Author Topic: Economic Espionage (China and others)  (Read 691 times)

Crafty_Dog

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Economic Espionage (China and others)
« on: February 23, 2021, 05:23:28 AM »
Understanding Economic Espionage: The Present

undefined and Global Security Analyst
Ben West
Global Security Analyst, Stratfor
11 MIN READFeb 23, 2021 | 11:00 GMT





Deputy Attorney General Jeffery A. Rosen on Sept. 16, 2020, at the Department of Justice in Washington talks about charges and arrests related to computer intrusion campaign tied to Chinese government the group called 'APT 41.'
Deputy Attorney General Jeffery A. Rosen on Sept. 16, 2020, at the Department of Justice in Washington talks about charges and arrests related to computer intrusion campaign tied to Chinese government the group called 'APT 41.'

(TASOS KATOPODIS/AFP via Getty Images)

Editor's Note: The following is part two in a three-part series on economic espionage; part one may be accessed here.

Following World War II, the United States firmly established itself as a global political and industrial power. With the fall of the Soviet Union in 1991, it became the world's sole superpower. This ascent has made the United States the preeminent target for industrial espionage in the early 21st century by the main countries that seek to undermine its relative power, Russia and China.

The Soviet Union/Russia
At the midway point of the 20th century, the Soviet Union presented the clearest espionage threat to the United States. It had just detonated its own atomic bomb in 1949 that ended the four-year U.S. monopoly on nuclear weapons, largely thanks to comprehensive Soviet spying on the Manhattan Project. But Soviet espionage was not limited to strategic and military intelligence; the Soviets were also immensely interested in U.S. industrial secrets.

Russia's push to acquire intellectual property started long before the Cold War. Following the formation of the Soviet Union in 1922, it was a political imperative for its leaders to accelerate and expand industrialization in order to catch up with the United States, United Kingdom, Germany and France, all of which had begun industrialization before Imperial Russia. An important part of that strategy was the establishment of the Amtorg Trading Corp., a Soviet office in New York that promoted commercial relationships and investment, but was widely suspected of serving as a base for Soviet economic espionage since its founding in the 1920s.

The Soviets soon realized that possession of trade secrets was not enough to replicate the technology. For example, Amtorg employees appear to have gotten their hands on the blueprints for a Ford tractor design, but efforts to replicate the tractor in the Soviet Union failed. So Soviet leaders hired a leading Detroit industrial designer, Albert Kahn, to design factories that could efficiently build tractors. Eager for revenue in the early 1930s following the stock market collapse, Kahn took the contract, but the Soviets ended it early. Having obtained the designs for a factory, they replicated it themselves rather than continuing to pay Kahn to build factories for them. Russian architectural historian Sonia Melnikova-Raich argued that the Soviet Union under Joseph Stalin extrapolated from Kahn's designs far more than just tractor production, also establishing more efficient means of production passenger vehicles, trucks and even tanks. This allowed the Soviet Union to develop its entire defense industry. Ultimately, Kahn's tractor factory blueprints helped the Soviets in their fight against Nazi Germany and to maintain parity with the United States in the Cold War that followed.

The Soviet Union continued to rely on imitation of American and European technology and trade secret theft during the Cold War, with mixed results. For example, the Soviet Tupolev TU-144 was a clear imitation of the Anglo-French Concorde supersonic passenger aircraft. While the Soviets were able to match (and even exceed) the Concorde in speed, the project suffered from a lack of demand and safety concerns. The North Atlantic economic zone created a demand for quick travel between Europe and North America for wealthy commercial elites. The Soviet Union's expansive geography also could have benefited from supersonic passenger travel, but demand for flights between Moscow and the rest of the Soviet Union was nowhere nearly as large as demand was for trans-Atlantic travel. Following several crashes, the TU-144 ultimately only flew 55 times carrying passengers. Ultimately, the Soviet TU-144 program was more motivated by a political desire to maintain technological parity than sustainable commercial demand.

