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15 April, 2011  ▪  Yurii Nikolov

Potatoes For the Top Brass

How army generals and officials are cashing in on soldiers’ rations

Deputy Economy Minister Oleksandr Sukhomlyn held his position for one year and two weeks, but he needed to sign just five documents to become the hero of our time. On March 31, 2011, Sukhomlyn was the first deputy minister in the Mykola Azarov government to become the target of an internal investigation and to be suspended from his duties on the suspicion of embezzling a truly colossal sum (UAH 621 million) which the Defense Ministry paid to four companies contracted to supply food to the army under non-transparent schemes in April–December 2010. The whistle-blower is Vadym Kopylov, First Deputy Minister for Economic Development and Trade in a ministry that was set up after the recent administrative reform. He went public with a statement that Sukhomlyn had been suspended from office for “giving permission to the Ministry of Defense to purchase UAH 621 million worth of services from four companies in single-supplier procedures without holding a tender.”

It is probably pointless to look for intrigue behind this statement. It is not clear whether the Economy Ministry will maintain its control over tender-related money flows. Put differently, it would be premature to say that Kopylov is seeking to get Sukhomlyn’s piece of the pie. There is enough substance to this corruption affair to ignore the possibility of bureaucrats playing games against each other. Furthermore, this case involves nothing less than starving the Ukrainian army.

IT ALL BEGAN WITH FOOD POISONING

Five years ago, Defense Minister Anatoliy Hrytsenko decided that soldiers should no longer be busy peeling potatoes and should be cleaning their firearms instead – in other words, they should be fulfilling their direct duties. Food supply was outsourced to several companies which engaged in a battle among themselves for the millions of hryvnias that were at stake. How fierce the battle was can be seen in the example of 150 soldiers in Bila Tserkva, who got food poisoning in a 2009 accident which badly tainted the reputation of Bilotserkivskyi Viisktohr, a food supply company run by the Defense Ministry. This was just one of many episodes in the big struggle. Unsurprisingly, this food poisoning case did not lead to any arrests - par for the course in Ukraine.

We need to look back to 2007 to understand the current state of affairs on the army food procurement market. One of the first companies to be contracted was Organika Plus Ltd., and one of its founders was Natalia Yezhel, wife of Mykhailo Yezhel, who later was appointed Minister of Defense. At the time, he was the ministry’s chief inspector with some influence over the housekeeping unit, but without enough to secure a monopoly. The company’s main founder was Interregional Investment Association Ltd., part of the Donetsk-Yenakievo group which teamed up with a bank associated with Russian Prime Minister Vladimir Putin to take control of Ukraine’s grain market. Out of this group came Agriculture Minister Mykola Prysiazhniuk and a Dmytro Medvedev, founder of the ZS Leading Food Company, which eventually the biggest greatest food supplier of Yezhel’s ministry.

This company was contracted a year ago, but its expansion on the market was constrained by the earlier adopted scheme for feeding the army. Under army regulations, suppliers are chosen one for each of geographical regions: East, West, North, and South. The price of each piece of the pie is the same across Ukraine and suppliers’ profits depend on the number of soldiers serving in their region. In order to increase one’s presence on the market, a company would have to get East for itself, a region dominated by the Dnipropetrovsk-based Ivala company. When Yezhel was appointed Defense Minister, payments to the company were simply discontinued, and the ministry ran up a debt of UAH 85 million by early February 2011. Ivala raised hell and got a reply from no other than the minister himself to the effect that “only cowards pay off debts.” “Debts have to be fought for. They thought that if there was a debt, it would be brought to them on a silver platter,” said Yezhel. “That’s not the case. We are ready to go to court and pay the debt, but we need to have feedback.”

PLAYING THE ANTIMONOPOLY GAME

Every year the Defense Ministry would have to hold open tenders to award food supply contracts, but no one knows how contractors were selected until now. There was no information about tenders. Incidentally, no lists of suppliers with their prices and sums paid have ever been published. The Ukrainian Week has had to gather crumbs of information from various sources about earlier contractors.

The Azarov government had the budget approved only on December 30, and of course this made it impossible to hold a tender. An open tender procedure takes about a month. Thus, the Ministry of Defense purchased catering services for the first quarter of 2011 using non-competitive, one-participant procedures. Contracts were granted for the first quarter only: two to the above mentioned ZS company (linked to Agriculture Minister Prysiazhniuk) and one apiece to Ukrprodakord OR (headed by Ruslan Bereziuk, a Party of Regions member on the Bila Tserkva district council), privately owned Artek-Soiuz company (founded by Natalia Lobik), and Optukrprom-VR (founded by Viacheslav Tymoshenko). Ivala was not on the list. Nor was Bilotserkivskyi Viisktorh which, even though run by the Defense Ministry, has yet to receive UAH 40 million from it as of early February.

