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Ukraine: Criminal Cases Filed Over Gas Schemes

In a dramatic announcement that could have far-reaching consequences, Oleksandr Turchynov, the head of the Ukrainian Security Service (SBU), said on 18 June that criminal cases have been opened concerning the activities of two offshore companies involved in gas-transportation schemes from Turkmenistan to Ukraine, schemes that allegedly deprived the Ukrainian treasury of more than $1 billion.

In an interview with the newspaper "Zerkalo tyzhnya" published on 18 June, Turchynov said the SBU has been investigating the activities of two companies -- Eural Trans Gas and its successor, RosUkrEnergo -- which acted as the "operators" of Turkmen gas to Ukraine. Investigators are also probing any role that might have been played in their operations by the management of Naftohaz Ukrayiny, the Ukrainian state-owned energy monopoly.

Russia's Gazprom and Naftohaz Ukrayiny are closely linked to the activities of the two offshore companies under investigation. Turchynov charged that former high-level officials in Ukraine, together with Russia's current leaders, knew of and approved these illicit schemes, Interfax reported.

Also on 18 June, Ukrainian Gas Bank head Vadym Lyashko was arrested as he allegedly was preparing to flee the country, Ukraine's Channel 5 television reported. The Ukrainian Gas Bank was recently investigated for allegedly laundering $59 million for the Ukrainian Transportation Ministry during the administration of former President Leonid Kuchma. The bank is closely linked to Naftohaz Ukrayiny.

Lyashko's arrest and Turchynov's announcement were long-awaited steps in the realization of President Viktor Yushchenko's and Prime Minister Yuliya Tymoshenko's promise to close down highly suspect schemes in the gas-transportation business that are alleged to be have drained the Ukrainian state treasury of $1.2 billion since 2003.

Thus far there has been no reaction from Gazprom to Tuchinov's allegations.

On 30 July 2004, Russian and Ukrainian media announced that the top management of Russia's Gazprom and Ukraine's Naftohaz Ukrayiny had jointly created a new offshore company to be the "operator" for Turkmen gas to Ukraine. The new company, RosUkrEnergo (RUE), would replace Eural Trans Gas, a Hungarian-based company that had been the center of considerable controversy in the media.

Eural Trans Gas, according to the registration document filed with the Budapest business court, was of curious origin. It listed its place of business as the small village of Csabadi, outside of Budapest, and named three previously unknown Romanians as its principals.

Eural, according to a 2003 interview with Eural Director Andreas Knopp in "The Kyiv Post," was closely linked to Dmytro Firtash, a Ukrainian businessman with interests in Moldova and Turkmenistan and the owner of a number of companies in Ukraine. According to court documents provided by the Itera International group of companies, Firtash's Israeli-registered company, Highrock Properties Ltd., is being sued by Itera, which accuses him of owing them $28 million.

Hermitage Capital Management, an investment fund in Russia that campaigns for minority shareholder rights, published its report on Eural Trans Gas and Gazprom in 2003. This forced Gazprom and Naftohaz to take steps to distance themselves from Eural, a company they helped create. Eural was sold in 2004 to a group of investors and came to be headed by Cedric Brown, the former head of British Gas. Another prominent player in Eural became Robert Shetler Jones, although his exact role was not clear. He was described in "The Kyiv Post" on 16 June as a consultant to another investor in Eural, the British publicly traded firm JKX Oil and Gas, a company with substantial oil-drilling assets in Ukraine's Poltava region.

Despite these changes of ownership, Eural Trans Gas was finally replaced by RUE, which began operations on 1 January 2005.

According to Gazprom and Naftohaz spokesmen, RUE was registered in Zug, Switzerland, on 22 July 2004, and seemingly consisted of two partners -- ARosgas Holding AG, a subsidiary of Gazprombank formed in 2004 that holds 50 percent of RUE, and Raiffeisen Investment AG holding the other 50 percent.

