Graham Stack for Business New Europe in Kyiv

July 31, 2013

Ukrainian billionaire Dmitry Firtash and his bank seized a soybean oil plant through “a campaign of fraud, physical threats, coercion and corruption,” according to a lawsuit brought by businessmen Vadim and Ilya Segal. But the case may bear not so much on ownership of the plant, as on a massive bank fraud in Ukraine committed nearly five years ago at the height of the global financial crisis – and could spark revelations about the reach of organised crime in post-Soviet banking. 

Brothers Ilya and Vadim Segal, the owners of Cyprus company Dancroft Holdings, in turn the former owner of Ukrainian company Kakhovka Prom Agro, have filed a complaint against one of Ukraine’s richest and most furtive men Firtash and Nadra Bank, currently the Ukraine’s 11th largest lender, in New York County Supreme Court. 

According to the complaint, Firtash, as the new owner of Nadra Bank after 2008, pressured the Segal brothers over around $40m outstanding loans to Nadra owed by Kakhovka Prom Agro, a soybean oil producer in Kherson region, and other agricultural businesses controlled by the Segals. 
The brothers claim that Firtash entered a handwritten agreement with them in July 1, 2009 that apparently settled the issue of the debts, freeing Kakhovka from further payments in exchange for the Segals’ purchasing the debts at 50% of their value. 

However, according to the complaint, Firtash failed to comply with the agreement and instead launched a barrage of lawsuits. In addition, Nadra Bank deliberately supplied Kakhovka with a false bank account number, preventing the successful transfer of any funds to the bank. In December 2010, Nadra Bank then took control of the plant, installing new management. Firtash’ press service has declined to comment on the complaint. 

The whole saga about the dispute and alleged seizing of Kakhovka Prom Agro is used to explain why in March 2011 Ukraine’s security service SBU brought charges of large-scale fraud against the Segals – charges which have now placed them on Interpol’s red list, the closest that exists to an international arrest warrant. This was allegedly part of the plan forcing the Segals out of the country, making them unable to contest the takeover of Khakovka. 

The complaint adduces widespread reports (although apparently no documentary proof) that the then head of the SBU, Valery Khoroshkovsky, is a business partner of Firtash, together with head of the presidential administration Sergei Levochkin, and former energy minister, now Deputy Prime Minister Yury Boiko. Thus according to the complaint, the SBU, in bringing charges against the Segals, was simply acting on behalf of Firtash.
 “As a result of Firtash’s intimate connections to the government, there is no fair and impartial forum for plaintiffs’ grievances in the Ukraine,” the complaint reads. 

The Segals are now demanding actual and punitive damages against Firtash and Nadra Bank for their “extreme and outrageous conduct,” including breach of contract, unjust enrichment, fraud, and conspiracy. 

Blast from the past 

The complaint apparently neglects to mention some key facts, however. The Segals themselves are widely to believed to have been from 1997-2008, via a proxy, one of the major shareholders in Nadra Bank before its bailout. Publicly they only acknowledge on Vadim Segal’s blog that “in 1996 Mr. Segal took part in reorganization and development of the bank.” 

However, their agricultural companies feature among the leading borrowers from the bank, in a list of its largest debtors published by the bank in October 2009. The other leading debtors were companies linked to Ihor Eremeev, owner of the Kontinuum group of fuel retailing companies, also believed to have held a large stake in the bank via a proxy. In addition, the Segals’ ties to Nadra Bank’s manager from 1997-2009 and co-accused, Igor Gilenko, appear corroborated by leaked company data from the British Virgin Islands database, which show the Segals and Gilenko to be co-directors of an offshore set up in 2003, Universal Advisory Capital Limited. 

According to Ukrainian court records, the Segals are accused of conspiring with Gilenko to steal $25m from Nadra Bank in 2008, via companies KUA Kruar and TOV Solnechnaya Dolina. An appeal against the charges was turned down by Ukrainian courts in June 2011, and in July 2011 the Segals fled Ukraine, according to Vadim Segal’s blog. 

Nadra Bank was before the crisis Ukraine’s eighth largest and a brash exponent of the virtues of the credit boom, with CEO Igor Gilenko touted as a financial Wunderkind and regularly winning top awards as banker of the year. 

But the dream turned sour. Allegations of massive fraud at Nadra Bank in late 2008 are no invention of Firtash and his cronies: It was in fact then prime minister Yulia Tymoshenko – Firtash’ arch-enemy – who first railed against the theft of bailout funds from Nadra as the global financial crisis struck. According to reports, the National Bank of Ukraine lent Nadra Bank nearly $1bn from October through December 2008, but in February 2009 the bank had nevertheless to be placed under temporary administration. The bank had reportedly used more than half of the NBU money, intended for recapitalisation, to buy dollars at the official lower rate and re-sell them commercially at a higher rate. The remainder was used to make new loans. It is these new loans made in October-December 2008 that the criminal charges against the Segals apparently refer to. 

Also listed as co-conspirators in the criminal case in Ukraine against large-scale fraud at Nadra Bank are unnamed officers at Latvia’s Trasta Komercbanka, presumably where the allegedly stolen funds were transited through. Trasta Komercbanka has previously been involved in similar stories – for instance listed as transiting $1.5bn moved by Kazakhstan banker Mukhtar Ablyazov from his bank BTA in an assets retrieval court case won by the now nationalised BTA in the High Court of London in 2011. The bank denies any irregularities regarding anti-money laundering compliance. 

However, the mention of Trasta Komercbanka officers as co-conspirators of the Segals is intriguing, because the bank is linked to Firtash through his long-term junior partner Ivan Fursin, and other associates. Fursin owns 20-33% in Trasta Komercbanka. In 2009, Charles Treherne, deputy head of Firtash’s holding company Centragas AG, sat on the board and held a stake in Trasta Komercbanka. Centragas is now Nadra Bank’s shareholder. 

Firtash may use this fact to refute the Segals’ claims that he is behind the criminal charges brought against the Segals – why would he incriminate a bank to which he is closely linked? The real reason for filing the lawsuit may be for the Segals to build a case against extradition, bne sources believe. 

Juicy revelations 

The court case may be fascinating for what it yet reveals about the post-Soviet underworld, and organised crime’s reach in the region’s banking – especially if, as seems probable, the Segals’ intention may be to drag Firtash’s name through the mud until he lobbies in Ukraine to get charges against them dropped. 

There is plenty of potential mud out there, considering that even such a “diplomatic” source as the leaked US embassy cables at the wikileaks website adduces business links between Firtash and alleged global crime lord, Kyiv-born Semyon Mogilevich, now resident in Moscow. The cables even quote Firtash directly acknowledging such links. Firtash has denied making any such statements. 

Moreover, the Segals may be optimally placed to shed light on such ties: their business career started in a number of banks in 1990s’ Russia that later acquired a reputation for organised crime links: Vadim Segal partnered Aleksei Frenkel at Moscow’s Neftyanoi bank 1993-1997, as a result of which “the bank became one of the most innovative financial institutions in Russia,” according to Segal’s blog. 

In 2006, the Central Bank of Russian withdrew Neftyanoi’s licence due to money-laundering suspicions, whereupon Russia’s deputy central bank head and “anti-money laundering tsar” Andrei Kozlov, was slain by Ukrainian hired killers in Moscow. In 2007, Neftyanoi’s Frenkel received a 19-year jail sentence for organising the killing. The Segals failed to respond to questions filed to them via their blog and their lawyers. 

The Segals may well be now grinding their teeth as they bitterly rue missed chances, with the fifth anniversary of the global financial crisis that devastated Ukraine’s economy looming: In the months leading up to the crisis, European banks were queuing up to pay top dollar for Ukrainian banks, and Nadra Bank one of the few top ten banks not yet to have closed a deal: according to a Forbes Ukraine report, in January 2008 Italy’s Intesa Sanpaolo offered $1.5bn for the bank. However the Segals and their co-owners held out for more – then the crisis struck, and they lost everything. 

Someone else got lucky in their stead: Intesa Sanpaola in the final analysis purchased the smaller Pravex Bank from the then mayor of Kyiv, Leonid Chernovetskii, for $750m, in February 2008, only months before the crisis struck. On July 23, 2013, Ukrainian media reported Intesea Sanpaola has put the bank up for sale after years of losses, with evaluations at around one-fifth of its original acquisition price.

Graham Stack for Business New Europe, August 7, 2013

Two maritime scandals involving Ukraine shipping companies unfolded at the end of July, featuring one import consignment of cars with a surfeit of parties claiming ownership, and an export consignment of armoured vehicles apparently still in search of a willing owner. The events point to how Ukraine’s weak rule of law disrupts relations with potentially lucrative trading partners. 

In the last week of July in Libya’s eastern city Benghazi, three leading politicians were assassinated, 1,200 prisoners escaped jail after riots, and two car bombs ripped through the city – but the biggest headache for 25 local Libyan businessmen were apparently unscrupulous Ukrainians. 

According to the businessmen, in March the Ukrainian-owned cargo ship Faina was transporting a cargo of 600 Hyundai, Kia, and Toyota vehicles from the Jordanian port of Aqaba to Benghazi. After proceeding through the Suez Canal, the ship mysteriously veered off course and vanished – only to reappear at Ukraine’s Black Sea port of Illichevsk, near Odesa, where it has remained ever since. 

The Libyan businessmen rushed to Odesa and hired lawyers, only to have their worst fears confirmed – according to documents supplied to Maritime Bulletin and confirmed to bne, the entire ship’s cargo had already been sold for $20m to a Ukrainian one-man company registered in Odesa called Alco Invest, by a Panamanian offshore vehicle called Wellgos PQ. 

The cargo ship Faina, and its owner Odesa-Israeli businessman Vadim Alperin, are no strangers to controversy. In 2009, the ship’s name hit world news when it was seized by Somali pirates – and revealed to be carrying a shipment of 33 Soviet-made T-72 tanks, ostensibly bound for Kenya, but in reality for government of South Sudan, then still part of Sudan and subject to arms embargos. Frantic activity was then needed to keep the weaponry out of the hands of Somali rebels. The crew finally walked free after five months captivity. 

This time round, it is again Alperin’s crews who are taking the brunt of the dispute – on July 17, the infuriated Bengazi businessmen seized what they believe to be another of Alperin’s ships, the Etel, which had docked in Benghazi, and barricaded the crew of 19 in their quarters. Emergency diplomacy then kicked in to control the situation, with Ukraine acknowledging the linkage to the Faina’s missing cargo. “Whatever the motivation of the attackers, it does not justify the use of force against people, intimidating them and endangering their lives and health,” Ukrainian Deputy Prime Minister Konstatin Hryschenko said August 1, during a visit to Tripoli to conduct talks on the issue. 

Carjacked 

Back in Ukraine, the battle for the cars is now being waged in courtrooms. “Alperin, as shipper of highly sensitive state weapons consignments, is very well connected in Ukraine and can fight his corner,” renowned investigator Mikhail Voitenko of Maritime Bulletintells bne. 

