NEWS ANALYSIS: Gas, corruption and lack of political will in Ukraine (05/14/06)

NEWS ANALYSIS: Gas, corruption and lack of political will in Ukraine

by Taras Kuzio

The Ukrainian owners of the shady RosUkrEnergo (RUE) gas intermediary, established to supply Turkmen gas to Ukraine and Europe, have been outed. Izvestia revealed the two Ukrainian shareholders to be Dmytro Firtash and Ivan Fursin who control 40 and 10 percent, respectively, of RosUkrEnergo. Their shares are held through Centragas Holding and administered by the Austrian Raiffeisen bank. Gazprom's 50 percent share is held through Arosgas. Centragas and Arosgas are both registered in Austria.

RUE was established in July 2004, replacing Eural-Trans Gas (ETG), which had operated in 2003-2004. ETG itself had succeeded Itera, which had operated during most of the 1990s.

On April 26 the Russian newspaper Izvestia cited an audit by KPMG on RUE. KPMG has resigned from this contract because it feared its reputation would be besmirched and has been replaced by PricewaterhouseCoopers as RUE's auditors.

The timing of the Izvestia leak was no coincidence and neither was the choice of the newspaper. Izvestia is owned by Gazprom, the owner of half of the shares of RUE. The leak came days after the U.S. Justice Department revealed it was investigating links between RUE and organized crime. The Izvestia leak was coordinated between Gazprom and Mr. Firtash going public to the Financial Times and the Wall Street Journal.

The leak was also meant to deflect attention from the July summit of the G-8 in St. Petersburg, which Russia wishes to use, ironically, to focus on "energy security." The Izvestia article was followed by the release of a lengthy report by the British-based Global Witness investigative think-tank "It's a Gas. Funny Business in the Turkmen-Ukraine Gas Trade" (http://www.globalwitness.org/reports/show.php/en.00088.html)

So, who knew what?

Both Gazprom and the Ukrainian authorities had long claimed that they did not know the identities of the Ukrainian shareholders of 50 percent of RUE. Gazprom clearly was playing a game of deception as RUE had been established, like its predecessor ETG, with the personal support of Russian President Vladimir Putin and then Ukrainian President Leonid Kuchma. RUE was established in July 2004 and, therefore, then Prime Minister Viktor Yanukovych also would have been aware of all of the inside details of RUE.

At a March 1 press conference, President Viktor Yushchenko said he had still not received information about the owners of RUE, and then claimed surprise at the two names leaked by Izvestia. This is curious, as on January 31 Ukraine's Anti-Monopoly Committee announced that RUE had provided the government with the information about its owners. But, the Anti-Monopoly Committee claimed it could not reveal this information as it was "confidential."

On February 1 President Yushchenko said that, based on information supplied to him by the Anti-Monopoly Committee and the Security Service of Ukraine, "there is no Ukrainian structure behind the enterprise." In order to state this, President Yushchenko must have been aware who the real owners of RUE were, even though he denied this a month later.

The Ukrainian authorities could have demanded to know the identities of the Ukrainian shareholders at the early January gas talks, but either did not or knew the names but claimed otherwise. It seems highly likely that former presidential aide Oleksander Tretiakov knew the two Ukrainians involved in RUE. Ukrainian negotiators could not fail not to notice Mr. Firtash's and Ihor Voronin's involvement in the January gas deal when Mr. Voronin was instrumental in drawing up the charter.

Since the January gas deal Ukrainian authorities have been either disinclined to find out who they are, lest the names reveal continued tolerance of corruption and non-transparency in Ukraine's energy sector, or have known but have refused to reveal them. Herbert Stepic, head of Raiffeisen International, a subsidiary of Raiffeisen Bank, said on April 24 that the Ukrainian and Russian governments "have always known who the owners are of RUE." Why, then, the surprise when Izvestia outed the two Ukrainian businessmen behind RUE?

