Archive for the ‘EU’ Category

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Awaiting an unsanctioned Archduke Ferdinand moment?

November 11, 2016

An interesting event in the Balkans has been on the radar where coup plots and assassinations have seemingly reared their head.

The Ukrainian SBU claimed to have passed information leading to the arrest and deportation of Russians and Serbs that had apparently been involved or in the orbit of the occupied Donbas, had headed to Serbia with the intent of staging a coup in Montenegro storming government buildings and assassinating Prime Minister Djukanovic with the intent of installing a pro-Kremlin government.

The arrests in both Serbia and Montenegro, not to mention reaction within the national elites of both nations, seemingly sufficient to prompt an immediate flying visit from the head of the Russian Security Council Nikolai Patrushev and former FSB chief.

Attempts to manage the fallout subsequently followed with the usual denials and distractions and the general muddying of the waters in the public domain.

It is now claimed that diplomatic sources have revealed that this alleged attempted coup and assassination plot brought forth private apologies from Mr Patrushev and the assurances that it was not a Kremlin sanctioned action but rather a rogue operation.

Some or all of the above may be true, mostly true, partly true, but probably not entirely false.

However, unsanctioned actions are perhaps not surprising in the current Kremlin environment where there appears to be a lot of room for improvisation and risk taking for those on the overt or covert front line in order to get noticed and moved up.  When the official policy is plausible deniability, it becomes very easy to act knowing that such deniability is not only plausible but would also be genuine.

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And thus we perhaps await Europe’s next Archduke Franz Ferdinand moment – not through Kremlin design or sanction, but through a policy that may prove to simply have too little control for those improvising and risk taking to gain the “Tsar’s” attention.

Of course this may, and hopefully will not come to pass, but it seems something worth pondering upon the 11th day of the 11th month as we mark the armistice that ended World War I when there are so many potential Archduke stand-ins.

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Ukraine and the US – Initial thoughts with Trump on the horizon

November 9, 2016

There will be terabytes of commentary about the relations with “nation X” and the USA in a President Trump environment between now and his taking office.

Naturally much commentary will be regarding US – Russia relations.  Clearly some of that will overlap upon Ukraine.  US-Ukraine relations however, are not the same thing as US-Russia relations.  Unless President Trump immediately surrenders the post Soviet space to The Kremlin within days of taking office – which he won’t – there will be a period of policy pondering beyond anything that took place during his campaign .

Nevertheless for Ukraine there will be no “Uncle Joe (Biden)”.  There will be a far more “pragmatic” and perhaps a far less “values” approach to geopolitical issues.  Where any Trump red lines will be drawn remains very much to be seen – as will his reactions should they be crossed.

As such, most importantly it is not what President Trump says.  What matters is what President Trump is heard to say (or understood/interpreted to have said) which is not the same thing.

In short, what he says (or thinks he has said) may not be what is heard by either The Kremlin in Moscow, or The Bankova in Kyiv – or the capital of any other nation.  It is the interpretation of what he says (and does) that will be a factor in any understanding and/or response by The Kremlin, The Bankova (or any other capital the world over).

Ergo Kyiv will need to plan contingencies for whatever he says, and also for the interpretations of those words within The Kremlin.

The worst case scenario for Ukraine in the immediate future is the removal of sanctions within 6 months of President Trump taking office and the recognition of Crimea as Russia, which if his campaign rhetoric is to be believed (and campaign rhetoric very often fails to match actions when actually in power), he stated he would “consider”.

It then matters how those actions would be interpreted by The Kremlin – as being given carte blanche to re-assume control over Ukraine by hook or by crook with no meaningful US response should it do so, or not?  Ukraine should be prepared for either or both of those eventualities – as should Europe, for there would be repercussions.

Sanctions upon Russia will not last forever, and whether it be President Trump or a crumbling position within the EU that is the catalyst, to visualise sanctions as they currently exist remaining in effect in 2018 may prove to be a little more than wishful thinking even if The Kremlin position remains unchanged, and thus the reasons for their imposition remain unchanged.

Thus far The Kremlin position has not given any ground over the past few years.  A policy of exhaustion is still one The Kremlin believes it will win, regardless of any pain it suffers meanwhile.  It is particularly difficult to believe such a policy will be dropped if President Trump turns out to be less than hoped for within The Kremlin.

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The best case scenario is that Ukraine will have to fight very hard to prevent a US drift from the current US policy position – and succeeds in doing so.  Yet a drift seems much more likely than not unless Ukraine has a critical mass, (or a very influential mass), within both the Senate and Congress that will prevent a US policy drift – be that drift permanent or temporary.   Ukraine surely has some supporters of influence in both US institutions, but are they enough, are they stalwart, and can they manage/manipulate the unpredictable personality of Donald Trump sufficiently?

What of the Nuland-Surkov channel – is there to be a similar channel?  If so with whom?  A Kremlin dove like General Flynn, or a more hawkish Republican?  What of the behind the scenes liaisons between the US and the nations within the Normandy Four?

Once sanctions are undone, they will not replaced even if a Trump led US drift results in The Kremlin misreading him and crossing whatever lines he may have.  The European unity that has lasted thus far would not see them lifted and then once again find the unity to reapply them if removal is realised.

Perhaps far more important is the “consideration” of recognising the Crimean annexation per the Trump campaign rhetoric – which is hopefully just that.

Ukraine therefore requires some dependable and predictable partners capable of supporting its diplomatic and political line within the White House in the event of a very probable US drift (temporary or otherwise) – for what occurs within the space left by that drift may prove exceptionally difficult to undo.

