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2 June, 2011  ▪  Yurii Nikolov

The Amazing Invisible Milking Machine

Ukrainian Week has singled out the dirtiest deals in the state procurement market this year and presents the main “heroes” of this multi-billion milking of the public purse

This little review is dedicated to the Verkhovna Rada’s passing of amendments to legislation on state procurements in late May. Should President Yanukovych sign off on these changes, Ukrainians will no longer be able to freely get information about nearly all the tender deals described here, where those close to the helm were involved. The approved bill contains changes that, rather than combating corruption in the tendering system, restrict access to information about state procurements—moreover, not only for ordinary Ukrainians but even for oversight agencies.

King of The Hill

For the sheer amount of money won at this year’s state procurement tenders, DTEK Trading, the energy division of the Akhmetov empire, is the hands-down leader, just like its boss, Rinat Akhmetov, is the undisputed leader in any ratings of homeboy billionaires.

This year, DTEK Trading won contracts to supply coal for a total of UAH 11 billion or around US $1.4 billion. In 2010, it managed to get another UAH 15bn, or nearly US $2bn. These multi-billion contracts have been made with power companies that are nominally state-owned: DonbasEnergo, DniproEnergo, ZakhidEnergo, and DonetskOblEnergo. Nominally state-owned because, while Mr. Akhmetov’s businesses may hold minority stakes, they completely control the management of these enterprises.

Akhmetov businesses managed to grab a number of other tasty morsels as well. Not long ago, Metinvest Ukraina gained a contract from UkrZaliznytsia, the state railway monopoly, for railroad ties worth UAH 515 million, ASTA got a contract to supply medical preparations to the Donetsk Oblast Department of Health worth UAH 200mn, while Parallel-M regularly wins the tenders for gasoline supplies in the region worth tens of millions.

Friends of Yanukovych

At the end of April, Vuhillia Ukrainy, the state coal trader, tendered out a contract for UAH 18bn worth of coal. Ukrainian miners extract coal at an extremely high production cost by world standards and the state trader buys it at a rate that includes a state subsidy. Typically, such procurements have not undergone open tenders, as they are fundamentally uncompetitive: the coal is bought at a price above world rates to keep the domestic coal industry afloat. But last year’s law on state procurements forced them to hold open tenders. Thus, for the first time it became known who actually is involved in milking of billions.

The players in these tenders were a dozen or so state coal mining companies and two completely private ones: Luhansk Coal Company and the Donbas Settlement and Financial Center (DSFC), which won UAH 950mn each out of a total sum amount of UAH 18bn. The first is a wholly-owned subsidiary of VAT New Technologies Closed Undiversified Venture Capital Investment Fund, whose director is Ivan Avramov, known as the younger partner—or right-hand man in the coal business—of PR Deputy Yuriy Ivaniushchenko. Meanwhile, DSFC is partly owned by TOV SPS Group, founded by Oleksandr Yurchenko, known as the co-founder of the company that runs the Zorianiy Cinema in Kyiv, where the Party of the Regions had its headquarters for many years, and of TOV Dim Myslyvtsia, TOV Dom Lesnika, and the Renaissance of Ukraine Charitable Foundation, which participated in the transfer of land for the Yanukovych estate north of Kyiv, Mezhyhiria.

Yefremov’s Billions

The family of Oleksandr Yefremov, leader of the PR faction in the Rada, has chalked up impressive successes on the state procurement market as well. Just this year, more than a billion hryvnia from state-owned coal-mining companies in Donbas passed through their hands, in return for goods and works.

For this analysis, the tenders won by a number of companies were taken into account: TOV DC-8, whose main founder is the son of Ihor Yefremov (PR); TOV Indeksprom—Natalia Yefremova and the deputy’s long-time partner, Viktor Nemlikher. Two companies registered on Bulgarian Kolyev Khristo Dimitrov, TOV Krasnolutskiy Mashynobudivniy Zavod Trading House and PP Porteks, are considered “friendly” with Mr. Yefremov according to press reports, because when he was Governor of Luhansk Oblast, he helped them privatize the Krasnolutsk Plant, a steel and machinery manufacturing company, which went to Indeksprom and Porteks.

Data on the results of tendered procurements has been published online since mid-2005. Thus, between September after the Maidan, when Mr. Yefremov was on the carpet before the Prosecutor-General over the Severodonetsk separatist convention, and September 2009, these companies were able to win only UAH 196.7mn in state procurements altogether. Their real ascendancy began at the end of Yulia Tymoshenko’s second premiership, which has an interesting explanation. This was when the most far-seeing BYT deputies understood who was most likely to win the Presidency in 2010. Natalia Korolevska, the person whom many considered the real Coal Minister, understood this. So, in September 2009, Yefremov Street saw the first trucks roll in with goodies. Altogether, some UAH 2.05bn was tossed their way by May 2011, half of which came in four months of this year.

