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How Berezovsky pushed Putin to power

Graham Stack in Berlin for Business New Europe (www.bne.eu) April 14, 2015

Fifteen years after the then unknown Vladimir Putin took over the Russian presidency, analysts still puzzle over how he arrived in the position. Newly declassified documents from President Bill Clinton’s administration, show how Putin’s candidacy was a compromise after a fierce battle for power in Russia between pro-US oligarchs and pro-state conservatives. At stake was not just power in Russia, but the crucial question of Russia’s relationship with the West.

Russia’s ‘oligarchy’ took power during Yeltsin’s re-election in 1996, when they used his reliance on funding from Russia’s leading seven bankers to acquire the cream of the country’s resource-producing assets.

According to the documents from the Clinton administration, which were released under a mandatory declassification review, one of the chief ideologists of Russia’s freshly minted oligarch system was Russian-Israeli banker and media magnate, Vladimir Gusinsky, owner of Most Bank and TV channel NTV.

Gusinsky came to a November 1996 lunch meeting with US embassy officials with an important message: the oligarchs were here to stay – but they should not be feared by the US. Oligarchy was a fitting governance system for Russia, and would put the country on a pro-US course.

“Russia, Gusinsky explained, was not a democratic or a European country; it is an Asiatic country,” he said, according to embassy records, with Gusinsky’s name redacted but implicit. “The country was run by an oligarchy, of which businessmen like him were an integral part, and would be for some time,” Gusinsky told the US diplomats.

“Our friends in the West” had been right to criticise the oligarchs in the past, he said, but now they had taken on “responsibilities for Russia’s national interests”.

Gusinsky “did not deny that many Russian businessmen, including himself, had engaged in dubious activities, especially as they were setting up their operations and accumulating capital”, he told the diplomats. “Nevertheless, a number of big businessmen had now emerged – for example, Berezovsky’s seven bankers [Boris Berezovsky himself, Vladimir Gusinsky, Mikhail Fridman, Vladimir Vinogradov, Aleksandr Smolensky, Mikhail Khodorkovsky, Vladimir Potanin] – who were so big and influential that they no longer had to engage in such activities and no longer did,” the document reads. Gusinsky claimed that allegations of oligarchs’ links to organised crime were spread by Russia’s security services, with the aim of stemming capital flight.

Rule of seven bankers 

Of all the 1990s oligarchs, none was more powerful than Berezovsky, who coined the phrase “the rule of seven bankers”. Berezovsky attained high political office, allowing him to directly shape Russian domestic and foreign security policy – at the same time as being a citizen of Israel.

Berezovsky acknowledged that his power was based on his control over TV channel ORT. “90% of all TV influence is concentrated in the top three channels: ORT, RTR and NTV,” Berezovsky told US diplomats in 2000, according to the declassified documents. Of these, his own ORT was by the far the most powerful, he said.

With ORT as his power base, Berezovsky set himself apart from all other oligarchs in terms of his political ambitions. He sought and gained influence not only on key domestic political questions, including the country’s territorial integrity, but also directly on Russia’s foreign policy.

At the height of his power, Berezovsky was deputy head of Russia’s powerful security council, but, as the documents make clear, security council head Ivan Rybkin was merely his pawn.

In this capacity, Berezovsky actively sought US backing in 1996 for what he promised would be a “radically pro-Western policy”, according to an account to US diplomats in 1996 provided by then Georgian president and former Soviet foreign minister Eduard Shevardnadze.

Shevardnadze was backed in Georgia by Berezovsky’s close business partner and friend Bardi Patarkatsishvil, and appears to have acted as wingman for Berezovsky to approach the US in 1996.

In a meeting with a US ambassador-at-large in Tbilisi in November 1996, Shevardnadze told US diplomats that Berezovsky was an “extraordinary person”, who “wanted a radically different foreign policy, putting Russia squarely with the West”. “He merited US support,” Shevardnadze advised, but “support would have to be done in the right dosages”. In time, “he would develop into a necessary and useful man,” Shevardnadze said.

In particular, Shevardnadze said, Berezovsky was entirely free of any interest in expanding Russian influence across the post-Soviet space, for instance viewing embryonic plans for a post-Soviet customs union as “nonsense”.

Berezovsky’s plans for a pro-Western revolution in Russian foreign policy had to find a way of countering then foreign minister Evgenny Primakov. Primakov was a former deputy head of the KGB and strongly sceptical regarding the West’s intentions towards Russia. According to Shevardnadze, Berezovsky intended to undermine Primakov’s position in that he “wanted to create something like a secretary of state within the Russian security council”. The powers of the security council were not defined in the constitution, and critics feared it could be used to create a parallel government outside any parliamentary control. At the same time, Berezovksy sought to sideline Primakov.  “Berezovsky felt Russian policy should radically change, and he understood this would be impossible without changes in personnel,” Shevardnadze said.

US diplomats were well aware of the negative reports in both Western and Russian media alleging that Berezovsky, the so-called “godfather of the Kremlin”, was involved in corrupt schemes such as siphoning funds from state-owned national carrier Aeroflot, as well as benefiting from crony privatisations. There is no sign in the documents they ever committed themselves to support him, as Shevardnadze wished. “Deputy security council chairman Berezovsky is a dangerous figure,” Pavel Gusev, newspaper publisher and editor of leading Russian paper Moskovsky Konsomolets, told US diplomats. “He is a pure mafioso, and his appointment is proof that major criminal groups have reached the highest levels of government.”

The only question of wrongdoing discussed in the declassified documents is Berezovsky’s admission that he held Israeli citizenship along with Russian, which was illegal and especially questionable for the deputy head of the security council. “I did it in 1993 and had totally forgotten about it,” he told US diplomats somewhat implausibly.  He also claimed to have recently revoked his Israeli citizenship. “Judging by a phone conversation he had in pol/int chief’s presence, he was seeking to have the revocation antedated to precede his appointment to the security council,” the dispatch commented drily.

‘Do it quietly’

The oligarchs came to power at the same time as Nato launched its controversial eastwards push. US diplomats record encountering deep-seated antagonism to the move in Moscow. “Utterances about the undesirability of Nato expansion and the need for ‘special agreements’ were heard ad nauseum around town,” American diplomats wrote in 1997.