2017 will see the UK, Germany and France internally distracted.

Confrontations over historical issues with Poland would certainly not be timely, and the political and/or diplomatic weight of Poland with a Trump White House is as yet unknown anyway.

Attempting to become a part of whatever European policy solutions emerge to deal with a President Trump White House will have to be pursued with the maximum vigour possible by Ukraine.

Perhaps of all the current and actively supportive partners Ukraine has, only Canada and the IMF will see no distracting and/or significant changes in 2017.

Thus unless Ukraine very rapidly becomes a poster child for swifter, deep and implemented reform from which no nation would want to disassociate itself regardless of its internal issues, the Ukrainian position seems set to diminish unless it helps itself.

Whether President Poroshenko can rein in the appetites of those around him such as Igor Kononenko to the point where the mere mention of his name no longer makes a diplomat’s eyes roll remains to be seen – but it would seem prudent to do so quickly.  What meaningful reform can be thoroughly implemented between now and a probable US drift in relation to Ukraine and/or tempo reduction of US action within Ukraine remains to be seen.  There were only so many fires it could and would fight within Ukraine under the Obama Administration.  It is likely to be fighting fewer fires under a Trump Administration.

Despite that which has been achieved with regard to reform, there is much to do.  What will get the attention and support sufficient to insure US policy toward Ukraine both remains unchanged – making any US policy drift short and swift?  Will anything prevent that drift, or at the very least is a temporary drift inevitable?

Ukraine requires contingency plans.  It should also perhaps decide upon a carefully assembled policy regarding just how to influence a personality like President Trump – who is not lacking in narcissism nor unpredictability (and to be charitable clearly has some appetites).

Whatever the President Trump policy toward Ukraine and whatever his policy toward The Kremlin will ultimately be – good or ill from a Ukrainian perception – there is far too much rhetoric on his campaign trail that forewarns of at the very least the likelihood of a period of drift which may be exploited by The Kremlin if Ukraine does not defend that space.

The immediate challenge for Ukraine is to prevent as much damage during that period as possible, whilst preparing contingency plans for a Trump led US policy toward Ukraine that as yet remains to be seen – and in all likelihood is yet to be formulated.

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Kremlin offers gas at $180 – Ukraine signs a deal with Engie (France)

October 28, 2016

Following President Putin’s very predictable monologue at the Valdai gathering, that day he also made a statement regarding Russian gas prices for Ukraine, should Ukraine decide to buy Russian gas once again.

Nowadays, the price of Ukraine won’t be higher than that for the neighboring states, namely for Poland. I’m not aware of actual prices, but at the moment of our conversation with Ukrainian President Petro Poroshenko, Poland was buying gas at $184-185 per 1,000 cubic meters on contractual terms. We could sell [gas] to Ukraine at $180. I named the price – $180 per 1,000 cubic meters.

We have discussed the issue of gas shipments to Ukraine with the president of Ukraine at his initiative. He asked whether Russia could resume the shipments. Certainly, it could, at any second. Nothing additional is needed – we’ve got a contract and an addenda to it. The only thing required is prepayment.

As far as I know, the price of gas for the ultimate industrial consumer in Ukraine already exceeds $300 per 1,000 cubic meters. We offer a price of $180, but they don’t want to buy from us yet.

Let it be – let them work. The main thing is that they could ensure transit supplies to European countries.

(He also commented upon the “illegalities” of Ukraine buying from western sources “which is a violation of a contract between Gazprom and its western counteragents” and to which Russia “had turned a blind eye.” and inferred to a return of  dubious”middle men” between Ukraine and western suppliers.)

 

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At the same time, Prime Minister Groisman was in France.

During this visit a deal was signed with French energy company Engie regarding supply and the reservation of transport and underground storage facilities operated by UkrTransGaz in Ukraine – the deal commencing this winter.

Since mid-2015 Engie has become a major supplier of gas to Ukraine, predominantly via Naftogaz, delivering approximately 3.5 billion cubic meters of gas.  Indeed Engie intends to open a subsidiary in Ukraine.

Thus far, despite quite significant legislative changes in the Ukrainian energy sector to bring it toward EU Third Energy Package compliance and Association Agreement obligations, the Ukrainian energy market has remained impenetrable to external market players.

The proposed privatisation of Centroenergo in 2017, whilst certainly of interest to dubious Ukrainians such as Igor Kononenko (who seems to be filling key positions within the company with “his people”), presents the best and swiftest opportunity for the energy market to receive a competent foreign entrant assuming control and ownership of assets and production in Ukraine – which will cause waves in the corrupt and opaque trough of Ukrainian energy from which no self-respecting oligarch fails to drink one way or another.

Clearly the Engie subsidiary, unless it becomes more than an “on-site” import management entity requires little investment and negligible risk – unlike the purchase of Centroenergo.

Nevertheless, there is a certain degree of symbolism to the French Engie opening a subsidiary in Ukraine which a reader can expect will be embellished for the purposes of political expediency.  Much more to the point however, is a clear move in the direction of a consolidated and irreversible diversification of energy supply for Ukraine.

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A belated thanks to CPRDiP

October 15, 2016

Of the varying formats when it comes to gathering scholars, practitioners, policy shapers and agents of influence, they can generally be split into two types.

Although it is tempting to state simply large and small, as an invitee they are perhaps better divided into intimate, press-free and useful, or on such a scale and which are so deliberately media focused as to be fairly pointless from a personal perspective – unless there are moments for enlightenment “on the fringes” distant from the masses.

