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Bribery, back room dealing, and bullying' in Ukraine: The origins of Burisma

By James Stafford
web posted October 19, 2015

What's wrong with Burisma—an influential Ukrainian gas company with high-profile Westerners on its board—is what's wrong with Ukraine: Its origins are highly suspect and it is controlled by a recent fugitive accused of stealing the country's gas assets.

It is this type of situation in Ukraine that "kills productivity and smothers inspiration," according to U.S. Ambassador to Ukraine Geoffrey Pyatt, who recently used a financial forum in Odesa to air his grievances and concerns about the ongoing corruption in Ukraine and widespread attempts to allow it to perpetuate.

"Innovation and entrepreneurship lag under the weight of bribery, back room dealing and bullying," said Pyatt, who took the opportunity to specifically address Burisma and the man who controls it: former Ecology and Natural Resources Minister Mykola Zlochevsky.

Pyatt accuses figures in the Ukraine Prosecutor General's Office (PGO) of misconduct in a British investigation into Zlochevsky that resulted in the April 2014 freezing of $23 million in illicit assets, that belonged to the Ukrainian people, who then suddenly affected an about-face.

Criminal proceedings were initiated against Zlochevsky in August 2014, seeking access to his accounts in LGT Bank Zlochevskiy Ltd (Switzerland), as well as to the accounts of companies controlled by Zlochevskiy Brositi Investments Limited and Burisma Holding Limited in the London office of BNP Paribas Bank.

In January this year, the Central Criminal Court in London discharged the freezing order against assets beneficially owned by Zlochevsky, as detailed on Burisma's website, with the court ruling that the UK Serious Fraud Office (SFO) had not been able to demonstrate reasonable cause that Zlochevsky had benefited from criminal conduct.

Right before the London court removed the asset freeze on Zlochevsky, the Ukrainian Prosecutor's Office had placed him on the country's wanted list. But prior to this, in early 2014—when it was clear that Yanukovych's oligarchs would be placed under scrutiny--Zlochevsky fled Ukraine, while his U.S. visa was revoked.

The Prosecutor General's Office, said Pyatt, "not only did not support investigations into corruption, but rather undermined prosecutors ..."

In the case of Zlochevsky, "officials at the PGO were asked by the UK to send documents to support the seizure. Instead, they sent letters to Zlochevsky's attorneys attesting that there was no case against him. As a result, the money was freed by the UK court, and shortly thereafter the money was moved to Cyprus," according to the U.S. ambassador, who is now calling for this misconduct to be investigated and that those responsible have their jobs terminated, at the very least.

In the meantime, while the Burisma website would like everyone to believe that this criminal case is closed, it is not: The investigation is ongoing and the UK SFO is not giving up.

Zlochevsky's UK assets may have been unfrozen and whisked off to safety in Cyprus, but anyone considering investing in Ukrainian gas or this influential player should understand that the next stop will be Switzerland.

In August, the Ukrainian Prosecutor General's Office requested access to information about Zlochevsky's Swiss bank account as they search for $35 million in alleged illicit benefits.

Suspect Origins and Illicit Enrichment

Zlochevsky is one of ‘Yanukovych's oligarchs'—who have from Ukraine—none of which has been recovered yet.

And while this alone should be enough to send any mildly cautious investors running, the fact that he is accused of everything from money-laundering and large-scale embezzlement to abuse of power and illicit self-enrichment should be a deciding factor.

Zlochevsky was the former Minister of Environment and Natural Resources until April 2012, when he was replaced by Eduard Stavitsky under the government of Mykola Azarov. Zlochevsky was first appointed minister of natural resources in the government of Leonid Kuchma and became environment minister under President Yanukovych. While the Azarov government replaced him in this post, he was instead given the post of deputy secretary of Ukraine's National Security Council—a position he retained until Yanukovych's fall in February 2014.

Zlochevsky's position at the Ministry of Ecology and Natural Resources meant that he controlled the granting of licenses for the development of mineral deposit extraction. When Yanukovych was president, he removed state-owned Naftogaz Ukrainy's license to develop the country's largest gas deposits, opening the door for Zlochevsky to grant these licenses to his own companies. Specifically, he transferred the license for the Sakhalinska field in the Kharkiv region—one of the country's largest fields—to his newly formed private holding, Ukrnaftoburennia.

The abuse of power allegations arise from information that 10 companies controlled by Zlochevsky obtained some 30 permits for oil and gas while he was in his ministerial seat, according to Antikor, a Ukrainian anti-corruption watchdog. Those companies include Nadragaz, Azov Oil, Gazoylinvest, Krymtopenegoservic, Tehnoresurs, Paris, First Ukrainian Petroleum Company, Esko-Pivnich, Aldea Ukraine and Ukrnefteburenie--all connected to Burisma.

