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Special Report: Putin's allies channeled billions to Ukraine oligarch
Reuters
By Stephen Grey, Tom Bergin, Sevgil Musaieva and Roman Anin 4 hours ago
File photo of Dmitry Firtash and then Ukrainian President Viktor
Yanukovich taking part in an opening ceremony of a new complex for the
production of sulfuric acid in the Crimea region
.
View gallery
Dmitry Firtash (R) and then Ukrainian President Viktor Yanukovich take
part in an opening ceremony of ...
By Stephen Grey, Tom Bergin, Sevgil Musaieva and Roman Anin
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MOSCOW/KIEV (Reuters) - In Russia, powerful friends helped him make a
fortune. In the United States, officials want him extradited and put
behind bars. In Austria, where he is currently free on bail of $155
million, authorities have yet to decide what to do with him.
He is Dmitry Firtash, a former fireman and soldier. In little more
than a decade, the Ukrainian went from obscurity to wealth and renown,
largely by buying gas from Russia and selling it in his home country.
His success was built on remarkable sweetheart deals brokered by
associates of Russian leader Vladimir Putin, at immense cost to
Russian taxpayers, a Reuters investigation shows.
Russian government records reviewed for this article reveal for the
first time the terms of recent deals between Firtash and Russia's
Gazprom, a giant gas company majority owned by the state.
According to Russian customs documents detailing the trades, Gazprom
sold more than 20 billion cubic meters of gas well below market prices
to Firtash over the past four years - about four times more than the
Russian government has publicly acknowledged. The price Firtash paid
was so low, Reuters calculates, that companies he controlled made more
than $3 billion on the arrangement.
Over the same time period, other documents show, bankers close to
Putin granted Firtash credit lines of up to $11 billion. That credit
helped Firtash, who backed pro-Russian Viktor Yanukovich's successful
2010 bid to become Ukraine's president, to buy a dominant position in
the country's chemical and fertilizer industry and expand his
influence.
The Firtash story is more than one man's grab for riches. It
demonstrates how Putin uses Russian state assets to create streams of
cash for political allies, and how he exported this model to Ukraine
in an attempt to dominate his neighbor, which he sees as vital to
Russia's strategic interests. With the help of Firtash, Yanukovich won
power and went on to rule Ukraine for four years. The relationship had
great geopolitical value for Putin: Yanukovich ended up steering the
nation of more than 44 million away from the West's orbit and towards
Moscow's until he was overthrown in February.
View gallery
File photo of Russia's President Putin meeting …
Russia's President Vladimir Putin (R) meets with Gazprom's Chief
Executive Alexei Miller at ...
"Firtash has always been an intermediary," said Viktor Chumak,
chairman of the anti-corruption committee in the previous Ukrainian
parliament. "He is a political person representing Russia's interests
in Ukraine."
A spokesman for Putin rejected claims that Firtash acted on behalf of
Russia. "Firtash is an independent businessman and he pursues his own
interests, I don't believe he represents anyone else's interests,"
said Dmitry Peskov.
The findings are the latest in a Reuters examination of how elites
favored by the Kremlin profit from the state in the Putin era. In the
wild years after the fall of the Soviet Union, state assets were
seized or bought cheaply by the well connected. Today, resources and
cash flows from public enterprises are diverted to private individuals
with links to Putin, whether in Russia or abroad.
Putin's system of comrade capitalism has had huge costs for the
ordinary people of Russia: By granting special cheap deals to Firtash,
Gazprom missed out on about $2 billion in revenue it could have made
by selling that gas at market prices, according to European gas price
data collected by Reuters. Four industry analysts said that Gazprom
could have sold the gas at substantially higher prices to other
customers in Europe.
At the same time, the citizens of both Russia and Ukraine have seen
unelected oligarchs wield political influence.
