New energy scandal hits Kyiv

The head of the Ukrainian parliament's anticorruption committee, Yuriy Karmazin, sent a letter on 3 August to the country's prosecutor-general, asking him to reverse a Ukrainian court decision and return the UkrNaftoProdukt company to state ownership. Karmazin also requested of Prosecutor-General Mykhaylo Potebenko that prosecutors reverse on constitutional grounds a decree by the Cabinet of Ministers from 30 January 1998 that formed the company. This marks another public scandal in the oil industry involving the Cabinet of Ministers, gangsters, regional political bosses, and possibly the highest leadership in Kyiv.

UkrNaftoProdukt was formed as a joint-stock company to take into receivership a nearly bankrupt company by the same name and also in accordance with the Presidential Decree on Privatization of 1997. The new company was to involve itself in domestic business in Ukraine to supply the country's oil needs.

The old UkrNaftoProdukt was a unique company. It failed to make money in the energy sector. In 1996 it failed to repay a $19.5 million debt that was guaranteed by the state. Thus the decision to roll the old company into a new entity. It is not clear whether there was an investigation into why the company almost went under, but stranger things have occurred in the Ukrainian energy business.

From the very beginning things did not go by the book. A portion of the start-up capital for the new company came in the form of stakes in profitable regional oil companies from the Crimea and Kyiv, and an Odessa-based company called Eximnaftoprodukt. These shares were transferred to the new company on the condition that they were not legally theirs to sell or use as collateral. Then the State Property Fund of Ukraine decided to sell off 44.19 percent of the new holding company. The buyer was an unknown company, Concern 'Naftoprodukt Ukrainy Ltd.,' which had foreign investment included in its capital. Soon even stranger transactions took place. On 21 September 2000, UkrNaftoProdukt borrowed more than $3 million for one month (from 25 September until 27 October) at an annual interest rate of 12 percent from a Cyprus-based company, . As collateral, it turned over to Bevalo stakes in the three regional energy companies (from Crimea, Kyiv, and Eximnaftoprodukt).

On 5 January 2001, Bevalo Investments sold that entire batch of shares -- apparently now collateral for a loan that was never repaid -- to , a company registered in Geneva, Switzerland, on 26 September 2000 with assets of $70,000.

Evidence that something was amiss soon surfaced. Two members of the supervisory board of UkrNaftoProdukt, S. Zaytsev and Yu. Shumacher, were also representatives of Bevalo . Shumacher was also a close friend of the first vice president of UkrNaftoProdukt, A. Kosmin, who worked for the Odessa Maritime Transport Bank which is owned by Oleksandr Zhukov who was arrested in Italy for illegal arms trafficking to Croatia (see "Crime, Corruption, And Terrorism Watch," vol. 1, no. 3, 16 November 2001).

Kosmin is a colorful figure who has held many different and senior posts in Odessa. For many years he worked as the deputy director of the Odessa branch of Bank Ukraine (his boss, N. Smarus, was found dead under strange circumstances). Kosmin then became the director of the Marine Transport Bank, from which he became the head of the financial department of the Odessa City Council's then-deputy mayor under R. Bodelan. His last position was deputy director of UkrNaftoProdukt.

Soon the supervisory board of UkrNaftoProdukt was shuffled to include -- aside from Shumacher (concurrently a representative of Bevalo ) and S. Zaytsev, also from Bevalo -- a certain N. Batrak, a lawyer for Syntez Oil Company (another firm owned by the resident of an Italian prison, Oleksandr Zhukov). Other new members of the supervisory board included the director of UkrNaftProdukt, Yu. Kolupaylo, and the director of Syntez Oil, V. Yurdyk. Even the lawyer who had defended the interests of Bevalo , Ye. Lamzina, was hired to represent and provide counsel to UkrNaftProdukt.

Despite the promises of Ukrainian President Leonid Kuchma to investigate this case, little has been done. According to Prosecutor-General Mykhaylo Potebenko, the case was reviewed at a meeting of the Coordinating Committee Against Corruption and Organized Crime -- "but the case is still being investigated." The Odessa Oblast prosecutor, Mykhaylo Kosyuta, stated: "It is difficult for us to understand the privatization of UkrNaftProdukt since many events are being cooked up in Kyiv, in the State Property Fund..."

The only investigation being pursued by the authorities seems to be by the tax authorities, who have opened a criminal case against Volodymyr Fylypchuk, the director of Eximnaftoproduckt, and, according to the Internet publication "Grani," a close friend of Leonid Minin. Fylypchuk is accused of fraud and tax evasion of roughly 10 million hryvnias (approximately $2 million). (Sources: "Zerkalo Nedeli," 15 June 2001; a letter from Yuriy Karmazin to Mykola Potebenko of 3 August 2001; "Grani" and sources in Odessa and elsewhere.