Se­crecy Blan­kets Cor­rup­tion In Ukraine’s De­fense Sec­tor

Kyiv Post - - Front Page - BY WILL PONOMARENKO PONOMARENKO@KYIVPOST.COM

Since Rus­sia’s war started in 2014, Ukraine has been spend­ing much more money on its de­fense sec­tor than ever. But how much of it is well­spent is an open ques­tion.

Al­most all de­fense pur­chases are still con­ducted in se­crecy, a danger­ous prac­tice for na­tion with a long his­tory of cor­rup­tion in state pro­cure­ment.

In 2017, the coun­try’s se­cu­rity and de­fense spend­ing reached a record Hr 129 bil­lion, or $4.9 bil­lion, which is roughly 5 per­cent of the na­tion’s gross do­mes­tic prod­uct of $100 bil­lion. For com­par­i­son, most of NATO’s 29 mem­bers don’t meet the al­liance’s spend­ing goal of 2 per­cent of GDP.

The ramp-up came quickly. Ukraine spent very lit­tle on its de­fense be­fore Rus­sia’s invasion of Crimea and the Krem­lin’s in­sti­ga­tion of war in the eastern Don­bas in 2014, which has killed more than 10,000 peo­ple with no end in sight.

With this mas­sive in­vest­ment, Ukraine is seek­ing to de­fend it­self, while over­haul­ing a long-ne­glected and un­der­funded mil­i­tary, with the am­bi­tious goal of meet­ing NATO stan­dards by 2020.

But to do so, the coun­try needs to re­duce cor­rup­tion in the sec­tor. Many crit­ics say it is far from do­ing so. Graft watch­dog Trans­parency In­ter­na­tional’s Gov­ern­ment De­fense Anti-Cor­rup­tion In­dex in 2015 rated the level of cor­rup­tion in Ukraine’s mil­i­tary sec­tor as high. The sit­u­a­tion looks un­changed to­day.

Even as­sess­ing how much money is be­ing stolen or mis­spent in the de­fense sec­tor is nearly im­pos­si­ble due to the rigid se­crecy of most con­tracts. Ukraine’s leg­is­la­tion gives the De­fense Min­istry and its sub­sidiaries free­dom to de­cide which pur­chases to make pub­lic and which to keep se­cret.

A few con­tro­ver­sial pur­chases that were dis­cov­ered by jour­nal­ists show the De­fense Min­istry’s en­ter­prises buy­ing over­priced equip­ment, over­pay­ing by tens of thou­sands of dol­lars to firms that ap­pear to be linked to de­fense of­fi­cials or top po­lit­i­cal lead­ers, in­clud­ing Pres­i­dent Petro Poroshenko.

Poroshenko’s press ser­vice is­sued a state­ment on Sept. 14 said the allegations “are un­founded, not con­firmed by any facts, and ap­pear to be an im­proper po­lit­i­cal tac­tic that is be­ing used against the pres­i­dent by his op­po­nents within the coun­try and his en­e­mies in the ag­gres­sor state.”

Socks made se­cret

Ukrainian me­dia, ac­tivists and top of­fi­cials point fin­gers at Ukroboron­prom, the state arms agency with 80,000 em­ploy­ees and 130 en­ter­prises. Its ac­tiv­i­ties are cloaked in se­crecy, jus­ti­fied on na­tional se­cu­rity grounds.

One of those ring­ing alarms is Fi­nance Min­is­ter Olek­sandr Danyliuk. He called for greater ac­count­abil­ity.

De­fense spend­ing is “fully non-trans­par­ent,” Danyliuk said dur­ing a con­fer­ence spon­sored by Chatham House on July 5 in London. “Even for me, as a min­is­ter who fi­nances a lot of pur­chases, I’m not fully aware of what ac­tu­ally is hap­pen­ing, how ef­fec­tively money is used. This is wrong.”

Danyliuk said that he saw con­tracts for pur­chas­ing items like socks and buck­ets marked as top se­cret. When he asked de­fense of­fi­cials why such triv­ial pur­chases were made se­cret, he was told that the num­ber of socks can help the en­emy fig­ure out how many troops that Ukraine is de­ploy­ing.

