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Why Ukraine frittered away Motor Sich and $ 3.5 billion

Author : Oleksiy Kushch

Source : 112 Ukraine

The situation with "Antonov" and "Yuzhmash" enterprises is a vivid example of de-industrialization
21:11, 23 November 2020

KP.UA

In a recent interview with the Xinhua news agency, President of Ukraine Zelensky announced the prospects for mutual cooperation and added as an argument for the country's “Sinification:” the Chinese language is already being studied in general education schools and higher educational institutions. In Ukraine, about 500 Sinologists annually receive diplomas of philology. We have qualified translators.

China is indeed an important trade partner for Ukraine, although the format of this cooperation is not profitable for us: we supply raw materials, while the Chinese supply finished consumer and industrial goods with a high level of added value. You can even calculate in your mind how many tons of corn you need to sell to the Middle Kingdom in order to compensate for one budget car brought from there. For the same reason, the mutual trade balance is deeply in deficit for Ukraine, worth billions of dollars.

Related: Ukraine's Motor Sich company loses USD 715 mln due to arrest of its shares in 2017-2020, - expert

On the other hand, this format is extremely beneficial for our FIGs and groups of influence that control the power: they profit twice from the trade deficit. The first time – by supplying to China agricultural raw materials, bought on the domestic market much cheaper, and the second time - by importing consumer goods through smuggled channels to Ukraine. The most amazing thing is that sometimes both the first and the second are done by the same business owner. And Ukraine then covers the negative trade balance with loans.

Ukraine and China have practically no investment cooperation. We did not become part of the route of the "New Silk Road" and Belarus was ahead of us. We did not become members of the Asian Infrastructure Investment Bank (an analog of the Asian IMF), but Belarus did. At one time, China provided Ukraine with the so-called "grain loans" for the supply of corn, which were successfully "capitalized" by our statesmen.

Today, China is becoming the center of new Asia-Pacific power. Even the neoliberals in our Ministry of Economy admit that Ukraine's exports were pulled out by Asia this year. And Asia is consolidating around China, at least the East, plus the Pacific region.

The main event of the outgoing year is the signing of an agreement on the establishment of an Asia-Pacific free trade zone: "Regional Comprehensive Economic Partnership" (RCEP). The agreement was approved by representatives of 14 countries, including China, Japan, South Korea, Australia, Indonesia, Singapore, Vietnam, Philippines, Thailand, Myanmar. A third of the world economy, more than 2 billion people.

Related: Motor Sich Airlines cancels part of flights due to epidemic situation in Ukraine

This agreement was another confirmation of the cluster development model and the concept of global defragmentation of the world economy, which we have been writing about all these years, and even long before the pandemic. Good old globalism has gradually died in Bose and not at all under the influence of the coronavirus epidemic: the global world caught a cold long before the appearance of the "overseas guest" from Wuhan, who sang his "apotheosis" aria to the world. The growth of human resources, on the one hand, and the limited material reserves, on the other, have created global prerequisites for changing the model of the world economy and the international trade system.

If in the old days the world continuum, consisting of global value chains, functioned on the principles of cooperative games, when the benefits from international trade could be distributed in favor of the main participating countries, which were collective beneficiaries of the globalism model, then during the transition to a scarce model of world economic growth this stratagem transformed into a model of antagonistic or zero-sum games where the bottom line for the main participants is the opposite.

Motor Sich engine, workers
The Washington Post

In the 1980s, the United States and China launched a cooperative investment-trading game model called Chimerica by analysts. American companies used cheap factors of production in China, primarily labor, and made investments in that country. The Celestial Empire received an export-oriented model of the economy, and the Americans – the import of cheap Chinese consumer goods, which were significantly cheaper for buyers than American ones. In addition, China has invested its trade surplus in US debt securities, thus financing the US budget deficit. For decades, this model has functioned successfully and benefited both sides: Americans printed money and gave it to the Chinese, lost their jobs in their factories, but at the same time bought cheap Chinese goods through social benefits paid from the state budget, which replenished resources with the help of Chinese investments in debt securities of the Treasury.

Related: Motor Sich refused to perform domestic and international flights due to coronavirus

But since 2008, when the global financial crisis hit, this model has turned into a zero-sum game for the United States: the more they invested in China, the deeper their trade deficit with that country became. In this model, an improvement in the well-being of a conventional Chinese by one dollar led to a worsening of the same indicator for an ordinary inhabitant of the American hinterland. That is why Trump has activated the model of economic nationalism, resumed state protectionism and launched trade wars with the main trading partners – the EU and China.

In this regard, the change of the working globalist model to the new model of global defragmentation was a matter of time. What is their difference? Global defragmentation preserves the general rules of globalism, including multilateralism, where each participant benefits from cooperation, but at a more local level. That is, we are facing the same fragmentation of global value chains, but with a shortening of their physical length and a decrease in the level of added value in the host country due to the general diversification of production, to which the main participants adhere.

In practice, this means that the world will be divided into several global clusters: the EU and trade satellites; EAEU, including observer countries; North American Free Trade Agreement (USMCA). And now the Regional Comprehensive Economic Partnership (RCEP) is likely to be the largest of all.

