5-15-16
For Ukraine in particular, the battle with corruption will make or break the country’s future as a liberal democracy. President Petro Poroshenko’s democratically elected government is reform-oriented, but reining in the oligarchs is no easy task.
The government must push through the painful reforms needed to weed out corruption, or the country will continue to be beholden to economic interests and kleptocratic networks. As Swedish economist and expert on Russia and Ukraine Anders Aslund wrote in 2015, “Ukraine must reform hard and fast to survive or cease to exist as a nation. The question today is whether Ukraine can save itself.”...
Ukraine’s elite has largely retained its freedom. Thanks to their wealth and connections, the most powerful oligarchs such as Rinat Akhmetov, Victor Pinchuk, Ihor Kolomoyskyi or Dmytro Firtash continue to control the political agenda, often to their own financial benefit.
What began in each country as mass market reforms and privatization created unprecedented opportunities for politicians, as well as for unscrupulous and unsavory groups. They accumulated awesome wealth, and then proceeded to destroy governments, individuals or laws in their way. At the same time, both countries have struggled to modernize their economies.
Russian incomes today are one-third of those in energy-rich Saudi Arabia. Compared to other Eastern European post-socialist countries, Ukraine has fallen far behind economically. Between 1992 and 2015, Ukraine’s gross domestic product per capita rose from $428 to just $2,109, even as GDP in Latvia soared from $631 to $13,729. Meanwhile, as the ruble halved in value to the dollar, many Russian oligarchs still managed to retain their wealth; in 2015, 1,815 individuals were worth $50 million or more, and 93 were billionaires.
In 2014, 80 percent of Ukrainians were impoverished while five were billionaires and 98 were worth over $50 million. Ukraine has been so financially devastated by corruption and war with Russia that it requires life support from Western financial institutions, most notably the International Monetary Fund (IMF).
In Russia, the economic situation is also dire. Energy prices, which had been falling since 2014, pushed one in every seven Russians below the poverty line in 2015.
Political instability in both countries incentivized businesses to stash vast quantities of cash abroad. From 2004 to 2013, an average of $104.98 billion per year left Russia for a total of nearly $1 trillion ($981.57 billion). Ukraine loses an average of $11.68 billion annually, and a 10-year total of $115.642 billion.
“There are $700 billion private Russian assets abroad,” Aslund said in September 2015, “$100 billion to $200 billion from government officials. That’s a guess, but it’s very substantial. These numbers are outside Forbes’s figures of the richest people in the world.”
Russia is unlikely to change much in the near term thanks to the tight control established under Putin. Ukraine, however, is a more complex case. The country’s civil society is active and has a strong core of reformers who cut their teeth on the Maidan Revolution of 2013–2014, which, at its core, was a democratic movement against the rampant political corruption of former President Yanukovych’s government.
But Ukraine’s economy has been further damaged by Russia’s intervention in the Donbas and Crimea. Russian meddling in Ukrainian politics has stymied political development.
In an interview in the summer of 2015, former Ukrainian President Leonid Kravchuk blamed Russia for making the country a “hostage” state since its independence. “They [the Russians] took away the best assets.”
Before the Maidan Revolution of 2014, Ukrainian political elites worked hand in glove with the Kremlin—using state resources for political gains. The oligarchic system of governance began to take root in Ukraine after the collapse of the Soviet Union, but was firmly established under the watch of President Leonid Kuchma in the second half of the 1990s.
As Russian expert Karen Dawisha notes, “Putin leaned on Kuchma in 2000 for campaign contributions—according to conversations taped by Ukrainian KGB. Kuchma says, ‘Putin telephoned…during the campaign—Leonid well, at least give us a bit of money. Kuchma asked [state gas monopoly] Naftohaz to withdraw $56 million from the Bank of Ukraine and Ukraine’s Import-Export Bank and transfer it to Putin.’” Under Kuchma’s administration, corruption flourished, with Ukraine’s vast state enterprises used as personal and political piggybanks. Along the way, Naftohaz was plundered and the Ukrainian treasury along with it.
Ukrainian oligarchs bought gas from the monopoly at far below market prices to fuel their industrial holdings, while the gas flows became an arbitrage dream, as company officials colluded to flip cheap gas offered by Russia for re-export at higher prices to Europe.
