'Team Georgia' graftbusters open container of worms in Odesa clean-up

By bne IntelliNews September 21, 2015

Graham Stack in Odesa -


Odesa region governor Mikheil Saakashvili wants to crack down on corruption and the shadow economy in Odesa's ports, and with the appointment to the post of regional prosecutor of Davit Sakvarelidze he now has the power to do this. 

After intense lobbying in Kyiv, the former Georgian president got what he wanted on September 16: the appointment of one of his closest associates, former Georgian deputy prosecutor general, Davit Sakvarelidze, to the post of head regional prosecutor for Odesa. Sakvarelidze will now combine the Odesa role with his existing job as Ukraine's deputy prosecutor general. 

With another close Georgian associate, Giorgi Lortkipanidze, already appointed head of police in Odesa region, and former head of Georgian customs, Giorgi Tskhakaia, in Odesa in an informal advisory role, Saakashvili and what some have dubbed his "Team Georgia" are now fully weaponised to tackle corruption in the massive entrepot. 

Plenty to fight for

And there is a huge amount of business to keep tabs on in the region's four ports, led by Odesa Sea Port, the focal point of hundreds of millions of dollars worth of sea traffic to and from Ukraine, Europe, the Middle East and Asia. With capacity to handle more than 900,000 containers and 25mn tonnes of bulk cargo annually, the Odesa Sea Port moves oil and oil products, liquefied gas, ferrous and nonferrous metals, ore, pig-iron, vegetable oils, raw sugar, grain, vehicles and many other cargoes. Its passenger terminal can also serve up to 4mn people a year.

Backed to the hilt by Ukrainian President Petro Poroshenko, an old friend and associate of Saakashvili’s, the new governor and Sakvarelidze have vowed to crack down on alleged – and generally widely acknowledged – port business corruption here and in the other coastal hubs. 

“We are well informed about the situation in the ports, we know the scale of the problem,” Sakvarelidze commented to bne IntelliNews following the announcement of his appointment. “There's a large flow of shadow money, shadow economy, a lot of which goes into the pockets of offshore banks – it doesn't go to hospitals and schools, it doesn't go to buy tanks and APCs for the army.”

Dealing with the Kruks

Saakashvili has already taken a run at what is regarded as one of the most powerful port clans in July, when he successfully pushed for the removal of Yury Kruk from his post of the head of Odesa region's Illichevsk port. At the same time, Ukraine's SBU security service detained his brother Vyacheslav Kruk. “But the Kruks are just one clan. There's not just one clan, there's a whole number of them,” Saakashvili commented to bne IntelliNews. “In Odesa everyone knows them.”

Even Saakashvili's victory over the Kruks was not final. Following Yury Kruk's removal from the post, an open tender was announced for the position – and Kruk is reported by bne IntelliNews sources to be one of the front-runners to get the job, which is outside Saakashvili's direct remit. Moreover, he and his brother are both deputies in Odesa's municipal council, and part of its powerful port lobby, while their father Yury was a long-serving MP in Kyiv.

Favourite schemes

First Deputy Minister of Infrastructure Volodymyr Shulmeister – who hails from the port town of Mykolaiv and has a background in marine engineering and finance in the Netherlands – tells bne IntelliNews of the type of corruption schemes uncovered in Odesa’s state-owned port sector, where private interests have undermined state interests.

“One universal scheme is for state companies to place money on deposit with private banks at below-market rates. For instance, Illichevsk port [in Odesa region] held UAH100mn in private banks with an effective stake of only 3% p.a.,” Shulmeister tells bne IntelliNews. “Another scheme counts as an open secret in Odesa: A [state-owned] vessel gets leased bareboard charter with a clause that all expenses for repairs paid by the lessor will be offset against the cost of the lease. The ship sets sail and Ukraine receives bills for millions of hryvnia worth of repairs in foreign ports, as a result of which the lessor effectively pays no lease.” 

Another example is the Odesa port hotel, where a private investor owns 20% and can block all contracts by failing to sign them, Shulmeister says. “As a result of the conflict, the hotel stands empty for a third year in a row and is slowly crumbling.”

Some private port operators partnered with the state in joint activity agreements inflate the volume of their investments dozens of times, the official claims. “For instance, a crane costs $1mn, but according to documents it was bought for $10mn – the difference was simply returned in cash to the buyer. This means that gradually the state's share gets diluted in joint activity agreements.” 