Against this background, the claim of Chinese investors against Ukraine regarding corporate rights to Motor Sich looks enchanting. International law firms will try to sue our country in international arbitration for $ 3.5 billion. All this is presented as a kind of phantasmagoria against the background of bills on "investment nannies" and promises to draw up sales and purchase agreements with buyers of Ukrainian privatization objects based on English law, and introduce a separate "investment court" for foreign investors.

Related: USA suggests Ukraine not to sell Motor Sich to China

The story with Motor Sich began several years ago, when then First Deputy Prime Minister and Minister of Economy Stepan Kubiv visited China at the Belt and Road Forum, following which he announced that the first aircraft engine assembled in the framework of cooperation between Motor Sich and a Chinese partner can be demonstrated as early as the end of 2017, while the project to create an appropriate joint plant in Chongqing, China, was named "one of the government's priorities" (of course, ours). The First Deputy Prime Minister also announced the readiness of the Chinese to invest $ 250 million in Motor Sich itself. After that, apparently having received a shout from overseas, the Security Service investigators opened criminal cases regarding the impending export of the plant to China. They planned the celebrations, and ended up almost with arrests. The current government has decided, apparently, to combine.

The scientific and technical potential of the enterprise is much more important than the bare numbers, which withstands competition with such world manufacturers of aircraft engineering as General Electric (engines for Boeing), Snecma / Turbomeca (France), etc.

Motor Sich is a developer of 28 types of serial engines, the staff is more than 25,000 employees, the company's engines are used on Mi-2, Mi-8, Mi-24, KA-26 helicopters, An-26, An-72 aircraft, An-74.

Thus, the plant is a colossal depository of scientific and technical developments, a significant part of which belongs to the military-industrial sector of the economy, and its specialists are carriers of unique know-how and technical skills.

In recent years, we have witnessed the last crumbs of our scientific and production potential being "swept up" by those countries that want to become leaders of innovation and scientific development from the "workshops of the world." The first violin here is played by China, which is no longer satisfied with the role of the US manufactory but wants to produce sophisticated equipment itself, including aviation. And for this it is necessary to buy everything that was left in countries such as Ukraine, from the once-powerful rocket and aircraft industry, along the way taking the best specialists for satisfying bread.

Related: Putin warns of China's, Germany's strive for superpower status

It's just that China has its own economic policy, while Ukraine does not yet, and even at the project level. And if in the Celestial Empire they think about the production of aircraft engines, then in Ukraine they are trying to "conceive and give birth" to a domestic seeder anew. And they are trying to continue to buy agricultural machinery from Belarus.

The situation with "Antonov" and "Yuzhmash" is a vivid example of de-industrialization. Blocking the traditional sales markets of these companies, the previous government did not bother to create effective compensators in the form of credit programs for the development of new markets and government purchases to saturate the domestic market. But we are ordering aircraft in France for hundreds of millions of dollars and are negotiating with Turkey on the purchase of drones. And at a meeting with the Brazilian president, our head of state promises to buy military transport aircraft produced in Brazil, while having his own project for a similar aircraft. Over the past decades, the army has not ordered a single new military transport aircraft from a domestic manufacturer, and Ukrainian cadets are forced to fly on scrap metal.

According to the latest reports, 4,500 workers are being fired from Motor Sich, and in recent years the company has lost 8 thousand workers and engineers. Including families, this is more than 30,000 inhabitants of the city of Zaporizhya. Interestingly, someone assessed the losses of the state due to the loss of such a significant number of highly qualified specialists in the employment system? At least based on the cost of training the same number of new workers.

As a result of the mediocre industrial and economic policy of recent years, a most valuable enterprise, a diamond of our high mechanical engineering, has been practically lost. Both the past and the current government have become like a "dog in the manger", not developing their industrial potential and not giving it to others. Although everything is obvious here: the sale of Motor Sich is blocked by a "call." Mild euthanasia is the recipe prescribed by overseas doctors to our high-tech sector of the economy (so that it does not "spread around the world"). Unique technologies must die along with their carriers, preventing a new change from growing.

Related: Ukraine pledges its readiness to expand bilateral trade with China

For another five to ten years, our politicians will be able to post "photos" with the unique "Mriya" and "Ruslans" at foreign airports, smugly smiling in response to the enthusiastic exclamations of foreigners, while having neither Mriya nor Ruslan relationship. As a result of the Motor Sich scandal, Ukraine will disappear from the radar of Chinese investors for a long time, giving way to countries like Belarus. The new global mega-cluster that is forming around China will hardly offer us to become a connecting link with the EU market (and after all, with the right economic policy, we could successfully fulfill this role, attracting tens of billions of dollars in foreign investment and multiplying our economy at times).

And a very real threat of paying $ 3.5 billion under international arbitration looms ahead. And if such a decision is made, we will have to pay, because we ourselves are quite effectively appealing to the system of international law. The center of the world economy is gradually moving to China. Beijing will never forget about the "grain loans" or the situation with Motor Sich. No, there they will continue to change their auto industry for our corn. And that's all. The Chinese are guided by the principle that before you speak, you need to count to ten, and before you hit, to a thousand. Well, in our country everything happens according to the classics: "There are moments when it is impossible to resist and not start doing stupid things. This is called enthusiasm."

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