreign Investment in the United States, headed by Treasury, reviews foreign acquisitions to check if they pose a potential danger to American interests, said the source.” In the meetings the U.S government suggested that the Ukrainians should establish an analogous body.
The source said some Ukrainians found doing business with China convenient as China was not averse to corrupt deals. They said: “Ukrainians ask ‘who else are we going to work with if America won’t invest?’ Well, U.S. companies won’t invest until Ukraine cleans up corruption.”
Another consideration for Ukraine, said the source, should be that American regulations mean that the U.S. cannot buy items from foreign companies that are dealing with potential enemies like China and Russia.
America knows, they said, that Ukraine’s former large Russian market for defense products has dried up because Ukraine understandably ended selling arms to its enemy. “So we say — good, you’ve decided that.
And the West won’t buy your equipment. But be careful about what you’re selling to the Chinese and be smart about what you’re giving them access to. You can have them invest money but you don’t have to give them the technology. There are ways to get inflows of money but you don’t have to open the doors to have them rob you of everything.”
