Ukraine defence exporters under fire for UN arms embargo breach

By bne IntelliNews July 18, 2012

Graham Stack in Kyiv -

The UN has pinpointed defence exporters in the southeastern Ukrainian city of Zaporozhe as violating arms sanctions imposed on Eritrea, via a UK trading company, according to a bne source. If true, the allegations will add to Ukraine's notoriety as a recurrent infringer of arms sanctions, and to the UK's reputation as a no-questions-asked jurisdiction.

According to a bne source at the UN with knowledge of the matter, a UK company, Espace Soft Trading, linked to defence plants in Ukraine's industrial hub of Zaporozhe is considered to have supplied defence technology and training to Eritrea in violation of UN sanctions. Espace Soft is believed to have overhauled the Eritrean Airforce's Sukhoi fighter planes and providing training to pilots.

Eritrea is ranked internationally as one of the world's worst dictatorships. The UN Security Council imposed sanctions in 2009 due to dictator Isaias Afawerki's support for the Al-Shabab Islamist militants in neighbouring Somalia's civil war.

Kyiv's apparent failure to comply with international arms sanctions will heighten fears about the rule of law and state corruption in Ukraine. The unhindered use of UK shell firms to obscure traces of illegal arms deals will also add to criticism of the UK's lax regulation of company registration.

According to bne's UN source, Espace Soft's operations in Eritrea were probably linked to Zaporozhe's state-owned MIG Remont, Ukraine's leading military aviation overhaul facility. The 2011 report on Eritrea from the UN sanctions committee already outlined suspicions of ongoing servicing of Eritrea's Sukhoi jets by a MIG Remont team. Neither MIG Remont nor its parent company, state-owned defence holding Ukroboronprom responded to bne questions.

Yet bne has been able to confirm the Zaporozhe link for Espace Space. While most past and present company directors listed in the UK documents for Espace Space are nominees (ie. strawmen hiding the real owners), for one month in 2009, perhaps through a filing glitch, a certain Oleg Krasnoselskii of Zaporozhe features as director.

bne has established that Oleg Krasnoselskii is the son of Vitaly Krasnoselskii, the director and owner of the company Zaporozhe Foreign Trade Association (ZFTA). According to its public profile, ZFTA exports military aviation technology, including for MIG Remont, and aims "to boost regional exports to fully load Zaporozhe's defence industry plants." In 2005, the US imposed sanctions on ZFTA due to alleged dual-use exports to Iran, accusing Krasnoselskii of "assisting the Iranian missile program."

Vitaly Krasnoselskii in comments to bne called Western-imposed sanctions "a legalised form of trade war". But he denied any supplies of technology contravening UN sanctions.

Ukraine now seems set to be named yet again in a UN report on the sanctions violations. Most spectacularly, in 2009 Somalian pirates seized the Ukrainian-owned merchant vessel Faina - and found it to be stuffed with tanks, weapons and ammunitions bound for South Sudan.

for Motor Sich Fears

The Espace Soft website says the company not only supplies aviation maintenance services, but has a sideline in gas turbine power units. This might indicate a link to Zaporozhe helicopter engine and turbine producer Motor Sich - Ukraine's leading engineering company and also its most traded stock.

Krasnoselskii's ZFRA previously listed Motor Sich as a partner company. But according to chairman of the Motor Sich advisory board Anatoly Malysh, Motor Sich has nothing to do with ZFRA or Espace Soft, although it admitted it knows of Krasnoselskii's activities.

According to bne sources in the company, Motor Sich might, however, have links to a different murky UK trading company - Hazel (UK) Limited - which also trades with very risky states, especially Syria. Motor Sich does not acknowledge any links to Hazel (UK), which features nominee directors to obscure its beneficiaries.

According to documents seen by bne, in 2009 Hazel (UK) held a Ukrainian arms export licence for Syria. A US embassy cable published by the wikileaks website shows US diplomats battling in 2009 to stop Motor Sich overhauling 100 aircraft engines for the Syrian Air Force - with the US threatening "a review of the applicability of sanctions against the Ukrainian entities involved." According to the leaked cable, the Ukrainian side insisted "there was no basis to oppose the overhaul of aircraft engines."

In 2010, Ukraine's security service then did seize a cargo of dual-use tyres being shipped to Syria by Hazel (UK) on Motor Sich planes, according to court records. But as late as April this year, Motor Sich's director of marketing Vladimir Shirkov in a press interview bemoaned the economic downturn in Syria resulting from the unrest, saying it was causing Syria to cancel orders.

If a connection to Hazel (UK) is established, the Syrian connection could yet have consequences for Motor Sich, due to the international crackdown on defence supplies to Syria's brutal regime.

Ukraine's UK corruption link

It is not just Ukraine that could be embarrassed by the upcoming UN report on Eritrean sanctions, but also the UK.

In 2009, Ukrainian diplomats provided the UK parliamentary committee on Arms Export Controls a list of UK-registered companies holding Ukrainian arms export licences - to the great surprise of the MPs. The committee concluded: "It is of serious concern that the UK Government was unaware of the existence of a list of UK brokers granted licences by the Ukraine," and called authorities to "instigate an investigation."

The list that so alarmed UK parliamentarians in 2009 included Espace Soft - now accused by the UN of supplying fighter jet servicing and parts to Eritrea's dictator - as well as Hazel (UK), the supplier of helicopter parts to Syria. The list names other UK brassplates holding Ukrainian licences to supply military kit to Gaddafi's Libya and nuclear technology to Lithuania, for example.

Three years later and apparently no measures have been taken against any of the companies - despite Espace Soft director Krasnoselskii's prior record of being sanctioned by the US. According to a wikileaks US embassy cable dating from 2006, US diplomats warned Ukraine that Krasnoselskii's ZRFA "is not a reputable firm and that just because it has not submitted an export license to your government does not mean it is not exporting items to Iran." According to the leaked cable, Vitaly Krasnoselskii had met with a front company for Iran's liquid-fuelled ballistic missile developer in 2005.

Hazel (UK)'s apparently unhindered operations in UK, despite its Syrian links, also contrast with the UK's recent very public measures to stop Russia shipping overhauled helicopters to Syria.

But the British embassy in Kyiv says that responsibility for such companies lies wholly with Ukraine. "The Ukrainian authorities are clearly aware of these companies, and we would expect the companies to be complying with Ukrainian export licensing laws," second secretary political Jon Bateson tells bne. "The list... contained a number of brass plate companies, foreign companies that had registered as a UK company, but were not based in the UK, did no trade in the UK and were run by foreign nationals."

The UK position seems to ignore a spate of recent publications - such as an "Idiot's Guide to Money-Laundering" by anti-corruption NGO Global Witness in June - that point to the UK as a leading "secrecy jurisdiction" where foreign wrongdoers set up brassplate companies precisely for the purpose of hiding their tracks - as seems to be the case with Espace Soft and Hazel (UK). Where such "anonymous" companies also hold foreign weapon export licences, almost by definition they are up to no good.

One further jurisdiction may be implicated: The meat in the UK-Ukraine money-laundering sandwich has traditionally been provided by Latvia's notorious banking system. Indications are that, in the case of Espace Soft, things are no different: the company is registered at the same London address as a shell company, Diafall Limited, implicated in 2011 in a major corruption scandal in Ukraine's state energy sector - where funds were processed by a Latvian bank.

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