“This is the last area be­ing re­formed We need to speed it up. If you want to build a strong, com­pet­i­tive army, we need to put more money in build­ing or buy­ing new weaponry,” Danyliuk said. “In or­der to do it, there needs to be some trans­parency, some ac­count­abil­ity for money put in, be­cause then there will be trust.”

The se­crecy cov­ers more than just socks and buck­ets.

In Fe­bru­ary, Poroshenko signed a de­cree on the state de­fense pro­cure­ment plan for 2017–2019. How­ever, the plan is clas­si­fied as se­cret. Ukraini­ans won’t learn what will be pur­chased and how much spent.

One rea­son for the high level of se­crecy, de­fense watch­dogs al­lege, is that Poroshenko is fi­nan­cially ben­e­fit­ing from de­fense spend­ing.

That is the con­clu­sion of Oksana Sy­royid, an op­po­si­tion mem­ber of par­lia­ment with the Samopomich Party who serves as deputy speaker of the Verkhovna Rada.

“The pres­i­dent is one of the main ben­e­fi­cia­ries of the de­fense bud­get,” Sy­royid told the Kyiv Post. “This is a con­flict of in­ter­est, first of all, for the pres­i­dent of the coun­try at war.”

She wouldn’t be­grudge the pres­i­dent’s suc­cess in mak­ing money from the war so much, she said, if she could be as­sured that the money is be­ing spent wisely. But she can­not say that, she said, be­cause of se­crecy sur­round­ing the de­fense bud­get. She didn’t want to go into too much de­tail, how­ever, say­ing she could be pros­e­cuted for di­vulging state se­crets.

“Be­cause of the state se­crecy law, all the in­for­ma­tion re­gard­ing de­fense pro­cure­ment is clas­si­fied,” Sy­royid said. “If you look at how it is pro­cured and who sup­plies those ser­vices, you would be shocked. I can get ac­cess to this in­for­ma­tion, but I can’t leak it to you. I would be pun­ished for leak­ing, not those us­ing state funds.”

She called the sit­u­a­tion dis­gust­ing, “es­pe­cially when I get to the front line and talk to sol­diers and see how they are equipped, when they sell those new tanks for ex­port and when they pro­vide those old weapons to Ukrainian sol­diers; when I know that Ukroboron­prom didn’t pro­vide al­most

any­thing to the army dur­ing the war.”

The pub­lished de­fense bud­get, she said, amounts to 20 vague lines on a spread­sheet, in con­trast to the wealth of in­for­ma­tion that the U.S. gov­ern­ment pub­lishes about the world’s big­gest de­fense bud­get of some $500 bil­lion an­nu­ally. Ukraine’s bud­get will in­clude such items as “four bil­lion hryv­nia for in­creas­ing de­fense ca­pac­ity, so you just have to guess” what the money is for, Sy­royid said.

Another per­son with in­sider knowl­edge of how de­fense pro­cure­ment works also pins the blame on Poroshenko.

Vik­tor Plakhuta quit last year as head of the de­fense department of the Min­istry of Economy and Trade. Oddly, the min­istry ap­proves de­fense pur­chases, even though Plakhuta said it amounts to rub­ber-stamp­ing re­quests from the Ukraine’s Se­cu­rity and De­fense Coun­cil or De­fense Min­istry.

Plakhuta is now the chief ex­ec­u­tive of­fi­cer at the Ukrainian Free­dom Fund, a think tank funded by Trans­parency In­ter­na­tional seek­ing to in­tro­duce trans­parency and com­pe­ti­tion into the de­fense sec­tor.

He told the Kyiv Post that Poroshenko has vast, unchecked pow­ers over the sec­tor, which gets the largest share of the $40 bil­lion in state spend­ing.

“I think Poroshenko re­gards Ukroboron­prom as one of his in­stru­ments to re­tain power,” Plakhuta said. “The whole de­fense and se­cu­rity sec­tor is un­der him. We have such a proverb: When the war lasts more than a year, it be­comes a good busi­ness. Un­for­tu­nately, our pres­i­dent is not a re­former.”

Two peo­ple iden­ti­fied as key Poroshenko fig­ures in de­fense spend­ing are for­mer busi­ness part­ners, Ro­man Ro­manov, the head of Ukroboron­prom, and Oleh Glad­kovskiy, first deputy sec­re­tary of Ukraine’s Na­tional Se­cu­rity and De­fense Coun­cil, which makes de­ci­sions about de­fense spend­ing and ar­ma­ments pro­cure­ment.

