A Company of Two. Secret Orders for Defence Industry Became a Gold Mine for Authorities
Assembly of disassembled IFVs, bizarre procurements of radio stations which would not fit inside tanks – these are some of the military production deals high-ranking officials are pulling.
In February at the Munich Security Conference President Petro Poroshenko proudly told the foreign partners that Ukraine spends nearly 6% of the national GDP, that is 179 billion UAH on defence. What he did not talk about is that about 20% of the Ministry of Defence Budget – which is 83.3 billion UAH as of 2018 – goes toward secret procurements. This sum is more than just large according the world standards – the similar share in the US equals 10%, what is more, these contracts, kept secret from the general public, became a sphere where suspicious financial deals run galore. And high-ranking officials from the President’s team and parliament coalition are involved in it.
In relations to such deals, experts and MPs aware of the situation in the defence complex give two names. First is Oleh Hladkovskyi, deputy secretary of the Security Council (National Security and Defence Council), old business partner of the head of state who controls automotive corporation Bohdan. Second is Serhii Pashynskyi, the People’s Front faction member and head of the parliamentary Committee on Defence. Not long ago, the latter headed the Supervisory Council of the state holding UkrOboronProm which consolidates defence oriented production assets of the country.
“Money flows in defence are divided between the Poroshenko’s Bloc and the Narodnyi Front, so that none of them would feel left out”, — says Serhiy Leshchenko, MP of Poroshenko’s Bloc and member of the Anti-corruption Committee of the Verkhovna Rada.
Infantry Financial Vehicles
One of the most bizarre contracts that the Ministry of Defence made in 2016-2017 concerns supply of the Infantry Fighting Vehicles (IFV) by Zhytomyr Armor Plant (ZAP).
The company procured decommissioned 1980s BMP-1 IFVs from Wtorplast company in Poland. The Polish company, in its turn, procured them from the Czech company Excalibur Army at 20-25 thousand EUR per unit, the price of scrap metal, according to the documents NV has obtained. Wtorplast disassembled the IFV, separating towers from undercarriages.
Then Zhytomyr Armor Plant imported these separate parts into Ukraine, each tower was estimated at 66 thousand USD, while every undercarriage – at 99 thousand USD. The Plant “repaired” IFVs by assembling the previously disassembled parts. Labour costs added another 40 thousand USD per unit.
As a result, the IFV worth 20 thousand EUR cost Ukraine’s defence budget some 205 thousand USD. In the previous year alone, the Ministry of Defence spent 41 million USD on 200 IFVs under the contract with the ZAP.
Military experts are at a loss as to why would the Ministry procure old IFVs, much less abroad. For instance, Kharkiv Tractor Plant produces lighter IFV analogues, says Anton Mikhnenko, Army Research Centre analyst. Besides, there are concepts which would enable IFV production in Ukraine.
One of the unnamed businessmen involved in this supply agreed to tell the NV that “Serhii Pashynskyi is the final beneficiary of this scheme”. He also said that the bigger part of the contact is nothing but corruption component.
The Narodnyi Front MP when asked about it by the journalist, confidently claimed that “Not only I have no commercial connections with the ZAP, I cannot have this connections in theory”.
Another suspicious contract was realized last year by Shostka plant Impulse, which is also part of UkrOboronProm structure. It can be seen in the invoices, that in April 2017, the company sold 109 detonator packages to the Cyprus offshore PH Strategic Business Limited at a significantly reduced price of 95 thousand EUR. Then the Serbian company Sloboda bought them at a market price of 684 thousand EUR. The payment came through the Latvian bank ABLV, accused of money laundering by the American Ministry of Finance in February 2018.
It is not quite clear whose Cyprus pockets got lined with the difference of nearly 600 thousand EUR.
What is known is that Pashynskyi’s son is involved in detonator supply, as he has been heading the foreign contracts department of the state SpetsTekhnoEksport. This very company issues licenses for arms export.
His MP father when talking to the NV did not confirm his involvement in detonator export. He did not deny it, either.
Such contracts in OboronProm are approved by Svitlana Khromets, deputy head of the corporation. She used to work for Hladkovskyi’s company Bohdan.
