Ukraine’s ‘Wizard of Gaz’

Graham Stack in Kharkiv, Ukraine for Business New Europe (www.bne.eu)

November 29, 2013

Most of the headlines about Ukraine right now concern how the country is being pulled in two directions by the EU and Russia. But a reminder of how oddly Ukraine would sit in the European fold can be found in the story of the meteoric rise of one Serhiy Kurchenko.

A year ago, no one had heard of the fresh-faced 27-year-old trader of gas. Now Kurchenko is a household name, having in the space of a year acquired a big oil refinery, a major football club, industrial and financial assets, as well as the media outlets that brought him to the attention of the public in the first place. His youth, unknown origins and apparently bottomless wealth have turned him into a major newsmaker. But none of the coverage of Kurchenko’s mysterious and meteoric rise has found convincing answers to the main questions: who is Serhiy Kurchenko – the man dubbed Ukraine’s “Wizard of Gaz” – and who is behind him?

Buying the messenger

Kurchenko was first named publicly in October 2012 by Forbes Ukraine as a major player running fuel trading structures under the umbrella name of GasUkraine, which had cornered the liquid gas market in Ukraine and made rapid inroads into the far larger markets of natural gas and oil product trading. Competitors complained that customs authorities were blocking their fuel imports on the border, and state companies were also showing the company favouritism in auctions of propane.

Right from the start confusion has reigned over what companies are part of Kurchenko’s holding – and where the revenues are coming from. When Forbes Ukraine broke the story in 2012, a source provided the magazine with a list of over 50 companies comprising the GazUkraine group, none of which were owned or run by Kurchenko directly – not even the apparent flagman GazUkraine 2009, which had cornered Ukraine’s autogas (propane) market already in 2010. But a spokesman for GazUkraine denied that most of the companies on the long list were connected to GazUkraine group, which itself did not exist as a legal entity. A short-lived GazUkraine website claimed the group had existed since 2003, and aimed to become the leading fuel trading company in the country, but provided no information about the group structure.

Sinisterly, the Forbes Ukraine source added that the companies in the ‘GazUkraine’ group attributed to Kurchenko constituted a ‘conversion centre’ – brass plate companies that provide off-the-book ‘black cash’ to clients in return for wired funds.

In March this year, Kurchenko announced that his structures would be reorganised under the umbrella of VETEK Group – East European Fuel Trading Company, or SEPEK in Ukrainian. According to Kurchenko, it has annual turnover of a whopping $10bn. But again, things are as clear as mud: in fact, there are two identically named companies VETEK founded on the same date, but with different registration codes, according to the state register.

VETEK is now pulling out all the stops to disassociate the company from the GazUkraine group, despite Kurchenko being first contacted by journalists via GazUkraine. “GazUkraine is not a part of VETEK,” Kurchenko’s press service told bne in a statement. VETEK is “focused on investments into the oil and gas industry of Ukraine and Europe,” and the strategy is “to create a vertically integrated company.”

Kickoff

In December 2012, Kurchenko bought his first assets – his hometown Kharkiv’s football team, the leading Ukrainian club Metallist. In March this year, VETEK continued the shopping spree, announcing it had bought the Odesa refinery, one of Ukraine’s largest. To date, the 27-year-old has now added the Kherson oil transshipment port, and the mid-sized Brokbiznesbank and regional Realbank.

Sceptics have pointed out that all these assets are in poor financial health. And Kurchenko’s most controversial investment has been downright value destructive: in June, Kurchenko acquired the UMH media holding that owns the Forbes Ukraine franchise, as well as another leading weekly publication, Korrespondent.

Forbes Ukraine during its brief existence had become the brightest star among Ukraine’s investigative media – and was the publication which broke the Kurchenko story in 2012. On November 13, 14 journalists including the chief editor announced their resignation due to interference in editorial policy. Ten days later, the editorial team at Korrespondent, who had published the only interview with Kurchenko to date, followed suit. The team that had investigated Kurchenko at Forbes Ukraine had already resigned immediately on the deal being announced in June, claiming they had received physical threats during their investigation of the source of the 27-year-old’s wealth and to whom does he owe it.

