ANALYSIS: Lazarenko trial reveals information on gas sales between Ukraine, Russia (04/04/04)

ANALYSIS

Lazarenko trial reveals information on gas sales between Ukraine, Russia

by Roman Kupchinsky
RFE/RL Organized Crime and Terrorism Watch

On March 25 and 26, the jury at the money-laundering trial of former Ukrainian Prime Minister Pavlo Lazarenko, which is being held in the Federal Building in San Francisco, was given a heavy dose of often confusing testimony on how natural gas was bought and sold between Ukraine and Russia.

The ponderous videotaped testimony was taken in Kyiv on May 30, 2003, from Anatolii Minchenko, former minister for industry, fuel and energy during Mr. Lazarenko's tenure as prime minister. It should be noted that any attempt to explain the inner workings of the gas sector in Ukraine and Russia in the mid-1990s to an American jury is a very daunting task since even most Ukrainians or Russians do not understand the opaque deals that take place in this highly corrupt sector.

Mr. Minchenko explained that in the mid-1990s, with hyperinflation rampant and money being worthless, most gas trade was conducted on a barter system and Ukraine piled up huge debts to Gazprom, the Russian gas monopoly. These debts were being incurred by independent Ukrainian companies that had been given licenses by the Ukrainian State Committee for Oil and Gas to import and distribute gas in Ukraine. Gazprom was not being paid and threatened to cut off the gas supply.

To control this dangerous situation, the Ukrainian side created a consortium of gas traders in order to narrow the number of players in this sector and ensure that Gazprom would be paid. The consortium, as a legal entity, was not chartered to buy gas, it was merely a clearinghouse of companies. One of the members of this consortium was Unified Energy Systems of Ukraine (UESU), then headed by Yulia Tymoshenko, who is presently one of the leaders of the opposition in Ukraine.

By 1996 the debt, along with late payment penalties, had risen to some $1.4 billion, and Gazprom began demanding that Ukraine provide guarantees that the debt would be repaid and that this should be done with a prominent Western bank. The Ukrainian delegation that went to Moscow to negotiate with Gazprom on the matter of payments knew that the Ukrainian government did not have the money to apply for the bank guarantees that Gazprom was insisting upon.

The transcript states:

"Question: So [then Gazprom head Rem] Viakhirev wanted bank, prime bank guarantees, but you got him to accept sugar, vegetable oil, butter, pork and beef instead?

"Answer (Minchenko): Yes. The foodstuff."

Mr. Minchenko explained that the consortium had Ukrainian state guarantees for barter payments for 2.5 billion cubic meters of gas monthly. The monthly needs of Ukraine were 7 billion cubic meters. But this guarantee was only in case Ukrainian commercial structures, members of the consortium, failed to pay Gazprom.

In the transcript, Mr. Minchenko says:

"Answer: The text of the guarantee, the supply of the goods under this guarantee starts after notification from Gazprom to the Cabinet of Ministers of Ukraine on the 15th day of the following month about the debt of wholesale buyer, and are carried out within 30 days from the indicated day.

"Question: And if you look at the sentence right above that one, can you explain that provision?

"Answer: In case any of the wholesale buyers carry - has debts - has debts under the contracts specified above, and the amount of debt is 40 percent or more of the overall amount of supplies to any one of them, the Ukrainian government pays off the debt with the goods in accordance with the nomenclature agreed with Gazprom."

Mr. Minchenko was then shown a document and asked if he had seen it earlier. He replied that, yes, he saw it, but since it was an internal memo of UkrNaftoGasProm, then the state gas company, and not from his ministry, he did not bother to read it carefully.

The document describes how the consortium, as a legal entity, was now actively trading gas. When asked how this came to be, the former minister for fuels and energy replied that he did not know.

Afterwards, according to the transcript of the deposition, Mr. Minchenko was asked:

"Question: (Martha Boersch, the U.S. prosecutor): And when you worked for the government were you aware that in 1997 $13 million was paid by [UESU] to accounts controlled by Mr. Lazarenko in the United States?

"[Harold] Rosenthal [a former member of the Lazarenko defense team]: Objection. Argumentative. It assumes facts not in evidence.

"Answer (Minchenko): Why? Certainly not. I didn't know this.

"Question: Were you aware that in 1996 approximately $84 million was paid into accounts controlled by Mr. Lazarenko and a man named Peter Kiritchenko [Petro Kirichenko] by Somolli Enterprises. [Somolli Enterprises is described in Mr. Lazarenko's indictment as an offshore company controlled by Ms. Tymoshenko.]

"Rosenthal: Now, this is just sheer argument.

"The interpreter: By whom? Sorry. I didn't get the name.

"Boersch: Somolli Enterprises.

"Answer: Well, I never knew this. And I don't know this today. I have no idea. I have no idea about these things."

On March 26, Interfax-Ukraine reported that Ms. Tymoshenko stated that she would not attend the trial in San Francisco as a witness, giving as her reason her busy schedule in Kyiv. She added that she had given testimony already in Kyiv that she believed in Mr. Lazarenko's innocence.

After the deposition of Mr. Minchenko, Harold Rosenthal was visibly angry at the behavior of Oleh Ukrainets, an investigator from the Procurator General's Office in Ukraine, during the interrogation of an earlier witness, Volodymyr Karpovtsev, a functionary of the Cabinet of Ministers of Ukraine.

According to the transcript of that deposition on May 30, Mr. Rosenthal said: "There were at least 55 other questions that we had to ask of him - and I can go through those in a second - but the most - one of the - the troubling aspect of it, though, was the fact that Mr. Ukrainets, again, and the record will speak for itself, made statements that in my estimation encouraged Mr. Karpovtsev in his non-cooperation, including the statement that he could walk out at any time that he wanted to, that he didn't have to answer any questions, which was first introduced into the mix by Mr. Ukrainets."

The prosecution in turn reminded Mr. Rosenthal that he had numerous occasions to cross-examine Mr. Karpovtsev. Mr. Karpovtsev later appeared in person in San Francisco to testify, at which time he said that he was pressured by his superior at the Cabinet of Ministers, who in turn was being pressured by Mr. Lazarenko, to endorse an inflated payment chit for six homes purchased by the Cabinet of Ministers from GHP Corp., a company controlled by Mr. Kirichenko, then Mr. Lazarenko's partner. The purchase price on the inflated voucher was $1.4 million, while the actual price of the homes was $542,763. The difference, $889,749, according to the indictment, was split, with half going to an account controlled by Mr. Lazarenko.

Roman Kupchinsky is the editor of RFE/RL Crime and Corruption Watch.

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