Voitenko was involved in mediating the Faina controversy in 2008, and then fled his native Russia in 2009 after breaking the story of the mystery ship Arctic Sea, apparently hijacked in the Baltic Sea, and suspected of carrying a secret Russian arms cargo. “According to the Libyan side, Odesa police initially acted correctly in launching an investigation of the cargo at their request, but then the General Prosecutor’s office intervened from Kyiv to take control of the case, and the investigation slowed to a crawl,” Voitenko says. 

Alperin could not be contacted for comment. 

According to bne’s enquiries, the Libyans’ claims are very credible, and show that major business structures may indeed be involved on the Ukrainian side, apart from the cargo shipper itself. Wellgos PX, the Panama company the Libyans claim fraudulently sold the car-cargo to an Odesa shell structure, is owned by three companies – Norwell Inc, Kenmark Inc. and Platinex Corp., all registered at the same address in the Commonwealth of Dominica, a low-profile offshore haven in the Caribbean known to specialists for its extreme level of secrecy. 

The address of all three owners of Wellgos PX – at Copthall 8, Roseau, Dominica – is that of a company registration agent, Isla Offshore. According to the Interfax Spark database, about a dozen Ukraine companies have owners registered at the Copthall 8 address. Among these companies is major Ukrainian car importer Intercar Ukraine, the official Volkswagen dealer in Ukraine. Intercar Ukraine is a subsidiary of the Belarus-based company Atlant-M, which holds 37% of the Belarusian new car import market, and lesser shares of the Russian and Ukrainian markets. 

Intercar Ukraine is owned by Global Cars Corp., registered at Copthall 8, Roseau, and two major Atlant-M dealerships in Kyiv are linked to other offshores at the same address – Auto-motion Corp. and Prime Provisions Corp. “Atlant-M has no relationship to the incident with the Faina,” the company assured bne. 

Atlant-M is apparently still owned by the trio who set it up in 1991, Sergei Savitskii, Oleg Khusaenov and Igor Malgin, who also hold a majority stake in Belarus bank Minsk Transit bank. 

Intriguingly, Atlanta-M is not the only major Ukrainian car importer to have connections to the same obscure Dominican address. “International Business Group Limited”, also at Copthall 8, Roseau, owns an Odesa customs brokerage with the same name, which in turn owns two dealerships, ZS Avtoelit and Luks Avtoservis. The former company owns Odesa’s main Audi dealership, Audi Centre Odesa South, according to Interfax Spark. The companies are run and believed controlled by prominent local businessman Evgen Deev. Deev declined to comment to bne. 

According to the Ukrainian embassy in Libya, as quoted by media, a Ukrainian court of first instance found in favour of the aggrieved Libyan merchants on August 1, and ordered the cargo to be shipped on to Benghazi. “Our sailors will be released as soon as the vehicle cargo arrives in Bengazi,” an assistant to the Ukrainian ambassador in Libya told media August 2. But with strong Ukrainian business interests potentially likely to keep pressing their claims in the courts, it may be too early for Ukraine’s long-suffering sailors to get their hopes up. 

Cracks in Iraq 

In parallel to the new Faina mess in Libya, a major Ukraine shipment of armour to Iraq was reported stuck on board its cargo ship for months, after Iraq refused to accept the allegedly defective consignment. 

A local Odesa news site quoted a source in the Odesa company White Wale Shipping on August 2 as saying that the SE Pacifica cargo ship had docked in Iraqi port Umm Qasr in the spring, but the Iraqis spotted cracks in the bodies of the 42 APCs and refused to unload the cargo. Since then, online vessel trackers confirm that the SE Pacifica has been loitering in the northern part of the Persian Gulf – apparently fully loaded and unsecured – and the shipping company has not been compensated for its losses. 

As bne has reported, in 2009 Iraq agreed to purchase $560m worth of Ukraine-built APCs and Antonov An-32 planes, but the deal hit the rocks after power in Ukraine changed hands in 2010. The original contract envisaged around 20% of the sum to be paid out in commissions, roughly half to Iraqis, and half to Ukrainian “lobbyists” incorporated in UK, Singapore and BVI, apparently linked to the former management of state arms exporter Ukrspetseksport. 

But the company’s new leadership, closely linked to the ruling Party of Regions as of 2010, was apparently loath to make the payments as planned, to either side. The Iraqis had consequently shown increasing reluctance to accept deliveries under the contract, under the pretext of real or imagined defects in the equipment. In 2011, it appeared that deliveries had started moving again, but the apparent plight of the SE Pacifica points to renewed problems. 

In a sign of panic about the deal, on July 11 Ukrspetseksport got a new acting CEO, Oleksandr Kovalenko. Kovalenko had been first deputy head of Ukrspetseksport in 2004-2010 under former president Viktor Yushchenko and thus part of the old guard who set up the deal in 2009. In the spring of 2010, as the former management was removed root and branch, he went into semi-retirement – and his return now looks like a last gasp attempt to get the deal back on the road, perhaps by bringing the original Ukrainian “lobbyists” back on board. Kovalenko is believed to be currently in Iraq in talks. Ukrspetseksport declined to comment to bne on the shipments, citing confidentiality.

Graham Stack for Business New Europe (www.bne.eu), August 8, 2013

bne’s tracking of a “meister creator” of shell companies suggests that recent moves by G8 countries to stop corporate anonymity will be insufficient, unless there are equivalent measures taken against the murky banks like those in Latvia and Cyprus whose clients require such vehicles.

US senators Carl Levin and Chuck Grassley introduced the “Incorporation Transparency and Law Enforcement Assistance Act” in the US Senate on August 3, which is intended to close down the US as a jurisdiction used by unscrupulous businessmen, often of Eastern European origin, to set up shell companies. “Our states don’t require anyone to name the owners of the corporations being formed under their laws, practically inviting people to misuse our corporations,” Levin said, introducing the bill.

That move comes after June’s G8 summit at Lough Erne, Northern Ireland, where leaders, including US President Barack Obama, resolved to legislate so that, “Companies should know who really owns them and tax collectors and law enforcers should be able to obtain this information easily.”

British Prime Minister David Cameron has subsequently launched moves to creating a national register of beneficial ownership, intended to eradicate widespread use of the UK to set up shell companies.

The prospects for the Levin-Grassley’s bill may be less rosy than Cameron’s initiative. But support from Obama is a given – he was one of four senators who introduced the Transparency bill first time round in 2007 – making the Lough Erne G8 declaration something of a return to his roots.

Small fry and big fish

However, the recent moves by the US and UK will probably raise false hopes that merely closing loopholes in corporate law will combat money laundering; experts say governments need to tackle the banks that generate such shell companies in order to shift funds around for their secretive clients.

Tellingly, Obama’s original letter of 2007 picked out Seychelles-based nominee director Stella Port-Louis as a flagrant example of corporate abuse. Obama pointed to how Port-Louis featured as director of over 100 companies alone in tiny Wyoming. It was later revealed that she was also director of hundreds of shell companies in New Zealand. Port-Louis was the employee of a company incorporation firm located in the Seychelles called Lotus Holding Company.

Obama then seemed remarkably prescient when, in early 2010, Port-Louis featured as director of four New Zealand companies that were named as laundering funds from Mexico’s Sinaloa narcotics cartel via Wachovia Bank. The story then grew wings after a plane stuffed with anti-aircraft missiles was intercepted in Bangkok, en route from North Korea to Iran – and it transpired the plane had been leased by another New Zealand company, SP Trading, which was set up by the same service provider.

Later, in 2010, following the death of Russian whistleblower Sergei Magnitsky in detention in Moscow, details emerged of how a massive fraudulent tax rebate had been siphoned out of Russia via shell companies, including by New Zealand companies featuring Port-Louis as director.

Journalists had a field day exploring the connections, and pinned the blame on the company service provider Geoffrey Taylor, eccentric founder of the GT Group, that had set up the New Zealand companies. The story of the colourful, but allegedly criminal, South Sea self-styled lord produced great copy, but dodged the question of how Australia-based Taylor sourced his secrecy-obsessed clients from the northern hemisphere.

That question was then answered when a massive leaked database of British Virgin Island databases, obtained and made available online in 2013 by the International Consortium of Investigative Journalists, pointed to a different story about Obama’s favourite nominee director, Stella Port-Louis – a story connected not to the South Seas and eccentric colonials, but to the Baltics and murky banks – the big fish in the money laundering game.

Rigged in Riga

The leaked database showed nearly 1,500 British Virgin Island (BVI) firms that had been set up by Port-Louis’ Seychelles employer Lotus Holding Company, and featuring her as nominee director, were all listed at the Riga address of a Latvian incorporation company called Financial Group Omega.

According to the Latvian company database, Omega was owned and headed by Latvian citizen Marks Rečkins, who is also listed in online sources as head of the Seychelles company Lotus Holding. Riga-based Omega offers customers shell companies with nominees in a range of jurisdictions, in combination with bank accounts at Latvian banks.

No surprise then that the criminal New Zealand companies that hit the headlines in 2010 later proved to all have bank accounts in the Baltics. For all the media brouhaha, the leaked BVI database indicates Taylor may have been merely the supplier of New Zealand companies and some nominee directors to Rečkin’s Riga-based head operation, which worked directly for the Baltic banks and their clients.

According to Latvia’s regulator, Financial and Capital Market Commission, around 23% of the Latvian banking sector’s non-resident deposits are incorporated in the BVI, 14% in the UK, and single figures for Cyprus, Belize, New Zealand , Panama, Seychelles, the US and Russia – pointing to huge demand for shell companies on the part of the banks’ clients. Around 90% of the non-resident depositors are from former Soviet (CIS) companies, but less than 10% of them are incorporated as CIS companies.

“I have no interest in talking to journalists,” Rečkins confides tobne, answering a Latvian mobile number. Rečkins apparently closed Omega in Riga in 2010, and Port-Louis was struck off as a Seychelles director. But she was later reinstated on appeal, and Rečkins now operates as Lotus Corporate Services in BVI, whose address of 3A Little Denmark Complex scores nearly 20,000 Google hits, many for dodgy business such as online pyramid investment scams – and, where visible, with Latvian bank accounts. Reckins also operates Lugano Corporate Services in Belize, according to whois records.

Alpine scamming

bne traced Rečkins’ activities and discovered they extend to another famous banking secrecy region besides the Baltics – to the Alpine countries, where shell companies are also de rigueur for clients, among whom are many wealthy businesspeople and officials from the former Soviet states.

In 2009, Rečkins registered a Swiss company called Lotus Corporate Services at Ville delle Scuele 34, Lugano. That was also the address of a tiny new bank called Aston Bank, founded in 2007. In December 2009, Aston Bank was raided by armed police, and the manager-shareholders bundled handcuffed into vans. In January 2010, its licence was withdrawn. Swiss financial regulators found CHF20m was missing from the bank’s capital, and tens of millions of Swiss francs of client funds had also apparently vanished. News magazine L’Hebdo established the funds belonged to Russian-Israeli oligarch Vitaly Malkin, apparently managed for him by Luxemburg banker Pierre Grotz.