Kurchenko, in his only major interview to date, told journalists from Korrespondent that he was a self-made man from a poor family who had started working at the age of 16 and had never stopped. Kurchenko said he had risen from sales manager at the age of 16 in Kharkiv firm Expogaz, to become deputy director in charge of the autogas (liquid petroleum gas or propane) wholesale department by the age of 20.

He then left to set up his own business in 2005, Kaskad KSV, and started investing in real estate during the credit bubble years. “Those were years when prices on the real estate market rose 200-300% per year. Banks gave loans to everyone who asked, to completely normal people like myself, at 7-8%,” he told the weekly.

With the revenues, he launched his own gas trading business and bought out Expogaz. “Perhaps one pillar of my success comes from having worked 11 years in one and the same business,” he told Korrespondent. “Another factor has been the continued ability to source cheap credit.” The logical next step was to start importing oil products alongside autogas, which Kurchenko told Korrespondent helped his business reach an annual turnover of $200m in 2008.

bne spoke under condition of anonymity to a former manager in Kurchenko’s structures who worked with him from the beginning. The manager confirmed much of Kurchenko’s timeline while adding detail to Kurchenko’s account of the origins of the business

According to the source, Kurchenko’s deceased father played a key role in his vertical takeoff. “Serhiy’s father was a diplomat in a Ukrainian embassy in the Balkans. He would arrive once or twice a year to sign papers. He carried himself like a nobleman, smoked a pipe, walked with a stick and wore a greatcoat. He had tremendous bearing and we all bowed down before him. If he took a dislike to some one working for Serhiy, Serhiy would fire that person. His word was law.”

VETEK declined to comment on Kurchenko’s father

According to the source, despite the father’s dominance Serhiy had strained relations with him and never visited him abroad. The strain may have derived from the youngster’s failure to shine academically as a result of apparent severe dyslexia – in Ukraine an under-diagnosed condition often equated with illiteracy. “Perhaps this is why he is now buying print media,” suggests the source, who adds that perhaps to compensate for this Kurchenko has developed a phenomenal ability to win friends and influence people. “He can make friends with anyone in the space of five minutes.”

“It was Serhiy’s father who got Serhiy his job at Expogas at the age of 16, he was acquainted with the owner. Then it was his father’s connections in Russia that got the wholesale business started: he arranged privately with managers at Russia’s Tyumen Oil Company (TNK) for import to Ukraine of autogas at incredibly cheap prices. First of all the scheme was implemented through Expogaz, with whom he was on good terms. Then his father set Serhiy set up on own his own when he turned 21. We earned UAH1.2 on every litre sold.”

“Serhiy saw the chance to occupy the mid-size wholesale niche,” the source says. “We were selling to 50-60 clients, each of whom controlled 10-20 filling stations. We had the whole of the surrounding region in our hands. The whole business ran on cash, and had us shifting 50-60kg of hryvnia notes per day.”

“In 2006-2007 we started to win tenders, using traditional means. We won the contract to supply autogas to the entire city transport system for one year. That was $500,000, paid upfront. The price at which we sourced the gas was around $50,000,” according to the source. “Serhiy owned 3,000 square metres of central office space – but the rental revenues were nothing compared to what we earned on gas.”

Business became less easy after the death of a key manager in a car crash in February 2007. Then in 2008 Kurchenko was himself struck by family tragedy, when his father died in a bizarre domestic incident. “Serhiy was devastated,” bne’s source recalls.

In 2009, Kurchenko abruptly announced he was moving to Kyiv, saying he had won a large contract there – and fired almost the entire management team in Kharkiv. “The evening after I had been fired, a top official from Kharkiv’s economic crime squad came to me at home in an SUV with private registration, and warned me never to say a word to anyone about what had been going on,” the source says. “I never heard from Serhiy again until I saw him on TV in 2012 when he bought Metallist – you can imagine the shock. But I want to pay tribute to Serhiy, who is an outstanding personality and gave me the best years of my life.”

Funny money

So what had happened in the intervening three years, between suddenly leaving Kharkiv and the triumphal return in 2012 to purchase Metallist? In the absence of convincing testimony, the only option is to follow the paper trail – of Kurchenko’s company Kaskad-KSV.

