Editor’s Note: Our 2019 Doing Business in Ukraine magazine is out. Get a PDF version online or pick up a copy in Kyiv.
The years-long battle of UkrOboronProm — Ukraine’s giant state-run defense production concern absorbed by corruption — is still in full swing, and the parties clashing over it are not equal in strength.
In February, when the Bihus.Info journalism project released its explosive investigation shedding light on multimillion-dollar embezzlement in the country’s defense production, it seemed to be a huge tactical win for reformers.
Oleh Hladkovkskyi, the former deputy secretary of Ukraine’s National Defense and Security Council, was accused of patronizing corruption and subsequently fired (although never prosecuted).
Then-President Petro Poroshenko repeatedly vowed to launch a game-changing reform of UkrOboronProm, which would start with a comprehensive independent audit of the heavily compromised state company.
Several months later, amid numerous declarations of “decisive action” from the ex-president, the government, and the National Defense and Security Council, a full-fledged international inspection is not even close to being launched. It is still hog-tied by bureaucratic hurdles in government offices, despite the urgent need to launch an effective military production industry in the sixth year of Russia’s war in Ukraine.
Nonetheless, according to some of the reformers, such as the recently-appointed UkrOboronProm Supervisory Board member Aivaras Abromavicius, there is still hope to overcome resistance from obstructionist forces.
Soon, the government is expected to finally make a decision to allocate funding for the audit, so that the long-overdue transformation of Ukraine’s military production can be started as soon as possible.
No progress
Attempts to get a glimpse into the secretive bureaucratic abyss of UkrOboronProm are nothing new. The concern was created under ousted former President Viktor Yanukovych in 2010, and has largely been a black hole since then.
As far back as 2017, an ill-fated Hr 130 million ($5 million) tender “to provide services for conducting strategic, operational, technological, financial, legal, forensic review and due diligence” was announced in the Prozorro e-procurement system. However, it yielded no results and was eventually cancelled.
The defense embezzlement scandal around Oleh Hladkovkskyi, Poroshenko’s business partner, inflicted a heavy blow on the ex-president’s reputation just weeks before presidential elections. In a bid to save the day, Poroshenko began making promises to actually do something.
During a National Security and Defense Council meeting on March 6, he promised an audit, an assessment of UkrOboronProm’s corporate management, a thorough cleaning of its supervisory board, and greater public control and transparency.
“All of that will help the concern transform itself and not lose the trust of citizens, partners, and investors,” Poroshenko said.
However, the reality on the ground contradicted Poroshenko’s rhetoric — and not for the first time.
No new competition to hire an international audit company was publicly launched on Prozorro, and the government announced no appropriations to fund the contract.
On April 17, facing the threat of a devastating defeat in upcoming runoff elections, Poroshenko even claimed that UkrOboronProm’s audit had already started with the March 6 decree of the National Security and Defense Council, “obligating UkrOboronProm to… lift classification and select auditors that would have access to state secrets.”
Nonetheless, in the following weeks, there was no tangible progress in finding a contractor and launching the check-up.
No money
After Poroshenko left office following the April 21 elections, Prime Minister Volodymyr Groysman became the most active verbal champion of UkrOboronProm’s nonexistence audit.
On May 15, he released a statement demanding that the audit be launched within 10 days — in other words, before May 25.
“I am defining the deadline for the start of the company’s financial audit,” he said. “We have made a decision to obligate the UkrOboronProm within 10 days to complete all negotiations with legal auditing companies, to select a winner, and kick-start the public financial audit. And to give an account of every hryvnia spent over the past years.”
He also added that the contract must be given to a company “having undisputed authority in the world.”
On May 22, the government announced that it had allocated Hr 32 million ($1.2 million) from the state budget reserve fund on condition of repayment so that the UkrOboronProm could launch “a comprehensive financial audit of its activities.”
Notably, Colonel Serhiy Kryvonos — appointed by Poroshenko to replace Oleh Hladkovkskyi at the National Defense and Security Council — asserted a much higher budget was necessary. On April 25, he said holding a complete audit could take nearly $5 million.
Expectedly enough, the audit was launched neither before May 25, as demanded by Groysman, nor any day later. The concern had not received the Hr 32 million allegedly allocated by the government, the Ukrainian News agency reported.
Citing a statement by UkrOboronProm’s press service, the agency reported that no audit company was selected to hold the inspection. The defense concern’s press service also pointed out that, despite numerous requests, the government had never allocated funds for the Hr 130 million audit tender announced in 2017.
