Corruption stains Ukraine's oil and grain businesses

By bne IntelliNews February 24, 2011

Graham Stack in Kyiv -

Since August 2010, two key Ukrainian businesses, grain export and oil refining, have been hit by parallel billion-dollar scandals: unknown companies with unknown owners that gain from administrative levers to make big money.

One of those involves state grain trader Khlib Investbud and its new manager. When squeaky clean 36-year-old democrat Arsenyi Yatsenyuk in 2009 set up his "Front of Change" movement, he called it an attempt to create a new political generation, untainted by the corruption of their elders. And he was gladdened by the response in the Western Ukrainian region of Carpathia: a group of young entrepreneurs, headed by a 33-year-old, clean-cut businessman called Robert Brovdy, wrote to Yatsenyuk offering their services. Yatsenyuk liked Brovdy so much that he made him head of his party organisation in Carpathia, and at regional elections in October last year, Brovdy headed the regional "Front of Change" electoral list.

But the party now has little else good to say of him: "Brovdy quit both his position and also party membership immediately after the regional elections, after we unsuccessfully held talks with him regarding his new job [with grain trader Khlib Investbud]. Unfortunately, there is no way to recall his mandate as a regional deputy," the party's press service tells bne.

Brovdy is not looking back. Despite having next-to-no experience in the sector, his new job is as head of state-controlled grain trader Khlib InvestBud. And just like Brovdy, the company has popped up from obscurity to take on a prominent role without losing any of the opacity surrounding its operations. Now company and chief are attracting the combined hostility of international grain traders and international lenders for its controversial and surging role in Ukraine's billion-dollar grain exports.

Analysts say it is only one of a number of cases in Ukraine featuring an alliance between dirigiste economic policies and private bureaucratic interests that point to corruption flourishing under the new administration of President Viktor Yanukovych.

State help

The government's introduction of quotas on grain export in October caused howls of outrage from Ukraine's mostly international grain traders, who over the last 20 years have pushed the country into the global top 10 of grain exporting countries. The results of the quota tenders then caused stunned silence: the unknown state-controlled company headed by the unknown youngster with no background in the business had snatched away the lion's share of quotas, some 750,000 tonnes out of 4.2m tonnes on offer, leaving global giants such as Cargill and Toepfer out in the cold.

Moreover, the newcomer was also awarded 1.55m tones of grain to be exported according to governmental agreements with neighbouring countries. According to Brovdy, it will cost around $500m to purchase this volume of grain from producers, and the total export volume will catapult the company into the top five of Ukrainian grain exporters in the first season of activity.

The last straw for the disadvantaged established exporters came when Agriculture Minister Mykola Prisyazhnyuk confirmed publicly in January that 39% of Khlib Investbud is owned by private investors. Prisyazhnyuk refused to name them.

The stand-off came to a head at a roundtable on January 27 attended by the agriculture minister, the European Bank for Reconstruction and Development (EBRD), the World Bank and International Monetary Fund (IMF), grain traders, as well as lobby associations. The EBRD and grain traders are the main foreign investors in Ukraine's agriculture sector, with the EBRD in January lending $25m to listed producer Mryia. The IMF and World Bank are Ukraine's main international creditors following the ruinous global economic crisis. The result of the roundtable was a memorandum signed by all parties wherein they committed themselves "to ensure the development of free competition in the grain sector." The EBRD also undertook to work closely, "and where necessary coordinate actions", with the IMF and World Bank.

According to participants at the meeting that bne has spoken to, the memorandum was in fact more of a six-week deadline for the Ukrainian government to show signs of reducing interventionist policies in the agricultural sector, otherwise further investment plans could be put on hold. Participants also noted that Agriculture Minister Prizyazhnyuk cut off the discussion as soon as mention was made of the unknown private investors in Khlib Investbud.

Brovdy himself is playing it cool. "There has been a campaign in the media to spread harmful myths about the company," he tells bne. "All the information the public needs is fully available on our website."