Public records show that after Kurchenko’s move to Kyiv, his Kharkiv firms continued to function on paper. Indeed, they apparently snowballed, with court records showing they acquired trading relations with dozens of small firms in Kharkiv and the Crimea, none of which had any clear business profile. Hundreds of millions of dollars started to percolate through this network of companies.

In late 2011, Kurchenko’s Kaskad KSV achieved mention of a sort in the media. The firm was listed among 38 companies which an anonymous internet post on a smear site claimed were “officially approved” by Kharkiv tax authorities as providers of tax evasion and money-laundering services – often referred to in Ukraine as “conversion centres” of bank funds into “black cash” and vice versa, using networks of brass-plate companies and fictive supply contracts. Such “conversion” services are used by owners of private business for tax evasion, and by managers at state-owned business for embezzlement. Ukraine’s security service SBU estimates the volume of the market for ‘black cash’ in Ukraine at over $7bn per year.

Kurchenko vehemently denies any links to tax evasion. “This is all exaggerated by our competitors. Their PR and legal departments invent all this, [arguing] because we have a large share of the market it means we don’t pay taxes,” he said in the interview with Korrespondent in May.

bne established that one contact number for the alleged “conversion centre” was that of Evgen Zhilin, a former officer in Ukraine’s security service and anti-organised crime squad, who spent three years in police custody in connection with high-level assassination attempts. He now runs a self-styled “fight club” in Kharkiv, and a political movement with a pro-Stalin line, Oplot. Without mentioning him by name, the internet leak may have targeted Zhilin, whom other publications have linked to Kharkiv “conversion centres”.

Zhilin, who calls himself a financier, sang the praises of Kurchenko when contacted by bne. He said he had first encountered Kurchenko as a financier in connection with local Kharkiv bank Real, and they had previously collaborated, but Kurchenko had now moved on “to a far higher level of business than a simple businessman like myself.”

“I know for a fact that law enforcement organs here have no complaints about him, and all his financial schemes are legal,” Zhilin assured bne. Zhilin said that talk of links to “conversion centres” was simply denigration of Kurchenko by those jealous of the young man’s success and outstanding capabilities. “Serhiy has a talent for making friends and forging ties quickly.”

Other sources contradict Zhilin’s positive assessment. Ukraine’s financial regulators cracked down on “conversion centres” 2011-2012 to shore up tax revenues by stemming the flow of black cash to the shadow economy. This resulted in a slew of court cases relating to such centres and fictive firms, shedding light on the shadow financial economy.

Some of the scores of court cases underscore links between Kurchenko’s Kaskad-KSV and companies on the Forbes list of alleged GazUkraine companies. Others point to links between the firms from the GasUkraine list and money laundering, as well as to apparent protection by law enforcement – including cases where tax police have started investigations of these firms, only to be prosecuted themselves for exceeding their powers.

Most disconcertingly, the companies on the GazUkraine list seem to have an umbilical connection to Ukraine’s largest company, state-owned Naftogaz, the country’s monopoly distributor of natural gas. According to the state tender database, firms listed on the Forbes list of GazUkraine companies received a whopping $220m worth of Naftogaz tender awards starting 2010. The lion’s share of these was sourced from Naftogaz’s offshore drilling subsidiary, Chornomornaftogaz. NGOs monitoring state tenders have argued that many of these tenders were rigged.

Drilling for cash

Court records allow one of these companies from the ‘Gaz Ukraine’ list to be traced to top managers at Naftogaz, to a  gas-trading oligarch and  to the dispensing of billions of dollars of ‘black cash’ in Ukraine.

A 2013 criminal trial showed a company from the Forbes ‘Gaz Ukraine’ list to have laundered money directly for Ukraine’s tax police: TOV Business Consult, registered at the same address in the Crimea as GazUkraine 2020, featured in a criminal prosecution of tax police officers in Chernigov region. According to the case, the police officer in the dock had busted a ‘conversion centre’ – but then offered to drop charges in return for a $100,000 bribe from defendants. The bribe was to be paid to ‘TOV Business Consult’.