Boyko’s Man

At the end of 2010, for the first time in his career, Yuriy Boyko formally took charge of the coal industry. Earlier, he did not venture beyond the oil and gas sector, but when the Ministry of the Fuel and Energy Complex and the Ministry of the Coal Industry were merged in December, Mr. Boyko was put at the head of the newly formed Ministry of Energy (MinEnergo). This led not only to a major shuffle in the coal industry, but also to a shift in capital flows.

Right after the reorganization of MinEnergo, TOV DV Oil & Gas Extraction Company won a tender for coal supplies worth UAH 200mn from Kharkiv’s TET-2 Eskhar, controlled by Naftogaz Ukrainy, the state natural gas monopoly. The director and co-founder of this company is the UK-registered DV Corporation Limited and Yuliy Ioffe, vice president of the Republican Party, whose leader is Yuriy Boyko. In April, the company won yet another tender worth UAH 43mn to supply coal to DonbasEnergo, which has long been controlled by the Akhmetov Group. Of course, these gains are not in the same league as what Mr. Akhmetov has achieved in the state procurement business, but the very fact that they have entered this market is worth notice.

The Titan of Alchemy

In Ukraine’s chemistry industry, Dmytro Firtash has a total monopoly today. In the last few months, his Ostchem Group added control over Stirol, a major chemicals and pharmaceuticals maker, as well as Severodonetsk Azot and Cherkasy Azot, fertilizer makers, to his “Crimean Titan,” a maker of titanium dioxide.[1] Mr. Firtash disingenuously denies this, saying, “Believe it or not, we’re not a monopolist.” What the oligarch probably means is that the state ostensibly controls a major part of the chemical industry through DAK Titan. But last year’s management appointments and further state procurement contracts made it clear that Dmytro Firtash has the state-owned part of the industry well in hand, too.

For instance, Ihor Lazakovych, a one-time manager of Crimean Titan, was appointed last year to head state-owned SumyKhimProm, a chemicals plant in Sumy Oblast, while another manager from the OstChem Group, Volodymyr Syvak, was made head of the Zaporizhzhia Titanium and Magnesium Plant (ZTMP). These two companies illustrate just how Mr. Firtash has gained control over the industry. This year, Sumy and Zaporizhzhia taxpayers paid UAH 202.5mn to buy ilmenite concentrate from Firtash-owned Vilnohirsk Mining and Metallurgy. They could have spent a lot less, of course, if the price of this concentrate hadn’t grown from UAH 654/t to UAH 1,800/t in the course of just four months. Moreover, all this takes place through tenders that are nominally open and based on decrees from the Economy Ministry that are nominally in effect, in which the price for concentrate from ZAT Crimean Titan was set at UAH 965/t ex VAT and product from a subsidiary of Irshansk Mining & Enrichment was set at UAH 765/t.

In February, ZTMP also signed a contract with Ostchem Germany GmbH for legal services worth UAH 1.25mn. Moreover, the Ukrainian subsidiary Ostchem Ukraina outfoxed VAT Ukrainian Graphite, which is in the hands of First Deputy Premier Andriy Kluyev, on a tender with ZTMP for the supply of electrodes. This Firtash-owned company, which has nothing to do with the manufacture of electrodes, got a contract worth UAH 27.95mn, winning the competition because the price it quoted somehow turned out to be a mere UAH 50,000 lower.

Azarov’s Buddies

Possibly one of the simplest and most primitive ways of milking the public purse is the one set up at the National University of the State Tax Service of Ukraine. The University’s president is PR Deputy Petro Melnyk, an old friend of Mykola Azarov, with whom he began to organize the State Tax Administration back in the 1990s. Being relatively new, the University unsurprisingly had no dormitories. The best that it could come up with was to rent a building for students from TOV Interregional Financial and Legal Academy for UAH 2.88mn a year. The Academy’s founder is none other than Mr. Melnyk’s son, Maksym. The University also needed housing for its faculty, so it has been buying new apartments in Irpin, the suburb of Kyiv where the University itself is located—at public cost. The builder is PAT Kyiv Specialized Renovation and Construction Society, whose COB is Olena Melnyk, Mr. Melnyk’s sister. Moreover, 43% of the company is owned by Oleksandr, their brother, while another 20% belongs to—Maksym. The state university bought these apartments for nearly US $2,400 a square meter—a price that is 1.5-2 times more than the going price in new buildings in the city of Kyiv today. Altogether, the state has coughed up UAH 11.56mn for this housing.