But the company website itself encapsulates the strangeness of the company: it is a "DIY" website at the blogging domain. Moreover, the site was initially registered as (dyvan means sofa in Ukrainian), an indication the site was originally intended for Brovdy's shadowy previous business as Uzhgorod furniture importer, positioned strategically close to the EU border.

Despite his entrepreneurial image, few believe Brovdy is a self-made man who's propelled himself into the big time in Kyiv. He has acknowledged publicly that Andrei Strizhak, son of the former head of the Constitutional Court and also a citizen of Uzhgorod, is a close friend. Strizhak Jnr. has done nothing more noticeable than writing off a Lamborgini on the outskirts of Uzhgorod in 2009, but the Strizhaks are linked to Minister of Emergencies Viktor Baloha, the grey cardinal of West Ukraine. Baloha was also Yatsenyuk's boss for a time as former president Viktor Yushchenko's chief of staff 2006-2008 - then he opportunistically switched sides in 2010 to serve as emergencies minister under Yushchenko's nemesis and successor Yanukovych.

Black hole for oil

In the same month, August, that the strangeness with Khlib InvestBud was starting, something just as strange was happening in the oil refining sector.

A Polish-Ukrainian joint venture started exploiting a tax loophole to import oil products free of import duty, excise and VAT. The scam derived from a 1992 law that gave 10 years of tax exemption to foreign investors. But tiny Poltava-registered Livela - owned by Polish-Ukrainian joint venture Taistra - inexplicably won a decision to have the tax benefits extended indefinitely specifically for its case. It was a local court in Kremenchug, Poltava, that found in favour of Livela, and Kremenchug is home to one of Ukraine's largest oil refineries, controlled by the Privat Group of companies, controlled by the Ukrainian businessmen Henadiy Boholyubov, Oleksiy Martynov, and Ihor Kolomoyskyi.

According to the Poltava regional anti-monopoly committee, by the end of 2010 the Livela loophole had cost the state around $330m. Livela imported a total of 1.55m tonnes of oil and oil products, of which 400,000 tonnes was oil from Azerbaijan supplied directly to the Kremenchug refinery. By November, Livela had accounted for an incredible 80% of all refined oil products imported to Ukraine, and 30% of the total Ukrainian oil product market. Swamped by the cheap imported petrol, Lukoil's Odesa refinery stopped production in October, with TNK-BP's Lisichansk refinery also slashing production. Only the Ukrtatnafta group controlled by Privat and including the Kremenchug refinery kept working. According to the customs authorities, the refinery even developed a scheme for the re-import of their own refined oil using Livela - with oil tankers loaded and unloaded in port - thus avoiding excise tax.

Investigative journalists have tentatively pointed to a parliamentary deputy Viktor Zubik as alleged final beneficiary of Livella and Polish-Ukrainian Taistra. Zubik was originally elected to Ukraine's parliament on a Bloc Yulia Tymoshenko (BYuT) ticket, but since switched to join the governing Party of Regions. Zubik acknowledges previous involvement in oil trading, but denies any connection to Livela. There has also been speculation about the involvement of Deputy PM Andriy Klyuev in connection with the scandal.

In November, President Viktor Yanukovych asked the anti-monopoly authorities to investigate the situation, a notably roundabout way of tackling the problem. Livela's imports then paused in December. But breathtakingly on December 28, Ukraine's highest commercial court ruled in favour of the company's tax exemption in a decision that cannot be appealed. Coincidentally, in December Transparency International also found Ukraine's court system to be rated as the most corrupt in the world.

Now Ukraine's refineries and petrol importers are waiting to see if Livela will return to life. "Is the court decision an insurance policy for their former deeds, or is it the start of a new spiral of activity?" asks Serhiy Kuyun, director of consulting agency A-95. "Many believe that a court decision of such a high level in Ukraine constitutes a serious investment - and one that will be made to pay off."

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