The same TOV Business Consult that laundered money for bent tax cops has since 2010 received around $11m worth of orders from Naftogaz onshore drilling unit Ukrgazvydobyvanie, which extracts 90% of natural gas in Ukraine. According to the plaintiff in an ongoing lawsuit, TOV Business Consult was contracted by a “joint activity agreement” – basically a profit-sharing joint venture without formation of an independent legal entity – between Naftogaz drilling unit Ukrgazvydobyvanie and a private company from Kharkiv, Tekhprojekt.

The plaintiff, a disgruntled minority shareholder in Tekhprojekt, is arguing that Tekhprojekt, as operator of the joint activity agreement, overpaid Business Consult for work that was not even necessary, thus reducing profit and dividends payable, and effectively off siphoning funds via Business Consult.

Earlier court cases and reports from the state audit chamber show that Tekhprojekt – and affiliate companies registered in the Kharkiv satellite town of Dergachi – operate several joint activity agreements with Naftogaz in the sphere of gas extraction, and have done so for nearly a decade. The audit chamber 2007-2008 also alleged that these low-investment joint activity agreements simply siphon off funds from Naftogaz through fictive contracts with suppliers.

Tekhprojekt is linked to a powerful family in Kharkiv – and Naftogaz, the Katsuba family. Volodymr Katsuba ran Tekhproject from 2001-2006, and his elder son Serhiy was CFO and deputy CEO, 2000-2005. Serhiy Katsuba was then deputy head of Naftogaz 2010-2012 in charge of procurement, and younger brother Oleksandr holds that same post currently, after father Volodymyr and Serhiy entered parliament in 2012.

The Katsuba’s failed to respond to attempts to contact them at their parliamentary offices.

Tekhprojekt is owned via foreign shell companies, making ownership difficult to prove, although the fact that it was managed by the Katsuba family during its formative years is a strong indicator. Another indicator is that one shareholder in Tekhprojekt is a Cyprus company, Norchamo Limited. Norchamo Limited is also a shareholder in listed Swedish company, Misen Energy Limited. Misen Energy in turn owns another Ukrainian company which operates as joint activity agreement with Naftogaz, Karpatygaz. Journalists have frequently pointed to gas oligarch Dmitro Firtash as real owner of Misen Energy and Karpatygaz. Firtash’ holding structure, Group DF, has however always denied any such link.

Dergachi, a satellite town of Kharkiv, is the Katsuba family’s traditional stronghold – father Volodymyr Katsuba was head of the state district administration here 2007-2012. One other Dergachi-registered company operates an identical ‘joint activity agreement’ with Naftogaz’ Ukrgazvydobyvanie as does Tekhprojekt, with the two agreements concluded within months of each other in 2004: TOV Tsefei.

TOV Tsefei is 50% owned by Ukrainian company Velika Khortitsa. Velika Khortitsa is in turn 100% owned by Urals Consult registered in the British Virgin Islands (BVI), which is in turn owned by a company Annex Holding Limited registered in the island of Nevis. According to a leaked extract from the company register of the British Virgin Islands, Annex Holding Limited is one of the holding companies at the heart of Dmitro Firtash’ Group DF.

Money-go-round

Tekhprojekt does not just have a revealing relationship to Business Consult, but also to another obscure brassplate company – Rondo Star.

In 2007, according to the state audit chamber, Ukrgazvydobyvanie – the Naftogaz drilling unit with which Tekhprojekt operates a joint activity agreement – paid around $110m in advance payments to a group of 12 suppliers. The 12 suppliers took the money but failed to come up with the good. Around $20m in advance payments went to one company alone, Lekstar Servis, which court records show was a brassplate company (owners and officers in reality had no connection to the entity, and it conducted no real business operations).

In 2010, Tekhprojekt settled a $5m debt still outstanding to Lekstar Servis, owed by Naftogaz offshore driller Chornomornaftogaz. The debt claim, dating back to 2007, had been transferred from Lekstar Servis via a string of small companies to a Kharkiv-registered company Rondo Star. It was thus with Rondo Star that Tekhprojekt reached an an out of court settlement in 2010 over the $5m debt.

True to its name, Rondo Star appears to close the circle between Naftogaz and money-laundering conversion centres. Rondo Star links to a huge ‘conversion’ case in Kharkiv, also dating to 2010: In the last four months of 2010, a Kharkiv brassplate firm Global Distribution received €100m and $30m worth of ‘non-refundable financial assistance’ from a New Zealand shell company from a Lithuanian bank account. According to state prosecutors at the 2013 trial of the director of Global Distribution – for not paying taxes on the money – , the defendant – who had a prior conviction on drug and burglary charges – then withdrew the entire sum in cash to fund the purchase of agricultural produce.

