Bankova has hatched a plan to cut the Gordian knot of problems accumulating around Motor Sich PJSC with a single solution: nationalize the company. But this is fraught with a cascade of new problems, writes DS.
Helicopter repair shop at the Motor Sich plant / UNIAN
The temptation of a simple solution
On March 4, David Arakhamia, head of the Servant of the People faction, announced that the Verkhovna Rada would soon register a bill on the nationalization of Motor Sich PJSC.
"You know that sanctions have been imposed against Chinese companies. This is a matter of defense capability... In order to regulate the legal status of this company," he told reporters. "This is part of the situation in relations with China; negotiations must be conducted. But I think we need to register the draft law, because the status of the enterprise has not yet been fully determined; tens of thousands of people work there. They are contacting us and asking us to determine the status and future of this enterprise. This is an important enterprise, a city-forming institution in Zaporizhzhia. We need to work on this."
It's worth noting that a month earlier, on February 5, Oleksandr Danylyuk, former head of the Ministry of Finance and then of the National Security and Defense Council, proposed nationalizing Motor Sich. He believed that under the current circumstances, nationalization remains virtually the only optimal solution. He also explained why the search for a full-fledged Western investor should be preceded by nationalization of the company. "During negotiations with John Bolton, I requested an American investor. An investor was found within two weeks. But after a year and a half, negotiations with him had stalled—there were no people left in power who understood how to conduct negotiations at this level. Furthermore, the state has no legal connection to Motor Sich. Consequently, potential investors were unclear who the government represented in these negotiations," he wrote in his blog on NV.
As a reminder, on August 18 of last year, the Kyiv Court of Appeal began hearing the case regarding the seizure of Motor Sich shares. On September 5, Chinese investors announced their intention to initiate international arbitration against Ukraine due to their being denied access to the company. Ukraine was accused of effectively expropriating Motor Sich and causing $3,5 billion in damages to investors.
On February 2 of this year, the National Securities and Stock Market Commission (NSSMC) opened a case against Dragon Capital LLC, whose securities accounts held Motor Sich shares. On February 3, the Ministry of Foreign Affairs received a note from China regarding sanctions against Motor Sich investors.
"We need to put an end to this mess!"
The story unfolded on March 4 at a meeting of the parliamentary committee on national security, defense, and intelligence, attended by Motor Sich President Vyacheslav Boguslayev, who contradicted himself. Initially, he categorically opposed the nationalization of the company.
"We'll have to pay a penalty. And lost profits... The entire state, the budget, will have to pay. What nationalization? What are you talking about? We need to negotiate with the Chinese," he told reporters. He then proposed this option: allow the Chinese to own 35% of the company's shares, and sell the rest to the Ukrainian state.
"I would insist on retaining a controlling stake in the state—either through Ukroboronprom or the Ministry of Economic Development—but we can't sever ties with our Chinese comrades. They helped me at a critical moment by borrowing $100 million. And I will repay it," Boguslayev said.
However, a couple of hours later, he made a completely different statement: "There is no investment agreement with the Chinese comrades. They deceived us." According to Boguslayev, he personally supports the president's decision, and the union does too—"we need to end this mess."
Boguslayev also said that he regularly holds teleconferences with the Chinese side and urges them not to violate Ukrainian law. "There are no Chinese investors or Chinese investment program. There are promises: the share purchase agreement stipulates that $100 million and $150 million are owed in 2018—a total of $250 million. Not a penny!" he stated, then clarified that there is a loan agreement with the Chinese side, according to which PJSC Motor Sich must repay the same $100 million in 2026.
However, judging by the Prime Minister's comments during a press conference on March 4, he is not eager to nationalize Motor Sich, but rather is inclined to focus on stabilizing the company's operations.
Motor Sich: The Background to the Conflict
We've written numerous times about China's attempt to acquire Motor Sich PJSC, while Ukraine resists, largely under pressure from the United States. And as recently as February, we recalled the long and complex history of the conflict. It began in February 2015, when Motor Sich and Beijing Skyrizon Aviation Industry Investment signed a memorandum to build an aircraft engine plant in Chongqing. In April 2016, Motor Sich received a $100 million loan from Beijing Skyrizon at a mere 0,3% interest rate. Later that year, the Zaporizhzhia company's longtime director and shareholder, Vyacheslav Boguslayev, sold 56% of his shares to trusted individuals of the owner of Beijing Skyrizon, according to the Security Service of Ukraine (SBU).
But in September 2017, the SBU suspected this was done illegally, after which the Shevchenkivskyi District Court of Kyiv seized the shares. In December 2019, Boguslayev confirmed that he had sold the company's shares to Chinese companies because otherwise, due to the plant's dire financial situation, he would have been forced to close it and lay off its staff.