Old regime's continued stake

During the Kuchma era, ETG was run by President Kuchma's first adviser in the presidential administration, Serhii Levochkin. Mr. Levochkin and Mr. Fursin, one of two RUE Ukrainian shareholders, were both in Volodymyr Lytvyn's election bloc, which failed to enter Parliament in the March elections. Mr. Lytvyn had been head of the presidential administration until becoming Verkhovna Rada chairman in 2004.

According to an Ukrayinska Pravda investigation, a proportion of Mr. Fursin's 10 percent share of RosUkrEnergo accrues to former President Kuchma. Widespread suspicion points to Mr. Kuchma being given immunity during roundtable negotiations in December 2004, possibly at the insistence of European Union negotiators. During theYushchenko presidency Mr. Kuchma has not been questioned for abuse of office, the murder of journalist Heorhii Gongadze or election fraud in 2004.

Mr. Kuchma's immunity also came with a large unofficial "pension" from RosUkrEnergo. It is bad enough that Mr. Kuchma is able to freely comment on Ukrainian events to the media; but it is even stranger that this unofficial pension from RUE has been allowed to be paid to Mr. Kuchma during Mr. Yushchenko's presidency. Boris Yeltsin (or former U.S. presidents) do not comment on contemporary politics to the Russian or U.S. media, unlike Mr. Kuchma.

According to investigative journalists at Ukrayinska Pravda and the Global Witness report, Mr. Firtash is the link between RUE and the former ETG. Mr. Firtash's main business offices (High Rock Holdings) are in Moscow and Nicosia, meaning most of Ukraine's 50 percent share of RosUkrEnergo is run by a businessman from Moscow, not from Ukraine.

These links to Russia go further. His business partner, according to Ukrayinska Pravda, is another Ukrainian businessman, Mr. Voronin, who played a key role in the January gas agreement. Mr. Voronin, according to this same report, has ties to the Russian domestic intelligence service FSB and was the go-between in the Kuchma era between Russia and Ukraine in energy talks.

Mr. Voronin, one of the founders of RUE, was removed as deputy head of Naftohaz Ukrainy by the Yulia Tymoshenko government. After the dismissal of that government, Mr. Voronin was reinstated with the support of Mr. Tretiakov, a longtime friend. According to the weekly Zerkalo Nedeli, Mr. Voronin was named on February 3 as acting head of the newly established UkrGazEnergo, a joint venture between RUE and Naftohaz Ukrainy.

Roman Kupchinsky, a regional analyst at Radio Free Europe/Radio Liberty, said that Messrs. Firtash and Fusin are "only the firewall between the big guys, the real beneficiaries." Who, then, are they the "firewall" for?

In the Wall Street Journal, Mr. Firtash admitted that a company he had once controlled had as a shareholder Simon Mogilevich's wife, whose shares he took over after he found this out. Mr. Mogilevich is an organized crime fugitive from the FBI living in Moscow, where he has official protection.

Speaking in London, Mr. Firtash further admitted that, "I have met Mogilevich a few times. But I have never been in any partnership with him and have never done any business with him." Mr. Mogilevich's lawyer, Ze'ev Gordon, and Raiffeisen's Wolfgang Putschek, both denied any links between Messrs. Firtash and Mogilevich.

Nevertheless, suspicions continue to linger as to who Messrs. Firtash and Fursin are the "firewall" for.

Loyalty preferable to competence?

Besides non-transparency and the continuation of old schemes, there are additional problems in Ukraine's energy sector. President Yushchenko has refused to fire the incompetent head of Naftohaz Ukrainy, Oleksii Ivchenko, after a recent scandal surrounding the purchase of a $220,000 (U.S.) Mercedes company car from a dealership owned by a family relative. At the time, Naftohaz Ukrainy was posting a huge loss of close to $700 million (U.S.). Naftohaz Ukrainy is a state-owned company and, therefore, the Mercedes was purchased with Ukrainian taxpayers' money.