In 2010, Rečkins joined the advisory board of another freshly minted bank – Valartis Bank in Liechtenstein, acquired and rebranded by the Swiss Valartis group in 2009, and headed by Gustav Stenbolt, a former fund manager in Russia. According to its annual reports, Valartis “specialised in providing advice for high net-worth families and institutional investors… from Russia to Turkey, the Middle East and the Far East.”

Andreas Insam, board member of Valartis Liechtenstein, tells bnethat the advisory board, on which Rečkins serves for free, is “only a marketing tool to get closer to the bank’s markets,” and that the bank has no relationship to Rečkins’ Lotus Corporate Services.

In early August, documents linked to a Liechtenstein money-laundering investigation were leaked to Maltese paper Il-Torca. The Liechtenstein investigation traced assets at Valartis that were linked to Kazakh oligarch Rakhat Aliev, former son-in-law of Kazakh President Nursultan Nazarbayev. Aliev was indicted in Kazkhstan of abducting two bank managers in 2007 in an apparent elite bustup and fled into exile, whereupon Nazarbaev’s daughter divorced him.

According to documents seen by bne, just under €10m in cash was anonymously paid into the Valartis account of Aliev’s Panama offshore called Plotin Associated on it being opened in late 2007. According to sources cited by Maltese paper Il-Torca, which originally obtained the documents, the account swelled to around €212m before Plotin Associated was dissolved in 2012. Valartis said it could not comment on any client.

Next generation

Underscoring the central role of banks and their agents in generating demand for mass-produced shell companies, a leaked audit of stricken Cyprus banks in April estimated that a whopping 75% of all accounts at the banks had been opened at the bank by “introducer structures”, ie. company service providers like Rečkins, who set up offshores together with bank accounts, on behalf of clients. Such introducer structures conduct customer due diligence in lieu of the banks – one reason why banks love them. As a result, “customer business profiles are generally not properly established by Cypriot banks,” found auditors Deloitte and Europe’s anti-money laundering body Moneyval.

Thus the secretive bank-client relationship in countries like Latvia, Switzerland and Cyprus seems the real motor behind the creation of shell companies around the world. Tightening up laws in UK and US, as Cameron and Obama propose, may simply prompt a search for fresh fields – and there are many. “Untraceable shell companies are in practice widely available,” says Griffith University expert Jason Sharman.

Offshore incorporators – including those who are agents for Latvian banks – are increasingly offering South African, Scottish and Canadian shell companies, and the cases of such companies implicated in East European dubious dealings are proliferating.

Even squeaky-clean Denmark could become the “new New Zealand”, according to market sources. In particular, the Danish equivalent of the UK’s notorious Limited Liability Partnership (LP) – the kommanditselskab, or K/S – is being touted as the next hot thing, potentially providing anonymity and tax exemption in a jurisdiction with spotless reputation.

Jan Breum Eriksen, Danish representative of offshore incorporator Sovereign Group, pitching to Moscow businessmen, even points to loopholes he claims can make a K/S completely invisible to law enforcement – meaning corporate rot could soon become a depressing feature in the state of Denmark.

Graham Stack for Business New Europe (www.bne.eu) September 5, 2013

A two-year operation to wrest control over top Moldovan banks is nearing an end, with the apparent overnight privatisation of the savings bank Banca de Economii Moldova, and a change in shareholders and managers at the country’s largest bank, Moldovan Agroindbank. Former shareholders in both banks claim they fell victim to “raider attacks”, ie. illegal expropriation. The identity of the new owners is unknown, but are allegedly linked to oligarch Vlad Plahotniuc and his group.

As a result of a closed share issue, the state’s stake in the savings bank Banca de Economii (BEM) has dropped from 56% to 33.3%, the head of the National Bank of Moldova, Dorin Dragutanu, confirmed on September 2. This means that the state has lost its controlling stake in the bank that has a monopoly on paying out of pensions to Moldovan’s villagers – the majority of the population – thanks to its extensive network inherited from Soviet times. BEM is also the bank where state organisations and state-owned companies hold most of their funds. As with most Moldovan banks, there is no official information on who the new owners are.

Prompting the share issue, to which the state did not subscribe, was the need to recapitalise the bank that was close to failure, after being looted by its management since 2009. As bne reported in February, a secret report by the International Monetary Fund (IMF) on the bank leaked to media in January described how massive fraudulent lending at the bank had driven it to the brink of ruin. Former BEM head Grigore Gacichevici was arrested that month and charged with disbursing a fraudulent $2m loan.

Auditors Grant Thornton, in a leaked audit, analysed another case where loans totaling €10m were paid to a group of Moldovan companies, secured by fake real estate, and then transferred to offshore accounts. It noted that, “there is a large probability of further such transactions.”

The IMF leaned toward winding up the bank, but the situation at BEM was eased by the sale of a swathe of non-performing loans in May, and August’s closed share issue may have been a secret part of the same agreement. With only existing shareholders allowed to participate, and the state abstaining, BEM’s minority shareholders would now seem to control the bank, although the results of the share issue won’t be published for another week.

The minorities gained a stake in the bank in 2011-2012 during the “raider attacks”, where dubious court decisions transferred stakes in top banks from former shareholders to offshore shell companies. They would thus appear linked to oligarch Vladimir Plahotniuc, whom UK court documents have connected to the “raiding” of second largest bank Victoriabank. Other reports circulating in the media allege that former prime minister Vlad Filat, an oligarch in his own right, is a new shareholder, but analysts say this could be smears by his enemies.

The share issue in fact raised only MDL80m ($6.3m) for the bank, after an earlier deal saw the bank’s non-performing loans sold off. Government officials say the state will retain a blocking stake, but are also talking up the need for private ownership of the bank to save it from further looting. And given the bank’s continued capital inadequacy, further dilution of the state’s stake in favour of the new owners may be just a matter of time.

Bad designs

BEM is the last of the three main banks that have been the subject of “raider attacks” to surrender. In 2011, new shareholders controversially gained control of Moldova’s second largest bank Victoriabank. And in July, Moldova’s biggest and best bank, Moldovan Agroindbank, saw controversial new shareholders vote out management that had built the bank up since 1996, despite attempts by the European Bank of Reconstruction and Development (EBRD), the bank’s main creditor, to fend off the attack.

“We have held talks both with the government and the regulator about a series of opaque deals resulting in shareholder change,” the EBRD’s Olivier Decamp told Kommersant Moldova in early August.

Agroindbank’s now ex-CEO, Natalia Vrabie, was less diplomatic: “The scale and odious nature of these fraudulent actions are sufficient to undermine the financial stability of the bank and of the country,” she said earlier, warning that a change in the bank’s shareholders without consent of creditors such as the EBRD could trigger default on the bank’s funding.

The deals referred to saw a total of 28% of the bank’s shares transferred between February and May from existing shareholders to a gaggle of UK and Latvian shell companies. Each shell company acquired less than 5% of the bank’s shares, thus remaining under the threshold for mandatory approval by the regulator. But, as demanded by the EBRD, the National Bank declared that it had identified one beneficiary behind the various shell companies, and suspended the companies’ voting rights given their evasion of approval procedures.

But on June 12, in a sign of the subjugation of the court system to oligarchic interests, a regional court overruled the regulator’s decision. As a result, the new shareholdings voted at a meeting on June 28 to replace Vrabie with a new face, Serghei Cebotari. Central bank chief Dragutanu said it could “not be excluded” that the new shareholder(s) already had a controlling stake in the bank.

What the future holds

The question now is what the future holds for Moldova’s banking system? The answer may lie to the east, reckonbne sources.

Earlier in 2013, the former head of Russia’s central bank, Sergei Ignatiev, said that around $50bn had been channelled out of the country illegally via rafts of shell companies in 2012 alone. As bne reported, according to a letter circulated by the National Bank of Belarus, a swathe of these funds flowed historically through the banking systems of the Baltics, Cyprus and Kyrgyzstan.

But with the Cyprus banks paralysed by the financial crisis there, Kyrgystan’s banking system in turmoil following the 2010 revolution, and two Lithuanian banks with core clientele from the former Soviet Union closed down 2012-2013, there is room for more mini-jurisdictions on the fringes of the former Soviet space to get in on “non-resident banking” alongside Latvia – and thus non-resident banking may be the market niche that Moldova’s new banking masters are eyeing. Former Agroindbank CEO Vrabie warned that the change in shareholders would herald a “radical shift in politics and strategy” at the bank.

There are signs that this already happening. According to investigations of the Russian tax rebate fraud that led to the imprisonment and death of Russian investigator Sergei Magnitsky, $53m of the dirty funds passed through Moldovan shell companies with accounts at Banca de Economii in 2008, and then onto Latvian banks, apparently without ringing any alarm bells.

A further indication may be that many shell companies used in the raider attacks were set up by company service providers associated with Latvian banks, as bne has described. Plahotniuc and other Moldovan oligarchs are believed to have close links to Latvian bankers, according to bne sources.

Graham Stack in Kyiv, September 2, 2013

A Norwegian firm has revealed its subsidiary Standard Drilling directly sold an offshore drilling platform to Naftogaz in 2011 for $220m, contradicting claims by the Ukrainian state-owned oil and gas company that it acquired the rig for $400m from Latvia’s Riga Shipyard via an open tender. The discrepancy will revive allegations of corruption at Naftogaz.

In a presentation recently uploaded to its website, the Norwegian financial company Ferncliff lists the buyers of all the rigs divested by Ferncliff subsidiaries, including Standard Drilling. Until now, only one buyer for a Ferncliff rig had remained undisclosed – that of Standard Drilling’s B319 rig. Standard Drilling said in September 2011 it had been sold to an “undisclosed buyer incorporated in the UK”. Now parent company Ferncliff has revealed that the rig was sold while still under construction to Naftogaz for $220m, after having ordered it from leading Singapore producer Keppel Fels in December 2010 for $179m.

The CEO of both Ferncliff and Standard Drilling, Martin Nes, declined to comment to bne. The disclosure may indicate that Ferncliff now regards the mystery UK buyer to have been an agent of Naftogaz.

In an apparent parallel dimension, however, Naftogaz staged a tender for the procurement of a drilling rig in October 2011, in which it acquired the same B319 rig for $400m from Riga Shipyard. Naftogaz had declined to respond to bne enquiries about the discrepancy within one week of asking, citing the need for extensive security checks before it could release information pertaining to the tender.

Smoke and mirrors

Ferncliff’s declared payment of $220m from Naftogaz for the rig clashes sharply with Naftogaz’s payment of $400m for the same rig to Riga Shipyard, and is likely to revive allegations of widespread corruption in procurement at the state company.

Riga Shipyard, owned by Ukraine-born Vassily Melnik, had no prior experience of building or repairing offshore rigs, but Naftogaz touted the company’s victory in the tender of October 2011 as a triumph for transparency. “Journalists had every chance to observe the entire process of the tender and to personally convince themselves in the transparency of the decisions taken at all stages,” Naftogaz CEO Evgen Bakulin announced at the signing ceremony for the sale on November 2, 2011.