However, the US actively opposed the Chinese purchase of Motor Sich, as they were reluctant to allow Ukrainian aircraft engine technology to strengthen China's military might. As a result, Ukraine, represented by the Antimonopoly Committee of Ukraine, never gave final approval for the deal. It didn't help that last August, Ukrainian businessman Oleksandr Yaroslavsky's DCH Group announced an agreement with Chinese investors representing Skyrizon Aircraft Holdings Limited to jointly develop the Motor Sich plant.
Nationalization: pros and cons
It's clear that in this case, we're not talking about confiscation of the enterprise, but rather its forced buyout, with compensation for losses to all interested parties. But for the Chinese, ownership of Motor Sich isn't a matter of money, but of national development.
We asked our experts: How realistic is it for the state to nationalize Motor Sich without facing numerous lawsuits?
"This is unrealistic. We've already seen the experience of nationalization in Ukraine. We had it with Kryvorizhstal, although the reasons and sentiments there were slightly different. The peculiarity of the nationalization of Motor Sich is that it will severely impact the investment climate in Ukraine," Anatoly Amelin, Director of Economic Programs at the Ukrainian Institute of the Future, told DS. "What happens if we take technological issues, which are key for China, out of the picture? Imagine an investor, say, an American company, comes in and privatizes a machine-building plant. Some time passes, and the government says: 'We did the wrong thing, we're nationalizing it.' I think America, as a country, will protect its investor and will never shake hands with Ukraine again. It's the same story with China. We, when we begin the process of blocking an investment deal, don't take national security issues into account."
According to the expert, interactions with the Chinese could have been structured differently, and access or circulation of technology could have been restricted by other laws. However, the attempt to take away a private owner's property creates a precedent that will deter any future investor seeking to enter Ukraine through privatization. "These are very significant risks for Ukraine. As for the adoption of such a law, I doubt there will be enough votes in parliament for it," Anatoly Amelin concluded.
Meanwhile, financial analyst Alexey Kushch believes that the nationalization of Motor Sich is a completely realistic and necessary undertaking for Ukraine.
"This is happening within the framework of the president's previously announced initiative to create a national airline. It will be based at the national aircraft manufacturer (Antonov), and this program requires Motor Sich, a company that produces aircraft engines, among other things," the expert said. "Plus, defense orders, helicopters for military and civilian use. In short, a state-owned aviation cluster will be created. Therefore, I believe this is a very realistic intention."
At the same time, the DS expert doesn't believe Ukraine faces much of a threat of lawsuits in the event of Motor Sich's nationalization. "After Chinese investors were prevented from buying shares, the lawsuits are already clear: they've already started. Now there are two options: either the plant dies, or it's nationalized," Alexey Kushch asserts. "But in the case of nationalization, the most important thing is that the owner receives due compensation. Another issue is that it's unclear right now who the owner is."
Letter of the law
"Currently, the concept of 'nationalization' is not enshrined in Ukrainian legislation. Several bills on this topic were introduced to the Verkhovna Rada at one time, particularly in 2014, but for one reason or another, none of them were adopted. A corresponding bill will be introduced again, but there's no point in discussing it right now, as we first need to familiarize ourselves with its text," Igor Chudovsky, managing partner of Chudovsky & Partners, told DS. "Until the relevant legislation is adopted, the only option for nationalization is a decision by the National Security and Defense Council (NSDC) to transfer the enterprise to state ownership and the state's acquisition of its capital, essentially acquiring a controlling stake. PrivatBank was nationalized under this scenario."
It's not particularly surprising that legislation in Ukraine can be amended to accommodate political objectives. But even here, there are complications.
"Article 41 of the Constitution of Ukraine enshrines the right of individuals and legal entities to own, use, and dispose of their property. To change this, two bills were submitted to the Verkhovna Rada in July 2020: No. 3790, 'On the Procedure for the Compulsory Alienation of Private Property Rights to the State (Nationalization)' and No. 3790-1, 'On the Procedure for the Seizure of Private Property Rights to the State and the Property of a Territorial Community (Nationalization)'," Maksym Oryshchak, an analyst at the Center for Exchange Technologies, told DS. "After the bills are reviewed, approved, and passed through all levels, their adoption will allow for nationalization. The advantage of nationalization is the presence of assets on the state's balance sheet. The disadvantage is the state's inability to manage affairs properly so that enterprises can continue to operate effectively."
A series of scandals and various investigations surrounding Motor Sich PJSC have been dragging on for many years. It's entirely possible that nationalization of the company is a truly good option. One big scandal, a one-time expense for the budget, and then the game will be played by clear and understandable rules.
Or we could leave everything as is. Then there wouldn't be a major scandal or expense—there would just be a long tug-of-war between the Chinese and the Americans, with Motor Sich playing the role of the rope. Until the company goes bankrupt completely.
Denis Lavnikevich
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