While this is the prosecution’s line, unusually for Ukraine the judge at the trial was having none of it: at a first hearing in April 2013, the judge sent the case back for further investigation – specifically of the possibility that Rondo Star – the Tekhprojekt counterparty – had been involved in handling the enormous funds.

However, Kharkiv prosecutors appealed against the judge’s request that police investigate Rondo Star – and predictably won the appeal, leaving Rondo Star’s true role in obscurity.

According to the state financial monitoring service, the funds transferred by the New Zealand shell company – Anglo Stand Limited –  had been originally transferred to its account by other international shell companies registered in the name of Ukrainian citizens.

These funds may have been only the tip of the iceberg of huge funds being moved to Ukraine from offshores via the Baltic states, and then cashed out as hard currency for conversion centres: the same tiny Ukrainian bank that cashed out the $180m total funds over the last four months of 2010 had already paid out over $1bn in cash to ‘individuals’ over the first nine months of 2010, according to media reports at the time which cited officials from the National Bank of Ukraine: The total amount of hard currency sold by this bank, Akta Bank, in 2010 placed it second in the county for sales of hard currency over the year, despite being only 66th in terms of assets.

The case suggests that procurement corruption at Naftogaz and organization of the market for ‘black cash’ are one and the same game.

The massive movements of funds did not stop after 2010. According to Ukraine’s state financial monitoring service, in 2011 and 2012, similar such massive suspicious movements of funds took place: the state financial monitoring service detailed two separate cases of $0.5bn-$1bn being moved to Ukraine from international shell companies via Latvian banks and then drawn down as ‘black cash’ in 2012. The financial monitoring service however anonymised the data regarding the cases.

Address to impress

Returning to the 2010 “Global Distribution” case, “Rondo Star” appears not to be the only lead that Kharkiv investigators ignored, according to court hearings: Lithuania’s secret service provided them with a Kyiv address for the New Zealand shell company, Anglo Stand Limited, that had transferred the funds. A Kharkiv judge however, refused to grant permission to inspect these premises, since the ‘findings of a foreign intelligence service have no legal validity in Ukraine.’

The Kyiv address for Anglo Stand Limited was vul. Druzhba Narody 19 office 311. bne inspected the premises. According to bne enquiries, in 2010 this was address was in use by a small travel agency owned and run by a certain Yana Efremova. Yana Efremova in an interview plausibly denied any knowledge of ‘Anglo Stand Limited’ and said two other firms had shared the same address.

Intriguingly, however, Efremova ran as a parliamentary candidate in 2012 elections in Ukraine, on the list of an obscure Donbass-based party, Narodnyi-Trudovoi Soyus. Efremova said that her involvement with Narodnyi-Trudovoi Soyus came about via her partner / husband.

Narodny-Trudovoi Soyus is headed by Valentin Zubov, a long-serving MP. His son-in-law Serhiy Gordienko also plays an important role in the party. Narodny-Trudovoi Soyus has strong ties to Naftogaz:  Zubov’s nephew Serhiy Zubov headed a Naftogaz subsidiary, Gaz Ukraina, 2006-2010, and Gordienko also served on the board during those years – alongside Oksana Mass, who has some ownership ties to Serhiy Kurchenko’s operations. From 2010 to the present, Serhiy Zubov works as head of Atomkomplekt – the procurement division of the state atomic energy holding. His predecessor in the job was Serhiy Katsuba

Valentin Zubov, Serhiy Zubov and Serhiy Gordienko all hail from the small one-company town of Kramatorsk in Donetsk region, where they have ties to its dominant engineering firm, Novokramatorskii Mashzavod. One other powerful Ukrainian has origins in Kramatorsk – Prosecutor General Viktor Pshonka. According to bne sources, Valentin Zubov and Viktor Pshonka are acquainted since the 1970s due to their Kramatorsk background and initial work experience at the engineering plant. Forbes Ukraine investigators linked Viktor Pshonka’s son Artem, a Party of Regions MP, to Serhiy Kurchenko.

