Graham Stack in Berlin for Business New Europe (www.bne.eu)
November 28, 2014
Over the last year, the European Court of Human Rights (ECHR) has found against the Ukrainian state in cases dating back to the murky 1990s and awarded tens of millions of euros in damages to controversial businessmen, raising questions whether it is a suitable adjudicator for such disputes.
On January 23, the EHCR found in favour of Irish aviation firm East/West Alliance Ltd against Ukraine, in a case concerning the violation of the Irish company’s right to “peaceful possession of goods.” Ordering the Ukraine government to pay €5mn in damages to East/West, the court ruled that the Irish firm “has been deprived by the State of its fourteen aircraft in an unlawful and arbitrary manner,” which along with financial loss may also have prompted “feelings of helplessness and frustration” on the part of management, the court ruled.
East/West, according to the case materials, was at the time of its confiscation by the Ukrainian state in 2001 part of Kyiv-based Titan Concern, which was controlled by former Ukrainian MP Anatoly Liovin, and centred around air freight operator ATI.
Anti-arms trafficking groups see Liovin’s ATI in a very different light than does the EHCR, and question whether the damages awarded by a human rights court to Liovin are morally appropriate. Because at the time of the confiscation, ATI was a leading operator of charter flights from Uganda to rebel-held territories in the Democratic Republic of Congo (DRC), according to a report “The Arms Fliers”, co-authored by anti-arms trafficking NGOs IPIS and TransArms in 2011.
The DRC was wracked by a civil war 1998-2002 that was fuelled by Uganda and other neighbours, who sent in arms, fighters and supplies by air, and brought out precious minerals. The war cost an estimated 3m lives. Thus ATI was close to the scene of horrendous human rights abuses. “We believe that no matter what you transported, aiding and supporting or exploiting a military invasion bears a certain level of responsibility,” TransArms’ Sergio Finardi, one of the authors of the “Arms Flyers” report, tells bne.
Liovin denied any involvement in illegal arms cargoes or the transport of looted goods, in an interview with bne at the time when he applied to have the ECHR hear his case. “We carried mostly humanitarian cargoes and food,” he said.
But in 2002, Liovin was the subject of an investigation by Ukraine’s parliamentary anti-organised crime committee, headed by renowned mafia-buster Hrihory Omelchenko. The investigation, seen by bne IntelliNews in the archives of the Verkhovna Rada, detailed payments made to East/West Alliance 1999-2001 from a slush fund close to then president Leonid Kuchma, for arms cargoes transported by Liovin for state arms trader Ukrspetseksport.
The tax case brought by Ukraine in 2001 against East/West Alliance and ATI quickly led to the closure of ATI, Liovin told bne. “We had operations ranging from Azerbaijan to Mexico,” he said, “and all this was lost because of the government.”
The case brought by Ukraine’s tax service in 2001 focused on the relationship between the offshore company East/West– on paper the owner of ATI’s planes, but lacking any office or staff – and ATI, which leased its fleet from the Irish company. Tax inspectors claimed this lease agreement was a fiction that allowed ATI to evade taxes by transferring profits to the Irish company. The tax authorities confiscated planes belonging to East/West based in Ukraine and operated by ATI, along with ownership documents for the planes found on the premises of ATI.
Liovin fought his corner, getting elected to parliament in 2002. He became deputy head of the parliamentary transport committee, through which he headed a parliamentary investigation into a supposed ‘crisis in the aviation industry’ that authorised him to seal the confiscated aircraft, according to the case materials, thus delaying their sale. During this time he also won a series of Ukrainian court decisions backing his case that the planes should be returned. Ukraine failed to implement those decisions, allowing him to appeal to the ECHR.
But even after the closure of ATI, during the period of the application to the ECHR Liovin’s planes continued to arouse controversy. In 2009, a report from the UN expert group on the DRC detailed that Liovin supplied three transport aircraft to the DRC army in 2008, with expired service lives, faulty paperwork and without notifying the UN as required. Liovin laid the blame elsewhere. “This is the fault of Antonov design bureau [the plane’s manufacturer] for utterly failing to provide adequate after-sales service,” he said.