Robert Shetler Jones became a member of the RUE advisory board, while the former head of the Eural Trans Gas office in Moscow, Oleg Palchykov, became one of RUE's managing directors. ARosgas AG shared the same mailing address in Vienna, Austria, as its partner in RUE, Raiffeisen Investment.

Raiffeisen Investment AG, an Austrian company registered in 1993, was described by Gazprom spokesmen as their partner in RUE that looked after the interests of Naftohaz Ukrayiny.

Despite Gazprom's explanations, there was considerable speculation in the press as to the role of Raiffeisen Investment and its exact relationship, if any, to Raiffeisen Bank. Gazprom spokesmen never clarified the relationship, merely repeating that RUE is a "fully transparent" structure.

On 6 August 2004 Interfax reported: "In late July 2004, 100 percent subsidiaries of Russia's Gazprombank and Austria's Raiffeisen Bank created the RosUkrEnergoprom company for the supply of Turkmen gas to the Ukrainian market. The company, shared by the parties 50-50, will be registered in Switzerland. RosUkrEnergoprom will purchase Turkmen gas for the Ukrainian market and act as operator of the gas purchased and investor in the development of the gas-transport infrastructure required for securing the transit. The company will be run by a coordination committee including representatives of the leading officials of Gazprom, Naftohaz Ukrayiny, Gazprombank, and Raiffeisen Bank."

Research has shown that Raiffeisen Investments has no direct management connection to Raiffeisen Bank, although both companies are owned by the Austrian RZB Group.

Furthermore, Raiffeisen Investment is not ARosgas AG's partner in RUE. According to an interview with "The Kyiv Post" on 16 June, Raiffeisen Investment spokesman Wolfgang Putschek stated that the company only manages the portfolio for "a group of Ukrainian businessmen who have worked in the gas industry" and is paid a commission for managing that portfolio. When asked to name the "Ukrainian businessmen," the spokesman declined to do so, citing confidentiality agreements.

Apparently, the "Ukrainian businessmen" whose portfolio's were being managed by Raiffeisen Investment were acting as private individuals, while ARosgas was clearly connected to the Russian state and collected nearly $478 million annually for Gazprom, according to Hermitage Capital Management, a Moscow-based investment company.

The total fee paid to RUE by the Ukrainian state for transporting gas from Turkmenistan, in Gazprom's pipeline, to Ukraine is reputed to be close to $1 billion per year, paid to RUE in the form of 13 billion cubic meters of gas, which it then sells in the West through a variety of agents. This is the same fee that Ukraine paid Eural Trans Gas, according to a contract signed in Moscow in December 2002 that has been made available to RFE/RL.

Asked by Ukrainian journalists at a press conference earlier this year if Naftohaz Ukrayiny is a principal in RUE, Naftohaz Ukrayiny head Oleksiy Ivchenko replied that it is not and that Naftohaz was seeking to buy into RUE so as to have some say in its management and to receive the $478 million the unnamed businessmen are reputed to collect yearly.

Apparently the former management of Naftohaz, headed by Kuchma loyalist Yuriy Boyko, renounced its right to be a principal in RUE and reclaim the $478 million that Ukraine paid RUE for its services, giving its consent instead to a group of unnamed private "Ukrainian businessmen" to collect this money. Boyko, however, rejects any allegations of wrongdoing.

Prime Minister Tymoshenko has stated that as a consequence of the Eural Trans Gas and RUE, schemes, Ukraine lost more than $1 billion, Interfax reported on 15 June.

Gazprom has not come under any official scrutiny in Moscow for its role in the RUE or Eural Trans Gas gas schemes. The lone critical voice was that of Hermitage Capital Management, whose spokesman told "The Moscow Times" on 16 June that Gazprom is losing out on $478 million in annual revenues from the RosUkrEnergo deal and that this money is going to unknown beneficiaries participating in RosUkrEnergo via Raiffeisen Investment.

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