Ukraine president Petro Poroshenko’s already embattled re-election campaign is in difficulties after journalists alleged his right-hand man Oleh Hladkovskiy, deputy head of the Security and Defence Council, was profiting from corrupt deals to supply Ukraine’s army. But the current scandal is only the latest instalment in a series of allegations of top officials profiting from supplies to Ukraine’s army since 2014.

President Petro Poroshenko’s shipyard Kuznya has been implicated in several of the scandals, although he sold the company before the start fo his presidential  re-election campaign to avoid any “conflicts of interests.” The president is also a former owner of the Bogdan automotive enterprise that has won millions of dollars in state arms procurement contracts.

In the latest scandal an investigation by Denis Bihus and Lesya Ivanova broadcast on February 28 was a bombshell because it showed numerous hacked text messages between Hladkovskiy’ son Ihor and partners discussing how to profit from selling military equipment smuggled from Russia to Ukraine’s army, including sending some of the money to Hladkovskiy senior, who is also a former close business associate of Poroshenko’s and, until last week, in charge of military procurements.

The public resonance has also been huge because of the ongoing election campaign that means that Poroshenko’s “Ministry of Information Policy” has not succeeded in keeping the stories out of prime time news, as in previous cases, by claiming they are Russian propaganda.

Poroshenko even confirmed the authenticity of the journalists’ material by firing Hladkovskiy. Ukraine’s National Anti-corruption Bureau (NABU) has launched an investigation. In an effort to contain the scandal Poroshenko went on to suggest asking Nato members to join the board of the state arms company Ukroboronprom to ensure transparency and end the scams.

Hladkovskiy deny the allegations, saying that the supplies were necessary to reequip the military after years of neglect and under conditions of military conflict.

But the Bihus and Ivanova investigation is only the latest in a whole series of defence sector scandals in Ukraine since the start of the war with Russian-backed separatists in 2014. All of them had the same theme: low-quality military kit supplied to Ukraine’s army at exorbitant prices by dodgy dealers with political connections.

Mysterious intermediaries

Allegations of corruption in the defence sector surfaced as early as Ukraine’s summer offensive against Russia-backed separatists in the Donbas in 2014. Journalist Dmitry Mendeleev of respected pro-Western weekly Zerkalo Nedeli described how volunteer battalions fighting on the frontline against the separatists were forced to buy their equipment – from Kalashnikovs to armoured personnel carriers - from shadowy private firms such as a mysterious entity called Techimpex, with evident connections to Ukrainian officials.

When buying the kit, the volunteer battalions knew they were competing with potential buyers in Africa and Asia, since Ukraine in the midst of war and with an underequipped army still managed to export large volumes of Soviet-era weaponry, in particular to Africa and the Middle East.

Poroshenko responded to the Mendeleev article by instructing his prosecutor general to investigate Mendeleev, not his allegations. But Mendeleev’s investigations continued– in 2016 exposing a massive corruption scheme among arms producers in Kharkiv region, who were paying money to money-laundering firms for fictitious supplies, as well as selling inventory to dealers such as Techimpex for export.

‘Spare parts’ from Europe

It is an open secret that the well-sourced ‘Mendeleev’ is the pen name of Anatoly Hrytsenko, Ukraine’s defence minster 2006-2007. Hrytsenko is a staunchly pro-Western former army colonel trained in the US, but also a fierce critic and rival of Poroshenko. His wife Yulia Mostova publishes and edits the Zerkalo Nedeli weekly. Hrytsenko is polling fourth in the current election campaign.

Poroshenko has claimed there is only political point-scoring behind the allegations. But a 2017 investigation by this correspondent published by Organised Crime and Corruption Reporting Project (OCCRP) confirmed Mendeleev’s allegations independently. Based on five boxes of Techimpex documents, the investigation showed that Techimpex – with backing from top defence sector officials – in 2015-2016 had imported large quantities of ex-Soviet kit from across Eastern Europe, for sale to Ukraine’s military of for export to conflict zones in Africa and the Middle East.

The special trick in the scheme was to import to Ukraine hundreds of APCs acquired from Eastern Europe’s surplus stock, declaring them as “spare parts.” To this end, in 2016 the vehicles were disassembled for transport, then reassembled on arrival in Ukraine. Techimpex paid the price of scrap metals for the vehicles in Poland and Czech Republic, then claimed to have “produced” the reassembled vehicles, even giving them new serial numbers, before selling them to Ukraine’s armed forces - or exporting them.

According to the investigation, one of the most profitable export countries was Uganda – which the UN calls “an arms corridor” to the ongoing civil war in South Sudan. The Techimpex scheme thus opened a corridor from the EU to potentially circumvent EU arms sanctions on South Sudan.