Russia continues to pose an elevated espionage threat to countries and companies around the world. While the collapse of the Soviet Union in the early 1990s led to a decade of political turmoil, there was a great deal of continuity in espionage activities in the new Russian Federation. Testaments to that continuity are the arrests of CIA officer Aldrich Ames in 1994 and FBI agent Robert Hanssen in 2001, both of whom provided political and strategic intelligence to Soviet handlers and their successors within the Russian Federation. Further arrests and dismantling of spy rings associated with Russian agents like Anna Chapman (2010) and Maria Butina (2018) continued throughout the 2010s. Today, the Russian Federation continues to pose an economic espionage threat to companies, too. At least three cases of Russian economic espionage targeting user information and technological trade secrets at major companies like Yahoo, GE and Boeing resulted in federal charges in the United States between 2016-2019. In 2020, a Tesla employee alerted authorities after a suspicious approach from a Russian national who wanted the employee to install malicious code on Tesla's networks in order to extort money from the company. While charges against this Russian national did not specifically mention espionage, the cyberespionage attacks on Yahoo illustrated an overlap between Russian criminal groups and the state's intelligence apparatus.

A list of priority sectors for business espionage by Russia and China
Modern Russian economic espionage campaigns also appear to replicate the model of establishing a commercial presence in a market to gain access to trade secrets. In 2015, FBI agents arrested Evgeny Buryakov and charged him with spying for Russia's Foreign Intelligence Service (SVR). Buryakov was working under nonofficial cover for the Russian state-owned development bank Vnesheconombank to recruit sources in the energy and finance sectors in New York. Additionally, the FBI issued public warnings in 2014 about the potential intelligence threat state-backed venture capital investment firms like Rusnano pose to the U.S. tech sector.

China
The clear frontrunner in 21st-century economic espionage is the People's Republic of China and its Ministry of State Security, which has been implicated in scores of trade secret theft accusations in the United States and around the world. Between 1996 and 2019, China stood to benefit from 66 (32%) of the 206 U.S. federal cases involving charges related to the Economic Espionage Act of 1996. China was second only to other U.S. companies, which accounted for 76 of the 2016 cases (37%) over that same period. Over a more recent timeframe, from 2016-2019 China accounted for half of all charges related to economic espionage (18 of 36 cases). FBI Director Christopher Wray has made clear that the U.S. government views Chinese espionage as a serious and growing threat. During public remarks in 2020, Wray noted that the FBI opens a new China-related counterintelligence case on average every 10 hours and that of the nearly 5,000 active FBI counterintelligence cases underway as of 2020, half were connected to China. Wray noted that this marked a caseload increase of 1,300% over the past decade. The economic impact is sizable, too: Researcher Nicholas Eftimiades estimated that Chinese economic espionage activities accounted for $320 billion in losses per year as of 2018, or 80% of the total cost of intellectual property theft to the United States estimated at $400 billion per year by the director of national intelligence.

The United States has introduced a variety of policies, ranging from sanctions to restrictions on Chinese students and programs, designed to identify and prevent economic espionage. History, however, suggests that preventative measures will at best slow down the transfer of technology. China and the United Kingdom had draconian measures in place to deter the illicit transfer of technology: China threatened death for violators and the United Kingdom forbade craftsmen in certain trades from traveling. But even then, secrets made their way out. The current wave of Chinese-led economic espionage targeting the United States is even more difficult to stop because the strategically important trade ties between the two countries facilitate the flow of information and make counterintelligence policies extremely expensive. The United States traded $558 billion in goods with China in 2019; any policy to counter economic espionage is going to have to accommodate the economic realities of the need to continue to do business with China.