Schemes un­cov­ered

The de­fense pur­chases that were leaked or un­cov­ered in jour­nal­ist in­ves­ti­ga­tions show ex­am­ples of cor­rup­tion in the sec­tor.

In one con­tro­ver­sial con­tract, which was leaked to Ukrainian jour­nal­ist Olek­sandr Du­bin­skiy in May, state-owned de­fense com­pany SpecTech­noEk­sport bought four used ar­mored Toy­ota Land Cruiser V8 cars from a Cyprus-reg­is­tered com­pany HUDC Hold­ing Lim­ited, pay­ing $428,000.

Du­bin­sky claimed that the ben­e­fi­cial owner of the off­shore seller is Glad­kovskiy, the first deputy sec­re­tary of Ukraine’s Na­tional Se­cu­rity and De­fense Coun­cil, ap­pointed in 2015 by Poroshenko, his long­time busi­ness part­ner.

Glad­kovskiy’s of­fice con­firmed in a com­ment emailed to the Kyiv Post that Glad­kovskiy, for­merly known as Oleh Svy­nar­chuk, “used to have a con­nec­tion to HUDC Hold­ing Lim­ited” through a dif­fer­ent off­shore com­pany that he owns, Teck­ford In­vest­ments Fi­nan­cial Cor­po­ra­tion, reg­is­tered in the Bri­tish Vir­gin Is­lands.

Be­fore en­ter­ing the pub­lic ser­vice, Glad­kovskiy au­tho­rized an in­de­pen­dent man­age­ment com­pany to man­age his off­shore firm, ac­cord­ing to the emailed re­sponse. “He doesn’t make any de­ci­sions and isn’t fa­mil­iar with the cur­rent busi­ness pro­cesses,” it read.

Still, it means that the com­pany linked to deputy head of the high­est de­fense co­or­di­na­tion agency in Ukraine sup­plied ve­hi­cles to a state com­pany through a se­cret, non-com­pet­i­tive pur­chase.

Each of the four cars cost the Ukrainian state-owned com­pany $107,000. Months ear­lier, the same Cyprus-based seller linked to Glad­kovsky sold ve­hi­cles of the same fea­tures to Do­zor Avto, a Ukrainian firm also for­merly owned by Glad­kovsky, at a cheaper price of $93,000, ac­cord­ing to a con­tract pub­lished by jour­nal­ist Du­bin­skiy.

The act­ing di­rec­tor of SpecTech­noEk­sport who signed the pur­chased of over­priced Toy­otas from an off­shore com­pany, Vla­dyslav Bel­bas, is a for­mer di­rec­tor of Do­zor Avto.

The deal was never looked into by author­i­ties. And they can’t. The in­ves­tiga­tive agen­cies have no ac­cess to clas­si­fied de­fense deals.

Dif­fi­cult to con­trol

The Na­tional Anti-Cor­rup­tion Bureau of Ukraine and the Mil­i­tary Pros­e­cu­tor’s Of­fice could in­ves­ti­gate and pros­e­cute graft in the de­fense sec­tor, but even they have their hands tied.

The de­fense agency must launch an in­ter­nal in­ves­ti­ga­tion first be­fore any other agen­cies can be legally in­volved. In other words, the de­fense com­pa­nies have no out­side con­trol and au­dits what­so­ever.

Re­cently, the NABU car­ried out its first high-pro­file in­ves­ti­ga­tion of the coun­try’s de­fense sec­tor since the bureau was cre­ated in 2015.

On July 14, four of­fi­cials from Ukraine’s de­fense in­dus­try sec­tor and an al­leged shell com­pany owner were ar­rested on sus­pi­cion of run­ning a fraud scheme to buy old out­dated en­gines for T-72 tanks in­stead of new mo­tors.

The NABU sus­pects the of­fi­cials of em­bez­zling up to Hr 28.5 mil­lion ($1.1 mil­lion) in 2015 alone.

