President Petro Poroshenko and General Prosecutor Yuriy Lutsenko have proposed reforms to Ukraine’s defense industry after investigative journalists revealed a shocking scheme that embezzled millions of dollars from state defense enterprises.
In a Feb. 25 broadcast of their investigative journalism program Nashi Groshi (“Our Money”), the journalists of the Bihus.Info news site recounted how the son of Oleh Hladkovskiy, deputy head of Ukraine’s National Security and Defense Council and a close associate of Poroshenko, and two other men took part in a scheme to smuggle parts for military equipment from Russia and sell them to state defense enterprises at inflated prices.
A subsequent Nashi Groshi broadcast on March 4 emphasized the elder Hladkovskiy’s connection to the scheme. However, before it went on the air, Poroshenko fired him from his post.
During a March 6 meeting of the National Security and Defense Council, Poroshenko and Lutsenko offered policy responses to the scandal. At the same time, they attempted to downplay the significance of the journalists’ investigation, while praising both the military and the work of Ukraine’s law enforcement agencies. It was a continuation of their broader response to the corruption revelations.
In opening the council meeting, Poroshenko hailed the successes of the Ukrainian military in deterring the Russian aggressor and said that in a few years it would meet the standards for NATO membership. He also announced that Ukraine would soon test Turkish Bayraktar unmanned aerial missile systems. These systems are already on the territory of Ukraine, he said.
However, the thrust of the meeting was efforts to reform UkrOboronProm, the state concern of defense enterprises.
“We need to initiate changes to legal acts to eliminate excessive secrecy in state defense contracts,” Poroshenko said.
That is a recurring subject in discussions of UkrOboronProm. The $7.6 billion-a-year defense sector makes up 6 percent of Ukraine’s economic output, yet most of its transactions are carried out in total secrecy with no oversight.
UkrOboronProm should continue to purchase Soviet-era military equipment, parts, and ammunition — the items at the center of the scandal — but this should be done transparently, largely openly, and on the basis of competition, Poroshenko said.
Poroshenko also announced that the Ukrainian government would initiate an international audit of UkrOboronProm and would review all of its contracts. He also called for providing the country’s international partners with information that would allow Ukraine “to deepen cooperation and demonstrate openness and transparency in reforming the concern.”
Finally, Poroshenko proposed finally increasing the size of UkrOboronProm’s supervisory board by adding specialists from partner nations that are members of NATO.
“This will allow us to help the concern transform and not lose the trust of our partners, investors, and citizens,” he said.
Russian contraband
Lutsenko also offered suggestions for reforming the defense sector. He said that the number of firms with the right to provide equipment and parts to UkrOboronProm had grown too large. In 2014, there were 502 such firms. However, by 2018, that number had reached 5,770.
The investigation of OptymumSpetzDetal — a central company in the corruption scheme revealed by Bihus.Info — suggested that companies offering the lowest prices don’t always win the tender to provide a good to UkrOboronProm. Rather, connections with the military and law enforcement also help.
Previously, Lutsenko had said it was entirely normal and acceptable for Ukraine to purchase needed parts for its Soviet-era military equipment as contraband from Russia — a service Bihus.Info revealed that private companies were providing.
To solve this problem, Lutsenko suggested that there should not be thousands of these companies.
“Their number should be clearly indicated in a closed decision of the National Security and Defense Council, their quantity should be limited, and it would be even better if they were to merge and become a branch of one of state enterprises,” Lutsenko said.
Under that arrangement, there would only be roughly 20 such firms and all would be under state control, he added.
But not all of these proposals will prove particularly useful, according to Serhiy Zgurets, director of information consulting company Defense Express.
“I expected more drastic actions,” he told the Kyiv Post.
Auditing UkrOboronProm has been under discussion since 2018. But the audit is “unlikely to change the rules of the game,” Zgurets says.
UkrOboronProm is an intermediate structure between the concern’s different defense enterprises, something its management recognizes. These enterprises should be incorporated and then subsequently privatized.
“The process of incorporation and privatization is so obvious that no audit is needed,” Zgurets says. What is needed is for parliament to pass a law decreasing the number of defense enterprises that should remain under state ownership. That hasn’t happened.
Ukraine’s defense sector desperately needs investment, but current laws don’t allow the enterprises to form joint companies with foreign companies. An audit also won’t change that.
However, decreasing the number of companies that import Russian parts for military equipment could be helpful. These imports entail serious risks, and Zgurets believes the security agencies should largely manage them.
Equal before the law
Poroshenko and Lutsenko also used the National Security and Defense Council meeting to downplay the importance of the Bihus.Info investigation and burnish their rule-of-law bona fides. This came just a week after the Constitutional Court overturned a law criminalizing illicit enrichment and potentially derailed 65 active corruption investigations.
Poroshenko noted that he had fired Oleh Hladkovskiy and publicly informed the National Anti-Corruption Bureau, or NABU, on his old friend and business partner.
“For those who want to line their pockets using our defense preparedness, my message is clear: I stress that everyone is equal before the law,” Poroshenko said. “Nothing will save anyone from accountability for abuse (of office) — not their office, not their connections, not their surname… and not longstanding ties with the president, lawmakers, ministers, opposition leaders or anyone.”
Both Poroshenko and Lutsenko also aimed to portray the Bihus.Info investigation as indicative of law enforcement’s efficacy, not its failure to prosecute corrupt officials — an odd argument that the General Prosecutor has pushed since early on in this scandal. Since 2014, there have been virtually no significant officials jailed for corruption.
In the wake of the Bihus.Info revelations, Lutsenko said that his office had been investigating the companies mentioned in the investigation since 2016 and the investigation was near completion.
Now, both he and Poroshenko presented the journalists’ story as the result of leaks from law enforcement.
Previously, investigative journalism revealed crimes that would only be investigated by law enforcement after the 2014 EuroMaidan Revolution led to a change of power in Ukraine, Lutsenko said. By then, the perpetrators had fled to Russia.
Now, however, a few weeks before law enforcement finishes a corruption investigation, journalists leak investigative materials to the public.
“I think that this is very correct change,” Lutsenko said. “It means that law enforcement is working and journalists also aren’t sleeping.”