a bar graph showing charges under the economic espionage act of 1996
China's strategic interest in conducting economic espionage has been made clear through initiatives such as Made in China 2025 and the Thousand Talents Plan. An industrial plan released in 2015, Made in China 2025 aims to transition China's labor-intensive manufacturing economy to a leader in more value-added technology production. The plan also includes achieving 70% self-sufficiency in high tech industries by 2025 and dominating global tech markets by 2049 — the 100th anniversary of the founding of the People's Republic of China. The Thousand Talent Plan is another familiar strategy that seeks to recruit scientists, researchers and industry professionals to work in China, thereby bringing in the know-how to help China achieve its ambitious goals. In recent years, U.S. investigators have alleged that the Thousand Talents Plan has offered targeted employees cash bonuses for bringing sensitive documents and trade secrets with them when they relocated to China. A U.S. federal investigation accused Chinese recruiters of offering an engineer at a U.S. energy company in excess of $170,000 in 2018 to bring secrets related to battery technology that his company was working on. Even before the Thousands Talents Plan, China in 2011 offered a disgruntled engineer at energy technology company AMSC $1.7 million to provide trade secrets that would save the partially Chinese-government-owned company Sinovel $800 million in contracts it had with AMSC.

Financial incentives also come in the form of investment and promises of lucrative entrepreneurial endeavors. A Texas-based materials science researcher used several million dollars in Chinese funding to adapt syntactic foam technology — which allows greater buoyancy control in modern maritime vessels — from his previous employer and start his own company in 2014 that provided China with the secrets it sought. Similar incentives are applicable in the pharmaceutical industry, in which China is also heavily interested. In 2016, Chinese investors (likely with state backing) lured a biochemist working on monoclonal antibodies to take sensitive materials from her employer, GlaxoSmithKline, and attempt to start up her own rival business in China. Chinese and Russian interest in pharmaceutical trade secrets only increased in 2020 with the outbreak of the COVID-19 pandemic and global race to find treatments and ultimately, a vaccine.

While the United States is a primary target, it is by no means the only target. German industrial chemical company BASF was targeted by Chinese economic espionage attempts in Taiwan, as was the industrial engineering and steel production conglomerate ThyssenKrupp. One of the most successful counterintelligence operations in recent years targeting Chinese espionage efforts took place in Belgium, where authorities arrested Ministry of State Security officer Yanjun Xu for his efforts to recruit intelligence sources within companies.

One major difference between China's current espionage campaign and previous ones is the pace and scope at which the transfer of technology is occurring. Modern technology has facilitated espionage in many ways. The digital storage of information and electronic means of collection allows intelligence operators to collect and transfer terabytes of information on an easily concealable hard drive or anonymous server. The source code and software that is so often the target of modern espionage campaigns can also be exploited much more quickly than technologies of the past, which took years (if not decades) to recreate. Cyberespionage techniques allow collectors access to sensitive information without the logistical complications of sending officers or informants on long, expensive missions through hostile territory. Storing contraband digitally makes it easier to maintain the integrity of the documents and share them as widely as needed. These all contribute to espionage on a scale that far surpasses the slow drip of information during previous campaigns.

It is clear that China has the interest, intent and capability to conduct economic espionage — that has been proved through dozens of arrests, charges and convictions over the past decade. China also appears well-placed to exploit the trade secrets acquired through espionage given its large manufacturing base, capital to support new start-ups, and political support for technological innovation through the Made in China 2025 and Thousand Talents program. China's primary target, the United States, has ramped up counterespionage efforts in response. But whether it's Chinese silk production, British textile mills or American factory production processes, history has demonstrated that it is very difficult to stop the spread of successful technology. History also has demonstrated that economic espionage alone isn't enough to translate stolen trade secrets to economic success, as was the case in French efforts to learn Chinese porcelain production secrets or Soviet efforts to replicate the Ford tractor. While Beijing has many forces working in its favor, its ambitious goal to attain global domination in technology by midcentury is by no means guaranteed. What is clear, though, is that economic espionage will continue to pose a threat to companies and the countries that benefit from their work for years to come.

Next in the series, we will explore the future of economic espionage. China is not the first and will not be the last to rely on economic espionage to achieve politically motivated industrial goals. What other countries stand to benefit from economic espionage, and who might they target?

