On his second day as CEO of state railway monopoly Ukrzaliznytsia in September, Maksym Blank was offered a Hr 5 million bribe ($227,272), according to an interview he gave to Ukrainian online newspaper Ukrainska Pravda in March.
Now demoted to deputy head of the railway company, Blank said then that the money was a kickback for paying off a Hr 20 million loan that Ukrzaliznytsia had on the books. He said he wasn’t able to name the person who offered the bribe.
“I cannot change simple things, I can’t (even) fire a thief,” the former investment banker complained to Pravda.
Maksym Blank, deputy CEO of state railway monopoly Ukrzaliznytsia. (Courtesy)
One thing he managed to do before being replaced as CEO on July 1 was to make corporate governance more transparent and blow the whistle on some other crooked schemes at the outdated railway. He secured a government decision to have the company’s assets assessed by Aug. 31, and to transform it into a joint-stock company by September to help draw in foreign investors.
Corruption scandals are a different story.
Last year Ukrzaliznytsya, which employs 300,000 people along 21,640 kilometers of rail, planned to make $29 million in profit, according to the previous management led by Borys Ostapiuk, who was dismissed over corruption allegations in early September.
Instead, the state-run monopoly finished the year with a $13 million loss.
Ukrzaliznytsia has a long history of serving as a corruption hub. For years multiple scams existed at all levels, ranging from trainmen smuggling cigarettes to executives using company assets for their personal benefit and skimming off money in procurement schemes.
“Ukrzaliznitsia has become one of the most corrupt entities of Ukraine,” Olena Scherban, lawyer at the Anticorruption Action Center told the Kyiv Post.
Since 2000, Ukrzaliznytsia has been buying electricity from private enterprises at prices that are 22 percent above market levels, according to the Interior Ministry. Although the railway company is required by law to purchase electricity from state-run Energorynok, it has been buying it from privately owned intermediary companies at marked-up prices, authorities say, involving the state energy and utilities regulator.
Inefficient management and embezzlements led to debt accumulation at Ukrzaliznytsia. It defaulted on some of its internal obligations on May 12 which led to a $500 million cross-default on its eurobonds. Some 82 percent of internal debt was restructured in July.
As a result, according to the Interior Ministry, a total of $9 million was embezzled over 2014 and the first five months of this year.
Blank spotted the scheme more than a month ago. “This is a longstanding set-up with Hr 400-500 million profits per month. The participants diverted the money they received to an offshore (company),” he wrote on his Facebook page on June 11.
The Prosecutor General’s Office subsequently opened a criminal case on misappropriation and embezzlement at Ukrzaliznytsia.
Ukrzaliznytsia, the Interior Ministry, Prosecutor’s General Office and the National Energy and Utilities Regulatory Commission failed to provide comments on the matter before the Kyiv Post went to print.
Energorynok said in an official statement that no charges were being brought against the management or employees of the company.
Inefficient management and embezzlements led to debt accumulation at Ukrzaliznytsia. It defaulted on some of its internal obligations on May 12 which led to a $500 million cross-default on its eurobonds. Some 82 percent of internal debt was restructured in July.
According to the state registry, all three intermediary companies allegedly involved in the electricity scam are affiliated with HazEnerho Trading House, belonging to citizens Serhiy Turukalo and Evhenia Romanova. The Kyiv Post tried to contact them for comments for this report, but the phone number stated in the register appears to have been disconnected and the official address of HazEnerho leads to the office of the minor political party Velyka Ukraina (Great Ukraine), whose workers have never heard of HazEnerho, which is supposedly located there.
Dozens of other criminal proceedings were opened against Ukrzaliznytsia during 2014-2015 on charges of money laundering, inspired by the efforts of the Anticorruption Action Center. However, most have since been closed on the grounds that no wrongdoing could be proved, while some are still ongoing.
“I can remember a Hr 270 million ($12.7 million) money laundering case involving an unfair consumer insurance tender. It was won by companies connected to former First Deputy Prime Minister Serhiy Arbuzov and former Health Minister Raisa Bogatyrova (both wanted by the Ukrainian authorities),” Scherban said.
However, during their investigation, prosecutors found no wrongdoing, saying Ukrzaliznytsia has the right to choose which companies to cooperate with.
The entire body of Ukraine’s railway legislation also enables corruption, according to industry expert Dmytro Podturkin. Everything from regulations down to secondary legislation like norms and bylaws needs to be introduced to install new rules.
“Until then, I think, we will keep receiving ever more reports of newly uncovered corruption schemes, on an annoyingly regular basis,” Podturkin told the Kyiv Post.
Ukzaliznytsia is also criticized for providing low-quality services, and for having a bloated company structure and inefficient management system.
The company’s workforce accounts for 60 percent of the company’s costs. According to Blank’s initial plans, 30 percent of the workforce was to be cut, mainly in the administrative divisions. Trade unions opposed the proposed measure and reached a compromise agreement in June. The deal implies gradual staff reductions with respective salary increases and half-wage bonuses to be given to all employees for the last year.
The new CEO, Olexanader Zavgorodnyi, a 20-year veteran of Ukrzaliznytsia, announced plans to change department management but promised no massive cuts or top management replacements at a news conference on July 14. He was put in charge as a “technician,” mainly to upgrade the company’s mostly outdated physical assets, Infrastructure Minister Andriy Pyvovarsky told LigaBiznesInform news agency.
Lack of capital investments has led to the depreciation of 80 percent of locomotives, raising safety concerns on the nation’s railways.
Industry expert Podturkin, however, believes there is more behind the decision to replace Blank as CEO.
“The railway elite would hardly accept an interloper in this position,” he said.
Kyiv Post staff writers Veronika Melkozerova and Olena Gordiienko can be reached at [email protected] and [email protected].