Firtash, whose main company, Group DF, describes him as one of
Ukraine's leading entrepreneurs and philanthropists, was arrested in
Austria on March 12 at the request of U.S. authorities. The Americans
accuse him of bribery over a business deal in India unrelated to
events examined in this article. Firtash denies those allegations and
is currently free on bail.
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File photo of Dmitry Firtash as seen in Kiev
Dmitry Firtash is seen in Kiev in this May 18, 2010 file photo.
REUTERS/Maks Levin/Files
Firtash imported the cheap Russian gas through a Cypriot company of
which he is sole director, and a Swiss one set up by Group DF. He and
Group DF declined to answer questions about those two companies and
their gas dealings. A spokesman said Firtash was not available to
discuss his business operations, and that Group DF did not wish to
comment on "any of the questions you put forth."
The Kremlin spokesman Peskov said Putin has met Firtash but that they
are not close acquaintances. He said Russia supplied gas at "lower
prices" to Ukraine because Yanukovich had asked for it and Russia
wanted to help Ukraine's petrochemical industry. Peskov said the deals
were arranged through Firtash because "the Ukrainian government asked
for it to be that way."
Yanukovich, who fled to Russia in February after mass demonstrations
against his government, could not be reached for comment.
THE MIDDLEMAN
>From the moment he first became Russia's president, Putin moved to
take control of his country's most valuable resource: natural gas.
After assuming power in 2000, he replaced the management of Gazprom,
put trusted allies in charge, and ensured the Russian state controlled
more than half the shares.
The corporate behemoth now supplies about a third of Europe's gas,
generating vital revenue for Russia and giving Putin a powerful
economic lever. "Gazprom is very much a tool of Russian foreign
policy," says Rem Korteweg, senior research fellow at the Centre for
European Reform. Every major deal that Gazprom signs is approved by
Putin, people in the energy industry say.
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Pressure compressor is pictured at Romny gas compressor …
Pressure compressor is pictured at Romny gas compressor station in
Sumy region October 16, 2014. Pic ...
Putin's spokesman rejected such assertions: Gazprom, he said, "is a
commercial, public company, which has international shareholders. It
acts in the interests of its shareholders, which also include the
Russian state."
In normal times, Gazprom's second biggest customer in Europe is
Ukraine; Russian gas was piped directly across the border between the
two countries until Russia cut off supplies earlier this year.
In the 2000s, though, Gazprom decided to sell gas not directly to
Ukraine's state gas company Naftogaz, but to intermediaries - in
particular Firtash, an international gas dealer who had risen from
humble origins.
Firtash grew up in west Ukraine, where his father worked in education
and his mother in a sugar factory, according to an account Firtash
gave during a meeting with the U.S. ambassador in Kiev in 2008. Both
his parents disdained communism and lacked the contacts needed to get
their son into university, he said.
He joined the army in 1986, then trained to be a fireman. When the
Soviet Union collapsed, leading to Ukraine's independence in 1991,
Firtash found himself having to make a living in an uncertain world,
according to his account to the ambassador. With his first wife, he
set up a business in west Ukraine shipping canned goods to Uzbekistan,
according to local media reports researched by the U.S. embassy.
A U.S. diplomatic cable, which summarized Firtash's discussion with
the ambassador, drily noted: "Due to his commodities business,
(Firtash) became acquainted with several powerful business figures
from the former Soviet Union."
View gallery
Gas cleaning system pipes are pictured at Romny gas …
Gas cleaning system pipes are pictured at Romny gas compressor station
in Sumy region October 16, 20 ...
According to the cable, Firtash told the U.S. ambassador he had been
forced to deal with suspected criminals because at that time it was
impossible to do business in Ukraine cleanly. He said he had needed
and received permission from a man named Semion Mogilevich to
establish various businesses. Mogilevich, an alleged boss of organized
crime in eastern Europe, is wanted by the U.S. Federal Bureau of
Investigation for an alleged multi-million-dollar fraud in the 1990s
involving a company headquartered in the United States. He was
indicted in 2003, and described by the FBI in 2009 as having an
"extensive international criminal network."