In 2005 after the Orange Revolution, then-Prime Minister Yulia Tymoshenko (also considered an oligarch for her past gas trading profits) unraveled the scale of thievery under Kuchma for all the world to see when she called for the sale of privatized assets to be annulled. The year before, Kuchma’s son-in-law Victor Pinchuk and oligarch Rinat Akhmetov acquired the Kryvorizhstal steel factory in 2004 for about $800 million. A year later, the next government reversed the sale and held a televised, public auction that netted $4.8 billion from Mittal Steel.
Ukraine’s predation was franchised, but sometimes cheaters cheated. In August 2006, Pavlo Lazarenko, one of Kuchma’s prime ministers who was also close to Tymoshenko, was singled out for misdeeds, fled the country and then was convicted and sentenced to prison in the United States for money laundering, wire fraud and extortion. According to authorities, he transferred roughly $114 million in funds embezzled from the government of Ukraine to banks in San Francisco from 1996 to 1997.
The network of corruption hurt, most of all, the Ukrainian people, as the government shoveled in subsidies to keep Naftohaz afloat. “The subsidies to Naftohaz contributed about 50 percent of the deficit in 2014 and amounted to about $7 billion. Of course these numbers do not include any direct subsidies that may have been given to industries or the actual lost opportunity costs to state companies from forced sale at low controlled prices,” said Ukrainian-Canadian academic Basil Kalymon.
For instance, Naftohaz bought 17 billion cubic meters of domestically produced gas at a set price of $53 per thousand cubic meters. Deputy Prime Minister Volodymyr Groysman disclosed later that 40 percent of this—worth $2.5 billion—was diverted through unknown intermediaries close to Yanukovych and sold at $410 per thousand cubic meters.
Those who dared report on political corruption, meanwhile, were intimidated by political and criminal forces. Between 1995 and 2001, three journalists covering corruption issues were murdered—Igor Hrushetsky, Igor Aleksandrov and Ukrainska Pravda’s Georgiy Gongadze, who was abducted and beheaded in 2000, possibly with Kuchma’s knowledge.
In addition to intimidation, arbitration fraud and asset stripping were rampant. Naftohaz was restructured into regional power generation companies that were partially privatized for oligarchs’ gain.
One offshoot, Donbasenergo, was forced into near bankruptcy by Naftohaz subsidiaries, then forced to sell off power plants and privatize 60.8 percent for below market value in 2013. The stake was purchased by an offshore Dutch holding company owned by Igor Gumenyuk, a man allegedly connected to Ukraine’s richest oligarch, Rinat Akhmetov, and Yanukovych.
In February 2015, a Ukrainian court agreed the sale was “illegitimate” because only a fraction of its value was realized. It did not unwind the sale but referred the matter to a lower court. Victims included the European Bank for Reconstruction and Development, which had loaned Donbasenergo $113 million years before.
Another blatant asset strip was caught in 2011–2012, involving Yanukovych’s minister of energy, Yuriy Boyko, who ordered Naftohaz to buy two offshore rigs for Black Sea drilling at a cost of $800 million. A television documentary uncovered that the seller in the United Kingdom was a company that belonged to Boyko and had paid only $470 million recently for the rigs.
Despite the revelation, Boyko remained minister until Yanukovych fled Ukraine in 2014. He then ran successfully for election that October as a member of parliament, thus providing himself with parliamentary immunity from prosecution.
Naftohaz’s former CEO Yevhen Bakulin, appointed in 2010 by Yanukovych, was arrested in March 2014 as part of an investigation into major gas industry corruption. “According to investigators the monopoly [Naftohaz] supplied oil products and natural gas worth 1.9 billion Hryvnia [$72.2 million] to two companies…effectively free of charge [because invoices were never paid],” wrote the Kiev Post.
In September 2014, the investigation was scrapped after records of the transactions could not be found. Bakulin was released and his accounts were unfrozen. A public outcry ensued, forcing the Prosecutor General’s Office to announce resumption of its probe.
In October 2014, however, the prosecutor general’s office reversed its statement and said it was not investigating Bakulin. As the Kiev Post wrote “The comments contradicted a statement released by the Prosecutor General’s Office in September that it had resumed the case against Bakulin.” The case was dropped against Bakulin, who, like Boyko, had won a seat in Parliament in October 2014, giving him parliamentary immunity from future prosecution.