With the US looking to overcome Russian suspicions, the oligarchs offered one obvious channel, given their monopoly on Russian TV and their search for international legitimacy. The oligarchs thus lost not time in showing themselves the strongest backers in Russia of Nato’s expansion. Berezovsky even backed an apparent offer to Russia to join the military alliance. “It was a mistake for Russia not to capitalise immediately on Nato’s invitation to Russia to become a member, ” Berezovsky told US diplomats later at a meeting in February 1999. Berezovsky said at the meeting that there was considerable support for US in Russia among the intelligentsia, both “as the carrier of democratic ideals as well as a powerful country with global plans”.

Igor Malashenko, right-hand man of Gusinsky and president of Gusinsky’s flagship NTV channel, was even more gung-ho over Nato expansion than the US diplomats themselves. While US diplomats were prepared to work with Russia to overcome misgivings over the policy, Malashenko simply advised US diplomats at a meeting in 1997 to just “do it quietly”.

Malashenko compared Russia’s position relative to the West in the 1990s to Germany or Japan’s position after their World War II capitulations, but said that the country’s leadership failed to recognise this. “Russia lost the Cold War, but you will never hear any of our leaders say this,” Malashenko said, as quoted by the US diplomats.

Malashenko’s injunction to the US to just get on with Nato enlargement ‘but do it quietly’ is a useful warning of the need for a deft hand in the present politically charged atmosphere,” was the US takeaway from the encounter.

From Primakov to Putin

Open oligarch support for Nato expansion may have deepened suspicion of the Western alliance among conservative figures in Russia’s foreign policy and security elites, who feared that the oligarchs were ready to sell out their country to the West.

The diplomatic dispatches show how competing foreign policy positions – pro-US vs Russia-centric – were quickly enmeshed with the domestic struggle over power and money at the end of the Yeltsin era. Berezovsky’s struggle for political supremacy with Primakov, whom he called his “ideological enemy”, ran parallel to Primakov pushing back against Berezovsky’s business practices in 1999.

Primakov had become prime minister in September 1999 following Russia’s default in August 1998. By early 1999 he was a strong favourite for the presidency, with elections due in March 2000, and Yeltsin barred from standing for a third time. Under Primakov, government agencies had carried out checks of Berezovsky’s business empire. Primakov at the same time opposed the West over military action against Slobodan Milosevic’s Serbia.

Berezovsky directly tried to enlist US support to oust Primakov from the post of prime minister in May 1999, and thus to scupper Primakov’s presidential ambitions, the documents reveal.

At a crucial meeting with US diplomats in February 1999, following the first government checks of his business, Berezovsky warned that, “Primakov actually is as red as a tomato’” and that, “Primakov would not serve as prime minister beyond May”. Berezovsky said he was moving “indirectly” to oust Primakov and sought assurances from the US that they would support what he called a “soft landing” for Primakov in favour of a new government.

Berezovsky then switched to English to ask for US support for a new government. “Such a government would understand and have a ‘clearer’ approach on who and how the economy should be led. In this case, he asked, would the US be ready to help stabilise the situation in Russia? Would the US be able to move the country forward?” the documents relayed.

US diplomats were cautious about getting caught up in domestic feuding, despite the foreign policy advantages it promised them. “Berezovsky’s thinly-veiled query about US support in such a circumstance and his well-developed penchant for scheming should be interpreted as a warning to be extra cautious about reacting to rumors or events in the coming months too quickly,” they wrote.

In the event, Yeltsin fired Primakov on May 12, sending shockwaves through Russian politics. Yelstin appointed Sergei Stepashin to succeed Primakov, only to replace him six weeks later with the politically unknown Vladimir Putin.

One year after Berezovsky had conspired to oust Primakov, Vladimir Putin was president and Berezovsky on his way out.

Death of an oligarch

Why did Berezovsky miscalculate Putin so badly? The main reason cited in the US diplomatic dispatches is exactly Berezovsky’s longstanding feud with, and fear of, Primakov. “Putin is better than Primakov,” Berezovsky told US diplomats bluntly in 2000. In contrast to Primakov, Putin had said he would not revise the controversial privatisations of the 1990s, through which oligarchs acquired ownership of key assets in the resource industries.

Berezovsky appears not to have anticipated that Putin would clip the oligarchs’ political wings, perhaps because for him and his fellow oligarchs political and economic power and were one and the same. Putin’s ideological mix of capitalism and conservative authoritarianism was new in Russia, which was used to a binary opposition of pro-Soviet statist forces and supporters of pro-Western laissez-fair policies.

Berezovsky was slow to catch on. “Putin is going down the path of Peron or Pinochet – not seeking an authoritarian state per se, but pursuing the goal of a democratic state via an authoritarian path,” Berezovsky told US diplomats in late 2000.

Not only was Putin against the oligarchs, but he was also suspicious of their pro-US policy preferences. “Putin fears neither the US nor Nato, but thinks the US holds positions that run counter to Russian interests,” Berezovsky warned the US.

Contrary to reports that Berezovsky had selected Putin as presidential candidate, Putin and Berezovsky seem to have had little contact with each other before Putin became president, which may have been another reason for Berezovsky’s misjudging him. Berezovsky himself told US diplomats that he backed new foreign minister Ivan Ivanov to succeed Primakov as prime minister in 1999, although Putin eventually got the nod, after an interlude of six weeks.

Oligarch banker Pyotr Aven confirmed to US diplomats that there was no special tie between Putin and Berezovsky, even “noting that he himself had introduced the two”, US diplomats wrote. Putin knows no-one,” Aven told the diplomats, while at the same time acknowledging that the oligarchs have “no instrument of influence over him”.

Soon Berezovsky realised that his efforts to keep Primakov out of office had backfired, and that his power was in decline. “We understand that from an early stage in the Putin administration, Berezovsky lost his privileged access to the Kremlin, and was required to apply for permission each time he wished to visit there,” US diplomats wrote in 2000.

Berezovsky put on a typical show of bravado, boasting of his willingness to resist the Kremlin. “They can put me in jail but it won’t help,” he boasted to diplomats. In the end he left the country to avoid jail on fraud charges relating to Aeroflot and the car dealership LogoVAZ that he controlled, and settled in the UK, from where he continued attempts to organise opposition to Putin.