Yet in 2013, a former director of Kherson airport, controlled by Liovin, was sentenced to jail for receiving an undeclared militarised An-26 transport plane flown in from Uzbekistan for repairs, and owned by a Liovin company registered in the United Arab Emirates.
Liovin claimed damages of over $166mn against Ukraine, making the €5mn award seem a token payment. But one dissenting opinion – regarding only the damages – queried the award. “There are elements in the file which suggest that the amount of €5mn may be much higher than the total price paid by the applicant company for the aircraft in 1999 and 2000,” ECHR Judge Paul Lemmens wrote.
“We won the case with a unanimous decision – and it couldn’t have been any other way. The damages awarded as they stand are purely symbolic,” Liovin tells bne in an email.
Ukraine’s Ministry of Justice tells bne that: “We will do everything we can to transfer this money in the allotted time.”
The damages given to East/West Alliance are dwarfed by the ECHR’s award of €27mn in September 2013 to the Ukrainian company Agrokompleks – the biggest ever award by the court to a Ukrainian plaintiff, and one of the biggest in its history.
“The whole proceedings [of the Ukrainian state] with this company were openly unjust – there were facts shocking in their unconcealed absence of respect to the courts on the part of the highest officials in the state,” Ganna Yudkivska, Ukraine’s judge on the ECHR, commented to the press in 2013.
“For instance,” Yudivska explained, “the case materials include a moment when then president of Ukraine appealed to the head of the Supreme Arbitration Court and indicated how the case should be decided – and the chairman of the court gave a written response that this had been performed.”
The €27mn award in 2013 refers to a contract drawn up originally between two Soviet enterprises signed two weeks before Ukraine even became independent, on December 18, 1991, with subsequent additional contracts.
On the plaintiff side was Agrokompleks, “a private company based in Ukraine which dealt, at the time of the events, with Russian companies involved in barter trade operations, such as exchanging Ukrainian raw foodstuffs for Russian crude oil and further sale of finished oil products,” according to a statement by the ECHR in 2011.
On the other was the Ukrainian state-owned Lynos, which operated the Lissichansk oil refinery, the largest in the country at the time. It ran up debts in the first half of the 1990s towards Agrokompleks and other suppliers for crude oil it processed. The situation was exacerbated by direct orders from top officials to the refinery to channel fuel to farmers as a social measure, despite the fuel being pledged as payment for crude supplies from Agrokompleks. It was these direct orders that strengthened the Agrokompleks case against Ukraine.
In the context of the time, the dispute was less shocking: the post-Soviet aftermath was shaped by what US economist Clifford Gaddy called the “virtual economy,” based on “an illusion about almost every important parameter.”
Cash-free barter relations and payment arrears were the norm, and traders often supplied inputs to insolvent state-owned companies, growing the debts as a tool to take over the plants. Agrokompleks was such an intermediary in import-export barter chains.
The history of the Lynos’ debt to Agrokompleks is thus also a history of struggle for control over Ukraine’s strategically crucial refinery, accounting for 35% of Ukraine’s fuel supply at the time. While the €27mn paid out to Agrokompleks in 2013 may have been record compensation for a Ukrainian case, it was only a fraction of the total €180mn in debt claimed by Agrokompleks, but this debt again was a fraction of the value of the refinery over which Agrokompleks sought control.
Agrokompleks founded the committee of Lynos creditors in 1997. But successive Ukrainian governments accused Agrokompleks of inflating the size of the Lynos debt by as much as ten-fold, and fought off the privatisation bid. In 2001, the government finally sold Lynos to the Russian oil company TNK, which was capable of supplying crude to the refinery on a stable basis. Agrokompleks then filed its claim with the ECHR.
Agrokompleks’ claim against Ukraine is also challenged by arguments that the debt was not Agrokompleks’ to claim: the company simply lucked out, as the last link in a chain of barter transactions supplying crude oil to the refinery, and receiving payment in kind, such as fuel and food products.
A Russian oil trading firm from the early 1990s, Gefes International, claims that it supplied crude oil to Agrokompleks for the Lynos refinery. “That was our oil which was to be processed to fuel and returned to us, and Agrokompleks was nothing but a go-between,” head of Gefes International, Evgenny Fedosov, tells bne.