Corruption in the gas sector benefited Ukrainian oligarchs loyal to Putin. In 2004, Kuchma and Putin gave exclusive rights to intermediary RosUkrEnergo to sell all gas to Ukraine. The intermediary was the brainchild of Dmytro Firtash, a Ukrainian trader with reportedly close connections to the Kremlin.
Firtash allegedly owned 50 percent of the company with a junior partner and Gazprom the other 50 percent. Evidence points to the fact that RosUkrEnergo was set up to funnel funds into the hands of Firtash and his allies.
A 2014 investigation by Reuters quantified its magnitude: during a four-year period, RosUkrEnergo bought 20 billion cubic meters of gas from Russia at below market prices and paid $230 per thousand cubic meters, or one-third of what Gazprom charged Naftohaz Ukrainy.
The price was so low that the gas was flipped at three times the initial price, making RosUkrEnergo a yearly profit of $3 billion, or $12 billion in four years. (Firtash negotiated the same arrangement in Cyprus and made another $3.7 billion in profit selling Russian gas there in just two years.)
“The evolution of intermediaries was to siphon the profits of gas earned between Gazprom and Ukraine,” said Bill Browder, an American-British investor whose fund was once the largest operating in Russia. “The crux of the matter was that Gazprom management abused their position for years in terms of the export of gas to Ukraine by selling the gas to intermediaries at a low price [and] then having those intermediaries resell at [a] higher price. Ukrainians, Gazprom managers and Russian government officials were involved.”
Firtash told the highest-ranking US diplomat in Ukraine in 2008 that a shadowy character also lurked behind the arrangement. In a secret memo, made public by WikiLeaks, former U.S. Ambassador to Ukraine William Taylor wrote “He [Firtash] acknowledged ties to Russian organized crime figure Semon Mogilevich, stating he had needed Mogilevich’s approval to get into business in the first place.”
Taylor said the “softly spoken” Firtash had come to see him on December 8, 2008 and “spoke at length about his business and politics in a visible effort to improve his image with the [United States government].” The Ukrainian press had reported that RosUkrEnergo’s beneficiaries included Mogilevich, who is on the Federal Bureau of Investigation’s most wanted list and lives openly in Moscow. Firtash said it was impossible to interact with a government official “without also meeting an organized crime member,” wrote Taylor in his cable.
The memo also noted that the gas trade had made Firtash staggeringly rich: “By 2006, Firtash’s estimated worth was over $5 billion, but most experts believed that Firtash had lowballed his true worth and estimated it was in the tens of billions. In his conversation with the Ambassador, Firtash gave no indication of the scope of his wealth.”
In addition to being a tool to enrich both Russian and Ukrainian elites, RosUkrEnergo was also used to extend Russian political influence. Gazprombank, a bank not affiliated with Gazprom but tied to Putin ally Yuri Kovalchuk, financed Firtash’s business transactions, according to Reuters.
“Banks close to Putin granted Firtash credit lines of up to $11 billion. That credit helped Firtash, who backed Yanukovych’s 2010 bid to become Ukraine’s President, to buy a dominant position in the country’s [Ukraine’s] chemical and fertilizer industries and [to] expand his influence.”
Yanukovych, like Kuchma before him, proved to be immensely corrupt. During his presidency, Yanukovych and his cronies grabbed tens of billions of dollars. For instance, Yanukovych’s son, a dentist, became a billionaire in three years, winning 50 percent of all government tenders while his father was in office.
And Yanukovych enriched himself to such an extent that he built a lavish $200 million estate outside Kiev, hidden from the public with 400 servants and a 34-kilometer perimeter fence 20 feet high topped with barbed wire.
Yanukovych’s ministers were openly on the take. Ecology Minister Mykola Zlochevsky became a major player in the production of oil and gas in Ukraine during his tenure. He claimed to have cornered a quarter of the country’s private hydrocarbon market. He put “trophy foreigners” on his board of directors, such as Hunter Biden, son of U.S. Vice President Joseph Biden, and the former president of Poland, Aleksander Kwaśniewski.
He abused his ministerial position to give a Cypriot company, which he controlled, extraction licenses without tendering for them. He fled after Yanukovych’s fall and is on Ukraine’s wanted list for alleged financial corruption, but he has gone missing, along with an estimated $156 million.