In a statement, Techimpex denied it was involved in any export business, since Ukraine’s state arms traders have a formal monopoly on exports.

After the OCCRP investigation, the same scheme continued, but without Techimpex’s involvement, according to a further journalistic investigation in 2018 by Novoe Vremya weekly magazine, owned by Czech investor Tomas Fiala. According to journalist Ivan Verstyuk, in 2017 over 200 disassembled APCs were imported from Poland and Czech Republic to Ukraine as “spare parts.” Then they were reassembled and sold to the Ukraine’s army at ten-times the purchase price, for a total of $41mn in 2017 alone.

Verstyuk named Hladkovskiy as one of the main beneficiaries of the scheme.

The president’s boatyard Kuznya

Besides Hladkovskiy’s alleged role in such schemes, Poroshenko links to such alleged corruption schemes in one other way: his Kyiv boatyard Kuznya (formerly known as Leninska Kuznya) on Rybalska in Kyiv figures in all these schemes: its owners until 2019 were Poroshenko and another of his lieutenants, Ihor Kononenko.

The site of the Kuznya on Kyiv’s riverside Rybalska district is also the address where Poroshenko’s assets are registered: both onshore and – literally and figuratively – offshore, according to another OCCRP investigation.

According to the Bihus.info investigation, funds from the dodgy deals revealed by the phone hacks flowed to Kuznya, which was used “as an ordinary shell firm” for laundering bank payments into cash.  According to the Novoe Vremia investigation, Kuznya also made money by armour-plating vehicles supplied to Ukraine’s army by Hladkovskiy’s automotive firm, Bohdan.

Kuznya also had close links to Techimpex, the firm named by Zerkalo Nedeli and OCCRP in connection with fraudulent supplies, bne InteliiNews can reveal. In 2014, Kuznya and Techimpex collaborated on upgrading Soviet-era APCs to be supplied to the army, according to the Techimpex documents. Techimpex continued to make serial payments to Kuznya through 2015 and 2016 ostensibly for supplies.

Techimpex and Kuznya did not respond to attempts to contact them about their business ties.

Kuznya of contention

If Poroshenko loses the election, Kuznya is unlikely to leave the headlines. Its controversial role as main supplier to Ukraine’s navy - after Russia seized the Crimea and much of Ukraine’s Soviet-legacy fleet – will attract interest from politicians and potentially law enforcement.

Kuznya’s fortunes have flowed and ebbed according to Poroshenko’s political career, as bne IntelliNews wrote. Ukraine’s navy placed its first two orders for Kuznya gunboats in 2012, when Poroshenko was economy minister during the presidency of Viktor Yanukovych. The order was cancelled after he left the government.

Under Poroshenko, Ukraine’s navy ordered 18 of the boats for use as maritime warships, bolstered by armour plating and heavy machine guns, according to Kuznya CEO Volodymyr Shandra. The total cost of the order is a state secret, but a Radio Free Europe / Radio Liberty investigation established each boat costs Ukraine around $30mn, putting the total order volume at just under $600mn.

Kuznya had originally designed the gunboats for river patrols, selling two to landlocked Uzbekistan in 2004. Critics claim that the boats cannot be safely deployed on the open sea. In 2018, deputy head of Ukraine’s naval command Andriy Rizhenko told Radio Free Europe / Radio Liberty that the boats cannot safely sail in more than sea state 2-3 (flat seas), whereas sea-state 4-5 (rough) is usual for the Black Sea for at least half the year.

CEO Shandra refuted this in an interview in the fall of 2018. “The gunboats supplied to the navy starting 2015 share only their type name with the riverine vessels supplied to Uzbekistan, they are completely different vessels, different parameters, design solutions, weapons systems, modules etc,” he told a defence publication.

In 2018, shortly before the start of the election campaign, Poroshenko sold the Kuznya to Serhii Tigipko, former politician and bank owner, for an estimated $300mn. “The Kuznya objectively has to play a noticeable role in our growing defence capabilities and I want to completely avoid any conflict of interest, so it should have a different owner, albeit one from Ukraine,” he tweeted to announce the sale.

Ukraine’s spends 5% of GDP on defence, around $5bn per year, because of the conflict with Russia-backed separatists in the Donbas, far higher than the 2% targeted by NATO countries, according to Viktor Plakhuta of the NGO Ukrainian Freedom Fund, which campaigns for transparency in the defence sector. This means Ukrainians feel the corruption issue in their pockets.

Moreover, given the war, corruption means Ukrainians may view the conflict in the East not as “a war for independence and pro-Western values, but as an opportunity for profiteering and speculation (…) using the blood of patriots,” Plakhuta says.