Graham Stack in Berlin for Business New Europe (www.bne.eu)
August 30, 2012
A verdict in a lawsuit in San Antonio, West Texas, has put yet another question mark over a controversial $560m Ukraine-Iraq arms deal, hailed at the time of its signing in 2009 as one that would resurrect Ukraine’s ailing defence industry.
The details are only emerging now, but bne can reveal that a San Antonio jury awarded Texan businessman Howard Lowry in June a whopping $61.75m damages against the Ukraine-US brokers who set up the 2009 deal for cutting him out of it. The court case seems likely to retrigger behind-the-scenes conflicts between Iraqi and Ukraine officials, old and new, over who will earn commissions on the contract.
The San Antonio lawsuit was brought by Howard Lowry, a US businessman who worked in Iraq following the US occupation in 2003 as a middleman for US companies looking to land orders from Iraqi authorities. Lowry sued and won against Oleg Jankovic, owner of Washington DC-based company Jankovic & Associates, an established lobbyist and intermediary for Ukrainian interests in Washington D.C. Jankovic, who is regarded as close to Democrat senator for Virginia Jim Webb, played a key role in facilitating the 2009 deal between Ukrainian defence exporters and Iraqi officials, and received commission payments for doing so.
But according to the lawsuit, it was Baghdad-based Lowry who actually set up the initial meetings between Ukrainian representatives, Jankovic and Iraqi officials. Lowry holds a written contract with Jankovic entitling him to 50% of commissions earned by Jankovic on ensuing contracts. But when the full scale of the pending deal became clear in 2009, Jankovic, with the backing of his Ukrainian client, the state-owned arms export company Progres, cut Lowry out of it.
As a result, the San Antonio court has now made Lowry a breathtaking award of $61.5m damages against Jankovic. The colossal sum is unlikely to be paid in full, as apparently only $112m of the deal’s total price has been transferred by Iraq to date. But Lowry is gunning for as much as he can get in the future “My client has a written contract that entitles him to a share of commissions on payments deriving from the deal, and a clause that stipulates Stockholm as place of international arbitrage,” David Prichard, Lowry’s attorney, tells bne.
With the apparent resumption of payments on the contract in 2012, the scene is now set for protracted court battles.
When Kyiv and Baghdad announced in October 2009 that Iraq would purchase 420 BTR-4 armoured vehicles and 6 An-32b transport planes from Ukraine, worth a total of $560m, it seemed Ukraine’s defence sector was finally recapturing its Soviet-era glory days. There was even speculation the deal would be only the first in a total potential partnership worth $2.5bn to Ukraine, as Iraq sought to rebuild its defence capacity.
But the deal was not enough to rescue the administration of Viktor Yushchenko from ignominy at the polls in early 2010, with Yushchenko taking a miserly 5% in the presidential elections. As soon as the new administration under President Viktor Yanukovych came to power, there was a wholesale replacing of defence sector management and the Iraq deal hit the rocks. Following initial delivery of 26 vehicles after delays in 2011, Iraq officials refused to accept the second batch of 62 vehicles due to technical defects revealed on reinspection in Ukraine 2011-12, according to media reports. Ukraine officials regularly announced imminent shipping of the armoured vehicles, but it never happened.
According to former defence officials from the previous administration, fighting a rearguard action via media, the real reason for Iraqi officials’ refusal to accept the second batch of armoured vehicles was that Ukraine’s new leadership were refusing to pay out “commissions” to Iraqi officials under a scheme agreed in 2009.
But in June it seemed there had been a breakthrough, with Iraqi officials inspecting and accepting the second batch of 62 BTR-4s in Kharkiv, although bne could not get confirmation from Ukrspetseksport as to whether it had shipped. This indicated some compromise had been reached regarding the commissions between Iraqi officials and the old and new Ukraine officials. Total commissions to both sides are put at around 20%, which is potentially worth around $100m over the course of the entire contract.
But just as the going got smoother, Howard Lowry has now upset the apple cart with his courtroom victory.
Lowry had already made a name for himself as whistleblower in 2011 when he passed to the US media salacious details of notorious US private security contractor Blackwater’s appetite for AK-47s, cocaine, steroids and random violence in Iraq. Now he has turned on Ukraine’s defence sector and lobbyists.
According to Lowry’s successful lawsuit, he personally organised the initial contacts with Iraqi officials in Baghdad for the Ukrainian intermediaries, Jankovic in Washington DC and his colleague, Mykola “Nick” Karanko from Kyiv. Lowry signed an agreement with Jankovic in 2008 assigning him a 50% share in commissions for any help in closing a deal. But after the initial contact to the Iraqis, Jankovic cut him out of the deal entirely, according to the court.
Backhanders on all sides
The details of the court case confirm reports that Iraqi officials had a strong personal interest in the deal going ahead in its original form, as negotiated under the Yushchenko administration. According to court documents seen by bne, Ukrainian arms exporter Progres in 2009 arranged to pay commissions via Mykola Karanko totalling around 8% of the contract sum, to Iraqi citizens Mohammaed Jasem Midnf Al Kaabi, Ahmad Mohammed Al Saady and Haider M. Salih Shnawa Al-Musaied, and to Iraqi companies Al Khairat Al Arabia Co. and Wahi Al Abdaa Co. The payments were for the benefit of members of Iraq’s presidential defence procurement commission, according to the court case. A leaked diplomatic cable from the US embassy in Bagdad expressed “concern about corruption” regarding the Ukraine deal, reminding that nearly 50% of Iraq’s defence expenditure was funded directly by the US.