Only once did American diplomats see a different, anxious Berezovsky, which may have presaged his suicide from depression in 2013, after a devastating London courtroom defeat to former partner Roman Abramovich in 2012. After Primakov’s government had ordered the first checks on Berezovsky’s businesses in 1999, spelling the beginning of the end of his business empire, Berezovsky’s “obvious signs of worry [were] reflected on the face and in the voice of the reputed oligarch”, who “spoke in hushed tones”, the US ambassador wrote of his troubled guest.

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European Court awards big damages to Ukraine businessmen in murky cases

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, although Ukraine’s database of litigation shows that Liovin-controlled firms indeed had contracts with state arms exporters at least in the Middle East.

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  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.

Tax problems

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.”

Virtual economy

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.

Pyrrhic victory

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.

Mysterious death

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.

roquebrune galkin death 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,” the company said, with reference to Galkin’s continued presence on its website.  Galkin’s widow, and new Ukrplastic CEO, Irina Mirochnik, 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.”

Poor judge

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.

Smuggling suspicions and organized crime cast shadow over Ukraine’s defence industry

Graham Stack in Kyiv for Business New Europe (www.bne.eu)
November 18, 2014

 

The shadow of organized crime hangs over Ukraine’s defence industry. bne investigations trace links between gangs and the defence sector that stretch back over 20 years of arms smuggling to places like Iran and North Korea.

Ukraine’s military prosecutors and the SBU security service in early November searched the houses and offices of former and current heads of the state arms exporter Ukrspetseksport, and seized documents from a number of state defence firms, pointing to a crackdown on the traditionally murky defence sector by Ukraine’s new reform-minded authorities.

The moves follow an October raid by the SBU – backed up by an elite SWAT unit – on the head office of Ukraine’s state arms holding Ukroboroprom. The crackdown sparked hopes that Ukraine may be finally getting serious about pushing organised crime out of its arms industry, although there is no confirmed information as to what investigators are looking for.

The latest shock to Ukraine’s defence sector came in 2013, when UN investigators named a Ukrainian aviation executive in connection with the illegal attempted transfer in 2009 of around $16m worth of rockets, rocket-propelled grenades and man-portable air-defense systems from North Korea to Iran – even though both countries are under an international arms embargo.

The attempted transfer grabbed world attention in December 2009 when Thai authorities seized an Ilyushin-76 plane numbered 4L-AWA at Bangkok airport, and found it stuffed with the North Korean arms bound for Iran apparently via Ukraine – the first cargo of North Korean weapons to have been seized under sanctions. Then the paper chase began: according to its documents, the plane was owned by a little-known Georgian operator Air West Georgia, leased by a New Zealand shell company, SP Trading, and chartered by a Hong Kong firm.

But investigators quickly traced the plane back to its previous owner from Kazakhstan, Aleksandr Zykov, whose local firm East Wing allegedly supplied the crew, with Air West Georgia and the Hong Kong charter both smoke screens. Zykov had a past history linking him to sanctions busting arms transfers.

That left only the New Zealand shell company SP Trading to account for. And in 2013 the UN investigation produced a surprise, by alleging that an unknown Ukrainian, Yury Lunov, had masterminded the transport together with Zykov.

But while Zykov’s role as provider of the plane seems clear, what was Lunov’s? The trail leads to a small office in Kyiv: A fax number provided for SP Trading in the cargo documents matches the number provided in Ukraine’s company register for an obscure local firm called GST Ukraine, which Lunov also told a UN panel was his place of work.

A guest of GST

GST Ukraine is registered at Frunze Street 19-21 in Kyiv’s Podil district. Embarrassingly for Ukraine, the address is the seat of the country’s State Service for Export Control – the very state body that controls the export and import of military technologies. The address – a former Soviet government department building – also houses the state-owned Ukrainian Cargo Airways, the country’s largest freight carrier, and state-owned Ukraine Scientific Research Institute for Aviation Technology. Thus it forms a trinity of air transport, dual-use technologies and export controls, around which a whole swathe of smaller, often private companies such as GST Ukraine have sprouted up.

GST Ukraine’s current office lies behind an unmarked door in an adjacent building, which also houses the very hush-hush Ukraine Scientific Research Institute for Aviation Technology (UkrNIIAT). bne found GST Ukraine’s director, Vyacheslav Kaplunenko, at his workplace in a cluttered one-room office. According to the state company register, Kaplunenko has run the company since its founding in 2004, with Yury Lunov’s son Boris a co-owner.

Responding to bne questions, Kaplunenko calls GST Ukraine an “air freight” business. When asked what projects they were currently working on, Kaplunenko complains that, “there is no work at the moment. Due to the war in the country, we just sit and read the news. When will it all end?”

Kaplunenko claims Yury Lunov – named by the UN in connection with the 2009 North-Korea to Iran arms deal – no longer works at GST Ukraine, adding that Lunov handled the aviation side of the business, while he only ran the commercial side. Kaplunenko also says he knows of no investigation into his company.

Kaplunenko insists GST Ukraine has no business relationship with the State Export Controls Committee, UkrNIIAT, Ukrainian Cargo Airways or any other state organisations. “The only relationship we have is purely commercial, being that we rent the office from UkrNIIAT,” Kaplunenko says, adding it was a “coincidence” that GST Ukraine was in the same line of business as its landlord and larger neighbours. UkrNIIAT, contacted later by telephone, also denied that GST Ukraine was connected, saying they rent office space to a number of firms.

But belying such words, Kaplunenko’s office is full of files suggesting he works directly for Ukraine’s state defence sector, labelled, for instance, “Ukrspetseksport” and “Yuzhmashavia” – the former the state arms trader, the latter an aviation company owned by Ukraine’s producer of intercontinental ballistic missiles, Yuzhmash. “Folders are folders, they don’t say what’s inside,” Kaplunenko shrugs. The wall of Kaplunenko’s office displays a poster detailing munitions and packaging sizes. “It’s a souvenir,” he explains.

The Kazakh operator linked to the plane seized in Bangkok in 2009, East Wing, was originally named GST Aero, a close match to GST Ukraine. UN experts in 2013 wrote that GST Ukraine is “an entity that the Panel has reason to believe is related to [Kazakh operator] Zykov.” Apart from the 2009 case, UN experts have linked Zykov’s GST Aero/East Wing to deliveries of arms, ammunition and vehicles to Somalia in 2006, Chad in 2007 and to Darfur rebels in 2008.

Moreover, the GST Ukraine fax number matches both that of the New Zealand shell company SP Trading as well as that of Air West Georgia, which the UN calls a “ghost operator.”