But the most difficult situation to deal with, according to Shulmeister, is created by a large number of “clever and disciplined professionals” who worked for years as officials in ministries and in state companies with miserable salaries and unclear motivation. Asked why they stay in the job, “they mumble something about interesting work and the now fashionable patriotism,” he says. “Our analysis shows that these guys are the well-motivated emissaries of large holdings receiving salaries from financial-industrial groups.“

View from the waterfront

But down on the wharfs in Odesa's ports, officials see things differently. “There is no corruption in Odesa Sea Port,” head of the port Mykhailo Sokolov tells bne IntelliNews, from an office with a view to Odesa's world-famous Potemkin Steps. 

According to Sokolov, there has just been one case of corruption in the last two years, leading to the firing and criminal investigation of the official. “Now we run an anonymous hotline to inform of incidents of corruption.” 

Sokolov has also just implemented government measures on deregulation in ports, meaning the only officials now to board vessels in harbour are from passport control, whereas previously eight or nine state agencies had the right to inspect vessels. “This will now move us a lot close to Western standards,” he predicts. 

According to Sokolov, the biggest hindrance in the fight against corruption is currently simply the low salaries of state employees. “Salaries were increased by 29% this year, but with the hryvnia collapse to the dollar, people are effectively getting far less now previously.” 

According to documents seen by bne IntellINews, the basic salary of an entry level government inspector in the state customs service is only around UAH700 per month, currently around $35, to which come bonuses. A departmental head with full bonuses takes home after tax around UAH4000, or $200, per month, according to the figures compiled by the EU Border Assistance Mission to Ukraine and Moldova.

Private operators still the pivot

At the core of the looming conflict in Odesa's ports is the future role of private operators that dominate the portside stevedore business. The private operators hold lease agreements with the state port authorities for their berths, where they have invested significant funds in infrastructure including attracting large volumes of international investment. 

Deputy Infrastructure Minister Shulmeister for one believes the private operators have got the best of the deal, and also use their considerable local political clout in Odesa to run a closed shop.

But port chief Sokolov disagrees that it's a rotten monopoly. “Private sector investment into port terminals totals as much as $400mn over the last 20 years, which has gone to build terminals, elevators, warehouses, and other infrastructure,” he says. Sokolov reels off an impressive list of completed projects that saw the private sector workforce in the docks swell to three times the number employed by the port authority and the one state-owned stevedore company. 

Going forward, the official calls for state-owned stevedores to be privatised, but for port infrastructure to remain in state hands. “This is the way it is done the world over,” he says.

Private port operators have indeed built successful businesses and attracted foreign funding. Local operator Brooklyn-Kyiv secured up to $60mn in funding from the European Bank for Reconstruction and Development (EBRD) to build a grain terminal in partnership with global grain trader Louis Dreyfus. Local operators MB Cargo announced in August a massive $130 deal with commodities giant Cargil to build a grain terminal in Yuzhne Port.

These projects are rare signs of major investment going on in crisis-stricken Ukraine, but they also came under pressure from law enforcement in 2015. Brooklyn-Kyiv called a series of raids by the SBU in 2015 “the work of competitors”. Another local operator with ownership links to MB Cargo, raided by security service in July, alleged much the same. 

Mind the hornet's nest

Saaskashvili and other vocal critics of the private operators also claim that in cahoots with state officials they are preventing new portside investors from gaining direct access to the waterfront, thereby limiting total potential volumes of investment.

Private operators such as Brooklyn-Kyiv and MB Cargo are regarded as having strong local political representation, including managers and shareholders sitting as deputies in the municipal council. Together with the powerful Kruk family, as well as Odesa Mayor Gennady Trukhanov, they are also often linked to what Saakashvili calls the "port clans". This means that any battle the Odesa governor wages in the docklands will also be a battle for political influence over the city and region, and vice versa.

But upcoming regional and municipal elections on October 25 will come too soon for Saakashvili or his patron Poroshenko to take majorities in the regional and municipal assemblies, let alone win city hall. Opinion polls suggest the existing local establishment will retain their grip on political power, and potentially remain a thorn in the side of Saakashvili and the quest of "Team Georgia" to clean things up, even if if they receive more power, as others are strongly advocating. Some observers also say the Odesa campaign can have repercussions that reach way beyond the region.

“The key to understanding Odesa is to understand that it is a mercantile city. Leave the local clans alone to get on with their port and trading businesses, and they will side with whoever is in power in Kyiv,” the widely-read British local blogger Nikolai Holmov tells bne IntelliNews. “But trying to interfere in that business might stir up a hornet's nest,” he warns.

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