The transparency feted by Bakulin derived from the victory of a genuine foreign shipbuilding company in the tender, rather than an anonymous offshore shell company as is so often the case. Riga Shipyard owner Melnik personally attended the signing ceremony, accompanied by Latvia’s current economy minister, Daniels Pavluts. “The decision taken to attend the ceremonious signing of agreement (took) into account that this is one of the biggest tenders Latvian companies have ever won abroad, with significant positive impact for the Latvian economy,” Pavluts tells bne.

According to unofficial minutes of Riga Shipyard’s shareholder meeting held in May, Melnik acknowledged that Riga Shipyard had itself sourced the B319 rig from a broker, for $393.3m. “We didn’t build this rig. We bought the rig from a broker that was trading this platform, already existing. Our work was only engineering work… and the reconstruction in Turkey when the platform legs were assembled – this was a unique task, which no one performed before us. And for this work we received €5m. I consider this a very good result – primarily because we gained great experience in engineering,” he told the shareholder meeting.

But according to bne sources, the Latvian shipyard played no role in the engineering work performed in Giresun, Turkey in the fall of 2012, when the rigs’ legs were reinstalled after transiting under the bridges of the Bosphorus. Rather, the work was performed by the Singapore rig manufacturers Keppel Fels and its subsidiary Caspian Shipyard, two local Turkish companies, and a rig crew supplied by Naftogaz offshore unit Chornomornaftogaz, according to site manager Salih Fidan.

Nor did the tender victory have the stimulating effect hoped for by Latvia’s economy ministry. According to Melnik, the Latvian company booked around $7m in profit on the $400m transaction. But to the chagrin of Riga Shipyard’s minority shareholders, the monster transaction stayed off the company books, making it impossible to verify Melnik’s words. The rig deal was implemented through a special-purpose UK subsidiary, Northsale Logistics. Riga Shipyard sold the subsidiary five days before the end of 2012, which, according to Latvian legislation, absolves it from mandatory consolidation on the parent company accounts. “We believe the transaction with the drilling rig was largely a fiction,” leading minority shareholder in Riga Shipyard, Linards Baumanis, tells bne.

According to bne sources, the authoritative Lloyds’s List lists Chornomornaftogaz as taking possession of the rig immediately on completion in Singapore.

Tragedy then farce

Naftogaz’s purchase of the controversial drilling rig in October 2011 from Standard Drilling repeated an equally controversial tender in March 2011 for an offshore rig, as a result of which Naftogaz acquired an identical Keppel Fells rig, B312, also for $400m – but this time from a shadowy UK vehicle, Highway Investment Processing.

The B312 rig had been previously owned for a brief time by Norwegian offshore driller Seadrill, which“>disclosed its sale for $248.5m in April 2011 to an “undisclosed buyer incorporated in the UK.” In an interview with bne in 2012, Seadrill’s then chief financial officer Esa Ikaheimonen, acknowledged that Seadrill had sold its rig to the UK company Highway Investment Processing.

Ikaheimonen and Seadrill’s vice president, Jan Olav Osthus, told bne that Seadrill had had no contact with Ukrainian state officials or state company executives during sale talks. But according to bne enquiries, a team of rig engineers from Chornomornaftogaz – Naftogaz’s offshore drilling unit – headed by chief rig engineer Vladimir Perminov inspected Seadrill’s rig at its drilling location in Myanmar in March 2011, before the deal with Highway Investment was closed. Perminov posted photos of the visit on his social network page.

Following an outcry when details about the tender leaked out in the Ukrainian press, Naftogaz ordered an audit by oil service giant Halliburton of the total cost of the ex-Seadrill rig, to justify the price tag of $400m. According to the audit, as seen by bne, beside the original purchase price of $248.5m for the rig, the $400m included $71m as the total cost of the operation to remove and then reassemble the rig’s legs for Bosphorus transit, with another $21m paid for a helicopter, $16.4m for winterization, $15m for dry tow and $16m for an electric line unit. None of these expenses was foreseen in the original tender and contract, as seen by bne, where point of delivery of the rig was specified as Singapore.

Highway to the underground

While Naftogaz countered corruption allegations regarding the first tender by flourishing the Halliburton audit, bne enquiries indicate that Highway Investment itself functioned as part of a Ukrainian money-laundering platform, or “conversion centre” – meaning effectively that “Highway Investment” was simply the name of a bank account where dubious funds landed.

bne tracked down a payment made to Highway Investment entirely unrelated to the massive $400m drilling rig deal. This was a payment of €270,000 in November 2010 made to Highway Investment by a unit of regional plant Zhitomir Cardboard Plant, Skherzo, to purchase an offset printing press from Germany. But no delivery ever took place, and the payment was flagged up by Ukraine’s Ministry of Economy as a violation of foreign currency regulations, with an ensuing court case. According to documents seen by bne, obscure Lugansk businessman Pavlo Dvulichanskii held power of attorney for Highway Investment Processing. Tellingly. Dvulichanskii features as owner and director of another company receiving payments from Zhitomir Cardboard Plant (ZKK), Lugansk company PP Oriens.

According to court proceedings, Lugansk tax police regard Dvulichanskii’s PP Oriens as “a member of a single financial-industrial group that was created for the provision of tax minimisation services, for the conversion of funds (into cash), and for the creation of VAT credits to reduce VAT payments – ie. a money-laundering platform or “conversion centre” that receives wired funds from clients under fictive contracts and returns them as “black” cash. The symmetrical dubious payments by ZKK to two companies where Dvulichanskii features as director, Oriens and Highway Investment, indicates that Highway Investment was part of the same “single financial-industrial group” as Oriens, busted by diligent Lugansk tax police.

“It does appear that Highway Investment Processing may be a part of a Ukrainian conversion scheme, because it has a director with a Ukrainian background linked to confirmed Ukrainian conversion centers, and because it received payment but did not deliver the goods ordered,” says Valery Fedichin, lawyer at Kyiv firm OMP.

Independent paper Ukrainskaya Pravda later investigated another Lugansk company, Lugpromstroisantekhmontazh, named by tax police as being part of the same “single financial-industrial group.” The breathtakingly named Lugpromstroisantekhmontazh also received suspicious payments from the Zhitomir plant ZKK. The newspaper traced payments made to the company by numerous politically connected firms – including those linked to President Viktor Yanukovych’s 129-hectare estate at Mezhgirya near Kyiv.

The Latvian bank – Trasta Komercbanka – where Highway Investment banked has been previously linked in court cases to funds flowing from suspected money-laundering platforms in Ukraine. The bank is also linked via business partners to Ukrainian gas oligarch Dmytro Firtash, who is regarded as a patron of Ukraine’s energy minster at the time of the controversial tenders, Yury Boiko.

The bank denies any connection to money-laundering. In December 2012, Latvian police announced they had opened a money-laundering investigation in connection with the Highway Investment rig acquisition.

In November 2012, Naftogaz ordered two semi-submersible rigs from Singapore’s Keppel Fels for a total of $1.226bn. However, following a change in energy minister from Yury Boiko to Eduard Stavitsky, in December 2012 the deal was cancelled. In June 2013, media quoted Stavitsky saying that a new tender for the semi-submersible rigs would be held in the autumn.

Graham Stack in Kyiv, October 15, 2013

As if a looming financial crisis in Ukraine weren’t enough to deal with, UniCredit Group is also having to deal with a dangerously escalating row between its Ukrainian subsidiary and a major debtor. The Italian bank is now ready to join other European banks that have left the country, licking their wounds – as soon as it finds a buyer for its Ukrainian bank.

Ukrsotsbank, Ukraine’s sixth largest bank by assets, has accused the country’s fraud squad of exceeding its powers during a raid on its Kyiv headquarters on September 20, which was carried out in connection with a court case brought by a major debtor of the bank. This is the first time a major European-owned bank has been raided by police in Ukraine and indicates that a wave of conflicts between international banks and debt welshers that have erupted since the economic crisis broke in 2008 shows few signs of abating.

“The bank expressed readiness to provide all documents and information regarding the request, but the officers launched an active inspection and ensuing removal of documents and computers from all premises of the central bank offices, including those not on the court list,” Ukrsotsbank said in a statement September 23. “The bank regards such behaviour during a search as an abuse of power… such precedents fundamentally spoil not only the image of the bank but also the business climate for European investors.”

The root of the conflict is apparently a whopping $190m lent by Ukrsotsbank to ISA Prime Development and a string of related companies to build office towers in 2005-2007 – in fact, before UniCredit purchased the bank in 2007. According to Ukrsotsbank, ISA Prime stopped servicing the debt after the crisis hit Ukraine in 2008, and it has since allegedly tried by hook or by crook to remove its properties that are under pledge to the bank. The court order backing the September 20 raid on Ukrsotsbank derives, ironically, from a criminal investigation into theft of Ukrsotsbank property that was prompted by a complaint from the bank itself.

In an apparent escalation of the conflict, on September 24, documents were leaked on  the Internet pointing to a criminal case building against the bank. The leaked documents contain the protocol of a police interrogation of an official employed in the state registry of deeds, who alleges he was forced under threat of physical violence to re-register disputed real estate assets built by Prime ISA to Ukrsotsbank, despite them having been frozen under court order at the time. This testimony could have served as the pretext for the police to search for documents believed hidden by the bank.

Ukrsotsbank CEO Graziano Cameli was called in for questioning by police following the raid. ISA Prime later put out a statement denying any connection to Ukrsotsbank’s problems with the police.

But the developer’s CEO Aleksandr Bashenko does not deny the ongoing dispute. “The problem started not with us, but with the bank,” Bashenko claimed in a statement on September 24. “It stopped its funding and started to seize our properties instead of a constructive dialogue. We finished construction of the objects with our money, spending over $170m to do so.”

Ukrsotsbank disputes this, saying the “talks had been going on for over two years, but the negotiations period was used by ISA Prime management to strip leased real estate objects from under pledge and not to settle the debt situation.” The bank believes ISA Prime’s annual income from leasing the properties to have been around $25m. As a result, the bank’s press service tells bne, Ukrsotsbank had no choice but to file a complaint in order to open a criminal case for property theft.

The dispute turned nastier last year. In April 2012, in what Ukrsotsbank representatives have suggested were attacks linked to the dispute, a yacht belonging to the bank’s long-serving CEO Boris Timonkin went up in flames, and a number of cars owned by top managers followed suit. The parent bank UniCredit wrote a letter to Ukraine’s president, Viktor Yanukovych, referring to physical threats made by ISA Prime against it, according to media reports. In a further twist, Timonkin, against whom most of Bashenko’s wrath was targeted publicly, suddenly quit the bank in June of this year.

The big guys

In a lengthy interview in Forbes Ukraine in January, Bashenko portrayed himself as a self-made man who had been undone by Timonkin’s overgenerous disbursal of credit pushed on his company during the pre-crisis lending boom.

Timonkin has acknowledged having had targets of 50% annual growth in the bank’s credit book prior to 2008, but the huge volume of loans dispensed to ISA Prime Development between 2005 and 2007 – a volume even the Ukrainian state has difficulty attracting these days – points to weightier backers than Bashenko, whose only official position is deputy president of Ukraine’s Federation of Cyclists.