Kaplunenko denies that his company has any relationship to Air West Georgia. But one folder on Kaplunenko’s shelf bore the registration number of a single plane, an Antonov 12B, registration number 4L-BKN. Aviation databases show this plane to be a sister to the 4L-AWA plane seized in Bangkok – also on paper operated by Air West Georgia, but currently in storage near Kyiv.

Kaplunenko hems and haws when queried about the plane, and then decides it is time for your correspondent to leave his office, haranguing the guard on the way out for having admitted a “CIA spy” to the premises.

Blast from the past

GST Ukraine was set up in 2004 at Frunze 19-21, but this was not Lunov and Kaplunenko’s first acquaintance with the address: records show that both men in the 1990s were shareholders in another company at the same address run by Lunov called Antonov Aerotrack-Aviaservice, the subsidiary of a major cargo flyer at the time called Antonov Aerotrack Aviation. “You’ve done your homework,” Kaplunenko acknowledges.

Despite being wound up in 2001, Aerotrack Limited at the Frunze 19-21 address was listed as consignee on the waybill for the 2009 4L-AWA flight.

In the 1990s, the CIA accused Antonov Aerotrack of having flown Scud missile launcher parts from North Korea to Iran via Kyiv, in 1995. “That was a long time ago and I know nothing about it,” said Kaplyunenko.

Antonov Aerotrack was a partly state-owned company that has ties with leading Ukrainian aviation and defence producers such as legendary plane producer Antonov, and Progress turbine builder from Zaporizhzhya.

But besides the links to the state, Antonov Aerotrack also had links to alleged organised crime structures: Ukraine’s company register shows that a significant stake in the business was held by a notorious Viennese company, Nordex GmbH, run by Grigory Loutchansky, a legendary figure from the 1990s. “The CIA reported that it [Nordex] deals in various schemes from illegal arms trading to money laundering for the Russian mob,” the US embassy in Kyiv wrote in a Crime Digest circular from April 1999.

Although based in Vienna, and often associated in the media with Russia, Nordex had strong Ukrainian links: Loutchansky’s partner in Nordex was Israeli-Ukrainian oligarch Vadim Rabinovich, according to Rabinovich’s own testimony in an authorised biography. GST Ukraine’s Kaplyunenko said that his company had no connection to Nordex or Rabinovich.

In 1996, CIA sources told Time magazine that in 1995 Nordex had flown Scud missile launcher parts from North Korea to Iran, using a Ukrainian-registered Antonov Aerotrack plane, via Kyiv. CIA sources were also quoted as saying said that Nordex had transferred nuclear materials to Iran in 1993-94.

Loutchansky admitted having visited North Korea and owning the plane, but said he had nothing to do with the cargo, because the plane was leased at the time to a Bulgarian firm. Rabinovich, when asked about the incident in his biography, added that Nordex was at the time no longer owner of the plane at the time, having sold it to Aerotrack.

Rabinovich, in an early 2014 interview with Russia’s radio station Ekho Moskvy, made light of past allegations of arms trading, such as in 2001 having sold 300 tanks to the Taliban via Pakistan. “At that time, for the first time ever, the Ukrainian state stood up for me: the head of the National Security Council declared that we simply didn’t have that many tanks,” Rabinovich said. He also reminisced: “I once left my hotel in Jerusalem holding a paper with the headline ‘Rabinovich sold arms to Iran.’ A local saw the headline, my picture and me, and said: ‘Congratulations!'” His advice to journalists? “Write what you want about me, but get my name right.”

Loose nukes

Underlining the Iran connection, GST Ukraine’s apparent partner firm, Kazakh company GST Aero/East Wing, is also alleged to have smuggled nuclear-capable cruise missiles stolen from Ukraine’s arsenals to Iran in 2001.

Ukraine’s SBU intelligence service announced in January 2005 that it had identified a gang that had stolen the missiles and smuggled them out in 2001. In a newspaper interview in 2005, the defence lawyer for the sole defendant – a certain Vladimir Evdokimov – mentioned that the cruise missiles had been flown to Iran in 2001 by GST Aero. The trial was held in secret.

While the SBU investigation remains under wraps, in 2004 Ukrainian MP Hrihory Omelchenko, himself a former police investigator, used his powers as head of Ukraine’s parliamentary committee against organised crime to launch his own investigation, which bne was able to view in the archives of the Verkhovna Rada, the parliament.

Some offshore structures involved in the 2001 deal, according to Omelchenko’s investigation, are still active today. For instance, according to Omelchenko’s investigation, a Cyprus firm, Volgen Trading, financed post-sale visits by Ukrainian experts to service the cruise missiles in Iran.

According to the Cyprus company register, Volgen Trading was reactivated in October 2014 – and now features as director a man with the same name, Vladimir Evdokimov – as the defendant in the 2005 trial. A recent listing for Volgen Trading on social media describes the firm as involved in air cargo.

Ukraine’s company register shows that at the time of the alleged Iran missile shipment in 2001, Volgen Trading was a shareholder in Orlan Beverages concern, founded by businessman and politician Yevhen Chervonenko. At the time Chervonenko headed Ukraine’s agency for state reserves, in 2005 he headed the transport ministry, later becoming governor of Zaporizhzhya region, and from 2010 headed the aviation department at Ukraine’s emergencies ministry. Chervonenko, widely regarded as an ally of Rabinovich, says he quit his business Orlan Beverages as early as 1997 on becoming an adviser to then president Leonid Kuchma. Volgen Trading ownership is hidden behind nominees, and phone numbers listed for the company did not work.

Mysterious Mr Salamatin

Rabinovich is still going strong 20 years on, running as an outsider in presidential elections in May 2014 and getting elected to parliament on October 26. The press service of his political party Centre said he is not available for comment before the opening of parliament at a still undetermined date. His known business interests focus on media.

Loutchansky in contrast has disappeared from public view and is believed to live in Israel. Loutchansky’s name – and the memory of the now defunct Nordex – echoed in 2010-2012, however, due to the bizarre rise through Ukraine’s defence establishment of a certain Dmitry Salamatin, who in 2010 out of the blue was named head of Ukraine’s arms export Ukrspetseksport, and in 2011 became minister of defence.

