"Why authorities are trying to kill key Rotterdam+ investigation" - Article KyivPost

11.09.2020 10:43

It should have been a good case. Evidence of a crime, billions of dollars in public losses and an oligarch-owned corporation allegedly controlling state bodies like marionettes. But for all of the new government’s reformist posturing, it refuses to cut the strings,- more about the case in the article KyivPost.

After being stalled by the previous administration, the Rotterdam+ investigation is being swept under the rug despite being one of the biggest corruption scandals in recent Ukrainian history. In late August, the Prosecutor’s Office ordered the investigation to be closed.

“We see that there is no political will and we can certainly confirm it,” said Denys Gulmagomedov, a detective with the National Anticorruption Bureau of Ukraine (NABU), which has been investigating the case for three years. “This decision shows unwillingness to fight oligarchs.”

The infamous “Rotterdam+” formula was introduced in 2016 by Ukraine’s energy regulator and ran until July 2019. After the coal-rich Donbas became a conflict zone, Ukraine looked to import. The formula set energy prices based on a coal index in European hubs “plus” the cost of its delivery to Ukraine.

Except most coal didn’t come from European hubs. According to NABU, paying for nonexistent delivery drained Hr 39 billion (today, $1.4 billion) from Ukrainian energy consumers — money they shouldn’t have had to pay.

NABU found evidence that DTEK Group, which controls 70% of the country’s coal energy, created the formula and illegally colluded with the regulator to make it law. This allowed the company to improve its cash flow and its securities soared in value. People with inside knowledge made billions on these securities.

The top benefactors were allegedly former president Petro Poroshenko and DTEK’s owner Rinat Akhmetov, Ukraine’s wealthiest oligarch. Both deny any wrongdoing.

“DTEK actually usurped power and prepared regulatory documents that were beneficial for itself, figured out how to approve them with all government agencies and on behalf of whom, and made them mandatory for national execution,” Gulmagomedov said.

DTEK’s press office sent the Kyiv Post a highly detailed response, denying that it was involved in any back-channel conspiracies. The company added that the formula was approved by many Ukrainian and international experts. Furthermore, it denied making any super-profits off the back of the formula, saying that its cash flow was relatively modest throughout this period.

According to London Stock Exchange filings, DTEK lost Hr 6.6 billion in 2016, compared to Hr 37 billion in 2015. Nevertheless, its revenue increased to Hr 128 billion from Hr 93 billion and its gross profit and cash generated from operations both tripled to Hr 15 billion in 2016 from Hr 5 billion in 2015.

“There was no behind-the-scenes ‘dialogue between DTEK, (the energy regulator) and high-level politicians,’ that would lead to the adoption of a methodology for determining the price of coal,” the company wrote.

Former President Petro Poroshenko’s press service flatly denied wrongdoing.

“We call on your respected paper not to distribute fake news produced by order of certain oligarchic groups. A ‘myth’ about Rotterdam+ was created for political purposes and the decision of SAPO (the Specialized Anti-Corruption Prosecutor’s Office) to close this case due to the absence of losses and victims proves this conclusively,” the ex-president’s press secretary told the Kyiv Post in an email.

Nevertheless, despite being stalled by the previous and current state administration’s delaying tactics, NABU said that it has enough materials to go to court. However, the Special Anti-Corruption Prosecutor partly suspended the case on Aug. 28.

The bureau appealed and also went public. In a 2.5-hour interview, NABU detectives walked the Kyiv Post through their investigation and why, despite having a strong case, they are being kept out of the courtroom.

“This whole story… probably looks very funny from outside to any adequate community, which can see that the prosecuting authority is screaming ‘take us to court’,” Gulmagomedov said.

Reluctant prosecutor

Gulmagomedov’s deputy was working late on Thursday, Aug. 27. He was putting together a monthly report when he noticed a change in the investigation database.

He took a closer look and saw that the Rotterdam+ case had been partly closed. He would later learn that a prosecutor ruled that there wasn’t enough evidence against the six main suspects — government officials and DTEK employees — and that it was impossible to establish losses.

