Ukraine’s leaders may be getting more than they bargained for when they asked Swiss authorities to reveal how much money opposition leader Pavlo Lazarenko had in Swiss banks.
The Ukrainian government’s repeated requests for judicial cooperation led Swiss authorities to freeze some of Lazarenko’s accounts last month and ultimately to jail the former Ukrainian prime minister last week on a charge of money-laundering after he tried to enter Switzerland by car from France.
At first glance, the Swiss criminal case looks like a dream come true for President Leonid Kuchma and his allies, who have been fighting a pitched political war with Lazarenko for more than a year. Lazarenko was considered already too tainted with corruption allegations to challenge Kuchma directly in next year’s presidential election; now Lazarenko may be constrained in lending financial support to other candidates as well.
However, an investigation and trial not under Ukraine’s control could prove embarrassing for current Ukrainian leaders, most of whom were not far from the scene of Lazarenko’s alleged crime at the time it was allegedly committed.
Lazarenko is accused by Ukrainian authorities of siphoning hundreds of millions of dollars out of the country through the company United Energy Systems, which received exclusive contracts to sell gas to one-third of Ukraine during his term as prime minister from June 1996 to July 1997.
Moreover, the case threatens to backfire against current leaders by once again drawing international media attention to the rich and shady business of gas trading in Ukraine. According to Kuchma’s critics, the same methods allegedly used by Lazarenko and his business partners to enrich themselves in 1996-97 are being used today by allies of President Leonid Kuchma to do the same.
‘Somebody involved in the gas business has to be close to Kuchma, otherwise he wouldn’t be in the business,’ added Ivan Lozowy, director of the Institute of Statehood and Democracy.
Moreover, gas-trading profits will be a major source of funding for Kuchma’s re-election campaign next year, the critics said.
‘A part of the money that’s earned on gas goes to financing all election campaigns,’ said Vyacheslav Pikhovshek, director of the Independent Center for Political Research.
A Swiss magistrate arrived in Kyiv on Dec. 7 looking for evidence that Lazarenko illegally earned money deposited in Switzerland, and, judging from what Ukrainian authorities have been saying, he shouldn’t have to look far. Ukraine’s prosecutor general has repeatedly said he has enough evidence to charge Lazarenko as soon as parliament agrees to lift the immunity he enjoys in Ukraine as a people’s deputy.
The Financial Times in its Dec. 9 edition ran an article that began by explaining how Lazarenko gave exclusive contracts worth billions of dollars to the company United Energy Systems.
‘But the real issue is that the scheme which Mr. Lazarenko is alleged to have profited from, gas trading, is still very much alive and well … and supported by high-ranking Ukrainian officials who have stepped into his shoes,’ the article said.
‘Gas trading sounds innocent, but in reality it is a scheme of monopolies, transfer pricing and barter which is designed to suck all the profits from the Ukrainian economy into foreign bank accounts,’ it added.
The article explained that energy is the most universal component of production and thus the most important commodity to control in Russia’s and Ukraine’s barter economies. Gas and other energy traders are thus in a position to acquire exportable commodities such as metals at bargain prices, generally without paying taxes.
The newspaper wrote that Oleksy Kucherenko, president of the private company Bari, had said in an interview that his company had been given $500 million worth of exclusive contracts by the Cabinet to supply state-owned factories with electricity this year. The Financial Times said Bari is Ukraine’s biggest electricity trader.
Before his election to parliament in March, Kucherenko was also chairman of the board of Intergaz, which along with another private company, Itera, controlled the second- and third-largest shares of the gas-trading business during Lazarenko’s term as prime minister.
Since Lazarenko’s dismissal, Intergaz has faded into the background, but its former president, Ihor Bakai, was appointed by Kuchma to head a new state firm, Naftogaz Ukrainy, that controls all of the state’s interests in the gas and oil business. Naftogaz Ukrainy, which controls a number of partly privatized companies, now has two-thirds of the gas trading business, and Itera remains a major player.
Earlier this year, after Gazprom refused to deliver gas to Intergaz due to unpaid debts, the gas was instead sold to Bari, according to Maksym Koryzhsky, a gas-industry analyst working for the Agency for Humanitarian Technology, a consulting firm.
Since the scandal around UES and Lazarnko, the workings of the gas business have become even more opaque. Little is known about how the government and Naftogaz Ukrainy plan to divvy up the gas market next year, but pronouncements that it will become fair and transparent are greeted with skepticism.
‘Information on the gas sector is closed and decisions are taken through non-transparent mechanisms because the decision-makers are not interested in openness,’ Koryzhsky said.
He said Naftogaz Ukrainy is lobbying to control all gas trading, cutting out Itera from the top level of the market. The state monopoly will then divvy up the country’s oblasts among various private dealers, he predicted.
When Kucherenko and six other deputies left the pro-government People’s Democratic Party last month, the newspaper Den and other observers explained it as a dispute between a circle of energy traders around Bakai who are loyal to and dependent on Kuchma and a number of PDP members who are trying to steer the party in a somewhat more liberal direction and are reluctant to support Kuchma’s re-election.
After the deputies’ departure, the PDP’s chief ideologist, Maksym Strikha, said the deputies had been promised a better position for their businesses in exchange for support for Kuchma. Other deputies in the departing group included a former vice president of Intergaz, a former member of the board of the state gas company Ukrnafta, the presidents of the National Gas Company and Ukrgazservis (both private), and – curiously – the former first deputy head of the State Tax Administration.
The Financial Times quoted the chief of that administration as saying it has no authority to investigate companies for transfer pricing, in which exportable commodities are traded at or below cost within the country and then sold at market prices abroad, where the profits remain.
There have more signs of a developing antagonism between the party Kuchma helped create and the president’s allies in the energy business. On Dec. 3, the PDP and Rukh issued a joint appeal to Prime Minister Valery Pustovoitenko blasting First Deputy Prime Minister Anatoly Holubchenko for allegedly acting independently from the rest of the government in ordering a halt to construction of the Yuzhny oil terminal in Odessa and a pipeline connecting it to Poland (see ‘Headline of story’ over there, see?).
Holubchenko, who oversees the energy industry, has a reputation of being the man in the Cabinet who most directly represents the presidential administration. Korizhsky said Holubchenko, Bakai and the presidential administration are the gas industry’s three main decision-makers.
The Financial Times quoted Holubchenko as saying the government no longer gives exclusive energy trading contracts and insisting, ‘You won’t find such documents anywhere,’ then said it had obtained an Energy Ministry decree giving a company called Kievkod an exclusive contract.
The Financial Times article is reminiscent of a string of articles in international newspapers last year on Lazarenko, UES and the gas-trading business. Just prior to his dismissal, Lazarenko led a delegation of Ukrainian businessmen on a tour of Canada that was meant to promote investment in Ukraine, but instead left a trail of summarized Financial Times and New York Times stories on the Lazarenko-UES scandal in newspapers across Canada.
The story of a prime minister from a former Soviet republic put on trial for money-laundering in Switzerland would set multiple precedents and would be certain to get considerable media attention around the globe. So far the story has been handled mostly by news agencies and the Swiss press.
The London-based Financial Times is the only major international newspaper with a full-time correspondent in Kyiv; most others cover Ukraine from their Moscow or Warsaw bureaus.