According to non-faction MP Yurii Derevianko from the parliamentary Anti-corruption Committee, there is one more story dragging from the previous year – the Ministry of Defence procurement of radio stations for the Army’s needs.
In the spring of 2017, the Institution decided to rearm their employees by allocating 350 million USD for the new radio stations.
Two companies competed for this order: Israeli Elbit, one of the highest league of equipment provider and Turkish Aselsan, a very modest player in comparison.
In the end, the Ministry chose the Turkish one and procured 100 million USD worth of walkie-talkies. Aselsan’s offer was 1% cheaper than that of Elbit. The experts, however, believe Israeli equipment to be of much better quality. On the world market, Turkish walkie-talkies cost 40% less than their Israeli counterparts.
Derevianko found out that the Ministry of Defence chose a winner based on testing. Interestingly, according to him, the Ministry officials compared the new Turkish samples with the old Israeli ones. Elbit company expressed their readiness to send their newest products, however, the state managers of Ukrainian defence agency ignored the offer.
Moreover, the method that the Ministry used to assess radio stations did not comply with the NATO guidelines, says Derevianko. Meaning that the Turkish samples connection structure is built around the central station and if the enemy manages to disable it, everything is gone. Whereas the Israeli samples conform to the decentralization principles, which drastically increases survivability of radio stations.
To add insult to injury, after the samples were tested and contracts signed, the Ministry officials discovered that the Turkish stations are too big to fit in the T-64BV tanks that they were specifically procured for.
The NV turned to the Ministry of Defence trying to clarify the details of the contract, but they referred the journalists to the General Headquarters. Their press-service, however, advised the journalists to discuss the walkie-talkies with the Ministry.
The NV obtained the copy of Shlomo Dagan’s letter, who is one of Elbit top managers, to the Anti-corruption Committee to the Verkhovna Rada. The author complains that general Volodymyr Rapko, testing commission chairman, was too quick to proclaim Aselsan the winner, even before the testing was complete. Moreover, during the testing process itself the Turkish stations kept breaking down.
Elbit’s press-service informed the NV that during the testing in Ukraine their products surpassed those of Aselsan according to all parameters. They also added that “In spite of significant investment in Ukraine, testing efforts and our continuous requests, Elbit company received no official report on the testing results”.
According to their letter, the Israeli experts were even prepared to share their technology of walkie-talkie production with Ukraine as well as to locate their manufacturing inside the country.
In November 2017 Israeli Prime Minister Benjamin Netanyahu, according to Derevianko, called Poroshenko and asked the Ukrainian President to resolve the situation. The MP also says that the Israeli special services discovered that the Turkish products had been lobbied by Pashynskyi and the National Council on Security and Defence secretary Oleksandr Turchynov.
However, the NSDC said in their reply to the NV that Turchynov has nothing to do with procurements.
After the Netanyahu’s phone call, the Defence Ministry re-tested the radio stations, yet the preference was once again given to Aselsan. In response to Derevianko’s enquiry on the matter the Ministry referred to a great number of technical details, which allegedly make the Turkish products more suitable for the Ukrainian Army.
The NV enquiry to the Ministry remained without a reply.
As for Pashynskyi, he is sure that the Turkish stations are much better than the Israeli ones.
Another instance trying to look into the walkie-talkie procurement, which is the Prosecutor General’s Office that is investigating the Ministry of Defence’s violations when making the contract.
Bohdan the Omnipotent
This auto-corporation has had a lucky streak as of lately. Its owner, Oleh Hladkovskyi, has a seat on the Security Council and heads the Commission on Military and Technic Cooperation to boot. Bohdan itself is a recipient of profitable orders from the state.
The Independent Anti-corruption Committee on Defence (NAKO) told the NV that in the beginning of the previous year the Ministry of Defence made a contract with Bohdan to commission 100 medical vehicles at 32 thousand USD each. The Ministry did not hold a tender since the law allows conducting such procedures without a tender if they are part of the secret defence order. That was exactly how the Ministry of Defence registered their application.
Unfortunately, according to the IACD, as many as half of 50 vehicles supplied to the front went out of order in less than a year. Non-the-less, the Ministry of Defence is willing to procure a hundred more of these very vehicles.