The US court case, at which Progres’ former deputy head Volodymyr Vladimirov testified, also tellingly revealed that Jankovic and Karanko organised commission payments from Progres in the opposite direction: to Ukrainian “lobbyists”. The court documents record that Progres agreed to pay commissions to Karanko’s Delaware company, Universal Investment Group (UIG). Almost all of the commission payment to UIG made by Progres on the initial down-payment by Iraq was immediately forwarded by UIG to three Ukrainian-owned shell companies, ostensibly for their subcontracted activity as “lobbyists,” under an agreement dated August 20, 2009. The court transcript records Lowry’s attorney Prichard calling the shell companies “fronts for these Ukrainian officials to get bribes.” The defendants obtained a court order preventing disclosure of the identities of the Ukrainian owners of these companies, claiming the information was highly sensitive, according to court records.
A bne source who prefers to remain anonymous, interviewed in Berlin, confirmed the payments to the Ukrainians. According to the source, UIG received a roughly $12m commission payment on the Iraqi down-payment of $112m, and paid just under $10m of this in three roughly equal portions to the Ukraine-owned offshore “lobbyists” – Singapore company UST-Tech Consulting, British Virgin Isles company Hectorian Services and UK company Lanefield Exports. Lanefield Exports at the time was formally owned by Belize companies Milltown Corporate Services and Ireland & Overseas Acquisitions, which media investigations have established are controlled by Latvian money-laundering banks, and are associated with numerous Ukraine corruption cases, including the shipment to South Sudan of armoured vehicles in 2009 on the MS Faina that was hijacked by Somali pirates.
According to bne sources, Karanko, the owner of UIG, is an associate of the former head of arms export company Progres, Taras Shiiko. Karanko, one of Shiiko’s 41 Facebook friends, got his start in business running a translation business in Kyiv, reportedly taking on defence sector orders.
According to bne enquiries, Shiiko himself was seen as a placeman of Serhiy Bondarchuk, head of Progres parent company Ukrspetseksport throughout the presidency of Viktor Yushchenko 2005-10. Yushchenko made Bondarchuk a “Hero of Ukraine”, the highest state decoration, in the dying days of his presidency. Karanko did not respond to email requests to comment on the court verdict. Jankovic & Associates refused to discuss the case with bne over the phone.
Lowry himself says he is now unemployed in San Antonio, suffering from post-traumatic stress disorder after his return from Iraq, and regards his mega-win as fair compensation. “Since becoming involved with the group, I have received more than 30 death threats,” he tells bne.
“My other job involved going into some of the most dangerous areas in Baghdad in order to obtain intelligence that the military could not,” he also writes in his Linkedin profile. “As such, the ‘proving’ initiations were beyond anything I could imagine that one human being would do to another… Unfortunately, as a private civilian, I have been dumped from my health insurance carrier, and can’t find a shrink that has seen nothing greater than a car wreck.”
Who is Mr Salamatin?
Meanwhile back in Ukraine, the derailed arms deal is overshadowing ongoing root-and-branch centralisation of Ukraine’s previously sprawling and shambolic arms export system. But centralisation is unlikely to bring more transparency, argue critics.
Just as Ukraine’s state finances are being centralised round the shadowy figure of 34-year-old national bank head Serhiy Arbuzov – who rose from regional obscurity to the top financial post in a matter of months, and acknowledges a court has exempted him from holding a personal tax ID “on religious grounds” – Ukraine’s defence sector is centralised around the equally shadowy figure of Defence Minister Dmitro Salamatin. Salamatin, whose career started in the mines of Kazakhstan, and who is rumoured to be the son-in-law of 1990s Russian Deputy Prime Minister Oleg Soskovets, only took Ukraine citizenship in 2005, at the age of 40, in order to enter the country’s parliament in 2006. And only in April 2010 did he make headlines in politics – in an offence rather than defence role – leading a charge with chairs and fists that injured opposition MPs during a major parliamentary bust-up.
Days after proving his martial prowess in hands-on fashion, Salamatin was made head of the parent arms export agency Ukrspetseksport. Salamatin immediately moved to centralise the organisation, with Ukrspetseksport assuming direct responsibility for implementing all contracts handled by its subsidiaries such as Progres, including the Iraq contract. Salamatin then successfully lobbied the establishment of a state defence sector holding Ukroboronprom, which now controls all 118 defence production plants as well as all export structures. Salamatin promptly moved to head the new monster holding in 2011, until in February 2012 he was made Ukraine’s defence minister – only seven years after swapping Russian for Ukrainian citizenship.
Critics have accused him of acting in Russian interests in “sabotaging” the Iraq contract, but there is no indication that Russia has swooped to steal the deal. But Salamatin’s strategy for the sector indeed mirrors that launched by Russia’s Vladimir Putin in 2004, in centralising both sales and production structures in holdings directly subordinated to the executive.
In contrast to Russia, however, Ukraine’s defence producers are far more reliant on foreign sales, since cash-strapped Ukraine’s expenditure on arms procurement is close to zero. But that could change: The turmoil breaking out across Ukraine’s key export markets in the Middle East in 2011 and continuing in 2012, along with the threats to the Iraq contract, have undermined hopes for a rapid boost to arms exports. With Salamatin’s move to the defence ministry in February putting him direct charge of procurement, and plans announced that defence production should double through 2017, Ukraine may now be set for a Putin-style hike in defence spending.