Mr. Azarov’s underlings are no less adept at milking the state. In April, the Management of Administrative Buildings of the Commercial Finance Department of the Cabinet Secretariat signed a contract with TOV VP Pobutrembudmaterial, a consumer building material and renovation company, worth UAH 18.52mn for the renovation of 1,254 sq m in the Government building, works that involved the attic and the sixth and seventh floors of one wing of this building. In short, the cost of a square meter of this renovation was UAH 14,770, which is what it costs to buy an apartment in a prestigious new building in Kyiv. Where these prices came from should be something the company’s founder, Svitlana Biba, should know: she’s the widow of the late PR Deputy Vasyl Biba.

The Finance Ministry gave TOV International Center for the Development of Entrepreneurship and Management a contract worth UAH 2.23mn for the support and servicing of two automated information systems in March 2011. The director and founder of this Center, Serhiy Kozachenko, is an academic in the Academy of Economic Sciences of Ukraine and co-author of the book, “Managing Organizational Change: Approaches and Problems.” The other author is Finance Minister Fedir Yaroshenko.

Saving Private Yeremeyev

Over the last few years, the main suppliers of fuel for UkrZaliznytsia were companies belonging to the country’s two oil magnates, Ihor Kolomoyskiy and Ihor Yeremeyev—until, that is, Viktor Yanukovych became President and Borys Kolesnikov took charge of the Ministry of Infrastructure. In January 2011, UkrZaliznytsia selected, via tender, a single, new supplier: TOV UkrPostachNaftoTrade. Prior to 2010, one of the co-owners of this company was Oleksandr Slabenko, the brother of Mr. Yeremeyev’s partner, Serhiy Slabenko. Another co-owner was Taras Bas, who joined Lutsk City Council as a BYT deputy that same year. But in 2010, the owners were changed. Now they are lawyer Mykyta Raban and Cyprus-based OVH Oil West Ltd. This led market observers to suspect that Mr. Yeremeyev’s Continuum Group has had its management ranks supplemented from Donbas—under the cover of a Cypriot offshore entity—and that these Donetsk “friends” enabled Ihor Yeremeyev to get a monopoly on supplying the state-owned railway.

But Mr. Kolomoyskiy was not about to give up without a fight. He long found common ground with MinEnergo boss Yuriy Boyko, who now tried to overturn UkrZaliznytsia’s January decision and UkrZaliznychPostach was forced to call a new tender. Nevertheless, it immediately became clear that this attempt to change the original outcome was doomed. UkrZaliznytsia is run by one-time Akhmetov manager at LemTrans, Volodymyr Kozak. Of course, UkrPostachNaftoTrade was once again declared the winner of the UAH 1.72bn contract.

Buy ’N’ Fly

Ukrainechairs the Committee of Ministers of the Council of Europe from May to November 2011. For Foreign Minister Kostiantyn Hryshchenko, this means things are getting busy and there will be endless flights to Brussels. The MFA had to call a tender for a carrier for its boss. TOV Aero Charter won with a bid of UAH 1.74mn. Its founders are former head of the State Aviation Administration Mykhailo Semenov and several of his partners. According to press reports, Mr. Semenov is close to ex-Deputy Premier Volodymyr Sivkovych, who is linked to Andriy Kluyev, currently First Deputy Premier. Aero Charter serviced a Gulfstream with license UR-KAS, which was used by the Kluyev brothers—KAS standing for “Kluyev Andriy and Serhiy.” Incidentally, when he was still Chief-of-Staff for President Viktor Yushchenko, Viktor Baloha regularly flew to his native Zakarpattia on Aero Charter planes, at that time, Mr. Sivkovych and the Kluyevs were in opposition to Mr. Yushchenko.

Little Drummer Man

For many years now, the Donetsk company Montblanc has won tenders to supply food and gasoline to Donetsk government agencies. Serhiy Bubka, former Olympic pole-vaulting champion and chair of the Ukrainian Olympic Committee, owns the company clear and free. Local pupils and students at the Bubka Sports Academy all eat thanks to him. Nothing unusual here: we go to our own for our own needs. But the many-year cozy relationship with a single supplier who oddly manages to win every single tender has another side. In March, when the average price for gasoline was just getting up to UAH 10 a liter, Montblanc sold fuel to the Donetsk Institute of Law for UAH 10.89. By May, the Donetsk City Executive Committee was filling up at Montblanc for UAH 12.80. This is in addition to the fact that these tenders themselves cost the state, not thousands or tens of thousands but nearly a million hryvnia—an amount from which even just a 10% kickback would be a juicy supplement to the salary of any chair of the National Olympic Committee.

In President Yanukovych’s first year, state procurements grew 2.2 times from UAH 175bn in 2009 to UAH 335bn in 2010

[1]In March 2011, the former chair of the State Entrepreneurship Committee, Oleksandra Kuzhel, told Ukrainska Pravda that two Firtash companies were apparently evading taxes: his Crimean Soda Plant had reported a UAH 34mn loss for 2010, after posting profits of UAH 62mn in 2009; meanwhile Crimean Titan was working above capacity while the town it is located in, Armiansk,  is operating in the red.

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