“He messaged me at midnight to say, well, how shocked he was,” Gulmagomedov said, displaying the deputy’s obscenity-laden late night texts on his phone.

The closure came without warn- ing, at the end of the workday on Thursday. Gulmagomedov thinks SAPO was trying to slip it under the radar to waste NABU’s three-day window to appeal.

“If we did not appeal on Friday, we could have lost our right to appeal altogether,” he said.

When asked whether SAPO is under corrupt influence, Gulmagomedov hesitated. “Generally, it is not,” he said. But this case’s prosecutor, Vitaliy Ponomarenko, might be.

“I once sent him a picture with a titan lifting a huge rock up a mountain. I always asked him: ‘Vitaliy Pavlovich, are you with us under the rock or are you the rock?’ It seemed like he was the rock. We were constantly pushing him,” Gulmagomedov said.

Denys Gulmagomedov (L) and Mykola Samoylenko, the NABU detectives who have been investigating the Rotterdam+ case for over three years, examine case files at NABU’s headquarters in Kyiv on Sept. 7, 2020. (Courtesy)

 

In an emailed response, SAPO refused to address NABU’s allegations against Ponomarenko and only said that it is an independent body, which closed the case for a reason.

According to SAPO, there was not enough evidence against the six suspects and the investigation deadline elapsed. The office also referred to the results of the most recent expert analysis released by the Security Service of Ukraine (SBU), which was unable to establish how much money the state lost due to Rotterdam+.

The losses amount Hr 39 billion, said Gulmagomedov. In his view, the math is simple and the evidence sufficient. It includes witness testimonies, DTEK’s emails to the energy regulator and the regulator’s internal reports.

“The prosecutor who took over the case knew this, but he did not even bother to point it out,” Gulmagomedov said. “What he had to do was to put together the numbers and other evidence and personally say ‘these are the losses, your honor’.”

If the case is renewed, the detectives will request a new prosecutor.

The general prosecutor’s office did not respond by press time.

Pressure and disruption

Finding experts was another challenge.

Only state bodies can choose eligible expert witnesses, whose testimony is mandatory. And state experts are easy to influence.

“This is our understanding — when (the experts) receive (documents for analysis), they need to make a call and get instructions on how to act.”

The investigation stalled and couldn’t get anything done while Poroshenko was in power. Things were looking up in spring 2019, when Volodymyr Zelensky won the presidency in a landslide election.

“We found an expert during this political turning point when they just eased control and an opportunity appeared,” Gulmagomedov said. “It seemed like Zelensky was the person who would not appoint his own people.”

That, he felt, would allow the experts to work independently.

NABU picked an expert bureau based in Kharkiv, some 500 kilometers east of Kyiv. The experts there determined that, due to Rotterdam+, Ukrainian energy consumers overpaid Hr 18 billion for electricity in 2016 and 2017.

The detectives needed one more expert witness and approached the SBU, which confirmed the Kharkiv results. But it later changed its mind. When asked to calculate the losses for the entire period from 2016 to 2019, it failed to do so. This was a major reason for SAPO closing the case.

The SBU did not respond to a request for comment by press time.

“These games with state bureau experts — this is a total desecration and an example of how they want to limit our opportunities,” Gulmagomedov said.

A lonely battle

NABU is going after Ukraine’s richest man and his giant energy corporation all alone.

The detectives have sought allies wherever they could. They unsuccessfully pressed the Cabinet of Ministers to stand up for the nation’s interests and submit a civil claim to support SAPO in bringing the case to court. Under Ukraine’s constitution, the government is the state body that represents the people.

“We believe that the state must protect the interests of the Ukrainian nation as a civil plaintiff,” Gulmagomedov said.

The government rejected their many requests.

“(Denys) Shmyhal, he is a smart lad,” Gulmagomedov said, referring to the prime minister, who used to work for DTEK in 2017–2018. “In the end, they just redirected it to prosecutors and said: ‘Sort it out on your own, we do not want to get involved.”