Fol­low­ing the ar­rests, the Lviv Ar­mor Plant di­rec­tor Ro­man Tymkiv, one of the sus­pects, was sus­pended by Ukroboron­prom. The hold­ing com­pany said that, over the past three years, it has in­formed law en­forcers of 158 in­ci­dences of fraud by its em­ploy­ees cost­ing the state a to­tal of $36 mil­lion, and that 41 crim­i­nal cases were be­ing in­ves­ti­gated.

Still, be­cause of se­crecy, this might only be a small frac­tion of the true size of the prob­lem.

Seek­ing trans­parency

Ukrainian leg­is­la­tion en­ables state de­fense bod­ies, such as the De­fense Min­istry, the In­te­rior Min­istry and the Se­cu­rity Ser­vice of Ukraine, to de­cide them­selves whether a con­tract must be clas­si­fied — no mat­ter what it is, from the pur­chase of an ad­vanced weapon or buy­ing sol­diers’ ra­tions.

Another prob­lem is that the clas­si­fied pro­cure­ment deals are closed in a non­com­pet­i­tive way, al­low­ing of­fi­cials to choose con­trac­tors re­gard­less of their price of­fers, ac­cord­ing to Plakhuta, the for­mer head of the economy min­istry’s de­fense department who is now the chief ex­ec­u­tive of­fi­cer at the Ukrainian Free­dom Fund.

In 2016, Plakhuta re­signed Min­istry of Economy and Trade be­cause he didn’t want to ap­prove clas­si­fied pro­cure­ment con­tracts that he did not have enough in­for­ma­tion to eval­u­ate.

“The prob­lem is over­clas­si­fi­ca­tion of bud­get, spend­ing, con­tract­ing. Our prob­lem is sin­gle-source con­tracts, when we don’t have ten­ders, who knows if it’s good for the coun­try or not?” Plakhuta said. “We don’t have a proper sys­tem of pro­cure­ment for the Min­istry of De­fense. If we go inside what hap­pens with ar­ma­ment and mil­i­tary equip­ment, I think it’s ter­ri­ble things. Also, there is no clear cri­te­ria for de­ter­min­ing which de­fense pro­cure­ment and pur­chase data must be clas­si­fied.”

To stop cor­rup­tion, Ukraine’s de­fense sec­tor needs to be opened up to pub­lic scru­tiny, he said. “First of all, data on state de­fense pro­cure­ment and pro­duc­tion must be re­vealed in open sources, at least par­tially,” Plakhuta said. “In the U.S., at least 75 per­cent of such in­for­ma­tion is pub­licly avail­able.”

He added that the gov­ern­ment must be obliged to pub­lish semi-an­nual and an­nual re­ports on se­cu­rity ex­pen­di­tures, as well as re­veal much more de­tailed de­fense bud­get items, pro­vid­ing a dis­tin­guish­able un­der­stand­ing of how much of the tax­pay­ers’ money will be spent on spe­cific needs.

To im­ple­ment such changes, the Ukrainian Free­dom Fund has of­fered the coun­try’s gov­ern­ment a num­ber of draft laws, but it has lit­tle hope they will be passed, Plakhuta said.

Ar­chaic sys­tem

Denys Gu­rak, Ukroboron­prom’s deputy di­rec­tor gen­eral, ad­mits that the cur­rent sit­u­a­tion in Ukraine’s de­fense sec­tor is dis­turb­ing. A par­tial de­crease in se­crecy in de­fense pro­cure­ment would not harm the na­tion’s se­cu­rity, he says.

“The re­ally sen­si­tive data is not in­for­ma­tion on sup­plies, terms, trans­ac­tion val­ues or item cat­e­gories, but rather on the ac­tual type of tech­nolo­gies pro­vided,” the of­fi­cial said. “In the mod­ern world, data on how many ve­hi­cles a coun­try has is any­thing but se­cret.”

Mean­while, among NATO-mem­ber na­tions, de­fense pro­cure­ment con­tracts con­cern­ing highly sen­si­tive data are made not at the dis­cre­tion of of­fi­cials, but via re­stricted ten­ders among com­pa­nies ap­proved for par- tic­i­pa­tion. Con­fi­den­tial­ity re­mains within the com­pe­tence of a spe­cial in­de­pen­dent gov­ern­ment agency, rather than the se­cu­rity ser­vices.

Ukroboron­prom would sup­port this model, since lack of trans­parency in Ukraine’s de­fense sec­tor also un­der­mines Ukroboron­prom’s im­age. Ukraine’s NATO part­ners back away from non-trans­par­ent con­di­tions, Gu­rak said.