The driving force behind Agrokompleks was prominent Ukrainian businessman Oleksandr Galkin. After losing out on privatising the Lissichansk refinery, Galkin focused on growing his packaging business, Ukrplastic, based on a privatised chemicals plant. Galkin developed a flourishing business, gaining a good reputation for enlightened entrepreneurialism and technological modernisation, including funding from the European Bank for Reconstruction and Development.
In 2005, Gefes International brought a lawsuit against Agrokompleks over the oil supplied to Lynos, and won damages of around $20mn, but the decision was later overturned, and finally thrown out in a series of decisions in 2013-14. “The money Galkin claimed from Ukraine, was money he owed to us, because that oil was ours,” Fedosov told bne, calling Galkin “a fraudster” who had once tried to have him arrested in Kyiv. In an earlier interview, Fedosov claimed Galkin had bought Ukrplastic “with other people’s money.”
Fedosov is currently head of Smolenergy, an oil refining company linked to a “pump and dump” stock market scam in the US in 2007, which led to prosecutions in Germany.
In the 1990s, Fedosov’s Gefes International was linked to Ingush businessman Mikhail Gutseriev, who ran Russian state-owned oil producer Slavneft. Fedosov said he financed the oil deal with a loan from Sayan Bank, a regional Russian linked to the controversial Israeli traders Mikhail and Lev Chorny, which was closed for money laundering in 1996.
Other traders supplied crude oil to Lynos in the first half of the 1990s, although it is not known if they worked with Agrokompleks. In 1993, the Vienna-based company Nordex GmbH – reported by the CIA at the time to be an organised crime syndicate – secured a massive Russian-Ukrainian barter deal to supply Lynos with crude oil, temporarily even taking office space in a Ukrainian government building.
Galkin, while celebrating the ECHR courtroom victory in 2011, did not live to see the final decision on damages in October 2013.
bne can reveal that on May 10, 2013 he was crushed under a 38-tonne truck whilst strolling with his common-law wife and co-owner of Agrokompleks, in the picturesque village of Roquebrune-Cap-Martin on France’s Cote d’Azure. He died after two hours of futile attempts to extract him from under the wheels. His death was subsequently hushed up in Ukraine, where he is still featured on the Ukrplastic website as president.
According to eyewitness accounts cited in press reports from France, which referred to Galkin only as a “Russian tourist,” the truck that hit him was registered in the former Soviet state of Lithuania and it was manoeuvring dangerously, paying no heed to honking cars. Police on the scene told the press they would charge the driver with manslaughter.
Was Galkin struck down by the Russian mob, motivated by the ECHR damages and debts from the 1990s? “A criminal investigation is underway under the offices of a judge… Secrecy of investigation forbids me to say more,” the state prosecutor for Nice, Eric Bedos, tells bne.
Agrokompleks and Ukrplastic itself have said nothing about Galkin’s death. “We do not comment on these topics,” an Ukrplastic spokesperson tells bne, referring to the circumstances of Galkin’s death and the Agrokompleks court cases. “Oleksandr Galkin is featured there as the company’s founder.” Galkin’s widow, and new Ukrplastic CEO, Irina Mirochnik, also declined to comment.
Fedosov too has since adopted a civil tone. While acknowledging that investigators had enquired about his relations with Galkin, he says: “I don’t have a bad word to say about Sasha [Oleksandr] Galkin… But he had a lot of enemies, because he had a lot of debts.”
Inevitably, such cases have raised questions about the ECHR’s adjudication of post-Soviet business-state relations, which cannot always be readily translated into Western categories.
International courts such as the ECHR are “exposed to the risk of fraud and money laundering,” and should do “at least a cursory review of entities and beneficiaries with high money laundering risk, before awarding damages,” believes money-laundering expert Saskia Rietbroek, of AML Services International.
“Awards paid out to companies with unknown beneficiaries, in countries with shocking levels of corruption such as Ukraine, are vulnerable to money laundering because they may be reinvested in criminal enterprises,” Rietbroek warns.