Media focused events are clearly necessary, but it has to be said that this blog much prefers the small and media-free environment.

As such there are two annual gatherings that stand out for the quality of attendees, the intimacy provided by the managed numbers present, and the absence of media (the latter allowing for blunt and sensitive discussion) .  Consistently two such gatherings stand out though the composition of attendees is quite different.  The first is the outstanding 2 day Black Sea Security Forum, and the second is the ever-erudite annual CRPDiP gathering in Gdansk.

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The blog remains grateful to both for the perennial invitations and last weekend witnessed the CRPDiP gathering.  Thus now a moment can be found, a public acknowledgement of thanks should be forthcoming.

As such gatherings are only ever as enlightening and intellectually challenging as those that attend, thanks to Lukasz Adamski, Anton Barbashin, Fabian Burkhardt,  Geir Flikke, Evgeny Gontmakher, Jonas Gratz, Siriol Hugh-Jones, Olga Irisova, Michal Koran, Kadri Liik, Bobo Lo, John Lough, Pavel Luzin, Stefan Meister, Maria Mendras, Cornelius Ochmann, Nikolai Petrov, Peter Rutland, James Sherr, Ivana Smolenova, Hans-Joachim Spanger, Ulrich Speck, Andris Sruds, Sergey Utkin and Natalia Zubarevich for the exchange of views.

Special thanks to Ernest Wyciszkeiwicz and the CRPDiP team for the seamless hosting of the event – notwithstanding the efforts of the city of Gdansk.

Also to Adam Eberhardt (OSW) and Slawomir Debski (PISM) who extended invitations to poke around in the darkened corners of their respective organisations next time the blog is in Poland, those invitations are gratefully accepted.

Back to matters Ukrainian tomorrow.

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The neverending Mriya/Dream (or nightmare) – Ukraine

October 10, 2016

This entry has bumped its way up the “should write a few lines about that” list due to further deterioration of the situation as of yesterday when yet more assets were illegally stripped from the Mriya Agro Holding entity that has become something of an international nightmare for the Ukrainian authorities – despite Mriya meaning “Dream” in Ukrainian.

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Where to start this nefarious tale, and which names on the periphery to include or exclude is somewhat subjective.  What happens next is far from clear either.  Whatever the case, there will be many readers left with the perception that the authorities grip upon the rule of law, even with this high profile case involving numerous foreign investors, is more than a little questionable despite innumerable historical and very recent assurances by the authorities to pay special attention to the rights and circumstances surrounding those committing to FDI into Ukraine.

Perhaps most aggravating (aside from an absence of rule of law enforcement) is the fact that this incident is in agriculture – a sector that the Ukrainian authorities view as a leading economic sector to drive and sustain economic growth.

First however, a little historical glossary is required to bring a reader to the present day.

Sometime around 1992/1993 from within the leaderless and lawless rubble of post-Soviet Ukraine Mriya Agro Holdings was created by Ivan and Klaudia Guta.  It went on to become a major agricultural holding in Ukraine – among the top 5 in terms of land under management.

The Guta family, Ivan, Klaudia, Andrei and Mykola remained 80% majority share holders even after a successful IPO on the Frankfurt Stock Exchange in 2008.

Investors such as BNP Paribas SA, Credit Agricole SA and UniCredit SpA, while bondholders include Argentem Creek Partners, CarVal Investors, DuPont Capital Management, Pioneer Investment Management and T. Rowe Price Group Inc piled in, the World Bank and EBRD provided loans for expansion.  Why not?  Mriya Agro was reporting wonderful annual results ($660 million per annum) and reportedly had a truly enormous 320,000 hectares of land under management.

Quite where the due diligence was in all of this is unclear, for Mriya Agro Holdings had within its set up a number of obvious shell companies.  There is nothing wrong with shell companies per se as far as doing business in Ukraine is concerned.  Whilst they may be synonymous with tax evasion and dodgy dealings they also provide Ukrainians with multiple jurisdictions beyond the ruinously corrupted court system that can insure property rights are far from inviolable.

What reader would have left multi-million/billion dollar businesses at the mercy of a thoroughly corrupted Ukrainian judicial system where rights for such entities historically have been temporary in the hands of a suitably selected judge?  Off-shoring is akin to insurance therefore.

Suffice to say that the entirety of the Guta family were shareholders in (at least) 5 off-shore companies, including HF Asset Management Limited which owned the 80% of Mriya and which was subsequently wound up in December 2014 when the company CFO was the infamous Alexander Cherniavsky (see below).

The summer of 2014 found Ukraine with empty cupboards following the Yanukovych regime grand theft, a war with Russia, and the inevitable crash of the Ukrainian currency.  Mriya Agro Holding could no longer service its $ denominated bonds.  (The total debt portfolio across more than 20 lenders exceeded $1.2 billion.)

By December 2014 it was clear to shareholders of the 20% of Mriya not owned by the Guta family, and also Mriya’s lenders that the Agro Holding was being systematically asset stripped with assets being illegitimately re-registered (often back dated) to other companies, whilst other assets were being stolen, hidden and/or sold off with the proceeds disappearing.  A process requiring dodgy lawyers and “black notaries”.

The Guta family and the senior management left Ukraine swiftly when awkward questions began to be asked.

The remaining international shareholders were then faced with acting swiftly not only to deal with the international creditors, but also to prevent the continuing illicit stripping of Mriya Agro Holding.

It swiftly became clear that the accounts of Mriya audited by Ernst & Young (Kyiv office) were hardly a true reflection of Mriya Agro Holdings.  Aside from the ubiquitous VAT scams associated with agriculture in Ukraine, the asset stripping, fraud, accounts manipulation and cash skimming swiftly became apparent.