Salamatin’s origins were in Kazakhstan and Russia, and he is believed to have only received Ukrainian citizenship days before he entered Ukraine’s parliament in 2006, remaining largely unknown until his shock appointment in 2010.

Salamatin swiftly consolidated Ukraine’s sprawling defence producers and export firms, uniting them in a new holding structure called Ukroboronprom – which he then headed. Having done this in the space of a year, in 2011 then president Viktor Yanukovych made Salamatin defence minister. Then Yanukovych dropped him in December 2012, and Salamatin has never been heard of since in Ukraine.  “The day after he was fired, he flew back to Moscow, where his family had remained,” says Oleksiy Melnik, defence expert at Kyiv’s Razumkov Centre.

Salamatin’s activity as Ukraine’s defence sector head may be the main focus of the ongoing investigation into Ukroboronprom. “His main interest was clearly the arms trade, and as defence minister he used Ukraine’s military mostly as a marketing instrument to sell weapons systems, with an eye to his own benefit,” says Melnik. “At the same time he was likely linked to Russian special services.” Salamatin could not be reached for comment.

So who was he? Salamatin’s qualification to head Ukraine’s defence sector may have derived from his 1990s Nordex ties. In 1994 Nordex entered a consortium to manage giant Kazakh steel producer Karmet, together with a US company, according to Time in 1996. Loutchansky was backed in this by two partners: Kazakh mining minister at the time Albert Salamatin, and Russian deputy prime minister Oleg Soskovets, also of Kazakh origin. Albert Salamatin is Dmitry’s father, while Oleg Soskovets is widely reported to be Salamatin’s father-in-law. The Kazakh deal ultimately failed, because the US government blocked Nordex involvement, according to Time.

Ukraine declares ceasefire but Kremlin and Donbass rebels demur

Graham Stack in Donetsk and Volnovakha, Ukraine
September 3, 2014

 

Confusion reigned on September 3 over hopes for a ceasefire in Ukraine, as President Petro Poroshenko announced on Twitter in the morning that he had reached a ceasefire agreement following a phone call with Russian President Vladimir Putin, though Russian officials later denied the initial wording by Poroshenko and subsquent statements by the Ukrainian president were amended.

The Ukrainian language tweet said that “as a result of a telephone call with the president of Russia, agreement has been reached on a permanent ceasefire in Donbass. Glory to Ukraine!” This tweet from Poroshenko came strangely only minutes after he had tweeted his family’s acceptance of the so-called “ice bucket challenge”, where celebrities have a bucket of cold water poured over them themselves in support of charity.

The strangeness continued when the initial Ukrainian language website announcement of the ceasefire – but not the tweet – was later significantly amended, raising questions as to what, if anything, had been agreed upon.

Poroshenko’s initial website post said that he and President Putin had talked on the phone and the “conversation resulted in an agreement on a permanent ceasefire”. But half an hour later the text of the announcement was amended, replacing “permanent ceasefire” with simply “a ceasefire regime”.The header of both first and second website posts referred to a “complete ceasefire”.

Things became even less clear when Putin’s press secretary, Dmitry Peskov, criticised the wording(s) of Poroshenko’s announcement(s), saying that no agreement as such had been reached between Putin and Poroshenko, “because Russia is not a party to the Ukrainian conflict”, as reported by RIA Novosti. Peskov’s words seemed consistent with the Kremlin’s oft-stated position that it is not a party to the conflict in East Ukraine, and that Kyiv can only negotiate a ceasefire with the rebels themselves, which Kyiv is reluctant to do.

The sticking point appears to be that Ukraine, while agreeing to a ceasefire after a serious military defeat at the end of August, is simultaneously trying to establish linkage between Russia and the pro-Russian rebels fighting in the Donbass region of eastern Ukraine: Ukrainian media quoted a government source as saying that the ceasefire deal as originally stated “implies Russian responsibility for the rebels”. The Kremlin had earlier conceded that talks between Putin and Poroshenko were progressing. Prior to Poroshenko’s announcement, the Kremlin press service reported that “the two heads of state have exchanged thoughts about the first steps needed to be taken for a swift end to the bloodshed”, and noted that the two presidents’ ideas overlap “to a significant degree”.

Putin, who is currently on a visit to Mongolia, then later outlined to news agency Itar Tass by phone Russia’s seven point plan towards regulating the conflict in Donbass and said that Poroshenko and he agree on “most” issues. Putin also told journalists that he hoped implementation of the plan could start on September 5 when talks between Russia, Ukraine and EU leaders resume in Minsk, Belarus.

As outlined to Itar Tass, the seven points of Putin’s plan are: first, for the rebels in Luhansk and Donetsk to cease attacking Ukrainian positions; second, for all Ukrainian forces to withdraw artillery and rocket systems out of range of  the civilian population; third, complete and objective international control and monitoring of a ceasefire; fourth, ending the use of aviation against civilians; fifth, opening of humanitarian relief corridors; sixth, exchange of all prisoners without any prior conditions; and seventh, dispatching brigades of repair workers to start reconstruction work on destroyed infrastructure.

However, even if Poroshenko agrees to Putin’s plan, the Russian-backed Donbass rebels themselves may not, in particular the second point regarding withdrawal of Ukrainian forces out of range of the civilian population. Self-styled deputy prime minister of the  self-proclaimed “Donetsk People’s Republic” (DNR), Vassily Purgin, told RIA Novosti that, “this decision [the ceasefire] was taken without us”, and the ceasefire is “invalid while [Ukraine] armed forces remain on the territory of the [Donetsk People’s] republic. Our condition for a ceasefire remains the withdrawal of Ukrainian forces from the territory of the DNR.”

Says Otilia Dhand of Teneo Intelligence, “Regardless of whether such a deal was agreed, the lack of clear chains of command on both sides and the likely popular backlash in Kyiv mean that any kind of agreement could easily fail even before it is supposed to come into effect. The contradictory announcements around the ceasefire might also undermine Poroshenko’s standing vis-à-vis Putin, with potential negative implications for his popularity at home.”

Peace returns?

Rebels in Donetsk questioned by bne had not heard anything about a ceasefire agreement and had mixed feelings. “We are nonetheless going to drive the Ukrainian forces out and back all the way to Kyiv,” a member of the Vostok battalion, who declined to provide a name, told bne. He nevertheless called the mooted ceasefire agreement a “small victory” for the rebels, and said that his men would observe it if it happened.