Crafty_Dog

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Economic Espionage Part One
« Reply #1 on: February 23, 2021, 05:25:32 AM »
ON SECURITY
Understanding Economic Espionage: The Past

undefined and Global Security Analyst
Ben West
Global Security Analyst, Stratfor
13 MIN READFeb 12, 2021 | 10:00 GMT






Series Introduction

The world is currently embroiled in a new wave of economic espionage facilitating technology transfer at a pace and scope unrivaled in human history. Previous waves saw the transfer of traditional practices and methods from China to Europe, including silk in the 6th century B.C. to porcelain and tea in the 17th and 18th centuries A.D. The United States drove the next wave of espionage, targeting British technology to grow its domestic industrial capacity following its independence. The current wave has brought history back full circle, with China now the main aggressor in economic espionage as it seeks to reclaim its title as a global technology leader.

A map showing three waves of economic espionage

In this three-part series, we will explore historical examples of trade secret theft and how the practice of economic espionage has assisted transfers of technology. We will also explore the current threat of economic espionage posed primarily, but not exclusively, by China. And we will also explore the future of economic espionage, the world's next aggressors and targets, and how this could facilitate shifts in the balance of power as seen during previous eras.

For our purposes, economic espionage will refer to state-backed efforts to steal trade secrets either through human, electronic or other intelligence practices. The definition of trade secret has shifted over time, but essentially it is any technology or process protected by law. Economic espionage is distinguished from corporate espionage, which involves the attempted theft of trade secrets by rival companies rather than states. While corporate espionage typically poses a narrow threat and can be resolved in court, economic espionage tends to be much broader and more difficult to resolve due to competing jurisdictions. In countries with state oversight of commercial endeavors, where state-owned enterprises have access to the state's intelligence apparatus through concerted, state-backed industrialization efforts, companies and the state act in unison. Trade secret theft that benefits state-backed enterprises is considered economic espionage. We distinguish both of these from strategic, or military espionage, which seeks access to government-controlled secrets. There is overlap here, since the theft of secrets regarding military technology or political strategies can have commercial benefits. But if the primary motivation is to gain a political or military, rather than a purely economic, advantage over a country, we will consider it strategic intelligence for the purpose of this series.

Part I: The Past

The threat of economic espionage involves an assessment of the interest, intent and capability of a state to steal trade secrets for economic benefit. This essentially means whether a country is interested in a technology, has the intent to acquire it through theft and the capability (i.e. intelligence resources) to gain unauthorized access to it.

But surveying the history of state-backed economic espionage, capability is more than just the technical ability to steal a piece of technology. It also requires an adequate financial, labor and industrial base to exploit the secrets. Intelligence successes do not always translate into economic advancement. Even then, economic espionage has been most successful at boosting domestic industries rather than destroying targeted industries.

China to Europe

For most of the previous two millennia, China was the international commercial center of the world. Products such as silk, porcelain and tea were rare and expensive in previous eras. The only way to get them was through trade with China. Commercial scheming by foreign powers to share in the profits generated by these products motivated trade secret theft that undermined China's monopoly on those products.

One of the first documented involuntary transfers of technology from one state to another is silk from China to the Byzantine Empire in the 6th Century A.D. Silk wasn't just coveted by the early European ruling class as a luxurious material that signified wealth and opulence, it was also one of the strongest, most versatile fabrics available. European fabrics were limited to wool, linen and leather. Silk was lighter, stronger and offered a greater variety of designs and applications. Silk also had important military applications: Special weaves could contain spear points that punctured the skin, making extraction easier and limiting the risk of infection. In addition to being prohibitively expensive and only accessible to the wealthiest people, the supply chain from China to Europe (via the Silk Road) was long, complex and risky. Persia, a historical rival to the Byzantine Empire and its Roman predecessors, occupied a prominent choke point along the supply lines and could disrupt European access to silk should it deem necessary.