Apparently, it was after two of Ukraine’s richest families, chemicals oligarch Mykhailo Yankovsky and banking brothers Sergei and Oleksandr Buryak, became shareholders in ISA Prime in 2005 that loans from Ukrsotsbank really started to flow. According to the Spark Interfax database, there are two ISA Prime Developments – one private joint stock company (PrAT) where Bashenko is CEO and co-owner, and a limited liability company (TOV), which featured Bashenko as co-owner only until 2005. After that, Yankovsky and the Buryaks took parity stakes.

These men had not just financial but political clout: Yankovsky was a senior MP of the now governing Party of Regions, and Sergei Buryak is a founding member and MP in Yulia Tymoshenko’s ByuT party, who also headed Ukraine’s tax service from 2007 to 2010. He currently serves as first deputy chairman of the budget committee of Ukraine’ Rada. Yankovsky could not be reached for comment, and Buryak was not answering his Rada office telephone.

According to the Interfax Spark database, the Buryak brothers sold out their stake in TOV ISA Prime to Donetsk-based Yankovsky in August 2012. In July this year, the Buryaks then sold 80% of their Brokbiznes Bank, a top-20 bank, to dark-horse fuel-trader Sergei Kurchenko, for around €200m, according to Forbes Ukraine. Intriguingly, Ukrsotsbank CEO Timonkin left Ukrsotsbank in July to oversee Kurchenko’s banking business, including Brokbiznesbank, where the Buryaks have kept the funds from the sale.

The bank is keeping mum over whether oligarch shareholders are implicated in the conflict. In previous public conflicts with alleged major debt welshers, such as with diner chain Puzata Khata, the bank has refrained from crossing swords directly with powerful shareholders of recalcitrant borrowers.

Mired in debt

European-owned banks have been devastated by loans going sour in Ukraine. In a series of negative reports about the Ukrainian economy and its banking sector this week, Moody’s Investors Service said it reckons problem loans at Ukrainian banks will amount to 35% of all loans by the end of 2013.

The reasons cited why foreign banks have been particularly hard hit by bad loans is not just because they lent recklessly in the run-up to the crisis, but that – according to their debtors – they are not “flexible” enough when it comes to restructuring. Experts say they are also more vulnerable than Ukrainian-owned banks to skulduggery by borrowers hijacking state bodies and dodgy courts.

A leaked US diplomatic cable from 2009 entitled, “Extortion, bribes and threats: A Kyiv banker laments”, detailed the full extent of the misery – the fact that borrowers perfectly capable of paying on debts were using the crisis as an excuse to renege on their debts. The cable, quoting an extensive interview with a top executive from Austrian-owned Raiffeisen Aval, Ukraine’s second largest bank, detailed how “second-tier oligarchs and members of the Ukrainian parliament are extorting from the country’s banks and threatening bankers.”

“The powerful borrowers act with impunity, having paid off the court system to evade their debt obligations,” the banker complained, detailing physical threats to bank personnel similar to “Russia in the 1990s” and saying the bank was crippled in disputes with debtors by refusing to bribe judges despite “a court system that exudes corruption”. The current Ukrsotsbank conflict suggests nothing has changed.

Looking for an exit

As a result of the disastrous legal situation and poor macroeconomic fundamentals, Ukraine’s European-owned banks are rushing for the exit. On October 3, Unicredit’s CEO Federico Ghizzoni acknowledged he was looking for a buyer for Ukrsotsbank, but this would be hard to find.

Forbes Ukraine reported October 14 that Austria’s Raiffeisen Bank International (RBI) is also looking to sell Raiffeisen Aval, its Ukrainian subsidiary. RBI denied this, but the bank’s future in Ukraine does appear shaky after the departure of its emerging market champion Herbert Stepic as the result of a scandal in July. His replacement, Karl Sevalda, in August announced a change of strategy, saying the bank would focus in the future on Central Europe, Romania and Russia. Ukraine was notably absent.

Graham Stack in Kyiv for Business New Europe, October 22 2013

Latvian regulators have ordered Riga Shipyard to consolidate a UK subsidiary on its accounts for 2012, following concerns about the local shipyard’s involvement in a 2011 deal to sell to Ukraine’s state energy company a drilling rig for $400m that was sourced from for just $220m. Opening up the accounts could provide answers to some lingering questions about the murky deal. 

Latvian regulators told bne that they have ordered Riga Shipyard (RKB) to consolidate the UK subsidiary Northsale Logistics Limited on the accounts filed for 2012. The move follows a bne article detailing the shipyard’s involvement as an intermediary in supplying the rig to Naftogaz Ukrainy in 2011 for $400m, which had been sourced from Norwegian leasing company Standard Drilling for just $220m. 

According to RKB’s accounts, the deal with the rig was implemented via its UK vehicle Northsale Logistics Limited. The UK company was then sold on December 28, 2012, which RKB auditors claimed exonerated them from consolidating Northsale on the books for 2012 – and thus potentially disclosing key aspects of the deal. But Latvia’s Financial and Capital Market Commission has now decided otherwise. “Following inspection the Financial and Capital Market Commission addressed RKB requesting to submit a consolidated annual report for year 2012,” FCMC told bne. 

However, RKB responded that it “disagrees with the Financial and Capital Market Commission statement,” suggesting a spat is in the offing. 

Christmas present 

Opening up the Northsale accounts could provide answers to some lingering questions. A recent court decision in Ukraine suggests that RKB was anxious to divest Northsale before year’s end 2012 – apparently to ensure its exclusion from RKB accounts for 2012. 

The court case, heard in August, resulted from an appeal by Naftogaz’s offshore operator Chornomornaftogaz, the new owner of the rig, against a back tax claim. It revealed that the parties to the rig deal suddenly agreed to cut the price of the rig by $14m in late December 2012, after the rig had already arrived in the Crimea and was waiting to clear customs. 

In December 2012, Naftogaz was suffering cash flow problems during the seasonal spike in gas purchases, and subsidiary Chornomornaftogaz was even sued for bankruptcy by one unpaid supplier. Also, in early December the then minister of energy Yury Boiko, who had overseen the original deals, was replaced by a new man, and the Naftogaz official who had directly supervised the rig procurement, Sergei Katsuba, a Boiko ally, also left the company to take a seat in parliament. This may mean both cash and will were lacking to complete payments for the rig according to the original contract from the tender of 2011. 

According to the court case, on December 17 Naftogaz and RKB suddenly amended the contract. The amendment saw the price payable to RKB reduced from $400m to $386m, and the contract amended to exclude one item in the scope of supply. It was not specified in the court case what this suddenly dispensable item was. 

Naftogaz and RKB both declined to respond to questions on the changed parameters for confidentiality reasons. 

With the amendment agreed on December 17, knocking $14m off the price, the sale was then promptly closed on December 21 – all payments made and the rig accepted by Chornomornaftogaz. Before even the conclusion of customs procedures on December 29, RKB divested Northsale on December 28. This allowed RKB’s auditors to leave the subsidiary off the 2012 accounts – until Latvia’s regulators intervened. 

Wriggling in Riga 

RKB, a listed company, has never disclosed its “Christmas present” of $14m made to Naftogaz. In comments made to the RKB shareholders’ meeting in May, RKB owner Vassily Melnyk said that Naftogaz had paid the company $400m for supplying the platform, and RKB had in turn sourced the platform from a broker for $393.7m, according to unofficial minutes of the meeting provided by minority shareholders. The discrepancy in prices named is just one of the mysteries that opening up the Northsale accounts might solve. 

Northsale was acquired from RKB by another UK company, FTS Management, an investment consultancy owned and directed by a certain London-based Valery Smirnov, who is also linked to accountants Howell Wade. FTS Management claims to have operated since the 1990s, but the website only went active in 2013, and the phone number is invalid. 

Smirnov is apparently a long-standing business associate of RKB owner Melnyk: he figures in the UK as director of Quantrade Limited, a shareholder in Melnyk-linked Latvian knitwear firms. In 2003, Latvian media also named Smirnov as a representative of Maltese company Kattegat Dredging Shipping Ltd, an RKB affiliate. According to the media reports, Smirnov had filed a complaint to police about embezzlement from the Maltese company by its director Maksim Frantsev, whose corpse was later discovered in a shallow grave near Riga. Smirnov did not respond to emails. 

Clouds on horizon 

RKB’s victory in the Ukrainian tender in 2011 had the blessing of Latvian authorities, despite the fact that the small shipyard had no experience or capacity for building offshore drilling rigs – its standard products are floating restaurants and patrol boats. Latvia’s economy minister even flew to Kyiv to attend the signing ceremony. 

Since then Riga’s stance on Naftogaz and the rig deals has hardened. In 2012, Latvian police launched a money-laundering investigation into a UK shell company, Highway Investment Processing, which acted as an intermediary in an identical deal by Naftogaz to acquire an offshore drilling rig for $400m signed in April 2011. Highway banked at Latvia’s Trasta Komercbanka. Now the Latvian financial regulator seems to be getting in on the act. 

Meanwhile, back in Ukraine there are also signs of turbulence around Chornomornaftogaz. In July, the new energy minister, Eduard Stavitsky, appointed his own man Sergei Golovin as CEO of the offshore drilling company. In early October, Chornomornaftogaz guards locked up officers from the State Financial Inspectorate, who had arrived onsite to review past procurement at the company. The company confirmed the incident, but blamed the government inspectors for producing faulty paperwork.

Graham Stack in Kharkiv, Ukraine for Business New Europe (www.bne.eu)
November 29, 2013

Most of the headlines about Ukraine right now concern how the country is being pulled in two directions by the EU and Russia. But a reminder of how oddly Ukraine would sit in the European fold can be found in the story of the meteoric rise of one Serhiy Kurchenko.

A year ago, no one had heard of the fresh-faced 27-year-old trader of gas. Now Kurchenko is a household name, having in the space of a year acquired a big oil refinery, a major football club, industrial and financial assets, as well as the media outlets that brought him to the attention of the public in the first place. His youth, unknown origins and apparently bottomless wealth have turned him into a major newsmaker. But none of the coverage of Kurchenko’s mysterious and meteoric rise has found convincing answers to the main questions: who is Serhiy Kurchenko – the man dubbed Ukraine’s “Wizard of Gaz” – and who is behind him?

Buying the messenger

Kurchenko was first named publicly in October 2012 by Forbes Ukraine as a major player running fuel trading structures under the umbrella name of GasUkraine, which had cornered the liquid gas market in Ukraine and made rapid inroads into the far larger markets of natural gas and oil product trading. Competitors complained that customs authorities were blocking their fuel imports on the border, and state companies were also showing the company favouritism in auctions of propane.

Right from the start confusion has reigned over what companies are part of Kurchenko’s holding – and where the revenues are coming from. When Forbes Ukraine broke the story in 2012, a source provided the magazine with a list of over 50 companies comprising the GazUkraine group, none of which were owned or run by Kurchenko directly – not even the apparent flagman GazUkraine 2009, which had cornered Ukraine’s autogas (propane) market already in 2010. But a spokesman for GazUkraine denied that most of the companies on the long list were connected to GazUkraine group, which itself did not exist as a legal entity. A short-lived GazUkraine website claimed the group had existed since 2003, and aimed to become the leading fuel trading company in the country, but provided no information about the group structure.