Zlochevsky had devised a "complicated pattern of off-shore holding companies established when he was still a serving Minister ... effectively to conceal his beneficial ownership of Burisma," according to the UK SFO in documents obtained by veteran Moscow-based journalist John Helmer, who has long specialized in investigating oligarchs. More specifically, the SFO alleged that Zlochevsky's wealth came from "the exploitation of mineral licenses awarded to his companies when he held public office."

According to Antikor, Burisma's plan is to take over all independent oil and gas production in Ukraine.

So far, its plan has worked: It's now ranked second in the country in terms of private gas production, after oligarch Rinat Ahmetov's Neftegazdobychi.

"The problem here is the question of whose assets these really are," said the chief investigator in Eastern Europe for OPTactical, the intelligence wing of Oilprice.com. "Along with the $30 billion that Yanukovych's oligarchs stole from the country, these currently producing and future producing gas assets once belonged to the Ukrainian people and there are very serious questions about how they ended up in the hands of these connected private companies at a time when Zlochevsky was minister."

Buying 'Legitimacy'

Burisma—registered in Cyprus in 2006--fails to pass the most basic due diligence check. Its registration documents are impossible to run down. It publishes no asset information or financial records, nor does it release any audited financial statements. The complete lack of transparency means that anyone interested—including potential investors—must rely solely on press releases about Burisma's future plans and intentions.

All of this has Western media wildly speculating as to why Hunter Biden, the son of U.S. Vice President Joe Biden, has joined its board of directors, along with Devon Archer (a campaign advisor and family friend of Secretary of State John Kerry) and former Polish president Aleksander Kwasniewski.

The former Polish president's involvement is particularly mysterious considering that, when Zlochevsky took over the Sakahlinska field license, he took it away from a joint venture between Ukraine's state-owned companies and Poland's national gas company.

While conspiracy theories abound, the general sentiment among industry experts on the ground in Ukraine is that Burisma brought two high-profile Americans with no energy experience on board in an attempt to gain legitimacy given Zlochevsky's tainted history.

The timing is significant: Biden and Archer officially joined the Burisma board right before the UK investigation that led to the asset freeze was announced.

According to Ukrainian analyst Oleg Varfolomeyev, "Ukrainian companies having reputation problems often hire Western managers, but this does little to improve their profiles locally."

And while attempts to buy legitimacy continue, the world continues to equate Ukraine with corruption—and corruption, in turn, with the gas sector first and foremost.

The companies that have arisen out of the fleecing of this country's assets are not only bad news for the interests of the state but bad news for investors who risk getting entangled with dirty money, unstable assets and endless legal battles.

"Zlochevsky, who's been in top politics and business in Kiev since the 1990s, used to be very influential. Such influence doesn't disappear overnight in Ukraine. If people linked to the kleptocratic regime which was overthrown remain influential, obviously this doesn't bode well for the future of the local oil and gas industry, and serious investors will tend to avoid this market," said Varfolomeyev.

Abuse of power may be the fast route to lucrative strategic assets, but as many in Ukraine have learned, these assets are highly unstable. Zlochevsky learned this as well in 2006 when his political opponents were in power, according to UK court documents, and issued an executive decree cancelling the exploration licenses granted to his companies in 2004. The licenses were restored some two years later, but in this industry time is money and this should be a primary concern for new investors in Ukraine.

"Burisma's glass house could very easily come crashing down, even if the inevitable is delayed by throwing a lot of money at the right people," according to OPTactical's Eastern Europe analyst. "As an investor, I would steer clear of anyone tied up with Yanukovych or on the radar of the Serious Fraud Office."

NewsBase Ukraine analyst Varfolomeyev concurred. "Burisma is likely to be affected. Zlochevsky, its founder and beneficiary, is one of the people firmly associated in the public mind with the government that ran Ukraine before February 2014 and was deposed for corruption," he said.

"Local investigative journalists targeted him on many occasions. It should be hard to make business with such a public profile after the anti-corruption revolution of last year. Incidentally, the newly established Interior Ministry's agency to return stolen assets said this past summer that Zlochevsky's businesses would be among its main targets."

According to Yaroslav Udovenko, Managing Director at Empire State Capital Partners in Kiev, the list of legitimate gas companies in Ukraine is a short one, and Burisma isn't on it.

"There are really only 5-6 purely western gas businesses in Ukraine: Cub Energy, Kub Gas, JKX, Arawak, Eni and Cadogan. These are the only companies in the gas sector that are independent and funded with Western money; with the exception of JKX, which lists Igor Kolomoysky and Vadim Novinsky as beneficiaries, although the Board is western and independent," Ukovenko told Oilprice.com.

As for the missing $30 billion—or even the $23 million that Burisma almost lost to the Ukrainian people until the UK court lifted the freeze—"imagine the impact," said Ambassador Pyatt, "if--instead of lining corrupt officials' pockets--the resources being zapped by corruption were freed up and reinvested in Ukraine's economy. Imagine what those resources could do to fuel the development and broad-based prosperity the Ukrainian people want and deserve." ESR

James Stafford is the editor of Oilprice.com where this originally appeared.






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