Indeed the 320,000 hectares of land reportedly under management turned out to be 220,000 – prior to further nefarious reductions.  In short $ hundreds of millions have been misappropriated

The minority shareholders won control over Mryia Agro Holding in the courts, struck deals the creditors, installed new management and began proceedings in Ukraine (and other jurisdictions), leading to former senior employees being declared wanted.  (Indeed Mykola Guta the former CEO had an Interpol Red Notice raised against him, currently sitting under house arrest in Switzerland.)  Legal process is underway to reclaim about 60,000 hectares of land bought with stolen cash from Mriya under the names of other companies.

Mryia Agro Holding today operates with about 180,000 hectares of agricultural land under management with a storage capacity of about 600kt.  It is now profitable, remains one of Ukraine’s largest agro-holdings, is servicing its restructured debts, has an operating capital of over $40 million, and should head to another IPO sometime around 2018 – 2020.

Bravo the much criticised legal system and law enforcement institutions of Ukraine?

Not exactly.

There have been recent “raider” attacks involving companies in one way or another related to the old Mriya management – FID Global Ltd, Global Health FID, FID Global LLC, Dream Leasing, OOO Bud M Haulage, OOO Bud M ATP, Global Feed Ltd etc.

Over the past month the following has occurred – 21st September 2016, the Kyiv Appeal Court lifted a freezing order on 142 units of agricultural equipment worth around $3 million that was illegally removed from the company by the previous management of Mriya when they defaulted on their debt obligations in August 2014.

The Appeal Court’s decision overturned the freezing order imposed by the Pechersk District Court on  July 6th 2016 as part of the main criminal case against Mriya’s previous management and owners.  That freezing order had returned the equipment to Mriya under its current management.

On October 4th, the former management began removing the equipment from a Mriya storage site and did once again on 10th October 2016 (prompting this “should write about one day” entry).

In response to the Appeal Court’s decision, the Special Anti-Corruption Prosecutor’s Office (SAPO) has prepared a request for a fresh freezing order. However, bureaucratic inaction by NABU is preventing SAPO’s request from going to court since NABU has (so far) not registered the fact that it is leading an investigation of/within the main criminal case against the former owners and management of Mriya.

The fact that SAPO and NABU are now involved can only mean that those individuals that fall within their legislative remit are involved.  The Category A and B public figures – the political class, judiciary, senior civil servants and SOE executives.  (The $ value of criminality certainly demands an investigation by an organisation perceived as having integrity.)

Nevertheless few such within that elite class would have the influence over the Appeal Court regarding such a highly visible on-going case with international complainants acting within a very sensitive economic sector for Ukraine.

Somebody with very serious clout is behind the above mentioned rulings less than one week ago – but who?  Undoubtedly the door to the Presidential Administration will be getting kicked down (once again) by numerous diplomats connected to the nations of shareholders and creditors – and rightly so.  Thus somebody who considers themselves “untouchable” by the Presidential Administration seems most likely to be behind the ordering of the Appeal Court decision.

Is there anybody in the Mriya Agro Holdings history capable of wielding such influence on such a sensitive case?  Do any such figures stand out from the others as having previously displayed the “right experience”?

From its inception in 1992/3, along the way the Mriya Holding certainly came into contact with numerous infamous names renowned for their less than stringent adherence to matters relating to the law.

For example, during 2003/4 it was associated with Yuri Karmazin who was something of a celebrity lawyer/parliamentarian at the time associated with questionable activities – among which land regularly featured.

Mriya’s association with Mr Karmazin seemingly came via Elena Berezhnaya, an “enabler of privatisation” granted numerous permanent and surprising legal abilities having done the “legal” for Party of Regions head office in Luhansk during post-Kuchma/pre-Orange 2004/5 elections.

Ms Berezhnaya’s daughter, Irina, miraculously found a role within the Verkhovna Rada in 2002 as an “assistant adviser to Yuri Karmazin and headed the Verkhovna Rada Sub-Committee for Synchronisation of Legislation in Ukraine.

While Elena Berezhnaya stayed in Luhansk and built a dubious but exceptionally profitable legal practice, her daughter Irena became something of a star within the Verkhovna Rada.  That stardom was not founded upon her legal qualifications or wily understanding of legislature, but rather that she was the first to bring cleavage to the VR coliseum, the first to bring tits to the theatre of the absurd, the first to bring admirably presented bare bosom to the most elite and feckless business club of Ukraine.

Irina Berezhnaya

Irina Berezhnaya

In short, womanliness was first displayed through fashionable “working apparel” within the corridors and halls of the Verkhovna Rada by Irina Berezhnaya, where conservative female dress code had otherwise prevailed.

To be honest, even as a “leg man”, the 2002 (onward) daily fun-pillow displays Irena presented to parliamentarians certainly caught the eye.  However, neither association with the then power of Mr Karmazin, nor Irena’s rather splendid boobs were her only attractions.  She was also associated with a very dubious notary service (black notary service) called Astra-Service.

By 2004 the illicit practices of this dubious (black) notary service had acquired clients such as VAB Bank, Ukrsotsbank and Mriya Agro Holdings.  To be blunt, such a notary service is rather useful when it comes to acquiring agricultural land rights by hook or by crook.

In 2006 Mr Karmazin lost his parliamentary position and was duly traded in by Irena Berezhnaya for one of Ukraine’s most infamous characters, Boris Fouksman.