Firtash has repeatedly denied having any close relationship with
Mogilevich. Mogilevich could not be contacted for comment. He has
previously denied any wrongdoing or any connection to the gas trade in
Ukraine.
By 2002, a company called Eural Trans Gas, registered in Hungary, was
transporting gas from Turkmenistan through Russia to Ukraine. Its
ownership was unclear, but Firtash represented it. In July 2004, a new
company, RosUkrEnergo, became the intermediary for gas deals between
Russia and Ukraine. The owners of RUE were unknown at first, but it
later emerged that nearly all of the company was owned by Firtash and
Gazprom.
RUE bought gas cheaply and sold it on at a higher price in Ukraine and
Europe. This arrangement guaranteed profits for RUE and was hugely
controversial among Ukrainians who saw RUE as an unnecessary
intermediary. Another U.S. diplomatic cable, from March 2009,
described RUE as a "cash cow" and a "serious source of ... political
patronage." In a website posting, RUE said that in 2007 it sold nearly
$10 billion worth of gas and had net income of $795 million.
After Yulia Tymoshenko, herself a former gas trader, became prime
minister of Ukraine in 2008, she reacted to public anger about the gas
trade and moved to cut Firtash and RUE out of the business. She struck
her own gas deal with Putin in 2009.
By that time, Firtash was rich. In the country's 2010 presidential
election, Firtash, by his own admission, aided the pro-Russian
Yanukovich. A U.S. diplomatic cable described Firtash as a "major
financial backer" of Yanukovich.
View gallery
File photo of a Gazprom sign seen in front of the White …
A Gazprom sign is seen in front of the White House, the seat of
Russia's then Prime Minister Vla ...
"Firtash supported Yanukovich in various ways," said Vadym Karasiov,
an aide to Viktor Yuschenko, Ukraine's president from 2005 to 2010, in
an interview. Karasiov said the mogul used his influence in the media
to promote Yanukovich. In April 2010, in the aftermath of the
election, Karasiov told the Kiev Post: "Without Dmitry Firtash there
wouldn't have been a (Yanukovich) victory."
With Yanukovich president, Tymoshenko stepped down as prime minister.
Business associates of Firtash were appointed to influential positions
in the new administration. He had allies in the corridors of power,
and ambitious plans to expand his business empire and get back into
the gas trade. His friends in Russia were happy to help him.
THE LOANS
Tucked away in Nicosia, Cyprus, a bundle of tattered papers wrapped in
string records Russian credit agreements made to Firtash companies.
The documents, reviewed by Reuters, detail a series of financing deals
worth billions of dollars.
The deals were arranged by a Russian lender called Gazprombank.
Despite its name, the bank is not controlled by Gazprom, which holds
only a minority stake. It is a separate business, overseen by people
linked to Putin. They include Yuri Kovalchuk, a banker who until March
2014 controlled an investment firm that manages a majority stake in
Gazprombank.
In a statement, Gazprombank said: "We do not receive any instructions
from the Kremlin ... The strategy of the bank is developed by its
management board and approved by the board of directors. No other
influence is possible."
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A dispatcher monitors the sensors in a dispatcher's …
A dispatcher monitors the sensors in a dispatcher's room at Romny gas
compressor station in Sumy ...
Asked whether Putin had any role in issuing the loans to Firtash
companies, Kremlin spokesman Peskov said: "Putin, as president, does
not have anything to do with this."
Gazprombank began lending money to Firtash companies soon after
Yanukovich took power in Ukraine in February 2010.
In June that year, Firtash established a company called Ostchem
Investments in Cyprus. A month later, Gazprombank registered a credit
line to the company of $815 million, according to the Cyprus
documents. In September, Ostchem Investments bought a 90 percent stake
in the Stirol fertilizer plant in Ukraine. It was perfect synergy:
Firtash knew the gas business, and natural gas is a major feedstock
for making fertilizer.