The rebels practicing assembling and disassembling machine guns at a base on Donetsk’s Kuibishev Street 44 had also heard nothing of a ceasefire. “Putin can’t decide this for us anyway,” said a senior officer, who refused to give his name.

In fact, ceasefire or no ceasefire, in the city of Donetsk since the start of the week, thing have got a lot quieter, say locals, with far less shelling  in recent weeks as Ukrainian forces moved in and around the city. Bearing witness to the intensity and inaccuracy of the shelling over the previous weeks, buildings on both sides of the rebels’ base on Kuibishev had been shelled – one of them a senior school – but not the base itself.

Ukrainian forces found themselves encircled in August 24-30 during an advance on Donetsk via the town of Ilovaisk, apparently by regular Russian forces encroaching into Ukraine across the border. Since then, the Ukrainian forces have been pulling back from Donetsk, and the shelling of the city has died down, with streets visibly fuller on September 3 than during August, although there have also been reports of rocket fire hitting Donetsk airport.

The same process is observable in Luhansk region, with eyewitnesses questioned by bne describing whole columns of tanks and artillery moving northward from the city. As a result, shelling in the town has largely stopped. On the other hand, rebels, with Russian backing, have been seeking to push home their new advantage and are turning artillery fire against the town of Schastye, some 10 kilometres north of Luhansk, and home to a large concentration of Ukrainian forces. Some reports speak of Russian air strikes against Ukrainian positions around the town, but this could not be independently confirmed.

In the Ukrainian-held town of Volnavakha, halfway between Donetsk and the coastal city of Mariupol, there was relief at the news of the ceasefire. Volnovakha, close to the front line, was only on September 2 readying for an attack by the advancing Russian-backed rebels, with the town’s one supermarket suddenly closing, Ukrainian sappers apparently mining bridges leading into town across the Donetsk-Mariuopol highway, and Ukrainian artillery and tanks appearing in the surrounding countryside. “Thank God,” said a local police officer, hearing of the ceasefire reports. “It is only a half hour’s drive from Starobeshovo [scene of some of the fiercest fighting] to here. But does anyone really control the hotheads who race around in jeeps?” he queried, referring to irregular forces on both sides.

“We’re compeletly in favour [of a ceasefire],” said a member of special police unit Berkut manning an armoured personnel carrier flying the Ukrainian flag in Volnakhava. Asked whether the ceasefire might imply defeat for Ukraine in the war he replied “only time will tell.”

Ukraine investigators fear treachery by top officials wrecking war effort

Graham Stack in Volnovakha, Ukraine for Business New Europe (www.bne.eu)
September 2, 2014

As Ukrainian President Petro Poroshenko promises dismissals among top security officials following battlefield defeats, investigators identified two top-ranking sets of brothers that they fear may be sabotaging Ukraine’s “anti-terrorist operation” against pro-Russian separatists.

Poroshenko promised far-reaching personnel changes on September 1 at the very top of Ukraine’s so-called “anti-terrorist operation,” following military setbacks that have seen hundreds of pro-government fighters encircled, many of whom have been killed, wounded or captured.

As bne has reported, Ukrainian volunteer battalions and army draftees regularly allege that the Russian-backed rebels they are fighting have precise information about their movements – pointing to moles in the general staff. Head of the Donbass volunteer battalion, who goes by the name of Semen Semenchenko, blogged on August 29 after his men were entrapped near the Donetsk region town of Ilovaisk that, “the encirclement of the voluntary battalions is the result of treachery.”

Ukrainian investigative NGOs hromadske.tv and Nashi Groshi, in fresh investigations into allegations of treachery in the general staff, have identified two sets of high-ranking brothers holding top commands in Ukraine’s military and security structures – both with strong ties to the previous regime of ousted president Viktor Yanukovych, as well as to Russia. The investigators suspect them, if not of actually passing on information, of impeding the war effort against the Russian-backed rebels – and likely candidates for the exit in any reshuffle at the top.

Startlingly, according to hromadske.tv, deputy head of Ukraine’ s “anti-terrorist operation,” Major General Vyacheslav Nazarkin – commander of the general staff’s special operations department – is the brother of a high-ranking Russian officer, the deputy head of Omsk garrison. Homradske.tv quoted staff officers as saying that Nazarkin is “constantly on the phone” to his brother, relating to him events on the field of battle. Hromadske.tv also reported that special forces units believe Nazarkin passed on information about their operations to the enemy in an episode where 12 men died as a result.

According to homradske.tv, Nazarkin is a longstanding close associate of the chief of the general staff, Viktor Muzhenko, overall head of Ukraine’s “anti-terrorist operation.” Nazarkin has been Muzhenko’s deputy in a number of posts, ever since Muzhenko headed an army base in Zhitomir region of central Ukraine and Nazarkin worked as his deputy.

Nazarkin, promoted to his current position in December after the start of the Euromaidan protests that led to the ousting of Yanukovych, was deeply hostile to the pro-European movement, according to the publications he liked on Russian social network Odnoklassniki. Contacted by homradske.tv by telephone, Nazarkin refused to answer questions about his brother, swore and hung up.

Brothers-in-arms

According to the investigative outfit Nashi Groshi, another band of brothers in high positions could also be sabotaging Ukraine’s war effort. These are the three Litvin brothers, the most famous and oldest of which, Volodymyr Litvin, is head of Ukraine’s parliamentary committee on national security.

During the corrupt era of former president Leonid Kuchma from 1994-2005, Litvin headed the presidential administration, including at the time that opposition journalist Georgy Gongadze was kidnapped and murdered for his opposition to Kuchma. Litvin subsequently served as speaker of parliament until 2012. Since Kuchma exited politics in 2004, Litvin has been an ally of Yanukovych’s Party of Regions, but switched his allegiance to the new pro-European regime when Yanukovych was ousted in February, and thus retained his position as the influential head of the national security committee.

Critics of his activity in the post have since pointed out that, for instance, Litvin in April opposed the recall from foreign assignments of 18 military helicopters leased abroad on operations, but urgently needed at home for use against rebels. Litvin did not respond to attempts to contact him via his parliamentary office.

Both of Litvin’s younger brothers hold top military and security posts, in part dating from when their big brother headed the presidential administration. Both men now hold crucial influence over Ukraine’s security sector.

