The Internet conference was held on-line on February 24, 2005
on the web-resource www.conference.osp-ua.info
Materials of the conference of
Mr. Oleksandr Galkin,
Director General of the Close Joint Stock Company
"Research and Production Association "Agrocomplex",
Chairman of the Board of the Open Joint Stock Company "Ukrplastic",
Ph.D. in Technical Sciences, Honored Worker of the Ukrainian Industry
In the course of privatization of the enterprise having strategic importance for the economy of Ukraine – the Lisichansk Oil Refining Complex (Open Joint Stock Company "LiNOS") – violations of the legislation had a systemic and purposeful character, thus the equity interest sale tender can not be regarded legally grounded.
The Public Prosecutor‘s Office must examine all the circumstances of this "privatization" and restore legality in a court of law.
Reference
On July 18, 2000 a contract for sale of 67,41% shares of the Open Joint Stock Company "LiNOS" was concluded by the State Property Fund of Ukraine with the company with foreign investments "TNK-Ukraine".
TNK-Ukraine paid UAH 53,1 mln, or about USD 10 mln, for that block of stock. Meanwhile, before its privatization, LiNOS value was estimated at about USD 1,2 mlrd. When in 1997 the Parliament became interested in the fate of that unique enterprise, the then Chairman of the Verkhovna Rada Commission for Fuel and Energy Complex Mr. O. Kozhushko in his report made at the session of the Verkhovna Rada of Ukraine said: "We have examined the materials submitted to the Commission. The authorized fund of LiNOS amounts to USD 10 mln, while its value – to USD 1,2 mlrd.".
Alena from Belaya Tserkov:What must be changed in the legislative framework in order to maximally secure the State against the clannish "grabbing privatization"?
Oleksandr Galkin: In this case there aren’t any conflicts of laws or gaps in the legislative framework of Ukraine. But it is well-known that the laws, at least during the Kuchma‘s ruling, were applied on a selective basis. You see, in case of "grabbing privatization" of LiNOS it is not actually possible even to speak of any kind of commercial tender: first it was decided who would be "the privatizing grabber" of the enterprise, and the respective "commercial tender" was arranged proceeding from the needs and circumstances of that specific buyer. And all that was done in such a barefaced manner that the tender on Krivorozhstal in comparison with LiNOS is a model of compliance with the laws.
Therefore, in order to secure the State against the clannish "grabbing privatization" it is necessary to restore justice and legality, as well as to punish the persons guilty, who deliberately violated the laws thus causing damage to the State and its citizens. The effective legislative framework allows the Public Prosecutor‘s Office to take such steps in a court of law. Because according to the responsibilities established for it, the Public Prosecutor‘s Office is obliged to react to the facts which have been made public.
And in the meanwhile because of the apparently unlawful acts of the specific officials of the State Property Fund functioning of the Antonov Aeronautical Scientific and Technical Complex is blocked, vessels are arrested and Ukraine pays off under decisions taken by international courts, there is even such a line in the state budget.
Vasyl Tokar:Why is it only now that you dare raise this question? Do you think that re-privatization of this giant is possible today?
Oleksandr Galkin: We have repeatedly raised these questions, and since 1997 have regularly applied to the highest state officials. In its time the Derzhkomnaftogaz (the State Committee of Ukraine for Oil and Gas) even developed the Program of taking LiNOS out of crisis, since because of its huge debts the enterprise was at the verge of bankruptcy. But, as it became clear later, those who intended to buy LiNOS for a trifling sum did not need the functioning enterprise. That was the reason why oil supplies were restricted, that was the reason why such conditions of work were created, under which the suppliers of give-and-take raw materials had to refuse from cooperation with LiNOS. After that the Chairman of the State Property Fund said that LiNOS, which value exceeded USD 1 mlrd, was "a heap of scrap metal" and sold block of its shares at USD 10 mln. I think everyone will agree that even if it had been sold for scrap metal, more money could be received from such a sale. For example: recently one of the markets in Dnipropetrovsk – "Ozerka" – was sold at USD 10 mln, having among its "basic production assets" just empty counters. And here we have the largest European strategic oil refining enterprise sold at the price of a market. And that was done in violation of laws, decrees, court decisions. Thus there are full legal grounds to return LiNOS‘s shares back to the property of the State.
Oleksandr: Are you opposing continuation of the Russian expansion on the market of oil products of Ukraine only for the reason that it is the "Russian expansion" and will you gladly give everything to the Americans, or are you opposing any privatization of the oil refining complex as such?