Further loans and deals with Firtash companies followed.
Reuters found that by March 2011, Gazprombank had registered credit
lines of up to $11.15 billion to Firtash companies. The companies may
not have borrowed that whole sum, but the documents indicate that
loans up to that amount were available, according to Cyprus lawyers.
In the space of seven months in 2011 alone, Firtash acquired control
of two more fertilizer plants in Ukraine, Severodonetsk Azot and Rivne
Azot. He also bought the Nika Tera sea port, through which fertilizer
and other dry bulk goods are shipped. He acquired a lender called
Nadra Bank and invested in the titanium processing industry.
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File photo of people seen through windows, covered …
People are seen through windows, covered with hoarfrost, as they take
a tram, with the air temperatu ...
Such was his expansion that Firtash became the fifth largest
fertilizer producer in Europe. Being a large employer brought not just
potential profits but also political clout, he boasted. "We have
relations with MPs," Firtash told Die Presse in Austria in May. "We
are big employers in the regions that they represent. Entire cities
live on our factories. Election candidates seek our support."
When asked in 2011 where the money came from to pay for his
acquisitions, Firtash was coy. At a press conference called to
announce his purchase of the Severdonetsk plant, he declined to name
his major lenders. "It's a secret," he told Ukrainian journalists.
But a Gazprombank manager told Reuters that the Russian bank had led a
consortium of lenders which in 2011 agreed to lend about $7 billion to
Firtash. The official said Gazprombank itself lent Firtash $2.2
billion, and that Firtash still owed the bank $2.08 billion. The
official declined to name other lenders in the consortium.
A $2.2 billion loan was a big commitment for Gazprombank: It amounted
to nearly a quarter of the bank's total capital, the maximum loan
allowed by Russian banking rules for any single client or group. Based
on regulatory filings, the loan facility made Firtash the biggest
single borrower from Gazprombank.
Reuters was unable to establish exactly how much in total the
Gazprombank consortium lent to Firtash companies.
In a statement, Gazprombank said that "the aggregate amount of loans
disbursed to Ostchem Group" was "several times lower" than $11
billion. "And all capital requirements and limitations of the Central
Bank of Russia in respect of loans granted have always been complied
with by Gazprombank, including loans to Ostchem Group," the statement
said.
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An employee shows gas transit pipelines on a map at …
An employee shows gas transit pipelines on a map at the Romny gas
compressor station in Sumy region ...
The bank declined to give any further details, saying it had to
protect client confidentiality. The central bank had no comment.
GAS PROFITS
Firtash now had money, political connections and businesses that
relied on large supplies of gas. What he needed next was fuel.
In January 2011, Firtash signed an unpublished agreement, seen by
Reuters, with Gazprom to buy gas through a company called Ostchem
Holding in Cyprus, where he is the sole director listed.
The gas deal was later extended to include sales to Ostchem Gas
Trading AG in Switzerland. It was also agreed by Naftogaz, Ukraine's
state-owned gas firm, where Yanukovich had installed new senior
management. Firtash needed Naftogaz's sign-off because it controlled
pipelines delivering gas and, until that point, had an exclusive deal
to import gas from Gazprom.
Naftogaz's decision to agree to the deal was an odd one. Not only did
it mean Naftogaz would surrender its monopoly on Russian gas imports,
but the deal could also potentially damage the state firm. Naftogaz
had previously agreed with Gazprom to pay for a set amount of gas
whether it could sell it in Ukraine or not. Firtash's deal could leave
the Ukrainian state firm buying gas it would struggle to sell.
View gallery
File photo of Dmitry Firtash taking part in an opening …
Dmitry Firtash takes part in an opening ceremony of a new complex for
the production of sulfuric aci ...
Firtash's return to importing gas became public knowledge after
Yanukovich's election victory. But the price he paid Moscow, and how
much cheap gas he bought, remained unclear. An Ostchem spokesman told
Reuters the price was "confidential information."