Sericulture is an example of a complicated technology that gradually transferred out of China over centuries. China certainly appreciated the importance of maintaining its monopoly on silk, threatening anyone who intentionally spread knowledge of sericulture with death. But it was also a technology impossible to contain over the long run. Sericulture involves multiple processes, including cultivating white mulberry trees for the silkworms to feed on, raising the ideal silkworm specimen, harvesting the silkworm cocoons, extracting the threads and weaving for various uses. It was a cottage industry in China for thousands of years, with the knowledge passed down from generation to generation, and was not a centralized process that could be contained to a few trusted individuals. As demand for silk increased abroad, so did demand for the tradecraft behind it. Chinese soldiers used silk to purchase necessities from Central Asian traders, so knowing how to produce silk was akin to printing money.

Samples of silk discovered throughout Central and Southwest Asia suggest that sericulture gradually made its way westward from China over many generations and political shifts, eventually making it to the Byzantine Empire by the 6th century A.D. Gifting silkworm eggs (which is how Justinian I allegedly obtained the secrets of silk production) was somewhat common, especially for traveling religious men seeking approval from local leaders. Having eggs alone would have been inadequate to the eventual establishment of Byzantine silk production; white mulberry trees and knowledge of the processes of producing silk, which appear to have come to Europe from Central Asia rather than China, would also have been required.

Despite the gradual transfer of technology and establishment of independent production bases in China's clientele markets, China remained the dominant producer of silk for the next thousand years. Even today, China is one of the largest producers of silk.

The story of how China lost its monopoly on sericulture is important because it highlights how the more valuable a trade secret is, the more vulnerable it is to theft or simply natural transfer; and how the theft of trade secrets and espionage for economic gain in general is just one force within the larger process of technology transfer. Whether the technology is sericulture or semiconductors, technical knowledge alone is not enough to set up a rival industry. One also needs reliable access to raw materials, a knowledgeable workforce, and a financial and industrial base to support the industry. Ultimately, while countries have every incentive to protect their trade secrets, and have tried to do so throughout history, the ultimate transfer of technology is likely inevitable: It's probably just a matter of whether it happens over centuries, decades or years.

Similar to silk, porcelain was in high demand across Europe in the 17th century, and China was essentially the only source. While porcelain didn't have the same strategic value of silk, replication of the product promised to be a commercial boon to any European that could figure out how to reproduce it.

Recognizing the value of learning the trade secrets behind porcelain and hoping to give their producers a leg up, France dispatched Jesuit missionary Father Francois Xavier d'Entrecolles to the center of Chinese porcelain production, Jingdezhen, in the early 18th century. D'Entrecolles used his religious background to work his way into porcelain factories that were otherwise barred to foreigners. He sent letters to his handlers laying out the process in great detail, noting that upward of 70 people handled each piece of porcelain in a complex assembly line-style production process. Though he spent nearly 20 years collecting illicit information on the Chinese porcelain industry, France ultimately failed to exploit the trove of intelligence d'Entrecolles provided to create an indigenous, French porcelain manufacturing industry. While France certainly had the interest, intent and capability to obtain the trade secrets, it lacked the industrial capability to exploit those secrets.

About 50 years later, during the mid-18th century, Englishman Josiah Wedgwood read Father d'Entrecolles' letters and incorporated some of the details observed of the Chinese porcelain assembly lines into his own production process. The intelligence helped to increase the quality of English dishes and establish a company bearing the Wedgwood name that is still well known for fine porcelain today. Historian Robert Finlay even suggests that far beyond the production of porcelain, d'Entrecolles' letters helped lay the groundwork for assembly line-style manufacturing during the early days of the European Industrial Revolution. Great Britain may have been better positioned to exploit Father d'Entrecolles' intelligence because it had advanced further with the Industrial Revolution than France had in the early 18th century, demonstrating the importance of indigenous industrial capability when it comes to exploiting the clandestine transfer of technology.