Those who profited from corruption schemes under Yanukovych have not been prosecuted. Yanukovych and Mogilevich live in Russia. Firtash, although initially arrested in Austria under an extradition request from the United States concerning a U.S. grand jury corruption case in India, has since been released under an Austrian judge’s ruling that the request was politically motivated.
Even in Austria, Firtash has found support from Russia. Consider that, for instance, Firtash’s bail was set at a staggering 125 million euros, and that a Russian oligarch paid it immediately.
According to Browder “Russian oligarch [Vasily] Anisimov put up his…bail money,” he said. “There’s the linkage. This is about Putin controlling everything.”
What’s more, Firtash, at least according to his own admission, continues to influence Ukrainian politics. Firtash told the Austrian court that before the 2014 fall election, candidates Petro Poroshenko and Vitali Klitschko flew to Vienna for a meeting with him. “I can say we achieved what we wanted,” Firtash said at the hearing. “Poroshenko became president and Klitschko became mayor of Kyiv.”
Perhaps Firtash’s self-aggrandizing was simply bravado but perhaps not. Some experts maintain that the meeting was about Poroshenko granting immunity to former Energy Minister Yuriy Boyko and Yanukovych’s Chief of Staff Serhiy Lyovochkin.
This involved “immunity from prosecution in exchange for the oligarchs’ support—in the form of money, media and connections—for their political ambitions,” wrote Ukraine expert Taras Kuzio. “It would have been impossible for the Yanukovych regime to carry out its corrupt schemes without Lyovochkin’s involvement—but today he is untouchable because of the Vienna immunity deal that he helped to broker.”
Poroshenko and Klitschko acknowledged that they met Firtash in Vienna but denied Firtash’s insinuation that the meeting was about guaranteeing their elections. Klitschko denied the allegations, stating that Firtash was “incorrect,” while a Poroshenko spokesman, Svyatoslav Tsegolko, said that the president had a “very simple position on the issue and had commented on the meeting during last year’s election campaign.”
Poroshenko said later, “I do not think [Firtash] liked the outcome of the meeting.” His spokesman later elaborated, saying that Poroshenko was a “president of de-oligarchization” and had reformed the energy sector, noting the firing of Ihor Kolomoyskyi, the oligarch governor of Dnipropetrovsk, in March.
In 2005, a rare glimpse into the nature of clan management in Ukraine surfaced when Kolomoyskyi showed up at parliamentary hearings into re-privatizing Ukraine’s government assets to help pay off its debts.
His appearance was “to confess that he was one of the beneficiaries of the dirty privatization of the late 1990s [to] early 2000s that made many of Ukraine’s oligarchs rich,” reported the Kiev Post. “He admitted, for example, that he paid $5 million per month during an unspecified period of time to fellow billionaire Victor Pinchuk and his father-in-law, Kuchma, in order to keep them out of Ukrnafta, an oil and gas extractor in which Kolomoyskyi has a 43 percent stake.”
Kolomoyskyi explained that privatizations under Kuchma were reserved for a handful of his favorite oligarchs: himself, Pinchuk and Akhmetov. Pinchuk denied the allegations and said Kolomoyskyi was trying to stir up trouble in order to get Pinchuk to drop a $2 billion lawsuit against Kolomoyskyi in London concerning an iron ore asset.
Years later, in October 2015, the two supposedly settled their disagreement, and Kolomoyskyi was rumored to have paid Pinchuk $500 million.
Yanukovych, after coming back to power in 2010, ran a tight ship, according to journalist and member of the Ukrainian Parliament Serhiy Leshchenko: “Yanukovych was the ‘super oligarch,’ the main beneficiary of the regime. Below him came the traditional oligarchs, who had to share their profits. Rinat Akhmetov, for instance, was granted control of metallurgy and energy, Kolomoyskyi had the oil industry and Firtash and Lyovochkin controlled the gas, chemical and titanium sectors.”
Perhaps the oligarchs helped bring about Yanukovych’s demise because he went too far....
Perhaps the tide will slowly turn against Russia. But the tide will only turn in favor of Ukraine if its oligarchy is brought to its knees, hopefully without further violence.