In March this year, Kurchenko announced that his structures would be reorganised under the umbrella of VETEK Group – East European Fuel Trading Company, or SEPEK in Ukrainian. According to Kurchenko, it has annual turnover of a whopping $10bn. But again, things are as clear as mud: in fact, there are two identically named companies VETEK founded on the same date, but with different registration codes, according to the state register.

VETEK is now pulling out all the stops to disassociate the company from the GazUkraine group, despite Kurchenko being first contacted by journalists via GazUkraine. “GazUkraine is not a part of VETEK,” Kurchenko’s press service told bne in a statement. VETEK is “focused on investments into the oil and gas industry of Ukraine and Europe,” and the strategy is “to create a vertically integrated company.”

Kickoff 

In December 2012, Kurchenko bought his first assets – his hometown Kharkiv’s football team, the leading Ukrainian club Metallist. In March this year, VETEK continued the shopping spree, announcing it had bought the Odesa refinery, one of Ukraine’s largest. To date, the 27-year-old has now added the Kherson oil transshipment port, and the mid-sized Brokbiznesbank and regional Realbank.

Sceptics have pointed out that all these assets are in poor financial health. And Kurchenko’s most controversial investment has been downright value destructive: in June, Kurchenko acquired the UMH media holding that owns the Forbes Ukraine franchise, as well as another leading weekly publication, Korrespondent.

Forbes Ukraine during its brief existence had become the brightest star among Ukraine’s investigative media – and was the publication which broke the Kurchenko story in 2012. On November 13, 14 journalists including the chief editor announced their resignation due to interference in editorial policy. Ten days later, the editorial team at Korrespondent, who had published the only interview with Kurchenko to date, followed suit. The team that had investigated Kurchenko at Forbes Ukraine had already resigned immediately on the deal being announced in June, claiming they had received physical threats during their investigation of the source of the 27-year-old’s wealth and to whom does he owe it.

Kurchenko, in his only major interview to date, told journalists from Korrespondent that he was a self-made man from a poor family who had started working at the age of 16 and had never stopped. Kurchenko said he had risen from sales manager at the age of 16 in Kharkiv firm Expogaz, to become deputy director in charge of the autogas (liquid petroleum gas or propane) wholesale department by the age of 20.

He then left to set up his own business in 2005, Kaskad KSV, and started investing in real estate during the credit bubble years. “Those were years when prices on the real estate market rose 200-300% per year. Banks gave loans to everyone who asked, to completely normal people like myself, at 7-8%,” he told the weekly.

With the revenues, he launched his own gas trading business and bought out Expogaz. “Perhaps one pillar of my success comes from having worked 11 years in one and the same business,” he told Korrespondent. “Another factor has been the continued ability to source cheap credit.” The logical next step was to start importing oil products alongside autogas, which Kurchenko told Korrespondent helped his business reach an annual turnover of $200m in 2008.

bne spoke under condition of anonymity to a former manager in Kurchenko’s structures who worked with him from the beginning. The manager confirmed much of Kurchenko’s timeline while adding detail to Kurchenko’s account of the origins of the business

According to the source, Kurchenko’s deceased father played a key role in his vertical takeoff. “Serhiy’s father was a diplomat in a Ukrainian embassy in the Balkans. He would arrive once or twice a year to sign papers. He carried himself like a nobleman, smoked a pipe, walked with a stick and wore a greatcoat. He had tremendous bearing and we all bowed down before him. If he took a dislike to some one working for Serhiy, Serhiy would fire that person. His word was law.”

According to the source, despite the father’s dominance Serhiy had strained relations with him and never visited him abroad. The strain may have derived from the youngster’s failure to shine academically as a result of apparent severe dyslexia – in Ukraine an under-diagnosed condition often equated with illiteracy. “Perhaps this is why he is now buying print media,” suggests the source, who adds that perhaps to compensate for this Kurchenko has developed a phenomenal ability to win friends and influence people. “He can make friends with anyone in the space of five minutes.”

“It was Serhiy’s father who got Serhiy his job at Expogas at the age of 16, he was acquainted with the owner. Then it was his father’s connections in Russia that got the wholesale business started: he arranged privately with managers at Russia’s Tyumen Oil Company (TNK) for import to Ukraine of autogas at incredibly cheap prices. First of all the scheme was implemented through Expogaz, with whom he was on good terms. Then his father set Serhiy set up on own his own when he turned 21. We earned UAH1.2 on every litre sold.”

“Serhiy saw the chance to occupy the mid-size wholesale niche,” the source says. “We were selling to 50-60 clients, each of whom controlled 10-20 filling stations. We had the whole of the surrounding region in our hands. The whole business ran on cash, and had us shifting 50-60kg of hryvnia notes per day.”

“In 2006-2007 we started to win tenders, using traditional means. We won the contract to supply autogas to the entire city transport system for one year. That was $500,000, paid upfront. The price at which we sourced the gas was around $50,000,” according to the source. “Serhiy owned 3,000 square metres of central office space – but the rental revenues were nothing compared to what we earned on gas.”

Business became less easy after the death of a key manager in a car crash in February 2007. Then in 2008 Kurchenko was himself struck by family tragedy, when his father died in a bizarre domestic incident. “Serhiy was devastated,” bne’s source recalls.

In 2009, Kurchenko abruptly announced he was moving to Kyiv, saying he had won a large contract there – and fired almost the entire management team in Kharkiv. “The evening after I had been fired, a top official from Kharkiv’s economic crime squad came to me at home in an SUV with private registration, and warned me never to say a word to anyone about what had been going on,” the source says. “I never heard from Serhiy again until I saw him on TV in 2012 when he bought Metallist – you can imagine the shock. But I want to pay tribute to Serhiy, who is an outstanding personality and gave me the best years of my life.”

Funny money 

So what had happened in the intervening three years, between suddenly leaving Kharkiv and the triumphal return in 2012 to purchase Metallist?

Public records show that after Kurchenko’s move to Kyiv, his Kharkiv firms continued to function on paper. Indeed, they apparently snowballed, with court records showing they acquired trading relations with dozens of small firms in Kharkiv and the Crimea, none of which had any clear business profile. Hundreds of millions of dollars started to percolate through this network of companies.

In late 2011, Kurchenko’s Kharkiv firm, Kaskad KSV, achieved mention of a sort in the media. The firm was listed among 38 companies which an anonymous internet post on a smear site claimed were “officially approved” by Kharkiv tax authorities as providers of tax evasion and money-laundering services – often referred to in Ukraine as “conversion centres” of bank funds into “black cash” and vice versa, using networks of brass-plate companies and fictive supply contracts. Such “conversion” services are used by owners of private business for tax evasion, and by managers at state-owned business for embezzlement.

Kurchenko vehemently denies any links to tax evasion. “This is all exaggerated by our competitors. Their PR and legal departments invent all this, [arguing] because we have a large share of the market it means we don’t pay taxes,” he said in the interview with Korrespondent in May.

bne established that one contact number for the alleged “conversion centre” was that of Evgen Zhilin, a former officer in Ukraine’s security service and anti-organised crime squad, who spent three years in police custody in connection with high-level assassination attempts. He now runs a self-styled “fight club” in Kharkiv, and a political movement with a pro-Stalin line. Without mentioning him by name, the internet leak may have targeted Zhilin, whom other publications have linked to Kharkiv “conversion centres”.

Zhilin, who calls himself a financier, sang the praises of Kurchenko when contacted by bne. He said that Kurchenko had also started as a financier and they had previously collaborated, but Kurchenko had now moved on “to a far higher level of business than a simple businessman like myself.”

“I know for a fact that law enforcement organs here have no complaints about him, and all his financial schemes are legal,” Zhilin assured bne. Zhilin said that talk of links to “conversion centres” was simply denigration of Kurchenko by those jealous of the young man’s success and outstanding capabilities. “Serhiy has a talent for making friends and forging ties quickly.”

Other sources contradict Zhilin’s positive assessment. Ukraine’s financial regulators cracked down on “conversion centres” in 2011-2012 in an effort to shore up tax revenues and the exchange rate. This resulted in a slew of court cases relating to such centres and fictive firms, shedding light on the shadow financial economy – and suggesting Kurchenko’s links to one of the most secretive and powerful families in Kharkiv and Ukraine.

Family business

Some of the scores of court cases underscore links between Kurchenko’s Kaskad-KSV and companies on theForbes list of alleged GazUkraine companies. Others point to links between the firms from the GasUkraine list and money laundering, as well as to apparent protection by law enforcement – including cases where tax police have started investigations of these firms, only to be prosecuted themselves for exceeding their powers. One company on the Forbes GazUkraine list, TOV Business Consult, registered at the same address as GazUkraine 2020, was named in a criminal case in 2013 as laundering bribes extorted by tax police.

However, the volume of money passing through these companies far exceeded just that, rising to the tens of millions of dollars. So where has all this money been flowing from?

Apart from the motor fuel and autogas trading businesses, a major source of revenue in 2010-2012 appears to be tenders at state-owned energy company Naftogaz – Ukraine’s largest company with around $10bn annual revenues.

In total, according to the state tender database, firms listed on the Forbes list of GazUkraine companies received a whopping $220m worth of Naftogaz tender awards starting 2010. The lion’s share of these was sourced from Naftogaz’s offshore drilling subsidiary called Chornomornaftogaz. NGOs monitoring state tenders have argued that many of these tenders were rigged. Even TOV Business Consult – named as laundering bribes for tax police – was awarded $11m worth of tenders by Naftogaz.

bne has previously written how in 2011 Naftogaz purchased an offshore rig at an inflated price from a UK shell company linked to a Lugansk-based “conversion centre” that is connected to a sprawl of Lugansk-registered fictive companies, such as the breathtakingly named Lugpromstroisantekhmontazh. Further court cases resulting from the 2012 state crackdown on “black cash” point to the Lugansk cluster intersecting with the Kharkiv/Simferopol sprawl in shifting huge sums of money around, suggesting it was part of the same large operation, sapping funds from the ailing cash cow Naftogaz and other state companies.

One of Kharkiv and Ukraine’s most powerful and secretive families is the Katsubas, which could be the power behind Kurchenko. Volodymr Katsuba was head of the Dergachi district administration in 2006-2012. A close ally of the family, Vasily Salygin, former chairman of the Kharkiv regional assembly, became deputy head of the customs’ service in 2010.

Elder son Serghiy Katsuba has held top positions in procurement in Naftogaz and state nuclear power company Energoatom since 2003. From 2010-2012, Serhiy Katsuba was deputy CEO of Naftogaz, with overall responsibility for procurement. Katsuba named his younger brother, 26-year-old Oleksandr, as deputy CEO of Chornomornaftogaz, also with oversight of procurement.

In 2012, Volodymr and Serhiy Katsuba won seats in parliament. The Katsubas were contacted via their parliamentary offices, but failed to respond. In a Forbes Ukraine interview in December 2012, Serhiy Katsuba denied any existence of corruption in Naftogaz’s procurement.

