Ukraine rules to nationalize Motor Sich, extend Russian bank sanctions

Ukraine’s National Security and Defense Council,
headed by President Zelensky, decided at its March 11 meeting to return the
aerospace firm Motor Sich (MSICH UK) to the state, the president’s website
reported. “The enterprise will be returned to the Ukrainian people, to the
Ukrainian state, in a legal, constitutional way in the very near future,” the
council’s secretary Oleksiy Danilov commented. A majority stake of the company
was sold by entities close to Motor Sich president Vyachslav Boguslayev to the
Chinese company Skyrizon in 2016-2017, though the government refuses to
officially approve the Chinese firm as a controlling shareholder. Among the key
opponents to letting the Chinese firm enter the company is the U.S. government,
whose top official called such a deal as a “malign
Chinese investment” in August 2020.

In another decision, the council prolonged personal
sanctions against Ukrainian subsidiaries of Russian state-owned banks for three
years. The sanctions against five such banks were introduced for the first time
in March 2017. The measures banned any money transfers to the banks’ related
companies abroad. Since then, one Russian state-owned bank (VTB-Ukraine) has
been recognised as insolvent, one bank has been sold to a Ukrainian owner, and
one terminated its banking operations in Ukraine. At this moment, two such
banks, Sberbank-Ukraine and Prominvestbank (subsidiary of Russian state
institution Vneshekonombank) continue operating in Ukraine.

Among other decisions on March 11, the council ruled
to study an opportunity to nationalize Donetskoblgaz (gas distribution and
supply company in the partially occupied Donetsk region of Ukraine), which has
a non-transparent ownership structure.

Also, the council ruled to study the circumstances
behind the approval of the so-called Kharkiv agreements
between Ukraine and Russia in April 2010, based on which Ukraine extended the
presence of Russian naval fleet in Crimea for 2017-2042.

Alexander Paraschiy: While the
prolongation of the sanctions against the remaining banks that are owned by
Russian state entities was an expected event, the rulings to consider the
nationalization of Motor Sich and Donetskoblgaz are unexpected moves.

The government’s proactive position in resolving the
Motor Sich issue is a good start after more than three years of uncertainty.
Meanwhile, it is not clear in what way the company will be “returned” to state
hands after more than two decades of being a privately controlled company. In
particular, it is not clear what stake in the company will be nationalized
(before 2017, Motor Sich was a local stock market blue chip with the largest free float in the local universe) and what compensation
(if any) the current Chinese owners of a large stake will receive.

Theoretically, the nationalization could open an
opportunity for minority investors in Motor Sich to sell their shares to the
state as a new majority owner, but the prospects of such opportunity are not
clear now.

In any case, we believe it will be better for Motor
Sich’s mid-term prospects if it gets any shareholder who will be responsible
for controlling its operations.