M&A

Sail of the century

China’s sneaky aircraft carrier deal remembered, as Ukraine blocks jet sale

Zelensky-w

Zelensky: rejected China deal

What do you do when the Son of Heaven turns up on your doorstep? In the 13th century, the citizens of Kiev decided they weren’t that keen on welcoming in the Mongol army headed by Genghis Khan’s grandson Baku. The Mongols responded by slaughtering almost all of the city’s 50,000 inhabitants. Capturing Kiev gave the invaders a strategic bridgehead into Europe. Modern-day Ukraine and parts of Russia became part of the Mongol Empire – as did China when Khubilai Khan (another grandson of Genghis) founded the Yuan Dynasty in 1271 and was designated the Chinese ‘Son of Heaven’.

Almost nine centuries later, another Son of Heaven has returned to Kiev at the behest of a new superpower. The welcome has been equally unfriendly.

‘Son of Heaven’ is the Chinese name for Beijing Skyrizon, an aerospace company that’s been blocked this month from taking control of Ukraine’s leading jet engine manufacturer, Motor Sich, on national security grounds. From a purely domestic standpoint, it’s easy to see why founder Wang Jing thought it might be a good idea to adopt the same Chinese characters that Chairman Mao used in a poem to describe the Mongol conqueror as the Son of Heaven. It’s also easy to see why Skyrizon wants Motor Sich. The Chinese military has struggled to reduce its reliance on Russian jet engines. A homegrown engine project – the WS-15, has been ongoing since the 1990s – with defence websites reporting problems getting the thermodynamics right (a prototype reportedly exploded on a test stand before the 2018 Zhuhai Air Show).

Economically, China and Ukraine have become closer – which may have given Wang hope the deal would sail through. China is now Kiev’s largest trading partner and Ukraine is still a strategic bridgehead into Europe, this time for China’s Belt and Road Initiative.

But when it comes to security concerns, the US has a major say. Ukraine has received more than $1.5 billion in military aid from Washington since 2014 when Russia annexed the Crimea, officially part of Ukraine’s sovereign territory. That’s also when Motor Sich’s financial problems began. The company is a legacy of the former USSR (nearly one third of Soviet industrial production was located in the state). When Ukraine gained independence, Motor Sich’s manager Vyacheslav Boguslayev won control of the aerospace firm. Today, it still ranks as one of the world’s largest jet engine manufacturers and one of the few with end-to-end capabilities, thanks to a 60-year contract with the nearby state-owned engine design company Ivchenko-Progress.

Boguslayev decided to sell Wang’s Skyrizon a 65% interest after Motor Sich lost its major client, Russia. At the time Boguslayev portrayed the Chinese firm as a white knight saving a company whose financials had gone into a tailspin. However, reaction to news of the sale (structured via a series of offshore companies) was swift. Ukraine’s Security Service (the SBU) launched an investigation on the grounds that China might become a conduit for supplies to Russia.

The backlash is understandable. Wang has never been able to shrug off allegations that he is closely linked with the People’s Liberation Army (PLA). His companies have engaged in projects deemed strategically important for China, ranging from the construction of a Nicaraguan canal (see WiC261) to an ambitious satellite programme (see WiC350).

The Motor Sich sale was frozen and in January this year Wang was denied entry to Ukraine.

That same month Skyrizon was put on a US Department of Commerce blacklist. A few weeks later, Ukraine placed it on a sanctions list too. And this month, the Ukrainian courts upheld the government’s decision to nationalise Motor Sich.

Skyrizon has launched a $3.5 billion compensation claim. Ukraine’s national security chief was recently quoted as saying that “people who had invested money” into the factory instead of via the offshore companies (the web through which Wang’s interest was held) will be compensated. But the Chinese media wasn’t impressed. ThePaper.cn proclaimed that, “Ukraine should hold its head in shame” over what is deemed as the seizure of the firm.

Social media comment was hostile too. One Chinese netizen described Ukraine’s leader Volodymyr Zelensky – who wants Ukraine to join NATO as a bulwark against Russia – as a “comedian who’s turned his country into a tragedy”. Another said Ukraine has a “pro-American regime similar to Iraq and Syria” and believes it won’t end well. “The US subverts other countries, seizing their resources and turning their people into refugees.”

It is not lost on Chinese commentators that they have turned to Ukraine to meet a major military need before. Given the intrigue over the current attempted acquisition, it is worth recounting in some detail what occurred last time.

On this occasion it involved an aircraft carrier and a business tycoon named Xu Zengping – who is today viewed as a national hero in his native China for purchasing the nation’s first such miltary vessel from Ukraine.

Xu joined the PLA in 1968 in Jinan, and was later deployed to Guangzhou, where he was posted to in a sports division. After 10 years playing basketball for the PLA, he was discharged in 1983 and he set up a private business trading agricultural products and carpets in Guangdong. He became a millionaire and in 1988 he moved to Hong Kong, where his firm Chin Luck focused on real estate.

In 2012 Xu gave an exclusive interview to the Jinan Times in which he offered an extensive history that described how he bought the gigantic vessel. He recalls that in October 1997 he saw a report on Reuters that Kiev wanted to sell the Varyag. The carrier was commissioned in 1985 but the newly independent republic did not have the cash to complete it. By 1992 the unfinished hulk was left to rust at anchorage in the Black Sea.