The British were also capable of stealing secrets of their own, as evidenced by the highly coordinated 19th-century effort to steal Chinese tea cultivation secrets in order to assist the British East India Company's establishment of a rival industry in India.

United Kingdom to United States

During the late 18th and early 19th century, it was essentially U.S. policy to steal components of foreign technology and recruit technical experts to build up the U.S. industrial base from its infancy. Alexander Hamilton promoted rewards to anyone who brought secrets of value to the United States. Presidents Washington and Jefferson, eager to gain economic as well as political independence from Britain, approved of the acquisition of any technology or knowledge that would bolster U.S. manufacturing capabilities and end its junior economic relationship with Britain. Despite U.S. independence from Great Britain, the former colonies still relied heavily on selling raw materials to British merchants and buying finished products from them. Thomas Attwood Digges acted as a kind of case officer and recruiter, advertising rewards across the British Isles for anyone who could smuggle technology and know-how to America. Britain responded with bans on exporting technology and forbidding the emigration of textile workers for fear that they would help the fledgling U.S. industrial sector, as well as by arresting recruiters such as Digges.

One of the most successful examples of the recruitment of a British textile worker was the emigration of Samuel Slater to the United States in 1790. Slater was a successful apprentice at an English textile mill using state-of-the art technology to produce cotton fabrics. The mill owners' sons, however, inherited the operation and Slater was cut out of the business. He responded to an ad offering 100 pounds (about $20,000 in today's dollars) to British textile workers to relocate to America. While he allegedly did not smuggle any tools or equipment with him, he did possess immense knowledge about the technical aspects of running a textile mill, and had logistical and managerial expertise that helped establish one of the most advanced (and successful) textile mills in the United States within three years of his arrival. Like his predecessors, Slater hardly accomplished this on his own. He had the help of capable technicians who had also responded to the U.S. offers and likely access to machinery that previous recruits had smuggled into the United States. Slater also had access to capital from Rhode Island's Brown family, who were early industrialists closely linked to the political struggle for independence. In that era of American history, the struggle for economic development was imperative to political independence from Great Britain, and the theft of trade secrets was justified for national survival.

Another pivotal figure was American Francis Cabot Lowell, who leveraged his wealthy family's connections to gain access to manufacturing sites in Great Britain that were heavily restricted to Americans. Since Cabot Lowell came from a well-known, well-connected family, he found it easier to evade official efforts to block Americans. During a trip to Great Britain in 1810, Cabot Lowell toured textile mills across the country and returned to the United States inspired by what he saw.

Similar to Slater, Cabot Lowell also adopted some British technology that he observed, but his primary contribution to the U.S. textile industry was in management and organization. Thanks to Slater's innovations, American textile mills were using similar technology to their British counterparts, but the scale of production was still small and inefficient compared to the more mature British industry. Cabot Lowell improved upon American mills in two major ways after his trip to Great Britain: He developed the first fully integrated American mills that converted raw cotton bales into ready-to-use bolts of fabric; and he was a founding member of the Boston Manufacturing Co., one of the first industrial joint-stock companies in the United States that had a board of directors and sought to scale production beyond the single owner-manager mills that dominated U.S. textile industry. The creation of the joint-stock company created larger pools of capital to scale up the production of textiles in the United States. Cabot Lowell also benefited from the timing of his return to the United States during the lead-up to the War of 1812, which started over, among other things, trading arrangements between the United States and Britain. His contributions to the U.S. textile industry were as politically valuable as they were economically valuable, reinforcing U.S. policy at the time of copying and stealing British technology.

The United States was not alone in its targeting of British industrial trade secrets. In Belgium, Lieven Bauwens is considered a national hero for practicing many of the same tactics as his American counterparts, namely, luring British workers to kick-start industrialization in his home country. Later in the 19th century, German industrialist Alfred Krupp greatly improved on German manufacturing processes after touring British factories.