Mr Fouksman is long (and strongly) rumoured to have made a fortune smuggling antiques and icons out of the USSR prior to its collapse, for having been involved in gun-running and having close Russian mafia connections – notwithstanding significant influence within Party of Regions at the time.

It therefore follows that the buxom Ms Berezhnaya became a Party of Regions Deputy within the Verkhovna Rada in 2007 under such patronage (collecting numerous honours and awards along the way both within Ukraine and an Honorary Professorship from the International University of Economics Vienna), until 2014 and the aftermath of the Yanukovych regime flight whereby she lost her parliamentary mandate.

It is rumoured that the daughter of Irena Berezhnaya is fathered by Boris Fouksman – though this has not been confirmed or denied.  The godfather of the child is known – the almost universally despised Nester Shufrych.

During her parliamentary period Ms Berezhnaya became “known” for supporting “raids” on corporate entities – for example Tochmash and Sinbias Pharma among several that had dealings with VAB Bank (behind which sat Boris Fouksman).  VAB Bank being one of the first VIP clients of Ms Berezhnaya’s (black) notary service Astra-Service along with Mriya Agro Holding.

Since losing her Deputy’s immunity, she has, perhaps unsurprisingly, having facilitated so much nefarious activity within the elites, not been subjected to any repercussions as far as the rule of law is concerned.  No doubt “insurance policies” of historical transactions exist should she fall under the eye of the law.

She is however, hardly powerful enough to have caused the latest Appeal Court judgement.

What seems most prominent in the history of Mriya Agro Holdings prior to its unsavory revelations of 2014 is the very short term appointment of the infamous Alexander Cherniavsky as CFO between September to December 2014 – the time when Mriya Agro Holdings then defaulted on $1.2 billion of bonds and land and assets where illegally re-registered in alternative company names.

Mr Chernaivsky is associated with Rinat Akhmetov, Sergei Liovochkin and Artem Ershov and in particular to the dodgy dealings surrounding the purchasing of Ukrtelecom many years ago.

A reader may possibly perceive that Mr Chernaivsky was deliberately installed for a specific (and nefarious) purpose considering such a short tenure as CFO and what occurred during that time.  Questions perhaps regarding Mriya’s interaction with Rinat Akhmetov’s FUIB bank may be asked?  (Rumours also circulate regarding Alpha Bank involvement.)

Is Mr Akhmetov the “untouchable”?  If a reader believes that the occupied Donbas will return to Ukrainian control, then it will surely be stewarded by Rinat Akhmentov as the biggest employer in that region.

That said, the vast majority of illicit money channels from scams and schemes did not flee with the Yanukovych regime.  The names of the end recipients simply changed.  Some of those surrounding President Poroshenko have hardly displayed morality or integrity since he came to power.  It is well within the realms of possibility (maybe even probability) that for a large enough fee, the desired Appeal Court decision would be reached upon their nod despite serious and numerous negative implications for the Ukrainian State.

Whether a Ukrainian journalist will attempt to find out the puppeteer behind the Appeal Court ruling, or ascertain exactly who among the ruling elite is playing “roof” for the Guta family and their on-going schemes remains to be seen.  Perhaps in the next few days a name will become apparent.

In the meantime international shareholders and investors continue to get shafted in Ukraine despite favourable court rulings and the instigation of criminal proceedings, whilst criminal proceedings and court rulings thus far have put nobody in jail almost 2 years after they were instigated.

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The gathering reform storm of 2017 – Ukraine

October 6, 2016

Many Ukrainian eyes are focused on 2017 and what external events will mean for the nation.

How will US policy change when a new president sits in the Oval Office?  What of the elections in France and Germany?  How much of a distraction will BREXIT be when it is eventually triggered?

All good questions – and as stated a few days ago “….. unless the Ukrainian leadership really start making strides (rather than tip-toe) with real and effective reforms US patience will expire sometime in 2017, just as the European patience will.  Real support will ultimately be reduced to little more than that surrounding territorial integrity and sovereignty.”

That statement fails to include Ukraine meeting its obligations to international institutions.  There are agreements with the IMF, World Bank, EIB and EBRD that will either be met – or broken.  This in turn will have a major impact upon FDI if (or possibly when) these agreements go unfulfilled.

To keep a watchful eye upon the external, currently” friendly” influences that will effect Ukraine in 2017 is understandable, but there are some extremely prickly and difficult issues internally that have the ability to magnify or reduce the thus far (surprisingly robust) goodwill of the international community (minus Russia) which seem destined to once again radically and negatively effect Ukrainian standing among its “friends”.

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In short there is a reform (or distinct lack of) storm brewing that is going to hit Ukraine in early 2017 and which when it does, the feckless domestic politicians will be once again at its core.  The issues are vividly clear, yet as normal, preparation, professionalism and policy are entirely absent.

Before looking at 2017 however, 2016 has yet to run its reform course.  The next tranche of IMF money, about $1.3 billion, is due in November.  For this tranche to be forthcoming there are but a few obligations to meet.

Clearly insuring reform progression thus far does not reverse is necessary.  The irreversibility of what has been done thus far is highly questionable.  What reforms, if any, can be claimed as being irreversible and consolidated?  Some may be close, but which are truly over the line?  The NBU has done a very good job, but a change of leadership and/or policy could undo almost all that has been done.  NABU is under direct assault by the PGO and Attorney General.  The new national police for the most part is refusing to buckle to corruption despite the police service remaining only half reformed and far from ethical as an institution.  The military are now a capable fighting force, yet its leadership remains poor and con tinuing corruption is as corrosive as the war of exhaustion with Russia in the occupied east.

