Usual suspects surface in huge corruption at Ukraine's Naftogaz

By bne IntelliNews April 8, 2014

Graham Stack in Kyiv -

The March arrests of the Ukrainian oligarch and gas trader Dmitry Firtash and top managers in the shadowy empire of another Ukrainian gas trader, Serhiy Kurchenko, were unrelated. But the careers of both men were intimately entwined with Ukraine's state energy company Naftogaz, the scale of the corruption at which is only now emerging.

On March 27, Ukraine's Prosecutor General, Oleh Makhnitsky, announced that he had placed Kurchenko and other suspects on the international wanted list in connection with embezzlement at Ukrgazvydobuvannia, a major subsidiary of Naftogaz. Kurchenko has been accused of fraud in acquiring propane produced by the company at subsidised prices and selling it on at market prices between 2010 and 2013, among other criminal schemes.

Missing from the Prosecutor General's sweep of Kurchenko's gang was any mention of the former management at Ukrgazvydobuvannia such as CEO Yury Borisov, who was appointed to the post immediately following the election victory of former president Viktor Yanukovych in February 2010 and remained in the job until mid-2013.

Borisov had been one of Firtash's top managers, having previously been director of his holding company Ostchem Holdings Limited and of British Virgin Islands-based holding company Group DF. Since Firtash had been one of Yanukovych's main sponsors, it is unsurprising that once Yanukovych won the presidency he would bring Ukrgazvydobuvannia – producing 75% of Ukraine's domestic gas – under Firtash's influence.

It's become increasingly clear this was the case, raising questions about the relationship between Firtash, who is awaiting possible extradition to the US, and Kurchenko, who is on the run.

Joint activities

An indicator of Firtash's influence at Ukrgazvydobuvannia since 2010 is apparent control over a swathe of joint activity agreements (JAA) between the state-owned company and private sector players. Firtash-linked structures in partnership with top Naftogaz managers took stakes in a number of them, which also had connections to Kurchenko.

Joint activity agreements are joint ventures but without formation of a legal entity, and operated by the private sector partner. State auditors in 2009 had lambasted these agreements for allowing the private partners to take Ukrgazvydobuvannia to the cleaners, due to the undervaluation of the state company's equity contribution – licences and infrastructure – by as much as tenfold, and the private partners' sole responsibility for accounts. But attempts in 2009 to end the agreements were thrown out in the courts.

The largest of such JAAs is between Ukrgazvydobuvannia and Karpatygaz, with 360m cubic metres of production reported in 2012. Karpatygaz is owned by the Swedish-listed Misen Energy, following a reverse takeover of the Swedish company in 2011. Ukrgazvydobuvannia at the time gushed about the new "foreign investors" bringing advanced technologies and investment to expand production threefold, and even sponsored accommodation for the Swedish football team during the Euro 2012 football championships that Ukraine co-hosted with Poland, as a gesture of goodwill towards the investors.

But an examination of the Cyprus company register reveals a very different picture of Misen Energy's shareholders: 29.6% of Misen Energy is owned by Cyprus company Norchamo Limited, which in turn is owned by Heico Ventures and Suzel Enterprises. Heico Ventures was co-owner of a Firtash holding company, the Cypriot company Ostchem in 2010-2011. Both Cypriot companies feature on an internal map of the Firtash holding that was leaked to media in 2010. Firtash's holding Group DF historically denies any connection to any of the shareholders in Misen Energy, and the group's press service told bne that all its companies are listed on the official website, where there is no mention of either Misen or Norchamo.

Just under 20% of Misen Energy is held by another Cyprus firm, Blankbank Investment, which is owned by Zoulian Limited and Zoulian Management Limited. In 2011 a Cyprus company with the same shareholders bought Russian chemicals plant Minudobreniya on behalf of Russian oligarch Arkady Rotenberg, a close associate of Russian President Vladimir Putin. Media reports at the time suggested Firtash was Rotenberg's co-investor in the acquisition.

In 2010, Firtash-linked Norchamo took a 40% stake in another company that has a JAA with Ukrgazvydobuvannia, TOV Tekhprojekt. The Tekhprojekt investment links Firtash to the powerful Katsuba family of top Naftogaz managers: Volodymr Katsuba ran Tekhproject in 2001-2006, and elder son Serhiy was deputy CEO in 2000-2005, according to their official biographies. Before 2010, Tekhprojekt was owned by Cypriot company Navartis Limited, sole owner of which was younger son Oleksandr Katsuba, according to Cyprus company records, and they may have retained an ownership stake via a number of Belize and BVI shareholder firms. At the end of 2012, the Norchamo stake fell to under 25%.