Reform activist and Member of Parliament Igor Sobolev remains optimistic and said “If people rise again, the next revolution will be much more bloody because so many people are upset about this war. This is, of course, a big risk for the whole situation. We have so many new active citizens who feel this can be a successful state without bribes and oppression from the government. They want dignity and I think this is the most powerful power in Ukraine now. That’s why we will succeed.”
http://www.newsweek.com/why-putin-needs-corrupt-divided-ukraine-459338
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4-12-17 To frustrate any potential investigations, Ukraine’s rulers became masters of the offshore world’s network of tax havens. Once money was stolen, it was invested in European and American assets hidden at the end of intricate chains of shell companies, registered through tax havens in the Indian Ocean, Europe and the Caribbean. It is Cyprus, rather than Russia, Germany or America, that dominates the Ukrainian economy: an astonishing 92% of Ukraine’s outward investment flowed into the Mediterranean tax haven in 2014….
The $23m was held in bank accounts at BNP Paribas belonging to two companies, which were in turn controlled by a Ukrainian politician named Mykola Zlochevsky. A large man with a shaved head, Zlochevsky wears boxy suits, dislikes fastening the top button of his shirt, and has been a fixture of Ukraine’s public life for two decades. In 2013, according to the Ukrainian news weekly, Focus, which almost certainly understated his fortune, he was Ukraine’s 86th richest man and worth $146m.
In 2010, after Yanukovich won the election, Zlochevsky became natural resources minister. That position gave him oversight of all energy companies operating in Ukraine, including the country’s largest independent gas company, Burisma. The potential for a conflict of interest should have been clear, because Zlochevsky himself controlled Burisma. But there was no public outcry about this, because almost no one in Ukraine knew about it. Zlochevsky owned his businesses via Cyprus, a favoured haven for assets unobtrusively controlled by high-ranking officials in the Yanukovich administration.
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A leaked list of names of those who have benefited from Cyprus’s citizenship-by-investment programmes represents a detailed insight into the panoply of clients behind schemes providing passports to the super rich.
It also reveals the extent to which interest from the Russian and Ukrainian elite has driven the programme which, according to the Cypriot government, has generated more than €4bn in investment since 2013. There is no suggestion of wrongdoing on the part of beneficiaries.
Prior to 2013 Cypriot citizenship was granted on a discretionary basis by ministers, in a less formal version of the current arrangement.
“Golden visa” schemes, whereby countries sell passports or citizenship in exchange for investment, are almost universally carried out in complete secrecy. Only Malta has ever published the names of its applicants.
Several of the hundreds of names seen by Guardian are prominent businesspeople or individuals with political influence in their home countries.
Leonid Lebedev, a former member of the Russian parliament and the sole owner of the Sintez Group, is one of hundreds of Russian nationals named as having acquired Cypriot citizenship. His personal wealth is estimated by Forbes to be more than $1.2bn. Lebedev did not respond to requests for comment.
Another politically sensitive name is that of Alexander Ponomarenko, a Russian industrialist worth an estimated $3bn, who in 2011 reportedly paid $350m for a palace allegedly constructed for the private benefit of Russian president Vladimir Putin.
Ponomarenko said “In 2016 I acquired the Cyprus citizenship by investment scheme and presently I am a citizen of the two countries - Russia and Cyprus.” He said the purchase of the palace was a “private deal”.
Gennady Bogolyubov and his former business partner Igor Kolomoisky founded PrivatBank in the 1990s, and were its biggest shareholders until it was nationalised by the Ukrainian government in 2016. The Ukrainian central bank alleged that the two partners had illicitly extracted £4.2bn from PrivatBank.
A lawyer representing Bogolyubov confirmed that he had been granted a Cypriot passport in 2010 “as a result of him having made substantial investments in the country (via certain companies) and being fully compliant with the legal requirements at the time”. https://www.theguardian.com/world/2017/sep/17/the-billionaires-investing-in-cyprus-in-exchange-for-eu-passports
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11-10-17
The Paradise Papers, a leak of 13.4 million offshore documents published on Nov. 5 mostly came from two offshore services firms, Bermuda-based Appleby and Singapore-based Asiaciti Trust, as well as from 19 corporate registries maintained by governments in secret offshore jurisdictions….No one would go to the trouble of setting up an offshore company if they could do this at home or onshore,” George Turner, a researcher at Tax Justice Network, told the Kyiv Post. “In this way, offshores allow them to do things they can’t do otherwise.”
Offshore companies, often dummies, are used not only to avoid paying taxes but also hide cash flow and ill-gotten property.
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