Mr. Ivchenko made the company car scandal worse by ridiculing it as an issue, claiming he had changed his luxury car each year since 1992. Mr. Ivchenko had inherited a one-year-old Mercedes from his predecessor, Yurii Boiko, but this evidently had been insufficiently luxurious for him.

The reason President Yushchenko has refused to heed the public call to remove Mr. Ivchenko can only be because loyalty trumps competence, just as in the Kuchma era. Mr. Ivchenko heads the marginal Congress of Ukrainian Nationalists (CUN), one of five political parties that comprise President Yushchenko's Our Ukraine bloc.

Mr. Ivchenko took over CUN after Slava Stetsko, who had run both CUN and the Organization of Ukrainian Nationalists (Bandera faction) OUN(B) since moving to Ukraine in 1992, died in 2000. After her death, the relationship between CUN and OUN(B) became unclear as CUN was taken over by Naftohaz Ukrainy's Mr. Ivchenko and OUN(B) by diasporan Andrei Haydamakha.

The inclusion of CUN inside the Our Ukraine bloc did not provide it with additional votes in the March elections. If anything, it took votes away from Our Ukraine in Russian-speaking eastern Ukraine.

A similar scandal in a Western democracy would have led to the firing of Mr. Ivchenko; Mr. Yushchenko merely demanded that the Mercedes be sold. Mr. Ivchenko is not only accused of incompetence and corruption, but could be charged with "abuse of authority and his official position." This is due to Mr. Ivchenko's gross mishandling of Naftohaz Ukrainy, according to the May 5 issue of Kievskii Telegraf, a newspaper owned by Yushchenko ally Andrei Derkach, who was elected to the Rada on the Socialist Party list.

Mr. Yushchenko has chosen to defend those loyal to him, such as Mr. Ivchenko, rather than act as a Western leader would by upholding morality and battling corruption. The case resembles that of former Justice Minister Roman Zvarych, who was caught being very economical with the truth about his non-existent Columbia University degrees, and Petro Poroshenko, a business supporter of Mr. Yushchenko who was accused of corruption by the former head of his secretariat, Oleksander Zinchenko. Instead of removing Messrs. Zvarych, Poroshenko and Ivchenko from the public limelight, all three became part of the public face of Our Ukraine during the March elections. Is it surprising that Our Ukraine came in third with only 14 percent - 10 percent less than it received under the Kuchma regime during the 2002 elections?

Lack of political will

President Yushchenko expressed surprise at the Izvestia article and asked to see a copy of the KPMG audit. Yet, it is unclear why Mr. Yushchenko expressed surprise, as he has consistently defended the inclusion of the non-transparent RUE in the January Russian-Ukrainian gas agreement.

The BBC's "Hardtalk" presenter said to Mr. Yushchenko's chief of staff, Oleh Rybachuk, on May 2 that "it beggared belief" how Ukraine could sign an agreement with RUE if it did not, as Mr. Rybachuk claimed, know the names of the Ukrainian side (http://news.bbc.co.uk /1/hi/programs/hardtalk/4965486.stm?) In other countries such an agreement would be seen as non-transparent and a threat to a country's national security.

Why should one side be controlled by the Russian state (through Gazprom) on the one hand, while two Ukrainian medium-sized businessmen are permitted to control the Ukrainian side, rather than the state-owned Naftohaz Ukrainy. The Ukrainian side has claimed that Russia forced RUE upon it, while the Russian side has said Ukrainians proposed RUE. Perhaps both sides wanted to continue to include RUE, and thereby continue the same energy system that was in place under President Kuchma.

Businessmen and the Orange Revolution

Mr. Firtash, like many Ukrainian businessmen in 2004, supported both Messrs. Yanukovych and Yushchenko to ensure they came out on top whoever succeeded Mr. Kuchma as president. Zerkalo Nedeli claimed that Mr. Firtash contributed to Mr. Yushchenko's 2004 election campaign.