Mykola Litvin has been head of Ukraine’s state border guards since 2001, when Volodymyr Litvin was chief of staff to then president Kuchma. Mykola’s performance in recent months has attracted considerable criticism. When Russia annexed the Crimean peninsula in March, opponents said his lethargic reaction allowed Russian forces without insignia to seize border patrol boats and bases. “Litvin should be fired immediately for not lifting a finger to save his forces,” MP Gennady Moskal, former governor of Crimea, blogged at the time. Litvin blamed his subordinate, the head of the Crimean division of the border guards who defected to Russia, for the debacle.

Border lapses

Ukraine’s failure to control its border with Russia  – despite consistent claims from the border guards that they were in control – has been its Achilles’ heel in the fight against the Russian-backed insurgency across the Donbass region of eastern Ukraine, as bne has reported. There have been frequent accusations that Ukrainian border guards collaborate with their Russian counterparts in smuggling schemes. According to Nashi Groshi, a number of Litvin’s immediate subordinates have been indicted on corruption charges in recent months.

Petro Litvin, the youngest of the Litvin brothers, is commander of Ukraine’s 8th infantry division, currently deployed on the front line against Russian-backed rebels. Gennady Korban, deputy head of Dnipropetrovsk region and prominent in organising volunteer battalions to fight the rebels, accused Litvin on August 24 of having quit his command and fled the theatre of operations, after fighting intensified. “This was treachery and if we had been in a state of war he [Petro Litvin] would have been brought before a military tribunal,” Korban said in an interview at obzrevatel.com.

Litvin’s division in a statement on August 27 called Korban’s words “a lie”. The statement said that the division had completed its tasks, when it came under attack from land-land rockets fired from Russian territory, which killed five servicemen. “The decision was then taken to move the division’s command to a safer location,” reads the statement.

As Ukrainian forces encircled, Putin pushes “statehood” for “south and east Ukraine”

Graham Stack in Volnovakha, Ukraine for Business New Europe (www.bne.eu)
September 1, 2014

As Russian-backed rebels encircle government forces in east Ukraine, Russian President Vladimir Putin has called on Kyiv to start talks with the rebels over “statehood” for a territory in “south and east Ukraine” that he refers to as “Novorossiya.”

Ukrainian forces fighting in East Ukraine have suffered their worst setback since the start of the war in April, with thousands of their soldiers now encircled by Russian-backed forces near the major city of Donetsk. The encirclement – by reportedly both regular Russian forces as well as Russian-backed rebels – occurred after Russian-backed forces seized the border town of Novoazovsk on the Azov Sea on August 27, and rapidly moved north to attack from the rear the Ukrainian government forces besieging the major city of Donetsk and satellite towns, in particular the town of Ilovaisk.

Rebel artillery has since blasted at the trapped government fighters, hundreds of whom are reported to have been killed or injured, with many taken prisoner. Talks have taken place between the various sides for a ceasefire to allow Ukrainian forces to escape the encirclement, though reports say that despite being given the promise of safe passage, one Ukraine volunteer battalion claimed to have been shot at by Russian troops, massacring hundreds. “This has been the blackest day for Ukraine since the start of the war,” says Konstantin Mashovets, a defence analyst.

In the town of Volnovakha near Starobesh – the scene of some of the fiercest fighting – pro-Ukrainian forces counted their losses. “My cousin was killed beside me today by sniper fire,” says a fighter from a brigade of traffic police from West Ukrainian Kamenets-Podolsk, fighting on the front line. “He leaves behind two children, the youngest of which is starting school tomorrow… How can I explain to them what has happened?”

Serhiy Dubtsev, a local taxi driver, tells bne: “Yesterday I drove a refrigerator truck to Starobesh to pick up the corpse of a local truck driver who had been hit by shell fire – no one knows from what side. It is like a horror movie there – everywhere smashed trucks, burning houses, corpses, and constantly the crash of shells.”

The commander of the encircled “Donbass” volunteer battalion, who calls himself Semen Semenchenko, lashed out at Ukraine’s defence ministry and army officials from his hospital bed after being wounded. “A tragedy has taken place – and I have every reason to believe that the encirclement of the voluntary battalions is the result of treachery,” he wrote on Facebook.

Defence analyst Mashovets however blames the volunteer battalions for lack of discipline. “The battle was fought in a semi-anarchic manner, two units simply quit their positions without any explanation, and then tried to pretend they were heroes,” he says. “The volunteer units fight according to their own plan.”

Kremlin pressure

Russian President Vladimir Putin appealed to the Russian-backed separatists on August 29 to allow Ukrainian forces to escape the encirclement. “It is clear that the [rebel] militias have achieved serious success in thwarting Kyiv’s military operation… A large number of Ukrainian servicemen… have been encircled. I call on the militia to open a humanitarian corridor… to avoid senseless casualties.”

Putin also appealed to Kyiv to “sit down at the negotiating table with the representatives of Donbass, and to resolve all the accumulated problems exclusively by peaceful means.”

Exploiting the Ukrainian disarray, Putin stepped up the pressure on Kyiv on August 31, saying that any such talks with the Russian-backed rebels should negotiate “statehood” for “the south and east of Ukraine.” Speaking in a set-piece interview on Russia’s First Channel, Putin said Kyiv should “proceed swiftly to substantive talks, not on technical questions but on questions of the political organisation of society and statehood in south and east Ukraine.”

The term “statehood” – with its implications of independence – sent shockwaves through Ukraine. Putin’s press secretary, Dmitry Peskov, later explained that Putin did not mean outright independence for the territory, but some form of autonomy within Ukraine. Peskov said that Putin was “absolutely not” talking about independent statehood. “[Putin was referring to] the inclusive talks to determine mutual relations with the eastern regions – ie. talks within Ukraine relating to the intra-Ukraine structure, in order that the interests of the eastern regions, the interests of Novorossiya [south and east Ukraine], are taken into account – how, to what extent, using what mechanism etc. That is what the president was referring to,” Peskov said.

But Peskov’s use of the term “Novorossiya” – a broad term potentially including the whole of the east and south of Ukraine – further muddied the waters. Putin first used the term in a question and answer session on Russian TV in April, saying that it included “Kharkov, Luhansk, Donetsk, Kherson, Nikolayev and Odessa ” – territory far larger than that currently controlled by the rebels, constituting roughly half of the entire Ukraine.

