Ukraine’s Helicopter Engine Producer Looks West for an Alternative to Russian Market

Kyiv, June 16, 2014. According to experts, Ukrainian military companies must turn to new markets in the West or elsewhere, or face possible financial trouble or collapse in the face of new regulations limiting the sale of military-related products to Russia. Motor Sich, the Zaporizhia-based aero-engine producer and billion dollar company, is looking to expand its market in Poland following the crisis over Russia’s annexation of Ukraine’s Crimean peninsula. Motor Sich and PZL Swidnik are in the midst of negotiations on joint cooperation and the modernization of PZL Swidnik’s production.

Motor Sich is one of the largest helicopter and airplane engine manufacturers in the world, and the current political crisis between Russia and Ukraine has threatened its production. On March 29, because of Russia’s annexation of Crimea and the threat of military aggression in eastern regions, Ukraine suspended the provision of military weapons and equipment to Russia.

Russia and Ukraine’s military production industries and supply chains are deeply intertwined. Russia’s military industry relies on Ukrainian equipment, not only for domestic military production, but also for the completion of international military contracts. Likewise, several large Ukrainian manufacturers of weapons and other military-related equipment, Motor Sich included, rely on exports to the Russian market. The ongoing political crisis between Russia and Ukraine threatens the profitability of Motor Sich and other Ukrainian military manufacturers. According to Motor Sich’s 2012 annual report, 93.1 percent of the company’s income of approximately USD 1.66 billion comes from exports. The company sells approximately half of its products to Russia, which includes engine production for Russia’s Mi-8 military transportation helicopters.

The potential effect of the crisis on bilateral trade between Russia and Ukraine in the military industry raises some important questions about the future of Motor Sich and the overall Ukrainian military production industry, which is one of Ukraine’s most profitable and competitive sectors. Since Motor Sich and other manufacturers are now restricted from selling to Russia, they will either have to defy newly-implemented trade regulations, or make up for losses in the Russian market elsewhere. Motor Sich claims that the prohibition on the delivery of weapons and military equipment to the Russian Federation will not affect the company’s exports because the helicopters into which the company’s engines are installed are neither weapons nor military equipment and are “meant for export [by Russia] to third countries.”

However, recent negotiations between Motor Sich and Polish helicopter manufacturer PZL Swidnik indicate that Motor Sich is looking westward to replace its potential export losses to Russia. In May, Motor Sich also suspended its cooperation with Russia’s United Engine Corporation until the political crisis is resolved. The Director for Economic Programs at the Kyiv-based Razumkov Center, Vasyl Yurchyshyn, believes that Ukrainian companies will need to cease military exports to Russia. “It’s hard to imagine that Ukraine will continue to deliver equipment to Russian companies which can then use this equipment against Ukraine,” he said.

Interestingly, Anton Mikhnenko, the Deputy Director at the Kyiv-based Center for Army, Conversion and Disarmament Studies, thinks that the loss of the Russian market could undermine Ukrainian defense firms. He said that if “Ukrainian companies lose the Russian market, some firms will collapse.” It’s unlikely that Motor Sich will be able to recover the Russian market in the near future. In this environment, “the Ukrainian government will have to support the domestic defense industry” to prevent it from possible collapse, he said.

Motor Sich’s westward inclination toward Poland might indicate the beginning of a new trend for Ukrainian defense production. The political and financial risks associated with reliance on Russian markets are now simply too great to ignore. Despite the dangers posed to Motor Sich, the present situation also opens up opportunities in other markets, particularly in Western countries. The company officials stated that although the cooperation between PZL Swidnik and Motor Sich is in the initial stages: “Motor Sich is always looking for prospective markets” and already exports to more than 100 countries.

In order to offset risks and potential losses in the short-term, Yurchyshyn believes that “the government must expand its contacts with foreign investors and provide benefits to encourage investment in Ukraine.” Ukraine especially needs “technological support for modernization, especially from the West.”

Even if Motor Sich’s cooperation with Poland is unlikely to immediately recover potential losses from trade with the Russian market, there is hope that increased foreign investment and technical support, as well as the opening of foreign markets, will benefit the defense industry more broadly in the future. It has also been suggested that since the West is reluctant to impose tougher sanctions on Russia, it could at least give a helping hand to Ukrainian enterprises located in the east of the country.