While the systematic targeting of British industrial processes in the late 18th and early 19th centuries certainly strengthened its rivals on the Continent and in North America, the British textile industry and manufacturing in general continued its success throughout the 19th century and into the 20th century. While the United States caught up with British industrial output by the late 19th century and Germany caught by the early 20th century, British textiles still made up over half of global production in 1913 — over 120 years after Samuel Slater defected to the United States. Similarly, China's historical commercial dominance of sericulture, porcelain manufacturing and tea cultivation came to an end during the Century of Humiliation due in part to an erosion of their competitive advantage from trade theft. Modern-day China, however is the leading producer of silks and tea and a leading global producer of porcelain and ceramics. In previous economic espionage campaigns, the theft and transfer of trade secrets boosted economic independence and self-sufficiency in the receiving country; targeted industries suffered lost demand, but they continued to have success. This is an important lesson to keep in mind as we address the third and current era of economic espionage that has marked China's evolution from victim to aggressor.

Crafty_Dog

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Ukraine looks to nationalize defense firm to block the Chinese
« Reply #2 on: March 16, 2021, 11:34:08 AM »
Ukraine to Nationalize Defense Firm, Keeping China Out in a Nod to U.S.
Washington had urged Kyiv to halt Chinese acquisition of Motor Sich; move risks backlash from Beijing

A Motor Sich engine was displayed in Kyiv in 2017, the year a group led by Beijing Skyrizon Aviation completed a $3.6 billion deal for control of the Ukrainian company.
PHOTO: EFREM LUKATSKY/ASSOCIATED PRESS
By Brett Forrest and Alan Cullison
March 16, 2021 11:33 am ET


Ukraine plans to nationalize a prominent aerospace manufacturer and cancel its acquisition by China, after the U.S. opposed the deal to keep critical defense technology out of Beijing’s hands.

The Ukrainian government’s national security council last week announced the decision on Motor Sich, a maker of advanced engines. The decision angered China, which demanded Ukraine respect the rights of Chinese investors, and the plans still must pass the Ukrainian legislature and could face legal challenges from the spurned Chinese suitors.

If carried out, the state takeover would end more than three years of wrangling that had placed the company and Ukraine in an expanding confrontation between Washington and Beijing.

It could also salve relations between the Biden administration and Ukraine, after the government became embroiled in U.S. domestic politics during Donald Trump’s presidency, weakening support for the country in Washington.

The nationalization of Motor Sich shows that Ukraine “stands with the U.S. even at considerable cost,” said Anders Aslund, a Swedish economist and senior fellow at the Atlantic Council, a think tank in Washington. “This was an excellent step that the U.S. should greatly appreciate.”

The White House and the State Department didn’t respond to requests for comment. U.S. officials in both the Biden and Trump administrations have said that Ukraine must understand China’s ambition to acquire and master vital defense technologies and stop the purchase. The Ukrainian government didn’t respond to requests for comment.


In 2019, President Trump asked Ukraine President Volodymyr Zelensky to launch investigations into the business dealings of Hunter Biden, son of then-presumed presidential rival Joe Biden, while the younger Mr. Biden served on the board of a Ukrainian gas company, Burisma Holdings. The phone call between Messrs. Trump and Zelensky led to Mr. Trump’s first impeachment by the House; he was acquitted by the Senate. President Biden and his son denied wrongdoing.

Nearly two months after Mr. Biden’s inauguration as president, he has yet to speak over the phone with Mr. Zelensky. That, a Ukrainian official said, has caused anxiety in Kyiv, which sees the U.S. as a vital partner in standing up to Russia.

“They are trying to please the Americans and trying to get their attention,” said Oleksandr Lemenov, a founder of nonprofit civil-society group StateWatch, which lobbies for transparent economic practice in Ukraine and has received funding from the U.S. Embassy in Ukraine, among others.

Kyiv is also looking at setting up a body to review foreign investments into strategic enterprises—a U.S. goal.