These early ties to Mr. Yushchenko were pointed to in a Svoboda newspaper article based on a tape recording of Mr. Firtash allegedly chartering a plane for First Lady Kateryna Yushchenko's Ukrainian American family to attend Mr. Yushchenko's January 23, 2005, inauguration. The flight was arranged by Mr. Tretiakov, an old acquaintance of Mr. Firtash, and the alleged $270,000 cost was paid by Mr. Firtash.

Alleged links between Mr. Firtash and Mr. Yushchenko, according to insiders, are creating nervous panic inside the presidential secretariat. If Ukraine annuls the gas deal, as would be the case with a Tymoshenko government, would Russia release further details of Mr. Firtash's relationship to the Yushchenko administration? The Izvestia article was an attempt to besmirch President Yushchenko by claiming corruption was on the Ukrainian side of RUE.

Yushchenko's credibility on the line

Many Ukrainian analysts, and increasingly Western governments, are dismayed by the lack of political will on the part of President Yushchenko to clean up the energy sector as part of his promise to combat corruption. Mr. Kupchinsky believes that, "Nobody in Ukraine today, with the possible exception of Yulia Tymoshenko, is interested in rocking the energy boat because of the amount of dirty money involved." This is ultimately ironic because Ms. Tymoshenko has a less than good reputation in Washington as a "populist" and promoter of state capitalism, rather than market reform.

President Yushchenko has been reluctant to agree to Ms. Tymoshenko as prime minister in an Orange parliamentary coalition, despite the fact that her bloc won 8 percent more votes than Our Ukraine. This is not due just to personal animosities between President and Mrs. Yushchenko and Ms. Tymoshenko. Mr. Yushchenko's reluctance could be due also to his fear that Ms. Tymoshenko has the political will that he has failed to muster - namely, to root out corruption in the energy sector and abandon any gas deal involving RUE.

Mr. Kupchinsky explains this lack of political will because, "Yushchenko has been scared of touching the energy sector, fearing that if he moved to clean it up, the Russians, who are running most of the corrupt schemes, will create a great deal of mischief - which, as we know, they are perfectly able and willing to do - in order to keep the dirty money flowing."

During Ms. Tymoshenko's short-lived 2005 government her close aide Oleksander Turchynov headed the Security Service of Ukraine (SBU), which had been poised to arrest Mr. Voronin and the former head of Naftohaz Ukrainy, Mr. Boiko, both of whom were involved in setting up RUE with Presidents Putin and Kuchma in July 2004. The arrests were halted by a telephone call from Mr. Yushchenko's first aide, Mr. Tretiakov.

Mr. Boiko, who heads the marginal Republican Party, which was allied with Viktor Medvedchuk's Social Democratic Party - United in the 2006 elections in the Ne Tak! (Not So) bloc. One major aspect of their election campaign was to oppose Ukraine's membership in NATO. Ne Tak failed to enter the Parliament.

President Yushchenko is committed to taking Ukraine into NATO and the EU, goals that require continued domestic reforms and battling corruption. The most corrupt sector of the economy is energy, an area that Mr. Yushchenko ironically, has been, unwilling to touch. We can only reach the conclusion that Mr. Yushchenko has not found the political will to reform the energy sector and has left in place the same corrupt schemes that existed under Mr. Kuchma.

The only Ukrainian politician willing to tackle this problem is Ms. Tymoshenko, just as in the Yushchenko government in 2000 when she, as first vice prime minister, cleaned up energy scams that brought in billions of dollars into the Ukrainian budget. Perhaps it is time for the West to re-evaluate its views about Ms. Tymoshenko and for President Yushchenko to act as a statesman by accepting that she has the moral right to head the government.

Dr. Taras Kuzio is visiting professor at the Institute for European, Russian and Eurasian Studies, Elliott School of International Affairs, George Washington University.

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