Ukraine’s new authorities are moving against alleged massive corruption at state energy company Naftogaz carried out during the presidency of Viktor Yanukovych. bne’s own investigations have traced nearly $50m in suspicious payments by Naftogaz made to a one-man ship repair business in Istanbul, Turkey.
Traditionally every change of power in Ukraine leads to the swift arrest of the incumbent management of state energy company Naftogaz – and 2014 and the fall of the Yankovych regime is no exception. On March 21, masked and heavily armed special police swooped on Naftogaz headquarters and marched out long-serving CEO Yevhen Bakulin, whom acting Interior Minister Arsen Avakov accused of complicity in the theft of over $4bn from the company.
On the same day as Bakulin’s arrest, a long way from Kyiv in the Pendik port area of Istanbul, Murat Bayrak looks nervous and knocks his fork onto the floor when he hears of the arrest. Bayrak runs a small portside ship-engine repair outfit called Emarine. He says he has spent the day up to his elbows in oil on an engine repair operation, and displays photos on his smartphone of the rusty “patient”. But in the evening, he shows himself to be a convivial 30s-something with perfect English.
Murat does not hide his surprise to have a British business visitor. “I only have had the website up since 2013 and you are the first person to have contacted me via it,” he says over dinner at a quayside fish restaurant. “You are also probably the first person to have ever simply come by my office without an appointment,” he adds, which is unsurprising given that a local taxi driver had difficulty locating the small premises, that lack of a nameplate on the intercom, let alone a sign. “It is a small company,” acknowledges Murat. “For instance, I don’t have my own workshop.”
Emarine’s share capital totals just over $30,000, and Bayrak’s is the only name and face featured on the Emarine website. But over a six-month period in late 2012 and early 2013, Emarine hit boom time – $46.5m was paid to its Turkish account in multiple instalments by a UK company called Northsale Logistics from a Latvian bank account, according to extracts from the accounts seen by bne.
Northsale was a subsidiary of Latvia’s Riga Shipyard, and the $46.5m paid to Bayrak came out of $400m paid by Ukraine’s Naftogaz to Riga Shipyard for supply of an offshore drilling platform. Given Emarine’s tiny size, the $46.5m that flowed to Bayrak, out of the $400m paid by Naftogaz to Riga Shipyards, looks suspiciously like part of the $4bn allegedly siphoned from Naftogaz during the presidency of Viktor Yankovych 2010-2014.
Rigged in Riga
Riga Shipyard used Northsale – a company set up only in 2011 – to handle the controversial $400m deal that saw it supply Ukraine’s Naftogaz with a semi-submersible offshore drilling platform. The deal was controversial because Riga Shipyard had acquired the newly built B319 rig from Norwegian leasing company Standard Drilling for only $220m weeks earlier. Riga Shipyard played no further significant role except as intermediary; the company claims it made only around €5m on the deal.
Even allowing for cost of transport from Singapore to Ukraine, engineering work needed to transit the Bosphorus and extras such as a helicopter, the $180m discrepancy in prices was so enormous as to raise more than just eyebrows. Given the reputation of Naftogaz as one of the world’s most corrupt companies, the smell of dodgy dealing was strong. But apparently all of officialdom in Latvia was holding its nose – the signing ceremony in Ukraine was even attended by the then Latvian economy minister, who later told bne he hoped the deal would boost Latvia’s economy.
In fact the opposite has happened. Riga Shipyard, one of Latvia’s largest companies with workforce of around 600, may be nearing bankruptcy and is rapidly turning into a political hot potato. Former member of the management board Igor Komarov was quoted by local press in early March as saying there remained just “three to six months” until the shipyard went bankrupt. Riga Shipyard dismissed these comments and other reports as “informational attacks with the purpose to discredit the oldest company in the country.”
Riga Shipyard has also consistently denied any wrongdoing in connection with the Naftogaz deal, referring to the fact that in Ukraine no enforcement action has been taken over it. “The authors of this wrong information are fulfilling someone’s order,” says the company.
Bayrak says he received the funds for work he had performed “according to his business profile,” but says he cannot speak about the contract due to confidentiality clauses. Bayrak denies that there was anything improper about his receipt of $46.5m and says his company has been independently audited with no questions from Turkish authorities. He hints that he may have forwarded the funds to unspecified “subcontractors”.
The logic of using a Turkish company for the siphoning of funds from Naftogaz’s deal with Riga Shipyards appears simple – the rig transited the Bosphorus on its way to Crimea, involving extensive transport and engineering work, which were used to justify the payments to Emarine. The Northsale accounts also show smaller direct payments being made to genuine suppliers such as Singapore’s Keppel Fels, which supervised the Bosphorus transit.
Some details suggest the firm may have been primed to transit funds. Although Bayrak founded the company in 2008, it was only in 2013 that he launched the amateurish website – perhaps to satisfy cursory anti-money laundering checks. Since November 2011, Bayrak is no longer Emarine’s owner or manager on paper, with some partners taking over those roles, although he left no doubt in the interview that Emarine is his company.
Bayrak says his career got off to a promising start, heading the diesel engine sales division in Turkey of German engineering giant MAN, while studying for an MBA. But after a dispute over allegedly misappropriated money, he left the company in 2008. “It was impossible for me to work in a Turkish company after this, and so I had no choice but to start my own business,” he explains. Bayrak declined to say where his contacts to Riga Shipyard come from.
Loss of “Independence”
Naftogaz renamed the B319 rig “Independence” upon its entering service at its offshore drilling unit, the Crimean-based Chornomornaftogaz. The name Independence referred to the high hopes placed on the rig, and a sister rig B312 purchased earlier, which centred on reducing Ukraine’s dependence on Russian gas by exploiting domestic reserves in the Black Sea.
But since Russia’s blitzkrieg annexation of Crimea, Chornomornaftogaz and its new drilling platforms have been “nationalised” by the secessionist Crimean government, and in a bitterly ironic twist of fate are now under Russian control.
On March 23, Ukraine’s energy minister from 2010-2012, Yury Boiko, said on television that any corruption schemes at Naftogaz had cost the country “100 times less than the loss of Crimea”. Boiko – widely regarded as the mastermind behind the Naftogaz schemes – blamed the loss of Crimea on the Maidan anti-corruption protests that ousted president Yanukovych in February and on Ukraine’s new government that came to power on an anti-graft ticket.
But in fact there is a close link between corruption under Yanukovych and the loss of Crimea: at the time of Yanuovych’s fall, Crimea was run by his cronies, implicated in endemic corruption and badly exposed by their boss’ sudden departure. Russia offered Crimea’s elite security and the retention of their assets, in return for handing over control of the peninsula without a shot being fired. They gladly took up the offer, proving that while the price of liberty may be eternal vigilance, the price of corruption is loss of independence.