Nevertheless, aside from holding the reform line that has be advanced thus far,  to meet the requirements for the next IMF tranche NABU should be given the right to wire tapping.  The list of SOEs for privatisation in 2017 completed (notwithstanding the November 2016 second attempt to sell Odessa Port Side – and the equally robust attempts to prevent its sale by vested interests.)  The e-declarations of politicians and relevant public office holders are to be filed in their entirety.  A “fair” budget for 2017 is to have been submitted.

All this to be accomplished by the end of this month so the IMF can give a timely nod of approval for November’s $1.3 billion.

Thus far, “fair” or otherwise, the budget has been submitted for consultation within the Verkhovna Rada.  The outcome of those consultations and the guaranteed subsequent amendments remain to be assessed by the IMF.  The budget however, is possibly the least problematic of the IMF requirements.

An independent NABU logically should not require the SBU to carry out wiretaps on its behalf.  The more people that know that “Mr X” is subject to a wiretap, the more chance there is that “Mr X” will find out.  Having to use a third party brings with it an unnecessary potential for leaks and/or tip-offs.  It should therefore not require stating that a nefarious elite and feckless parliament do not want a self-sufficient NABU that is far more difficult to infiltrate, influence or preempt.

The e-declaration fiasco remains just that.  The  declaration system still fails to meet the legislative framework requirements.  The e-declaration legislation itself also requires some amendment – just not the amendments to remove criminal liability that so many politicians want to see.

The sheer scale of opposition to the e-declaration reform is naked to the observing eye when considering it took EU conditionality to get the e-declaration law passed initially, and then months later it requires IMF  conditionality to actually get e-declarations completed by those who are required to do so (by the end of October).

At the time of writing about 1600 e-declarations have been submitted.  Of those only one of that number is of a parliamentarian (Mikhail Gavriluk).  None of the other 400+ MPs have yet filed.  Not a single member of the Cabinet has either.  About a dozen of the 300 NABU detectives have filed, and only two of the four NAPC members charged with policing e-declarations have done so.  Even if all e-declarations are submitted by the end of October, as stated long ago, court challenges are inevitable when the system still fails to meet the legislative framework it operates within.

In March the blog forecast that by the autumn Ukraine would not need external financing (although it would continue to accept it gratefully), but that it should nevertheless earnestly complete its obligations for reasons of external confidence in the nation’s governance.  Naturally the usual issues of fecklessness loom large, for when it is clear to the political class that there is no impending and immediate fiscal doom, the will to complete prickly reform legislation evaporates – which is where Ukraine finds itself today.

Reform orientated legislation has more or less stopped and requires resuscitation.  In fact it requires steroids if Ukraine is to meets its reform obligations to the IMF (let alone others) for 2017.

There are issues with compiling a list of SOEs ready for privatisation, liquidisation or remaining State owned.  There are at least 20 outstanding audits from those commissioned.

If the next few weeks in meeting the November 2016 and the $1.3 billion IMF tranche requirements appears optimistic, then meeting the obligations for the scheduled February 2017 tranche of $2 billion is perhaps as remote as riding a unicorn naked through the centre of Kyiv without once being snapped by a smartphone.

Despite the reform orientated legislative work completed in the energy sphere, the Ukrainian energy market remains entirely impenetrable, thus looking to 2017 the privatisation of Centrenergo is perhaps the only realistic chance of breaking into this market if it be sold to a foreign investor.  As such, the sale of Odessa Port Side in November has to be seen as a fair and transparent process by all onlookers.

Whatever the case, there is no way the list of SOEs for privatising, liquidisation or remaining State owned will be completed (and made publicly accessible upon the Ministry of Economic Development) by the year end.  Even if the only list of those SOEs identified for liquidisation is completed by then, there is simply little interest within the Verkhovna Rada to kill off such entities.  Gathering 226 votes for an exercise where none have any interests close to the New Year break is somewhat unlikely.  Auditors will not be rushed either.

Likewise “supervisory boards” such as that Naftogaz currently has (and which seems to be working well) for another 10 major SOEs is very unlikely to be achieved prior to 2017 as planned.  There is really no political will to do it – and a good deal of vested interests that will obstruct it.

Thus this reform requirement will roll over into 2017.

Fecklessness, lobbying/nefarious acts, and legislative short-comings aside – now to ever-present populism.

There two obligatory reforms by year end 2016 that seem simply beyond reach, will thus roll over into 2017, and yet are still unlikely to get through the Verkhovna Rada to facilitate the $2 billion February IMF tranche – thus finally breaking the IMF agreement and dealing a critical blow to “friendly” transatlantic assistance beyond issues of Ukrainian sovereignty and territorial integrity.

The first is the long-standing issue of pension reform that almost every government has stated it will tackle – but hasn’t.  Pensions from the age of 50 are simply unsustainable, and to be blunt most people continue to work way past being 50 because the pensions do not sustain them.

It is a policy that has to be addressed, but one that when push comes to shove, and despite a decade of rhetoric regarding the necessity of raising the pension age, every Ukrainian leadership succumbs to populism.

Nevertheless it simply has to be raised.

It is foolish to believe that any attempt to raise it significantly in one go will ever get through the Verkhovna Rada.  A system, for example, of raising the retirement age by 1 year every 2 years over 20 years (or a variation therefore) may stand a chance – however slim.  A system of greater contributions equating to greater pensions may also find some traction – but enough?  The populists however (Ms Tymoshenko, Mr Lyashko etc) will always seize upon pension reform for short term politicking and pre-election electioneering rather than looking at long-term policy necessities.