Here today, here to stay? 

Kurchenko’s appearance out of nowhere to run and purportedly own a large and shadowy gas business is not a first for Ukraine – in 2006 a similarly unknown figure stepped forward out of the shadows as ostensible owner of gas trading businesses Eural Trans Gas and its successor Rosukrenergo, that sold billions of dollars worth of Turkmen gas to Ukraine via Russian pipelines. That man was Dmitro Firtash, 0f whom ten years ago no one had heard,  but who is now ranked as Ukraine’s second richest man and a household name in the country as oligarch:  owning the country’s largest TV station, most of the country’s chemical industry and most of the local gas distribution network, as well as being a key importer of gas to Ukraine.

Firtash was first named publicly in an investigation by anti-corruption NGO Global Witness. Firtash was also named as a shareholder in Cyprus company Highrock Holding?? apparently alongside the wife of Semen Mogilevich, one of the FBI’s most wanted men, allegedly an international organized crime kingpin, born in Ukraine and currently resident in Moscow.  According to leaked US diplomatic cable. Firtash acknowledged in 2009 that he had received his start in business thanks to Mogilevich, although Firtash has denied ever making such a statement.

For all that Firtash was taken to be a cipher for other powerful shadowy figures  when outed as co-owner of Rosukrenego in 2006, he is now established as one of Ukraine’s leading oligarchs and owner of Vienna-based DF Group. But Firtash has never adequately addressed the question of his origins and backers – and it did not escape public attention that 2008-9 – as Russia and Ukraine were locked in conflict over signing a gas agreement that would eradicate the role of Firtash’ intermediary – Russia placed Mogilevich under arrest.  Is Firtash the future of Kurchenko?

Graham Stack in Kyiv  for Business New Europe (www.bne.eu)
December 9, 2013

Hundreds of thousands of pro-EU protestors took to the streets again in Kyiv December 8, filling Kyiv’s central Maidan square to demand the resignation of Ukraine’s government, and erecting barricades sealing off the government district. Not only is the administration of President Viktor Yanukovych losing the battle of the streets, it is also losing the battle of the airwaves as the country’s oligarchs back the people’s protest.

Between 300,000 and 400,000 again took to the streets of Kyiv to protest against Ukraine’s failure to sign an association and free trade pact with the EU at a summit in Vilnius at the end of November, and a subsequent crackdown on protesters by riot police. RFE/RL posted some remarkable footage of the crowd taken from the top of the Christmas tree on Maidan that gives a clear idea of the scale of the gathering.

The protestors had three goals, head of opposition party Batkyvshina Arseny Yatsenyuk told bne on the eve of the demonstration, and since subscribed to by all opposition leaders: “Firstly, the liberation of the protestors who are in police custody following the bloody clearing of the Maidan square on the night of November 29. Secondly, the punishment of those responsible. Thirdly, the resignation of the current government and the appointment of a technical government.”

Not quite a million

Protest leaders had called for a “million man march” to up the ante from December 1′s protest rally that put 300,000-400,000 on the streets – one day after pictures of riot police beating pro-Europe demonstrators on the Maidan had shocked the nation.

This time round another event had alarm bells ringing: on December 6, President Viktor Yanukovych met with his Russian counterpart Vladimir Putin in Sochi to discuss possible financial help and trade relations. A blizzard of tweets by leading international supporters of Ukraine against Russia, such as The Economist’s Edward Lucas and Swedish Foreign Minister Carl Bildt, reported that Yanukovych had signed Ukraine up for the Russia-led Customs Union, a rival free trade area to the EU, in exchange for cash. Both Russia and Ukraine later denied having discussed Ukraine’s membership of the Customs Union, or to having signed any agreements.

In the event, there’s wasn’t a million, but 300,000-400,000 excited and cheerful supporters gathered on December 8, filling the Maidan and the adjoining Khreschatik high street. “We’re here to chase these people from power and win back our country for Europe,” said 19-year-old Kyiv student Oleh Chepak.

The protest leaders, keen to maintain momentum, skillfully used their strength in numbers to “extend” the Maidan camp from the central square to the neighbouring government district – erecting barricades to fully seal off all access roads to the presidential administration, parliament, central bank and government buildings. “This is a peaceful protest and we are merely picketing government buildings and creating a pedestrian zone to which everyone has access,” Yatsenyuk said following the protest.

Members of the nationalist West Ukraine-based Svoboda party toppled a statue of Vladimir Lenin, in a dramatic gesture from which protests leaders distanced themselves.

The barricades now standing round the government quarters significantly ramp up pressure on the government, says Vladimir Fesenko, director of the think-tank Penta. “This will make it almost impossible for government to go on with ‘business as usual’ and should force the opening of negotiations.”

With the protestors making the dismissal of the government a precondition for any talks, Yanukovych may now be stuck for an exit: Ukraine’s economic crisis is deepening, and dismissing the government would exacerbate the power vacuum. “Ukraine is in ongoing default,” Yatsenyuk said at the briefing.

Government and police reaction to the latest mass protests and erection of barricades was peaceful. Opposition leaders, however, report a crackdown is in the offing. “I have information from very good sources that Yanukovych is planning to introduce martial law as part of his bargain with Putin,” Yatsenyuk said on the evening of December 8. Ominously, Ukraine’s security service, the SBU, referring to the erection of barricades, confirmed it had opened a criminal investigation into “certain politicians committing illegal acts aimed at state power seizure.” US state department officials warned the Ukrainian authorities against any use of violence.

What happens next depends on who is pulling the strings in the Yanukovych camp. Head of the presidential administration Serhiy Liovochkin resigned November 30 in protest against the police violence, but Yanukovych has refused to accept the resignation and name a successor. According to Fesenko, the loyalist head of the national security council Andriy Klyuyev “seems now in charge and may be behind some of the most repressive measures.” Klyuyev has been accused of masterminding Yanukovych’s alleged ill-fated attempt to rig the 2004 presidential election, which culminated in the mass protests of the Orange Revolution. He could not be reached for comment.

EU’s foreign policy chief Cathy Ashton is set to travel to Kyiv to mediate this week, European Commission President Barroso announced December 8.

The oligarchs are revolting 

While grassroots organisations and opposition parties run the Maidan protest camp now in control of downtown Kyiv and besieging the seat of government, oligarch-controlled TV channels are endorsing the Maidan protestors in tens of millions of living rooms across the country.

Most surprising has been what media watchdog Telekritika calls an “information revolution” at Inter TV, Ukraine’s most influential broadcaster. Inter TV is owned by gas oligarch Dmitry Firtash, hitherto a Yanukovych loyalist. Illustrating the change: Inter downplayed initial pro-Europe protests on Maidan November 24, claiming only 20,000 attended while neutral observers spoke of four-times that number. On December 8 the opposite was true: Inter evening news reported a million had joined the Kyiv protest, while neutral observers estimated the number at less half that.

Inter TV has provided blanket positive prime-time coverage of the Maidan since November 30, including repeat screening of scenes of police violence and youthful blood-streaked faces from the night of November 29 – referring emotionally to the government’s “shedding the blood of Ukrainian children”. “This could not have happened without a direct order from above,” according to Telekritika’s Nikolai Kuzyakin.

Firtash himself, in his guise as head of the Ukrainian Federation of Employers (UFE), made his first statement on events December 7, in a call to prevent “the ruination of the Ukrainian economy”. According to UFE, “the high level of corruption on all levels of government, the huge administration and tax pressure on business, and a biased judiciary weakening property rights, have brought Ukraine to a critical threshold, beyond which await a drop in economic activity, catastrophic increase in unemployment and social tension.”

UFE demanded: “the liquidation of corruption, of administrative pressure, transparent taxation, a realistic state budget and support for national producers,” and for government to negotiate with the opposition, though not expressly for signing the Association Agreement with the EU.

Other TV owners, such as metals oligarch Viktor Pinchuk and banking oligarch Ihor Kolomoisky, traditionally less aligned with Yanuovych than Firtash, are also providing generous TV coverage of the Maidan, and leaning on Yanukovych to sign the Association Agreement. One opposition leader, former economy minister Petro Poroschenko, is himself a TV magnate, with his Fifth Channel providing rolling coverage of protests. Even a channel owned by Yanukovych’s closest ally, Ukraine’s richest man Rinat Akhmetov, has been providing balanced coverage, according to Telekritika: Akhmetov’s Systems Capital Management group, which has one of Ukraine’s slickest PR operations and is gearing up for a billion-dollar IPO on Western capital markets, also released a neutral statement on December 3 calling for “mutually acceptable solutions” to be found.

Opposition leader, and head of UDAR party, Vitaly Klitschko, told bne that there are no specific talks going on between the opposition and oligarchs. “Firtash, Kolomoisky, Pinchuk – I communicate with all of them and they are all interested in clear and transparent rules of the game, so that when times change they are not dependent on who comes to power next,” Klitschko said.

Graham Stack in Kyiv  for bne (Business New Europe)
December 16, 2013

As mass anti-government and pro-EU protests move into their third week in Ukraine, vox pop and opinion polls show the continued high motivation of protestors, but also the stubborn resistance of the east-west geographical fault line that shapes Ukrainian politics.

December 15 saw another large crowd take to the central square in Kyiv, Maidan Nezalezhnosti (Independence Square), to protest against the government’s failure to sign an association and free trade pact with the EU in November and the subsequent police violence against demonstrators. The numbers of participants, in what has become known as Euromaidan, was off off the previous weeks’ turnouts of over 300,000, but clearly surpassed the psychologically significant 100,000 mark.

The protest came as President Viktor Yanukovych prepares to fly to Moscow for meetings with his Russian counterpart Vladimir Putin on December 17. The opposition protesting on the Maidan fear that Yanukovych is preparing to take the country into the Russia-led Customs Union in return for urgently needed financial aid – trade concessions that may prevent Ukraine from signing a deal for closer ties with the EU.

Voices of Euromaidan

“We want to join the European Union, but politicians are taking us back to the Soviet Union in the form of the Customs Union. The politicians are ignoring the people and only interested in personal enrichment,” says Igor Potichny, 55, owner of an interior decoration firm in Kyiv, explaining his participation in the Euromaidan. According to Potichny, everyday corruption has got significantly worse under Yanukovych, especially tax inspections, and he wants to see early parliamentary elections.

32-year-old car mechanic Vasil Medvedev travelled to Kyiv from West Ukraine’s Ivano-Frankivsk to take part in the meeting for personal motives: “I usually have nothing to do with politics, but my friends were among those beaten by the Berkut (riot police) November 29 and I want punishment for those who gave the order.”

37-year-old Oleh Komoyansky is one of a group of ten who have travelled to the capital from West Ukrainian Ternopol to attend the protest, hoping to force the government’s resignation. A shopkeeper, he is bitter about the increasing taxes he is being forced to pay as part of the new tax code introduced by the government. “Like everyone here, I am against Yanukovych and for signing the EU agreement – in that order,” he says.