That scandal became a public affair on February 9, when Ivala stopped providing its services: in addition to last year’s outstanding debt, it failed to land a contract for 2011. While media circulated the news about the army starving, the issue quickly evolved into an information war between companies as they fought to win contracts. Eventually, the conflict boiled down to rejecting one company, Ivala, and striking a deal with another one. No one was actually lacking food, and the news about starving soldiers was merely the “correct” information background needed to re-carving the army food supply market.

However, Ivala slammed the door on a peaceful settlement by filing a complaint with the Prosecutor General’s Office forcing it, in view of the publicity the case got, to demand Yezhel “take urgent measures to remove violations in securing proper and uninterrupted food supply to the military.” The minister publicly snapped to attention but said that, considering the chaos involved in tenders, he wanted to revert to the age-old practice of soldiers cooking for themselves. Bids were indeed invited, and for a moment it seemed that the army would for the first time get a supplier selected in a transparent fashion. But on February 22, Metsobstar-KhK Ltd. filed a protest with the Antimonopoly Committee against the Defense Ministry claiming procedural violations and paperwork-related discrimination and demanding that the open tender be cancelled.

The Antimonopoly Committee scheduled the case to be considered on April 5 – in the second quarter for which the army had not picked any suppliers. The Defense Ministry was in a bind. The Prosecutor General’s Office and the common sense dictated having an open tender. But this was in fact legitimately blocked by the Antimonopoly Committee. Starting from the 1st of April, someone had to be there to feed the soldiers. The answer that came was no surprise. On March14, the Defense Ministry argued with the Economy Ministry that catering services worth UAH 621 had to be purchased under a one-supplier scheme. The contracted companies were the same as in the first quarter. One-third of the money went to the ZS company linked to Prysiazhniuk and co-founded by Yezhel’s wife.

In its arguments, the Defense Ministry cited the decision of the Antimonopoly Committee, the protest filed by Metsobstar, and “risks associated with securing uninterrupted food supply to the personnel of the Armed Forces of Ukraine after April 1, 2011.” Without batting an eyelid, it continued: “The experience of past years has shown that full-value, high-quality catering to large numbers of the military in fixed locations and in field conditions within such a short period can only be organized by companies that are already providing catering services to the Armed Forces of Ukraine.”

If you don’t feed your own army, you will end up feeding a foreign one, the saying goes. Consuequently, on March 25, in the absence of Minister for Economic Development and Trade Andrii Kliuiev who was abroad at the time, Sukhomlyn and State Procurement Department Chief Valerii Abasov did the heroic act of giving the go-ahead to the Defense Ministry. Now the Antimonopoly Committee could rule whichever way it wanted regarding the open tender.

WHO WILL TAKE THE RESPONSIBLITY

Ex-Defense Minister Hrytshenko explains in his blog how much money will be siphoned off under these schemes. A handpicked company will charge UAH 42 per day for feeding one soldier. Meanwhile, as the Finance Ministry (Yaroshenko) and the Defense Ministry (Yezhel) were preparing the tender, they agreed in writing to set the maximum cost at UAH 32.6. Thus, the contractor picked by Yezhel for 2011 will charge the budget (people) UAH 213 million more than allocated. Under the Criminal Code, this means inflicting “especially heavy losses” and deserves maximum punishment.

The sum should raise anyone's eyebrows. Even Kliuev was reportedly aghast at the deal his subordinates struck behind his back. Kopylov will now get a chance to purge corrupt officials. Breathing fire and fury at Sukhomlyn, the Economy Ministry said it would take action to annul the approval. But this still leaves the army in its bind: Who will feed it after 1st April, and how much will it cost?

From the point of the law, Sukhomlyn is not in a critical situation. He did nothing more than signing a “well-reasoned” submission from the Defense Ministry. This is where the true embezzlers should be sought. However, considering Ukraine’s political realities, he needs to brace for the worst. Previous Economy Minister Bohdan Danylyshyn did even less when he granted his approval to purchasing gas for the army and construction services for Boryspil Airport under a one-bid scheme for a much smaller sum. A full-fledged criminal case has been opened against him, forcing him to seek asylum in the Czech Republic. Mind you, he is one of the closest people around the influential oligarch Vitaliy Hayduk. Now what kind of protection does Sukhomlyn have at the top after a career in the vodka production industry? We will learn this soon. If arrested, he will be the first member of the Azarov government to be thrown behind bars. And it will mean that he does not have enough leverage to prove he is not guilty. Then the Party of Regions will be justified in claiming: We don’t care what color corruption is. If Sukhomlyn does have the requisite leverage, his arrest (and subsequent release) will be a thing of the past, just like another UAH 200 million siphoned off from the state treasury.


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