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16 April, 2019
Olena Tregub: Why Ukraine’s defense sector corruption is worse than we thought
As the March 31 presidential election approaches, Ukraine has been shaken, yet again, by a disturbing corruption scandal. Investigative journalists from Bihus.Info exposed corruption schemes through which at least 9 million euro were embezzled from within UkrOboronProm – the state-owned defense conglomerate of over 100 companies. The investigation exposed that UkrOboronProm knowingly purchased equipment either smuggled from Russia, or stolen from Ministry of Defense storage of decommissioned items from intermediary companies at inflated prices.

This expose was louder than previous similar investigations.

First, the investigation showed direct involvement of President President Poroshenko’s business partner, Oleh Hladkovsky, (formerly Svynarchuk), who was appointed the deputy secretary of the National Defense and Security Council in 2015. By way of a leak from Ukrainian law enforcement agencies, the authenticity of which was confirmed by Ukraine’s Prosecutor General Yuriy Lutsenko, the public was able to hear incriminating  and quite entertaining dialogues between an alleged group of embezzlers. The group includes – among others – the head of UkrOboronProm, Pavlo Bukin and the son of the recently dismissed deputy head of the National Security and Defense Council Igor Hladkovky.

The Independent Defense Anti-Corruption Committee, better known as NAKO, was created by Transparency International to help Ukraine fight defense corruption. It has been focusing on reforming UkrOboronProm and the Ministry of Defense since 2016. Under the influence of civil society volunteers and Western partners, the ministry has partially opened up and achieved some of the reform progress, including introducing the transparent and competitive e-system Prozorro for 55 percent of its procurements, UkrOboronProm has not changed much. Without changing the situation of UkrOboronProm, which supplies over 50 percent of the state defense order (arms and related goods and services) for the Ukrainian army, one cannot speak of defense sector reform.

The recent scandal revealed that the steps NAKO advocates — such as an independent international audit and an independent supervisory board — is more urgent than ever.

First, one of the exposed corruption schemes describes how Ukroboronprom resold unaccounted for and undocumented equipment stored by Ukroboronprom to its own companies.

In 2010, the Ministry of Defense transferred equipment to UkrOboronProm for storage.

In some cases paperwork regarding the transfer was not preserved.  Last year, the Ministry of Defense created a commission to verify the status of decommissioned equipment stored at UkrOboronProm companies.  The commission concluded that at least Hr 48 million worth of equipment was missing from storage in Lviv, Zhytomyr, Kyiv, Kharkiv and the Mykolayiv tank factories. Notably, the estimated amount is not the market value. At current market prices, this equipment could have been sold at 100 times higher price.
Second, the scale of embezzlement is larger than previously thought.

UkrOboronProm presented numbers to NAKO showing that between 2015-17 they identified corruption schemes worth over $10 million and reported them to the Prosecutor General’s Office. However, speaking at a press conference after Bihus investigation, the director of the National Anti-Corruption Bureau of Ukraine, Artem Sytnyk, announced that it is investigating corruption cases related to Ukroboronprom valued at least $37 million.

Third, defense corruption is more dangerous for the national and human security than other forms of corruption. Defense corruption is not just about the money. Defense graft is “modest” compared to the scale of corruption in Ukraine’s energy sector, state-owned enterprises, customs and tax administration.

Yet it poses a much graver threat to national and human security.

While some Ukrainian officials, such as the head of parliament’s security and defense committee, Sergei Pashynsky, are proud of the fact that Ukraine is able to smuggle Russian equipment for the Ukrainian army,  the investigation revealed much of that equipment was not functional and dangerous if installed on Ukraine’s weaponry.

Defense corruption cases often expose how soldiers are killed and maimed due to equipment malfunction. The case at hand pertains to Hladovky’s son and his friends’ company Optimaspetsdetal (the key firm in the scheme ) allegedly smuggling parts from Russia for the Ukroboronprom factories.

It is not unlikely that the smuggling of Russian equipment is known and controlled by the Russian Federal Security Service. Transparency International has studied how corruption is used as a statecraft by Russia to advance the its own national interests. How can one know if this is not part of a deliberate Russian strategy to let Ukraine’s corrupt officials illegally smuggle malfunctioning equipment to undermine Ukraine defense capabilities?

Finally, perhaps the most disturbing revelation from Bihus investigation was that Ukroboronprom corruption scheme was immune to any investigation and punishment.  Ukraine’s law enforcement and anti-corruption bodies have known about the ongoing corruption schemes while doing nothing about it. The expose asserts that the State Fiscal Service, the Prosecutor General Office, Military Prosecutor, the Security Service of Ukraine and the NABU  –  were all allegedly bribed regularly not to investigate OptimumSpetsDetal.

NAKO has been warning about corruption risks pertaining to Ukroboronprom and its untransparent procurement practices. Moreover, we have been advocating for an independent supervisory board and international audit for over two years.  Hopefully now things will change. The president has dismissed Hladkovsky. He also issued a decree pledging to: start an audit within a month after March 15, introduce more Westerners into the supervisory board and declassify defense procurement.

This scandal highlights the urgency of the changes NAKO advocates for. Immediately after the election, Ukraine’s new President should tackle the lack of good governance  in Ukraine’s defense industry and the excessive, arguably unconstitutional, amount of presidential influence over  Ukroboronprom. The topic has become too painful now to be ignored.