Russian customs records seen by Reuters show that in 2012, Moscow sold
the gas to Firtash for $230 per 1,000 cubic meters (the standard unit
used in gas sales). In 2013 the average cost was $267 per unit. Those
prices were at least one-third less than those paid by Ukraine's
Naftogaz.
Ukrainian customs documents and corporate filings show that Firtash's
Ostchem companies in Cyprus and Switzerland resold the gas to his
chemical plants in Ukraine for $430 per unit. The prices and volumes
suggest that the two offshore Ostchem companies made an operating
profit of approximately $3.7 billion in two years.
Naftogaz's current management is highly critical of the way in which
Gazprom favored Firtash's companies. Aliona Osmolovska, chief of press
relations, said: "These special deals for Ostchem were not in the
interest of Ukraine."
The real loser in the deal, though, was Gazprom. The arrangement,
which Putin described during a press conference as having been made
with the "input of the Russian leadership," meant Russia sold its gas
to Firtash for at least $100 per unit less than it could have made in
Western Europe, according to Emily Stromquist, head of Russian energy
analysis at Eurasia Group, a political risk research firm.
In addition, the profits from the subsequent resale of the gas were
all reaped offshore by companies that did not benefit the Russian
taxpayer. Those profits in 2012 and 2013 would have meant an
additional $2 billion for Gazprom, whose ultimate majority owners are
Russia's citizens.
Gazprom declined to comment on its sales to Firtash's companies.
Putin's spokesman Peskov said Naftogaz agreed to Firtash receiving gas
at low prices because the deal was intended to help Ukraine's
petrochemical industry. Asked why the gas was sold to companies in
Cyprus and Switzerland, Peskov said: "Putin doesn't need to approve
this action. These operations are technical and were made by Gazprom
according to the structures which are always used by its Ukrainian
partners."
Neither of the two Firtash companies that bought gas from Russia
publishes accounts. Firtash declined to comment on the firms or their
results.
UNEASY STANDOFF
The new government in Ukraine alleges that Yanukovich had allowed
corruption to flourish and stolen millions of dollars. In the longer
term, the new government says it wants to forge closer ties with the
European Union and reduce its dependence on Russian gas.
In June, Moscow cut off supplies of gas to Kiev, claiming that it was
owed billions of dollars by Ukraine's state-owned Naftogaz. Late last
month, the two countries struck a deal allowing supplies to resume,
but the agreement runs only until March. Firtash retains large stocks
of gas but has not imported new supplies since Yanukovich was ousted.
Firtash remains in Austria awaiting the outcome of extradition
hearings. According to a U.S. indictment unsealed in April, he is
suspected of a scheme to bribe Indian government officials to procure
titanium. Two U.S. government officials said the American
investigation into Firtash is continuing; they declined to give
further details.
The Ukrainian oligarch has said the allegations are "without
foundation" and has accused Washington of acting for "purely political
reasons." He has hired an all-star legal defense team. It includes
Lanny Davis, who helped President Bill Clinton weather a series of
White House scandals in the 1990s.
In his time of trouble Firtash has not been deserted by the Russians.
Since his arrest he has received another loan in order to pay his
bail: $155 million from Vasily Anisimov, the billionaire who heads the
Russian Judo Federation, the governing body in Russia of Putin's
beloved sport.
"I have known Mr. Firtash for a number of years, though he is neither
my friend nor business partner," Anisimov told Reuters in an email. "I
confirm that I loaned 125 million euros to him. This was a purely
business transaction."
(Additional reporting by Michele Kambas in Cyprus, Elizabeth Piper and
Jason Bush in Moscow, Oleksandr Akymenko and Pavel Polityuk in Kiev,
Jack Stubbs in London, Warren Strobel in Washington and Michele Martin
in Berlin; Edited by Richard Woods and Michael Williams)
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