Seeing “an opportunity that comes just once a century”, Xu flew to Ukraine. On arrival he told the authorities that his plan was to convert the half-built vessel into a floating casino and nightclub, and berth it in Macau. Xu was told that there were four criteria for making a bid for the boat: a bank statement showing he had at least $50 million; proof the carrier wouldn’t be used for military purposes; written approvals at governmental level; and docking permissions in Macau.

His staff were soon devoted full-time to pulling off this extraordinary project. Recalling that hectic time, Xu says raising the cash was “doable”, but the trickiest part was negotiating with officials in Macau, then still a Portuguese colony. Fortunately he found a “well-connected person”, paying a fee of HK$6 million ($771,200) to get the job done.

By December 1997 Xu had gathered the required documents. The deadline for submitting everything to the Ukrainians was February 1, 1998, and on January 27 he arrived in Kiev with a bank statement proving he had the money too, as well as carrying $2 million in cash.

At this point he was finally able to board the carrier and inspect it.

The next four days were spent back-slapping officials and drinking. Xu later told friends that even though the temperature was minus 20 degrees celsius, he soon felt he was sweating vodka. Similar to China’s drinking culture, this proved a necessary experience for winning the trust and goodwill of Kiev’s decisionmakers. At one boozy session, a senior bureaucrat told him privately they would sell him the Varyag for a “favourable” price of $18 million, but that Kiev would be absolved of any financial responsibility as soon as the carrier left the dock. Xu agreed, but on the proviso he was given the design and development blueprints for the Varyag. The Ukrainians initially refused, saying they were a national secret. Xu persisted that he couldn’t convert the vessel into a casino without the blueprints and would rather pay more to secure them.

The Ukrainian government was in desperate need of hard currency, and it eventually agreed to a price of $20 million with the blueprints thrown in. Xu offered his $2 million of cash as a deposit and said the rest would be wired to the vendors via Bank of China.

However, Xu’s plans nearly came to nothing 10 days later when Kiev told him that diplomatic pressure from other countries meant that the ship would now have to be sold at auction. But to favour his bid, the event would be held in three days time, giving rival bidders little time to prepare. The plan worked: Xu won the auction with his original $20 million offer.

The next order of business was to get the blueprints. These were voluminous, weighing about 40 tonnes (it was later estimated that it would take 100 translators two years to convert them into Chinese). They were loaded into eight containers and flown from Kiev to China.

By then it wasn’t hard to conclude that – rather than become a floating casino – the Varyag was going to end up in the hands of the PLA. The Ukrainians must have thought so too because Xu later learned that some of the most crucial pages in the design plans were confiscated by Ukraine’s defence ministry, which meant another vodka-fuelled visit to the shipyard bosses, who finally agreed to give him a second set they still held.

The final part of the purchase would turn out to be the trickiest of all: getting the vessel to China. The 15,200-nautical mile voyage ended up taking three years, although the final destination was no longer Macau as the government there had revoked its permission even before Xu took part in the final auction.

From Xu’s perspective that was immaterial. In November 1998 Xinhua published an article claiming that Xu planned to “donate” the carrier to “serve the motherland”. However, towing the 67,500-tonne ship to its new destination of Dalian proved less straightforward. A team of tug boats was hired in July 1999, but as they pulled the carrier from its Black Sea port towards the Bosphorus, the Turkish authorities blocked its passage. Towing the carrier through the narrow strait was deemed dangerous to the shipping channel, so the carrier had to be tugged back into the Black Sea. It set sail once more a month later, but was again stopped at Istanbul.

A lengthy negotiation then began between China and Turkey. This period was financially difficult for Xu, who was paying $8,500 a day to the tow company, as well as further fees to berth the boat in Ukraine. In August 2001 a deal was agreed to let the carrier through after the purchase of $1 billion of insurance cover. The Chinese government offered a financial guarantee too.

The Turkish authorities finally closed the channel to other traffic and the carrier was towed through the Bosphorus. The ship reached the Aegean Sea in early November but a force nine gale severed a series of the tow boats’ cables, turning the carrier into a “wild horse unleashed”, according to the Jinan Times. The Greek government now got involved, organising a rescue mission and airlifting the sailors to the nearest port. The cables were then reattached, with the boat continuing its journey across the Mediterranean (it was refused entry to the Suez Canal). Next it travelled into the Atlantic. In March 2002 it finally docked in Dalian.

When the carrier arrived at its new home – at a total cost, including transportation, of about $30 million – it was reckoned to be about 70% complete, but missing a number of operating systems and other key components. That explains why Xu was so insistent on getting hold of the design blueprints. In June 2005 the ship was moved to a dry dock to undergo a lengthy and secretive refit. Indeed, the Chinese navy only officially acknowledged the existence of its new carrier in 2011. After sea trials, it was commissioned in late 2012 and renamed the Liaoning.

China has since built its own domestically-designed carrier the Shandong and the Jinan Times alluded to this too, noting that “Xu’s grand act greatly accelerated China’s aircraft carrier development process”.

When the merits of Xu’s grand deception were debated in military discussion groups on Tiexue.net seven years ago, users gave short shrift to those who opposed Xu’s deceptions on ethical grounds. “Are you nuts? Our own country’s interest is supreme,” wrote one. Another considered Xu as one of China’s great modern heroes, writing: “I suggest that we change the name of the ship from Liaoning to Zengping to reward and encourage those who are devoted to the motherland.”

Mission accomplished, Xu’s Hong Kong-registered company Chin Luck was dissolved in 2009.

All of which explains why there were sceptics in Ukraine and elsewhere of Skyrizon’s recent aircraft engine purchase. To use the old adage: once bitten, twice shy.


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