The Cabinet of Ministers did not respond to a request for comment by press time.

NABU gathered all state energy officials, showed them the evidence and asked them to sign a protocol agreeing that Rotterdam+ robbed the nation.

One participant refused: the Ministry of Energy.

Under its previous leader, the ministry agreed that the formula was unreasonable, the detectives said. “They said they had not seen any benefits for society and saw where all the money went.”

But the new acting minister, Olga Buslavets, rejected NABU’s assertions, the detectives said.

Buslavets is a career government official. She has faced a number of allegations in lobbying the interests of DTEK, which she denies. The energy ministry did not respond to a request for comment by press time.

The controversial formula

The Donbas conflict ravaged Ukraine’s economy. GDP fell by 6.8% in 2014 and by 12% in 2015. The hryvnia lost 70% of its value against the U.S. dollar.

That was bad news for DTEK, which had borrowed money in foreign currencies but whose cash flow was in hryvnias. DTEK’s gross profit fell by half, from Hr 10.799 billion to Hr 5.250 billion, in 2014–2015, according to the company’s audit.

Akhmetov’s assets decreased from $12.5 billion in 2014 to $2.3 billion in 2016. During the Poroshenko presidency, the oligarch’s fortune increased to $6 billion in 2019. Now it stands at $3 billion, according to Forbes.

The company needed to increase its profitability, fast.

Russian control over parts of the Donbas meant that Ukraine was looking at disruptions of the anthracite coal supply.

With this in mind, DTEK began lobbying the government to raise energy prices in early 2015, according to NABU.

“At first they were simply demand- ing it. What’s important is that no one was talking about import parity or close-of-day prices,” said Gulmagomedov. DTEK denied this and said that the formula had nothing to do with its credit situation.

Import parity would be used as the economic argument in the Rotterdam+ formula’s favor. As part of its association agreement with the European Union, Ukraine committed itself to finding a transparent way to set energy prices. This did not exist before the formula.

The price of coal is the major part of a power producer’s cost structure. Fixing this price to the international API2 coal index in the hub of Rotterdam would ensure fairness and transparency in energy prices, proponents argued. At the time, the coal price was about Hr 1,200 per ton.

NABU says the price is fine. But the formula also included the cost of delivery from Rotterdam to Ukraine, which would bring it up to about Hr 1,500–1,600 per ton.

A cargo train loaded with coal stands stranded in Donetsk Oblast on Feb. 16, 2017. Activists were blocking coal supplies from the territories occupied by Russia-backed militants in protest against trading with the enemy. (Kostyantyn Chernichkin)

 

The coal deficit was projected to be 5% in the coming year. However, the formula would apply to all coal, whether it came from Ukrainian mines, South Africa, Rotterdam or elsewhere.

“Why the hell are we paying for delivery that doesn’t exist?” said Gulmagomedov, paraphrasing the public.

In fact, no coal ever came from Rotterdam, he continued. A few shipments came from South Africa and the U.S. Most of the coal came from Ukrainian mines.

Conspiracy in the making?

The detectives laid their evidence on the table in front of the Kyiv Post. Some of it showed that the energy regulator knew that Rotterdam+ was a bad idea.

Dmytro Vovk, head of the National Energy and Utilities Regulatory Commission (NEURC), and a suspect in NABU’s investigation, was at first skeptical of DTEK’s proposal.

“He understood that this way he’s giving them a slice of the pie that they don’t deserve,” said Saymonenko.

In Vovk’s private files, NABU found an analysis sheet comparing three coal pricing scenarios. One was a center-weighted average between API2 and local prices: Hr 1,148 per ton. One was the API2 price by itself: Hr 1,196 per ton. And the third was the Rotterdam+ formula: Hr 1,525.

Vovk wrote that the third option “significantly exceeds the cost in Ukraine” and “does not take into account demand on the internal market.”

He also compared possible electricity prices. The version that would “protect consumers,” was Hr 0.96/kwh and the version that would “balance profitability (with consumer needs)” was Hr 1.10/kwh. The version Ukraine got in the end was Hr 1.26 per kwh.