Moreover, on June 14, it became known that the Cabinet of Ministers had, on June 5, canceled its own decision to allocate Hr 32 million.
“Therefore, the audit is not going to be held in the nearest time,” said Hlib Kanievskiy, head of the StateWatch anti-graft watchdog, which revealed this cabinet decision.
That same day, the Independent Defense Anti-Corruption Committee issued a statement noting that UkrOboronProm’s audit had been championed for more than 2 years, but the issue had been repeatedly set aside “for a variety of reasons.”
“It looks like not everyone is interested in revealing corrupt schemes and the scale of embezzlement,” the watchdog said.
Visitors look at missiles produced by UkrOboronProm and displayed at the Arms and Security exhibition in Kyiv on Oct. 11, 2018. (Kostyantyn Chernichkin)
A new hope?
However, as the government later claimed, that was nothing more than a technical delay.
Later on June 14, Groysman’s spokesman, Vasyl Ryabchuk, explained that the decree was canceled because it required some more work.
“The approved decision regarding the allocation of (financial) support for holding the audit was commissioned to be fixed,” the official said.
“At the same time, during the follow-up revision, it became obvious that the amount of support needed to be ascertained, therefore this decision was canceled. The passage (a new) appropriate decree is expected during the next government meeting.”
But soon there was a glimmer of hope. President Volodymyr Zelensky appointed Aivaras Abromavicius, the former economy minister, to UkrOboronProm’s supervisory board.
His nomination finally ensured a quorum on the board, which is supposed to execute financial control over the defense concern and, in particular, kick-start the audit. Since March, the five-member board had only two duly authorized members, making it invalid.
Long before the appointment, Abromavicius, then a member of the Zelensky campaign, strongly advocated for holding an international audit involving one of the Big Four accounting firms — namely, Deloitte, PwC, EY, or KPMG.
“A company with billions of dollars in turnover must undergo an international audit by the Big Four,” he said on May 27. “Because not a single accounting chamber will find anything there, including counter-partners hiding their money in offshore accounts.”
Back in July 2018, during an interview with the Kyiv Post, Abromavicius was already talking about the need to audit UkrOboronProm.
“…I have a Bloomberg terminal here and if I type in Lockheed Martin, I get a lot of news on Lockheed Martin,” Abromavicius said, stressing the transparency of the company’s sales. With more than $50 billion in revenue, its board of directors is diverse and consists of retired generals as well as business corporate executives.
“And yet our UkrOboronProm — which is like lots of companies in a possibly very profitable sector — has decided to go for minimum transparency… This is unfortunately one of the reasons why (then-President Poroshenko) gets criticized, because it’s quite clear some of his closest allies (are) basically overseeing that sector with a minimum level of transparency.”
Abromavicius is also known for his strict opposition to the somewhat popular idea of totally liquidating UkrOboronProm and creating a brand new government body to regulate Ukraine’s defense production.
From his perspective, a comprehensive international audit must be held regardless of the concern’s ultimate fate — and those proposing to kill the concern right away “want to cover things up.”
At the same time, pushing through the bureaucratic jungle — particularly the government funding issue — remains a serious obstacle, even with Abromavicius on the board.
“Resistance,” Abromavicius wrote on Twitter on June 14, referring to the Groysman cabinet’s failure to allocate money for the audit.
“Again, the system is reluctant about rapid changes. But, after discussions with certain ministers, there is a hope that next week the Cabinet of Ministers will vote again and approve the right decision. We’re keeping this issue under control and expect the audit to start very soon.”
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UkrOboronProm facts
• Founded in late 2010 during the presidency of Viktor Yanukovych
• Over 130 defense production enterprises
• Over 30 design bureaus
• Over 80,000 employees
• Responsible for nearly 50 percent of Ukraine’s state defense procurement
• Active in nine military production industries: aviation, shipbuilding, military vehicles and weapons, radio-electronic production, military device engineering, munition, military-purpose chemicals.
• The world’s 72nd biggest defense producer in 2018, with $1.06 billion in revenue in 2017 (according to Defense News Top 100)
• The biggest enterprises: Antonov Aircraft Plant in Kyiv, the Malyshev Tank Factory in Kharkiv, the Kharkiv State Aircraft Production, the Luch Design Bureau in Kyiv
• Handed over to the Armed Forces of Ukraine over 3,500 items of military hardware in 2018
• Withheld Hr 400 million ($14.7 million) in wages from its employees in 2018 – the largest amount of any enterprise in Ukraine
• Nearly 480 criminal probes conducted regarding corrupt practices at the concern (according to former President Petro Poroshenko, as of March 2019)