There are also existing process issues relating to checking the authenticity of claimants – something aggravated by the large number of internally displaced people.

Most difficult of all however, is the issue of land reform.  Ukraine has obligated itself to creating legislation regarding agricultural land reform by the end of October 2016.  That simply is not going to happen.  As of the time of writing the blog cannot even find a draft law registered regarding the issue.

It may be that the IMF will allow this sensitive/populist issue to roll over into 2017 and allocate the November 2016 tranche if all other conditions are met.  It will not issue the $2 billion tranche in February 2017 without this issue being tackled however.

Ms Tymoshenko is already noisily calling for the current moratorium upon the sale of agricultural land to be extended to 2022.  The Radicals being equally as populist will enthusiastically support her.

The sly oligarchy or slightly less mega-rich will look to provide/create agri-loan businesses with formidable foreclosure clauses to assume agricultural land of those farmers they lend to should the sale of agricultural land be permitted.  Huge ranges of State land will be swiftly leased through cronyism prior to any right to buy.  The farmers must be given more time to save the capital to buy the land they current lease and farm.  All such reasons will be presented not to create an agricultural land market.  Those farmers that do own their land will be tricked out of it by the unscrupulous, or simply coerced into selling it for a pittance – by continuing to stop them being able to sell the land they currently own, we are saving them from themselves (rather than infringing upon their rights to sell their own property).

There will be some societal “buy in” for some of that rhetoric, but that rhetoric can perhaps be employed to create safeguards within any laws creating a land market – if anybody actually drafts a law to create a land market that will be fair, regulated, and if necessary contain legislative restraints.  (Perhaps Ms Tymoshenko would like to draft a law that explains how a land market will be created after her 2022 moratorium expires?)

If it proves simply impossible (as is likely) to find the political will not only to lift the current moratorium but also prevent its extension, then perhaps legislation creating a fair land leasing market  is an alternative?

If the land cannot be bought and sold in a (regulated) free market environment, then create a transparent free market where leases for the land can be.  Some imagination might be required, but there is surely some way to create a land market that brings about transparent and fair benefits to all and around which Ukraine and its “friends” can agree as constituting positive market driven reform.

Although it is possible to continue with examples that are going to lead to a reform storm in 2017, it is perhaps unnecessary insofar as highlighting how swiftly matters are going to come to a head and when a probable breach of IMF conditionality occurs – with undoubted repercussions with a newly installed US Administration and immediately prior to both French and German electioneering.

Indeed it may also become the catalyst for the long anticipated early Verhovna Rada elections in Ukraine (which are unlikely to bring about a reformist critical mass as current election laws stand).

* * * * *

A note to regular readers – For the next few days your author will be in Poland locked behind closed doors with a dozen sages and otherwise insightful boffins from across the region.  Although undoubtedly returning far wiser, the normal rambling and low-brow blog entries will continue upon return.

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Gov UA – What cost obligation and reputation?

October 4, 2016

Much has appeared in the blog regarding Government Ukraine’s obligations and reputation with regard to investment and the international arena.  Too little prose has been written regarding the obligations and reputation of Government Ukraine with regard to what occurs domestically.

It is perhaps overdue to raise such an issue once again.

Having written on numerous occasions about the privatisation of Odessa Port Side, to continue on a familiar theme for regular readers, there were, and remain, both domestic and international parties interested in its purchase – and by international that means genuinely international companies rather than Ukrainian owned internationally registered companies such as Dmitry Firtash’s Group DF.

With Ihor Kolomoisky’s claims toward Odessa Port Side now dealt with, the most prominent hurdle for privatisation to a foreign investor/company is most certainly the legitimate $251 million gas debt to Dmitry Firtash’s chain of companies.  (That is on the presumption that debt is truly to Dmitry Firtash and not ultimately to Gazprombank to which he is indebted to the tune of several $ billions.)

If (a significant if) Mr Firtash can write of the debt to himself, then Odessa Port Side will be a very cheap acquisition for Group DF – but perhaps he cannot.  Despite Ihor Kolomoisky’s long interest in owning Odessa Port Side, the bankrupt (in all but legal proclamation) position of PrivatBank, and equally questionable health of his MAU (Ukrainian Airlines) probably rules him out of any acquisition.

It is the question of legitimate debt to Mr Firtash that may very well force international investors to think and rethink any bids for Odessa Port Side.

Which (mostly European) international companies want to buy Odessa Port Side and be forced to write a cheque to “Mr Dmitry Firtash, marooned oligarch in exile, Vienna” for $251 million, when Mr Firtash is wanted by the USA and extradition attempts to get him will never end?    There are issues of corporate reputation at stake.

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The Ukrainian government has acknowledged the debt as legitimate and the opening bid price for Odessa Port Side has been radically reduced to acknowledge this.  Having done so, and recognising that some domestic bidders will have no consideration for reputation, the Ukrainian government are surely aware that some otherwise solid international bidders have such reservations.  If Gov UA is not aware of such reservations, then this blog certainly is.

For the sake of coalition survival within the Verkhovna Rada, the sale of Odessa Port Side to Dmitry Firtash is a non-starter.

Why then has the Ukrainian government not arranged the purchase of Odessa Port Side in a way that will save any external purchaser the reputation issues associated with giving a man wanted for corruption by the USA, $251 million?

It is not beyond competency or legal structuring of a purchase for Gov UA to assume the Firtash debt, receive and accept a good bid in full and then use part of the sale dividend to settle the Group DF debt without any reputational damage to an international buyer.