Motor Sich, once a linchpin in the Soviet Union’s defense industry, supplied engines to Russia’s military-helicopter fleet for decades. That came to a halt in 2014, when Ukraine and Russia went to war over Russia’s incursion into eastern Ukraine and its annexation of the Crimean peninsula.


“They are trying to please the Americans and trying to get their attention”— Oleksandr Lemenov of civil-society group StateWatch

Ukraine then banned exports of military gear to Russia, crippling Motor Sich’s business and providing an opening to China, a Motor Sich customer since the 1990s. Beijing Skyrizon Aviation, a private firm, led a group of companies that in 2017 completed a $3.6 billion purchase to control Motor Sich from shareholders led by company President Vyacheslav Boguslayev.

The U.S. pressed Kyiv to annul the deal, particularly driven by concerns that Chinese ownership would boost China’s efforts to build a fifth-generation fighter plane and a fleet of heavy-lift helicopters, according to U.S. and Ukrainian officials.

A Ukrainian court froze the Chinese transaction in April 2018, and the government’s antimonopoly committee opened an investigation into possible unfair competitive practices. Both actions effectively suspended the deal, with Washington and Beijing continuing to lobby Kyiv.

Then last week, Oleksiy Danilov, the secretary of the Ukranian government’s National Security and Defense Council, said that Motor Sich would be “returned in the near future to the Ukrainian people, to the ownership of the Ukrainian state in a constitutional way.”

Mr. Danilov said that enterprises regarded as strategically important would be legally returned to the state, and their investors would be compensated. He didn’t provide a timetable or other details or use the word “nationalize” in his comments.


“This is being done for the national security of the country,” Mr. Danilov said.

Chinese Foreign Ministry spokesman Zhao Lijian on Friday demanded the issue be properly resolved and that Ukraine “take into account the legal rights of Chinese enterprises and investors.”

A Skyrizon official said the company is preparing to file lawsuits in Ukraine and in other countries. “We will vigorously defend and protect the legal rights of Chinese investors,” he said.

The U.S. has attempted to find a buyer for Motor Sich, according to U.S. and Ukrainian officials, but the decision to nationalize could carry a big price tag, given the $3.6 billion purchase price.

Concern about the Motor Sich transaction persisted in the transition between the Trump and Biden administrations. In January, Motor Sich, signed an $800 million contract with Aviation Industry Corporation of China, a supplier to the Chinese People’s Liberation Army, to build engines for its JL-10 trainer jet fighter.

Around that time, the Trump administration placed Skyrizon on a sanctions blacklist. Ukraine followed suit, freezing Skyrizon’s assets in Ukraine.

U.S. officials have advised Ukraine to establish an entity similar to the Committee on Foreign Investment in the U.S., which reviews foreign investments in U.S. firms, to have a legal basis to deny transactions such as the Motor Sich deal, said a U.S. official who participated in talks with Ukraine on the matter.

Ukraine’s parliament has taken up debate on legislation to establish such a body. Separately, Alexander Kornienko, the deputy head of Mr. Zelensky’s parliamentary faction, said in a recent briefing that he would introduce a bill in the coming weeks to deal with Motor Sich.

“It’s not just the U.S. telling Ukraine what to do,” a Ukrainian official said. “It’s important for Ukrainian national security to keep such companies locally owned.”

A backlash from China is likely to prove costly for Ukraine, which is financially troubled. In recent years, China has purchased tank engines, turbines for destroyers, aerial refueling tankers and landing craft from Ukraine and has also been a major purchaser of Ukrainian agricultural goods.

Last week, as Mr. Danilov was announcing the nationalization of Motor Sich, a delegation of Chinese businessmen met with officials in the Russian-backed government in Crimea, the Black Sea Ukrainian peninsula annexed by Russia in 2014 and an enduring sore point for Kyiv.

Write to Brett Forrest at brett.forrest@wsj.com and Alan Cullison at alan.cullison@wsj.com