Pshonka has denied any connection to Kurchenko or tender corruption at Naftogaz.

From Latvia with love

The link between procurement corruption at Naftogaz and the operation of Ukraine’s market for ‘black cash” was pointed to by a bne investigation in 2011: Naftogaz unit Chornomornaftogaz purchased an offshore rig at an inflated price – $400m – from a UK shell company Highway Investment Processing, which had a bank account at Latvia’s Trasta Komercbanka.

According to the bne investigation, Highway Investment was linked to a Lugansk-based “conversion centre”: a network of Lugansk-registered fictive companies channeling funds and dispensing ‘black cash’. Further court cases from 2012 point to the Lugansk cluster intersecting with the Kharkiv / Simferopol sprawl, suggesting it was part of the same large operation, sapping funds from the ailing cash cow Naftogaz and other state companies.

Underlining the link between Naftogaz procurement and the ‘black cash’  market: At the same time as buying the $400m offshore drilling rig from Highway Investment, Chornomornaftogaz bought $150m worth of support vessels from another UK shell company Verylux Company. Verylux Company features in government records as a foreign counterparty to Lviv’s major bus producer LAZ – involved in LAZ illicitly moving funds abroad in connection with tax evasion, i.e. also with conversion centre links.

The link between Naftogaz and ‘black cash’ appears to date back earlier than 2010, however, if the role of Latvian bank Trasta Komercbanka is considered – a bank allegedly linked both to Naftogaz and to Ukraine’s market for ‘black cash’.

In 2008, then head of Ukraine’s security service, Valentin Nalivaichenko, alerted press to the operations of money launderers who had moved billions of dollars in and out of the country in connection with conversion centres. According to Nalivaichenko and relevant court documents, UK shell companies with accounts at Latvia’s Trasta Komercbanka, as well as Lithuania’s Ukio Bankas and Kyrgyzstan’s Asiauniversalbank, laundered around $2bn for clients of conversion centres 2007-2008.

In another case reported by bne, in 2006-2007 international shell companies with accounts at Trasta Komercbank and Ukio Bank pumped tens of millions of dollars to accounts at a small Ukrainian regional bank that were drawn down as black cash. https://grahamstack.wordpress.com/2013/02/26/baltic-banks-at-the-hearts-of-ukraine-graft/

Trasta Komercbanka is co-owned by Ivan Fursin, Firtash’ junior partner in the gas trading business – and currently chairman of Ukraine’s parliamentary anti-money laundering committee. CEO and co-owner of Trasta, Igor Buimisters, worked as consultant to the management of Naftogaz and of a Naftogaz joint venture company, Devon, according to his website biography. Another Firtash top manager, Charles Trehere, is on the board of management. Trasta denies any involvement in non-compliant activities.

Here today, here to stay?

Serhiy Kurchenko’s vertical career start in 2012 is strongly reminiscent of how Dmitro Firtash burst on the scene only 8 years ago: in 2006 Firtash was a completely unknown figure when he stepped forward out of the shadows as ostensible owner of gas trading businesses Eural Trans Gas and its successor Rosukrenergo, that sold billions of dollars worth of Turkmen gas to Ukraine via Russian pipelines.

Eight years on he is an international name as one of Ukraine’s richest and most powerful men: owning the country’s largest TV station, most of the country’s chemical industry and most of the local gas distribution network, as well as being a key importer of gas to Ukraine and other countries.

But Firtash, like Kurchenko, has never been able to put behind him allegations that he is in fact a cipher for other shadowy interests. An investigation of Firtash in 2006 by NGO Global Witness documented Firtash’ links to alleged global crime lord, Ukrainian-born Semen Mogilevich, now resident in Moscow, and one of the FBI ten most wanted fugitives, And as late as 2010, leaked US diplomatic cables documented Firtash acknowledging in private that he owes his start in business to Mogilevich. Firtash has denied ever making such a statement.

So like the cinema’s Wizard of Oz, who turns out to be a fraud behind all the smoke and mirrors, Ukraine’s latest ‘Wizard of Gaz’, Serhiy Kurchenko, is unlikely to keep all the promises he makes.

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