The US, as does everybody else, knows full well that Odessa Port Side has to be privatised.  It will also be well aware of the reputation issues many potential international buyers have with being forced to settle directly with Mr Firtash.  Whilst US patience with the current Ukrainian leadership is clearly thinning rapidly, there will be no issue with Gov UA settling with Mr Firtash if it would facilitate a successful international privatisation.

The US is also keenly aware that the Ukrainian government simply does not have the unallocated funds to settle the Firtash debt prior to privatisation.

To be absolutely clear, the Ukrainian government has little option but to sell Odessa Port Side – whether a reader considers Europe’s biggest fertilizer manufacturer a strategic asset for Ukraine when considering the scale of its agriculture, or not.

Gov UA simply cannot afford to continue to subsidise Odessa Port Side as it does to the tune of UAH billions.  The only reason it has to subsidise what would be a clearly profitable entity otherwise is due to the nefarious hands that make it unprofitable knowing the plant will be subsidised.

As is usually the case, regardless of the desire and recognition within the Cabinet of Ministers of the financial need to get Odessa Port Side off of the State books before next year’s budget, there are many influential hands within the Verkhovna Rada that require the privatisation to fail in order to maintain the dodgy deals and nefarious revenue streams from which they benefit lavishly.

It is no coincidence that former Prime Minister Yateseniuk appointed two people very close to Mykola Martynenko to sit on the board and manage the plant.  It is also no coincidence that another board appointee was a former assistant of Alexander Granovsky, who is close to Ihor Kononenko (President Poroshenko’s leg-breaker within the Verkhovna Rada).  Unsurprisingly the exceptionally odious Sergiy Pashinsky and dubious Sergiy Tishchenko also have vested interests in Odessa Port Side.

To be blunt Messrs Martynenko, Granovsky, Kononeko, Pashinsky and Tishchenko have no reason to welcome the privatisation of Odessa Port Side.  This is a particularly powerful group of individuals, all of whom do very well from existing schemes to the point where the plant records losses rather than the profits it would otherwise make.  Privatisation to a foreign corporation would end those lucrative schemes.

Nevertheless, it seems somewhat incredulous that Gov UA has not insulated the reputation of any foreign buyer from having to directly pay an oligarch in exile $251 million that is (and will remain) wanted by the USA for corruption.

To pluck another example from Odessa that shines a dim light upon Gov UA and its internal reputation and obligations, during the Yanukovych regime a major water treatment works project was commissioned and delivered in full by an engineering company from Odessa.

(Full disclosure, the blog is acquainted with the owner.)

It was a major project that included closing the cooperation of Turkey in closing the Bosporus Strait whilst pipe was brought through as the below YouTube clip displays.

It doesn’t take a civil engineer or quantity surveyor to realise that such a project costs many, many $ millions, nor that the project brought with it a tangible benefit to Odessa and the Black Sea environment.

This is a company that can deliver major projects and manage international supply chains.  It operates in Africa and the Gulf States too.  Such private Ukrainian contractors are few and far between.

It will not be working for or with the Ukrainian Government again any time soon however.

When the Yanukovych regime and government fled, it fled with unpaid contractors all over Ukraine – the above engineering company being one such contractor.  This Odessa company was and remains owed in excess of $20 million.

Unlike many such contractors, this company from Odessa is owned by a man with sufficient influence to sit in the Prime Minister’s office and raise the issue of The State’s unpaid debt.  When a contract is with the State, it is with The State and not whomever is currently in power.  If Gov UA can recognise as legitimate the $251 million owed to Dmitry Firtash (which it is), then there are a lot of other contractors with claims against the Ukrainian State which are equally as legitimate.

The answer given to the owner of this engineering company by Prime Minister Groisman was apparently “Ask the Americans”.

There is no way that the USA is going to undertake to repay Ukrainian State debts to contractors it has failed to pay.  It is simply a non-starter.  Indeed unless the Ukrainian leadership really start making strides (rather than tip-toe) with real and effective reforms US patience will expire sometime in 2017, just as the European patience will.  Real support will ultimately be reduced to little more than that surrounding territorial integrity and sovereignty.

It is for the Government of Ukraine to honour its obligations as “The State” to its unpaid contractors.  It may very well decide to use US backed guarantees to begin to fund such an effort – for as long as the US is prepared to issue such guarantees, and that will not be for much longer if the current leadership continue as is.  It may have to find other ways to pay them.  Whatever the case, the reputation of Gov UA will continue to suffer domestically so long as it fails to even recognise its obligations, let alone arrive at a strategy to honour them.

Quite what the State debt to unpaid contractors amounts to is probably a very scary number – and as it is unlikely that there is even $20 million unallocated cash available to settle even this single case.  Undoubtedly the Government of Ukraine will continue to ignore such issues rather than reach some form of accommodation with the domestic businesses, including those rarities capable of delivering large infrastructure of international standard.

As long as that situation continues, such contractors are not going to be enthusiastic about other opportunities with Government of Ukraine.  Instead the “bodge it and scarper” companies will be used.

Perhaps yet worse with a long term view, the contractor in this example has numerous clearly beneficial projects to both Odessa and the environment already drawn up – but it will not approach City Hall, the Oblast Administration, nor Gov UA with them unless it can be sure of a third party (EBRD or a sovereign investment fund) that provides some faith in contracts being fully honoured.

As such The State reaps as it has sown – and will continue to do so.

President Poroshenko is unquestionably the most PR aware president in Ukrainian history, thus a reader may well ponder quite why there is such disregard for reputation and obligation toward those with which the State engages (or hopes to engage).

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