40-year-old filmmaker Ruslan Ponochevny from Kyiv is likewise against corruption and police violence. “At the moment it is impossible to do anything without paying bribes,” he tells bne. “We need to restructure the whole system from the bottom up, but this will be a very long and arduous process.” Ponochevny is one of the few who expresses a clear political preference for one of the leaders of the opposition, Vitaly Klitschko, the former boxing champ and leader of the UDAR Party. “Because he is from Kyiv,” he says.

These views reflect the majority of protestors, according to opinion polls. The Kyiv International Institute of Sociology (KIIS) questioned over 1,000 participants on the Maidan on December 7-10, and found 70% of those present said they were there because of the violence against demonstrators on the night of November 29, 53.5% because of Yanuovych’s failure to sign the EU deal, and 50% because they want to change life in Ukraine. 71% listed signing the Association Agreement as their main goal.

Profiling the hundreds of thousands of protestors shows that 64% have higher education, just under 55% speak exclusively Ukrainian at home, and roughly half are from Kyiv or from the regions respectively.

Most worryingly for the government, 72% of protestors said they would stay on the Maidan for as long as it takes to achieve their goal. “We will keep coming back here until this band of bandits have lost their grip on power,” Ponochevny insists to bne.

Land of two halves

A rival pro-government rally held in Kyiv nearby to Euromaidan on December 15 only underscored what makes Maidan so special: the “Anti-Maidan” fielded apolitical young men in track suits bussed in apparently mostly from East Ukraine, with widespread reports that participants were paid to attend and handed hymn sheets of unconvincing pro-Yanukovych chants. The contrast between Euromaidan and Antimaidan seems to encapsulate everything positive about the pro-EU movement and everything negative about its opponents.

But whatever the aesthetics, poll data shows that the east-west divide in Ukraine is holding strong, giving Yanukovych more freedom of maneuver than the Euromaidan demonstrations would suggest. According to the reputable pollsters Research & Branding, while 46% of Ukrainians support signing the EU Association Agreement, a decent 36% support joining the rival Customs Union that comprises Russia, Kazakhstan and Belarus, with 19% sitting on the fence. The poll questioned over 2,000 respondents on December 4-9.

According to the same poll, 48% believe Yanukovych had grounds not to sign the agreement, with 35% holding the opposite view. Only 30% believe the Association Agreement will be beneficial for Ukraine, while 39% believe the opposite. “Though more people think the Association Agreement was not in Ukraine’s interest, more people want to join the EU than Customs Union,” says Nicu Popescu of the European Institute for Security Studies.

Opinions are largely determined by the map, according to the pollsters: 82% in West Ukraine and 56% in central Ukraine are in favour of signing the agreement, but only 18% in East Ukraine, the heartland of President Yanuovych. In East Ukraine, on the other hand, 61% support joining the Customs Union, 54% in South Ukraine, but only 7% in West Ukraine.

No significant Euromaidan demonstrations have been held in Ukrainian provincial cities apart from Lviv, with a crowd of 3,000 in Dnipropetrovsk December 15 coming a poor third. Given the West Ukraine contribution to the crowds in Kyiv, estimated at around 50%, this again points to the dividing line. “I am against joining the EU and in favour of the Customs Union, because in this part of Ukraine all our historical and economic ties are with Russia,” 28-year-old doctor Svetlana Kuznetsova from East Ukraine’s Lugansk tells bne.

There is no polling data in yet on how Yanukovych and his Party of Regions’ rating has fared since the start of the Maidan protests on December 1. Polls for November conducted by KIIS showed that Yanukovych and Vitaly Klitchko were head to head as presidential candidates. Yanuovych’s December PR disaster combined with Klitchko’s strong showing on the Maidan may now have tipped scales in the latter’s favour.

Exit polls for by-elections in the swing region of central Ukraine on December 15 point to a major shift towards the opposition. Exit polls showed that no pro-Party of Regions candidate is likely to take a seat. The five seats were all ruled too close to call in general elections in November 2012. They could yet prove crucial to the opposition, should the Communist Party parliamentary group defect from its current coalition with the Party of Regions, according to pundits.

But while the middle ground may be shifting towards the opposition, this may shore up the divide between the hard-core, geographically-rooted opposite camps, risking a further fracturing of the country. As one riot police commander put it in an exchange with star boxer Vladimir Klitschko, younger brother of UDAR leader Vitaly, during a standoff at barricades on December 9: “The difference between now and during the Orange Revolution [of 2004] is that back then everyone was supporting the protestors, but now the land is divided – and this is what makes the situation so dangerous.”

Ukraine’s new authorities are moving against alleged massive corruption at state energy company Naftogaz carried out during the presidency of Viktor Yanukovych. bne’s own investigations have traced nearly $50m in suspicious payments by Naftogaz made to a one-man ship repair business in Istanbul, Turkey.

Traditionally every change of power in Ukraine leads to the swift arrest of the incumbent management of state energy company Naftogaz – and 2014 and the fall of the Yankovych regime is no exception. On March 21, masked and heavily armed special police swooped on Naftogaz headquarters and marched out long-serving CEO Yevhen Bakulin, whom acting Interior Minister Arsen Avakov accused of complicity in the theft of over $4bn from the company.

On the same day as Bakulin’s arrest, a long way from Kyiv in the Pendik port area of Istanbul, Murat Bayrak looks nervous and knocks his fork onto the floor when he hears of the arrest. Bayrak runs a small portside ship-engine repair outfit called Emarine. He says he has spent the day up to his elbows in oil on an engine repair operation, and displays photos on his smartphone of the rusty “patient”. But in the evening, he shows himself to be a convivial 30s-something with perfect English.

Murat does not hide his surprise to have a British business visitor. “I only have had the website up since 2013 and you are the first person to have contacted me via it,” he says over dinner at a quayside fish restaurant. “You are also probably the first person to have ever simply come by my office without an appointment,” he adds, which is unsurprising given that a local taxi driver had difficulty locating the small premises, that lack of a nameplate on the intercom, let alone a sign. “It is a small company,” acknowledges Murat. “For instance, I don’t have my own workshop.”

Emarine’s share capital totals just over $30,000, and Bayrak’s is the only name and face featured on the Emarine website. But over a six-month period in late 2012 and early 2013, Emarine hit boom time – $46.5m was paid to its Turkish account in multiple instalments by a UK company called Northsale Logistics from a Latvian bank account, according to extracts from the accounts seen by bne.

Northsale was a subsidiary of Latvia’s Riga Shipyard, and the $46.5m paid to Bayrak came out of $400m paid by Ukraine’s Naftogaz to Riga Shipyard for supply of an offshore drilling platform. Given Emarine’s tiny size, the $46.5m that flowed to Bayrak, out of the $400m paid by Naftogaz to Riga Shipyards, looks suspiciously like part of the $4bn allegedly siphoned from Naftogaz during the presidency of Viktor Yankovych 2010-2014.

Rigged in Riga

Riga Shipyard used Northsale – a company set up only in 2011 – to handle the controversial $400m deal that saw it supply Ukraine’s Naftogaz with a semi-submersible offshore drilling platform. The deal was controversial because Riga Shipyard had acquired the newly built B319 rig from Norwegian leasing company Standard Drilling for only $220m weeks earlier. Riga Shipyard played no further significant role except as intermediary; the company claims it made only around €5m on the deal.

Even allowing for cost of transport from Singapore to Ukraine, engineering work needed to transit the Bosphorus and extras such as a helicopter, the $180m discrepancy in prices was so enormous as to raise more than just eyebrows. Given the reputation of Naftogaz as one of the world’s most corrupt companies, the smell of dodgy dealing was strong. But apparently all of officialdom in Latvia was holding its nose – the signing ceremony in Ukraine was even attended by the then Latvian economy minister, who later told bne he hoped the deal would boost Latvia’s economy.

In fact the opposite has happened. Riga Shipyard, one of Latvia’s largest companies with workforce of around 600, may be nearing bankruptcy and is rapidly turning into a political hot potato. Former member of the management board Igor Komarov was quoted by local press in early March as saying there remained just “three to six months” until the shipyard went bankrupt. Riga Shipyard dismissed these comments and other reports as “informational attacks with the purpose to discredit the oldest company in the country.”

Riga Shipyard has also consistently denied any wrongdoing in connection with the Naftogaz deal, referring to the fact that in Ukraine no enforcement action has been taken over it. “The authors of this wrong information are fulfilling someone’s order,” says the company.

Straitened circumstances

Bayrak says he received the funds for work he had performed “according to his business profile,” but says he cannot speak about the contract due to confidentiality clauses. Bayrak denies that there was anything improper about his receipt of $46.5m and says his company has been independently audited with no questions from Turkish authorities. He hints that he may have forwarded the funds to unspecified “subcontractors”.

The logic of using a Turkish company for the siphoning of funds from Naftogaz’s deal with Riga Shipyards appears simple – the rig transited the Bosphorus on its way to Crimea, involving extensive transport and engineering work, which were used to justify the payments to Emarine. The Northsale accounts also show smaller direct payments being made to genuine suppliers such as Singapore’s Keppel Fels, which supervised the Bosphorus transit.

Some details suggest the firm may have been primed to transit funds. Although Bayrak founded the company in 2008, it was only in 2013 that he launched the amateurish website – perhaps to satisfy cursory anti-money laundering checks. Since November 2011, Bayrak is no longer Emarine’s owner or manager on paper, with some partners taking over those roles, although he left no doubt in the interview that Emarine is his company.

Bayrak says his career got off to a promising start, heading the diesel engine sales division in Turkey of German engineering giant MAN, while studying for an MBA. But after a dispute over allegedly misappropriated money, he left the company in 2008. “It was impossible for me to work in a Turkish company after this, and so I had no choice but to start my own business,” he explains. Bayrak declined to say where his contacts to Riga Shipyard come from.

Loss of “Independence”

Naftogaz renamed the B319 rig “Independence” upon its entering service at its offshore drilling unit, the Crimean-based Chornomornaftogaz. The name Independence referred to the high hopes placed on the rig, and a sister rig B312 purchased earlier, which centred on reducing Ukraine’s dependence on Russian gas by exploiting domestic reserves in the Black Sea.

But since Russia’s blitzkrieg annexation of Crimea, Chornomornaftogaz and its new drilling platforms have been “nationalised” by the secessionist Crimean government, and in a bitterly ironic twist of fate are now under Russian control.

On March 23, Ukraine’s energy minister from 2010-2012, Yury Boiko, said on television that any corruption schemes at Naftogaz had cost the country “100 times less than the loss of Crimea”. Boiko – widely regarded as the mastermind behind the Naftogaz schemes – blamed the loss of Crimea on the Maidan anti-corruption protests that ousted president Yanukovych in February and on Ukraine’s new government that came to power on an anti-graft ticket.

But in fact there is a close link between corruption under Yanukovych and the loss of Crimea: at the time of Yanuovych’s fall, Crimea was run by his cronies, implicated in endemic corruption and badly exposed by their boss’ sudden departure. Russia offered Crimea’s elite security and the retention of their assets, in return for handing over control of the peninsula without a shot being fired. They gladly took up the offer, proving that while the price of liberty may be eternal vigilance, the price of corruption is loss of independence.