When commenting on this case, Hladkovskyi claimed that first, he learned about the vehicle procurement from the press and, second, only three vehicles broke down.
Even though representatives of his corporation admitted to 25 medical vehicles being out of order.
Hladkovskyi is confident that low-quality fuel is the main cause of vehicle malfunction. The Ministry of Defence procures it from the company Trade Commodity.
“Money flows in defence are distributed between the Poroshenko’s Bloc and the Narodnyi Front”
the BPP MP
The National Anti-corruption Bureau is looking into suspicious activity of this supplier. In the end of March, the detectives completed the investigation of this case. Primary suspect in the case, Ihor Pavlovskyi, deputy Minister of Defence, was going to be released on Hladkovskyi’s bail. The Court, however, released the deputy minister on bail of two military men.
Trade Commodity is owned by businessman Andrii Adamovskyi. In the past he was business partner of Oleksandr Hranovskyi, MP of Poroshenko’s Bloc, who, in his turn, was closely linked with another representative of the Presidential faction, Ihor Kononenko. The latter is the member of the business-trio Poroshenko-Kononenko-Hladkovskyi.
The Ministry of Defence also procures cargo vehicles from Hladkovskyi’s corporation. According to the NV sources, in 2015 defence order they stipulated procurement of 120 Bohdan cargo vehicles produced jointly with Belarus MAZ. The contract was worth 100 million UAH.
In the following years, the order grew to be 150 vehicles annually.
Bohdan-MAZ cargo vehicles are armoured at Kuznia on Rybalskyi plant, which happens to belong to Poroshenko and Kononenko.
When giving preference to Bohdan-MAZ vehicles, the Ministry of Defence rejected their Ukrainian counterpart, Kremenchuk KrAZ cargo vehicles which are 10% cheaper and have a five-year guarantee, unlike that of 2 years from Bohdan.
Dina Stehantseva, KrAZ press-secretary says that defence produce from their plant goes through a 2-year testing period before being supplied to the Ministry of Defence, at the company’s expense. Whereas the testing period for Bohdan-MAZ is a meagre two months. Besides, the Ukraine-Belarus production utilizes Russian spare parts.
In March Bohdan corporation reported that for the new supplies they would not use spare parts from Russia. However, the KrAZ people note that the new model proposed by Bohdan is a Belarus MAZ assembled in Ukraine and more expensive than the Ukrainian counterpart.
Hladkovskyi, when asked about whether he sees any conflict of interest, since he both owns Bohdan Corporation and occupies high position in the Defence sector, deputy head of the NSDC said: “Just look at American top-level politicians, practically all of them own some companies”.
The official adds that he has given Bohdan over to the assets managing company as far back as 2014. However, when talking to the NV, Hladkovskyi did not manage to remember the name of the company. Just said that Bohdan is doing very poorly indeed.
Military secret which is not a secret
Redundant secrecy in the military field — this a key source of dubious deals and corruption in the army orders sphere in Ukraine, according to Denys Vasyliev, expert on the defence reforms of the Reanimation Package of Reforms.
It is not a secret even for foreigners anymore.
The Government Defence Anticorruption Index made by London’s Office of Transparency International to monitor corruption in the defence sector puts Ukraine into group D. The “cleanest” countries are group A, the most shady ones are group F. Anyone knowing the Latin alphabet can guess that Ukraine is far from the ideal point.
To improve the current state of affairs, Olena Tregub, Secretary General of the Independent Defence Anti-Corruption Committee (NAKO), does not propose to put people in prisons. She believes, it is enough to change entirely the approach to the state defence contracts by making them more transparent and accountable to the general public. Allegedly, there is no need of labelling everything as classified, — it is possible to procure most of the conventional weapons at public tenders without damage to the state defence capacity.
Besides, an audit of UkrOboronProm should be held, adds Tregub.
In February 2018, this state corporation was well inoculated against non-transparency — Anthony Tether, former head of the US Defence Advanced Research Projects Agency (DARPA) was appointed member of its Supervisory Board. It is not enough though.
Vasyliev concludes that as the defence expenses grow, the need for more efficient use of the allocated funds grows as well. Otherwise, not only the state budget will incur losses, but also the actual state’s defence capacity.