Despite his misgivings, Vovk decided to play ball. NABU said there is evidence of a political compromise, involving pressure from above. From then on, the regulator would push the Rotterdam+ formula in tight coordination with DTEK.

This violated several laws. NEURC has to balance the interests of producers, consumers and the state, which it did not do.

But worse still was the evidence of direct collusion between NEURC and DTEK employees.

Conversations extracted from mobile phones reveal that DTEK was in direct contact with Vovk’s subordinate, hashing out the formula and the best way to present it to the public. By the time formal discussion of the formula began, NEURC and DTEK were already in agreement.

“We see from computer information that we got from searches that the rule was written by DTEK and was sent by email to computers of the employees of NEURC,” said detective Mykola Samoylenko.

The formula had to go through the Antimonopoly Committee, which at first rejected it and sent it back

with questions. According to NABU, DTEK employee Ivan Geliukh, another suspect in NABU’s investigation, drafted the reply and sent it to NEURC, which added its signature and presented it as its own.

There is further evidence of collusion at the implementation phase. DTEK asked NEURC to be careful and avoid commenting on the size of the electricity tariff increase. The regulator assured the company that it would keep its explanations vague, using percentages rather than hryvnias.

Furthermore, the regulator had to ask DTEK to mobilize friendly lawmakers to push the formula through the parliamentary energy committee, which is what the company allegedly did.

“If they support the position in the committee that this formula is transparent, lawful, correct…why does it need support from MPs who are backed by DTEK,” said Samoylenko.

DTEK responded that as a major industry player, it participated in the legitimate industry working groups with energy officials to come up with the best solution to a possible energy crisis and did not engage in any collusion with the regulator or any other state bodies.

Profits upon profits

The formula also proved lucrative for insider traders.

“We have secondary documented evidence that proves that while he held the role of head of NEURC, Vovk had access to and used commercial information about the volume of some energy generation companies on the market,” said Samoylenko. The information included their profitability and their operating projections for the future.

“(Vovk) was leaking this information to ICU, where he previously worked, which helped, among other things, to make a future decision to invest in the development of these companies and get dividends.”

ICU’s alleged insider trading has been under investigation for years, as have its ties with Poroshenko. According to NABU, Vovk passed information through ICU managing director Makar Paseniuk, an investment banker who was hired to manage the sale of Poroshenko’s Roshen candy company. Paseniuk denied the allegations.

Based on this information, ICU acquired DTEK’s eurobonds on the Irish Stock Exchange as well as the company’s credit portfolio from a consortium of international banks. After Rotterdam+ spiked DTEK’s cash flow, ICU reaped a harvest of money. Vovk, a former ICU employee, was directly appointed by Poroshenko and some have pointed to the connection that Ukraine’s former president also benefited from the deal, yet no direct evidence has been revealed.

ICU denied engaging in insider trading. ICU also said that the securities did not rise in price as

the result of the Rotterdam+ formula. NABU is still waiting for international investigators to return information that could more directly implicate the actors in this alleged scheme.

What happens now

NABU appealed against SAP’s decision and is now waiting to see whether the general prosecutor’s office will proceed with the case. If it takes the side of NABU, then the six notices of suspicion will be reissued.

When asked whether they can hand notice of suspicion to someone as influential as Poroshenko or Akhmetov, the detectives shrugged: “I don’t know.”

It will be very hard to prove their personal involvement as the process of holding people responsible in Ukraine is more complicated, they said.

Despite the supposed lack of expert witness testimony, the detectives believe they have all the evidence they need to prove that the law was broken and that the suspects are responsible for it. But a conclusion to this case is far from certain.

If it is thrown out and a conviction cannot be secured, the detectives said that their only recourse would be to go to the court of public opinion. In the meantime, the fiasco further damages Ukraine’s already-tarnished image.

“‘Rotterdam+’ is not terminal for Ukraine,” said Gulmagomedov. “But this is an indicator of where we are going and who rules Ukraine.”

By Anna Myroniuk, Igor Kossov