“Since 1991, some things have been chang­ing in Ukraine — for the bet­ter, or for the worse. But in the de­fense in­dus­try and in the min­istry, noth­ing has re­ally changed. Our 1991 started in 2014,” the of­fi­cial said.

One for­eign part­ner who has no­ticed the prob­lems of Ukroboron­prom is for­mer deputy U. S. De­fense Sec­re­tary Michael Car­pen­ter.

“Ukroboron­prom is too opaque, too con­vo­luted. It’s es­sen­tially a mid­dle­man’s or­ga­ni­za­tion, which is al­ways vul­ner­a­ble to cor­rup­tion in every sec­tor of the economy, par­tic­u­larly in the de­fense sec­tor,” Car­pen­ter told the Kyiv Post. “It needs a whole­sale root and branch over­haul — a new board of di­rec­tors, a man­age­ment strat­egy and then an au­dit of the whole con­glom­er­ate to fig­ure out how you can break it down in the most busi­ness-friendly way. It’s a recipe for cor­rup­tion, the way it’s struc­tured.” It “pre­vents a lot of Western in­vest­ment from flow­ing in,” he said.

En­coun­ter­ing re­sis­tance

Sy­royid said law­mak­ers are de­bat­ing mea­sures to make de­fense spend­ing more trans­par­ent, along the lines of what Plakhuta and Car­pen­ter ad­vo­cate, but she ex­pects re­sis­tance from Poroshenko and oth­ers.

“The only ap­proach is to change the sit­u­a­tion,” Sy­royid said. “You have to de­clas­sify pro­cure­ment in the de­fense sec­tor; ex­cept the pro­cure­ment of in­no­va­tive prod­ucts, which have to be classed not as state se­crets but as com­mer­cial se­crets.”

Ukroboron­prom and other de­fense con­cerns should be au­dited not by the state, but by one of the ma­jor pri­vate au­di­tors, she said.

And Ukroboron­prom needs to be re­or­ga­nized and its vast hold­ings of 130 en­ter­prises “turned into nor­mal cor­po­rate en­ter­prises” to at­tract in­vest­ment into the sec­tor.

“It’s very sim­ple, but this would in­ter­fere with the plans of the pres­i­dent,” she said.

The con­se­quences for Ukraine’s army can be se­vere, but have not been fully tested since Rus­sia’s big­gest mil­i­tary of­fen­sives in 2014 and 2015, in which Ukraine’s mil­i­tary suf­fered losses that led to the un­fa­vor­able terms of the two peace agree­ments reached in Minsk, Be­larus.

“Com­pared with 2014, yes, (Ukrainian sol­diers are) do­ing much bet­ter,” Plakhuta said. “Com­pared with the U.S. army, sorry. Imag­ine to­mor­row if the Rus­sian army goes on the of­fen­sive. It will take it one day to get to the left bank of the Dnipro River.”

Kyiv Post ed­i­tors Brian Bon­ner and Olga Ru­denko con­trib­uted to this re­port.

(Pavlo Po­d­u­falov)

Ukraine’s de­com­mis­sioned Soviet-era tanks are kept at a scrap­yard in Kyiv. De­spite record mil­i­tary spend­ing of $5 bil­lion an­nu­ally, in­creased be­cause of Rus­sia’s war against Ukraine, the army still re­lies on Sovi­etera weaponry while do­mes­tic pro­duc­tion and trans­parency in sec­tor spend­ing re­main weak.

(Oleg Pe­tra­siuk)

Chil­dren play on a tank dur­ing an arms ex­hi­bi­tion on Aug. 23 in Kyiv.

A worker re­pairs an ar­mored per­son­nel car­rier’s track as­sem­bly at the Zhy­to­myr Ar­mored Plant in Novoguyvinske on March 30. (Ukrafoto)

Ukrainian sol­diers col­lect un­ex­ploded shells af­ter a mas­sive fire at the army de­pot in Balak­liya on March 29. De­spite huge in­vest­ments made in rear­ma­ment since 2014, Ukraine’s de­fense in­dus­tries haven’t started pro­duc­ing am­mu­ni­tion yet. (Ukrafoto)

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