In 2010, along with Yury Borisov's appointment as head of Ukrgazvydobuvannia, Serhiy Katsuba was named deputy chairman of Naftogaz with oversight of procurement, and his younger brother Oleksandr also took a top procurement job at Naftogaz.

In 2012 Volodymyr and Serhiy Katsuba entered parliament. The Katsubas were contacted via their parliamentary offices for comment on their connections to Firtash and Tekhprojekt, but failed to respond.

Tekhprojekt also has links to Kurchenko. In June 2013, an unidentified minority shareholder sued Tekhprojekt for reducing profits and effectively siphoning off money by allegedly placing spurious orders with sham firms. "In the plaintiff's opinion, the defendants did not demonstrate the justification for such work, the price significantly exceeds the market average, and there is no evidence of the work being actually performed by the counterparty, TOV Business Consult," read the complaint, which the court ultimately threw out.

The supplier in question, TOV Business Consult, is one of around 50 sham companies that journalistic investigations have identified as operated by Kurchenko. Business Consult is registered at the same address as Gaz Ukraina 2020, one of the group's flagship firms. Gaz Ukraina 2020 manager Arkady Kashkin was arrested on March 21 by Ukraine's security service SBU as part of Kurchenko's alleged "criminal gang that embezzled budget funds." Business Consult also features as recipient of bribes paid to tax police in Chernigov, in a separate criminal case.

Already in 2008-2009, state auditors had accused Tekhprojekt and a linked company, Lekstar Service, of siphoning tens of millions of dollars from Naftogaz by overcharging for supplies – thus minimising the profits from the JAA to be shared with Naftogaz. This may have been standard practice across JAAs – and Kurchenko's network, with its ties to Ukrgazvydobuvannia, may have become the main channel for this post-2010.

Revealing connections

Besides Tekhprojekt, a number of other firms with Naftogaz JAAs are registered in the small Kharkiv region town of Dergachi, the stronghold of the Katsuba family, where father Volodymyr headed the state district administration in 2007-2012.

At least one of these also has traces of Firtash ownership: TOV Tsefei is 50% owned by a Firtash-linked company, Ural Consulting Corporation, via a Ukrainian firm. Ural Consulting Corporation, registered in the BVI, is in turn owned by Nevis company Annex Holding, which was a holding company at the centre of Firtash's whorl of holdings, according to a leaked excerpt from the BVI company database. 50% of Tsefei is owned by a Belize firm that could not be traced.

According to documents filed in the US under the Foreign Agents Act, in 2005 Ural Consulting funded a visit to the US by Firtash associate Yury Boiko, in his then capacity of head of the Republic Party of Ukraine, with meetings planned with then vice president Dick Cheney, among others. Informally, Boiko is believed to have lobbied on behalf of Firtash's controversial gas trading outfit EuralTransGas, which US authorities suspected of links to organised crime. Boiko was energy minister in 2010-2012 with oversight of Naftogaz, and deputy prime minister with oversight of energy until March 2014.

At the end of 2012, Firtash's partners Yury Boiko and Serhiy Katsuba left the energy ministry and Naftogaz respectively, while Yury Borisov left as head of head of Ukrgazvydobuvannia in 2013 – all of them replaced by confidantes of younger son of exiled president Viktor Yanukovych, Oleksandr. Kurchenko reportedly went on to work primarily for the Yanukovych "family before the president, family and assorted cronies fled in February after his regime collapsed.

The full extent of fraud at Naftogaz over the last four years is only just starting to come to light, with many further revelations expected – including regarding Firtash and Kurchenko's dealings with the company.

On March 21, heavily armed police arrested the head of Naftogaz since 2010, Evhen Bakulin. After an all-night session of the government on March 25-26, his successor was announced, Andriy Kobelev, a former PriceWaterhouse Coopers management consultant, and regarded as a bright, new broom. "It is hard to believe, but they have actually appointed a decent person to manage this black hole," says Sevgil Musaeva, the Forbes Ukraine journalist who first shed light on Serhiy Kurchenko and his Naftogaz connection.

Firtash, meanwhile, is out on what is believed to be the world’s largest bail, €125m, pending extradition to the US on charges of overseeing the payment of bribes to Indian officials to secure mining licences for his Group DF empire in the province of Andhra Pradesh. Kurchenko's whereabouts are still unknown, but he has been placed on the international wanted list.

Whatever ties these two Ukrainian oligrachs might have enjoyed previously have now been cut.

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