The rebels of the self-proclaimed “Donetsk People’s Republic” and “Luhansk People’s Republic” however also employ the term to refer to themselves jointly. Putin used the term in his August 29 appeal to the “Militia of Novorossiya” to allow encircled Ukrainian forces to escape, implying it could also denote only the Donbass regions of Donetsk and Luhansk.

In any case, the Kremlin has now made clear the linkage between the ongoing war in Ukraine and the future status of the country’s east: The war will not stop until Kyiv recognizes the rebel structures as negotiating partners, and enters talks on autonomy for East Ukraine.

As top-level talks on Ukraine that began in Minsk continue on September 1, involving Russia, Ukraine and EU officials and member countries, Peskov repeated Kremlin calls for Kyiv to start direct talks with the rebels. “There can be no agreements [of Russia] with [Ukrainian President Petro] Poroshenko about a solution to the conflict because it is not a conflict between Russia and Ukraine, it is an internal Ukrainian conflict,” Peskov said.

Russian and rebel forces seen free to advance from border to Ukraine port of Mariupol

Graham Stack in Bezimmine, Ukraine for Business New Europe (www.bne.eu)
August 28, 2014

The forces of the self-proclaimed Donetsk People’s Republic – comprising irregular Russian-backed rebels and regular Russian troops – are free to advance from the border town of Novoazovsk to Ukraine’s second largest port of Mariuopol, warn fighters of Ukraine’s irregular Dnipro battalion, which is based in the seaside village of Bezimmine 15 kilometres from Novozovsk.

Fighters of the irregular pro-Kyiv Dnipro battalion told bne that they were on their own against the Russian-backed separatists and what is now accepted also Russian regular forces, which have taken control of the strategically important border town of Novoazovsk, on the Azov sea. Bezimmine, meaning literally “nameless,” is a sleepy seaside village popular among holidaymakers, 15km west of Novaszovsk and around 30km east of Mariuopol. But now it is on the front line of a conflict that is escalating every day.

“We have called for backup from the army in the form of artillery and aviation, but nothing has come,” complained one of around 15 fighters commanding high ground on the eastern outskirts of Bezimmine, looking towards Novoazovsk. Apart from volunteer fighters and National Guard forces reportedly dug in near Bezimmine for around six weeks, no other Ukrainian forces were to be seen on the road between Mariupol and Bezimmine on August 28.

“We were beaten out of Novoazovsk starting Monday [August 25], because of the artillery fire coming from behind the Russian border,” said the fighter with the Dnipro battalion, who declined to be named but said he hailed from Donetsk. “Now we are simply waiting here.”

The group of irregulars had two jeeps, one of which had a heavy machine gun mounted on the back. “All we have here are our automatic guns. Do you think we can stop Russian tanks with them?”

The fighters from the Dnipro battalion questioned by bne said they had not seen Russian soldiers with their own eyes when fighting in Novoazovsk, since they had pulled out due to the artillery fire. But they had accurate reports of a column of over 50 armoured vehicles that had entered Novoazovsk from the Russian side, including tanks, armoured personnel carriers and artillery. “They have dug in now their heavy guns around the town,” said the fighter.

One hour later, a salvo of land-land rockets apparently from the direction of Novoazovsk struck positions behind Bezimmine, apparently where Ukraine’s National Guard were dug in. “Donetsk People’s Republic are coming now,” said the pro-Kyiv irregulars, racing through Bezimmine with an improvised anti-tank weapon fixed to the roof of a jeep. The National Guard had pulled out from their positions to defend Mariuopol itself, the irregulars said before themselves racing out of Bezimmine.

Third front?

Ukraine’s Security Council in a statement on August 28 confirmed that Ukraine had lost control of Novoazovsk and other nearby settlements, saying they were now fully under the control of Russian regular forces.

Main roads from Novoazovsk lead east along the Azov coast to Mariuopol and north to the city of Donetsk, currently besieged by Ukrainian forces. Multiple reports spoke of settlements along the Donetsk road coming under control of the Russian-backed forces. “This is the opening of a third front and the risk of encircling Ukrainian forces around Donetsk,” says analyst Dmitro Tymchuk, director of the Centre of Military Political Research.

The easy advance of the rebels and Russian forces towards Donetsk from the South may demoralise Ukrainian forces, who have believed themselves to be close to victory in recent weeks. Russian media claimed August 28 that the Donetsk People’s Republic forces had recaptured from Ukrainian forces the strategically and symbolically important hill of Savur-Mohila south of Donetsk, scene of an epic Second World War battle. Ukrainian media reported August 28 that an entire regular army battalion of 400 mobilised reservists from West Ukraine, fighting in the east, mutinied and set off home with their equipment, saying that two months without leave under constant artillery fire was enough, and they wanted to be replaced. They were stopped in the Central Ukrainian town of Kirovograd and agreed to surrender their armoured vehicles.

Potentially adding to demoralization, Ukrainian investigative journalists reported August 27 that the deputy head of Ukraine’s so-called “anti-terrorist operation” in East Ukraine, Major General Vyacheslav Nazarkin, is the brother of, and possibly in cahoots with, a high-ranking Russian army officer.

The fact that the road to Mariuopol is now open is equally worrying for Ukraine. Mariupol was already briefly itself under control of the Russian-backed Donetsk People’s Republic until Ukrainian forces entered the town on June 13. A pro-Kyiv demonstration of several hundred was held in the port city August 28, but the city, like most of the surrounding area, is divided roughly equally between those who support the Russian-backed rebels and those supporting Kyiv. The overriding desire on both sides however is for peace and negotiations between the two sides.

Mariuopol is Ukraine’s second largest port city after Odesa, and plays a vital role in an economy dependent on metallurgy, chemicals and arable exports. It is also in itself home to two massive steelworks, Azovstal and MMK. According to military analysts, the Ukrainian stretch of Azov coast may also have strategic significance for the Kremlin in comprising a land bridge from Russia to the Crimean peninsula, annexed by Russian in March, but currently only accessible for Russia by sea or air.

People are starting to leave the seaside holiday villages along the Azov coast fearing the advance of Donetsk People’s Republic, but many have nowhere to go – a large number are forced holidaymakers who have found cheap accommodation by the seaside after fleeing their homes for the seaside in Luhansk or Donetsk. “We have no idea where we can go now,” says Dmitry Kolesnichuk, 46, a building worker from Luhansk, renting accommodation in Bezimmine with this wife and children.