Oleksandr Galkin:I am opposing gross violations of the effective legislation, which took place in the course of the sale. But I am also against complete oil dependency of Ukraine on transnational companies even if it were several companies competing with each other, including not Russian ones. In the meantime, in our case we have an example of a completely Russian expansion, as regardless of the name the Russian oil companies bear, with regard to Ukraine they have the policy that has been coordinated between them. Not without reason has the Antimonopoly Committee of Ukraine made repeated statements that it is unable to counteract the cartel policy of oil companies.
The recurrence of events on the oil products market during the harvest time is a striking example of the most terrible consequences, to which shortsighted decisions taken by the Ukrainian authorities may lead.
To my mind, the State must have a powerful oil refining company that would secure its economy and citizens against conspiratorial price policy of transnational companies. After all, today Russia because of its dominating influence upon the Ukrainian oil products market has become able to blackmail Ukraine. The Government has no other way to choose but to continually conclude various memorandums with oil refiners. No other definition but "dependency" can be thought of for such a practice. That is why it is necessary to find a balance of energy security, which would not cross the water-line, because once you are under water you can think of nothing else but of a jolt of fresh air, to say nothing of economic development.
Volodymyr Lesiv: During the "certificate" privatization my family and I received certificates to 1688 registered shares of the Open Joint Stock Company "Lisichansknaftoorgsynthesis". Since 1995 even symbolic dividends have not been paid under such shares. What is you opinion of the future these securities?
Oleksandr Galkin: It is true that today, through the efforts of Ukrainian officials, your shares are really nothing else but a piece of paper, and until the OJSC LiNOS, the shares of which you have acquired during the certificate privatization, has no other property but chairs in the premises of a kindergarten, in which its "office" is located, no dividends can be expected. Since as a result of illegal manipulations with the shares of the Open Joint Stock Company "LiNOS" the company‘s assets were transferred to new owners and the losses remained with participants of the certificate privatization. In the meantime the new owners do not deny themselves dividends: for instance, according to the results of only four months of the year 2003 the owners of TNK-BP, which includes the Ukrainian LiNOS, received dividends to the amount of USD 1,12 mlrd, and according to the results of the year 2004 this figure amounts to USD 3,52 mlrd. A part of this sum, no doubt, was earned with the help of OJSC LiNOS. That is why just USD 10 mln for the entire enterprise with the simultaneous disregard of the Ukrainian minority shareholders looks like a challenge.
I think that minority shareholders of LiNOS must unite and stand upon their rights. If the unlawfully appropriated block of shares is returned back to the property of the State, you and thousands of other shareholders of LiNOS, as well as the State, to which LiNOS is also in debts, will be receiving fixed remuneration from the work of this giant.
Lisova Liza:In which way is it possible to carry out re-privatization, so as not to scare potential investors away?
Oleksandr Galkin:First of all, potential investors need transparency and consistency in actions of the State. In the same way, potential investors need confidence that privatization will be carried out according to the rule of law and not according to the "rule of bribe". Don‘t you have a question, why aren‘t western investors in a hurry to invest money in Ukrainian economy? The reason is that they, unlike some unscrupulous structures, are accustomed to act according to the law and not according to the instructions given over the telephone. I am sure that consistent and transparent restoration in a court of law of the rights pertaining to each of us will never scare investors away. On the contrary, it will be the sign that they can do business with Ukraine.
At the same time I do not accept the expression "a potential investor". Is he waiting for something? Is he a thimblerigger or a hunter on the watch for a prey? I accept investors that are recognized as such and competent in their branch. Such an investor will not resort to fraud or criminal acts because he values his name. And what can be expected of "a potential investor", who during a tender draws up some fraudulent schemes how to grab the object at the cheapest price and subsequently sell it at the highest price? I am convinced that an honest answer in a court of law to the questions asked can hardly scare the investors away but on the contrary – after that we will face the opportunity of having the same investment processes, which are now under way in the Czech Republic or Poland.
But please note: according to International Labor Organization, average monthly salary in Poland for the year 2004 amounted to USD 801 and in the Czech Republic – only USD 639. In other words, it is mostly foreign investors that hold back salary increase in the Czech Republic, as against Poland, where this role is played mostly by domestic investors, which professionally invest money in production at the expense of inexpensive bank recourses.
That is why in Ukraine it is necessary to develop own domestic manufacturer and own domestic investor.
And there is more than enough money on the world markets.
Olena Bakharenko: Why is re-privatization of only one oil refinery mentioned here? Maybe, it is necessary to nationalize all the enterprises of strategic oil refining industry?
Oleksandr Galkin: I raise the question of return of shares of the most powerful oil refining complex back to the property of the State because I am well aware of numerous violations of the legislation, which occurred during the "tender" with regard to LiNOS shares sale.
I have no doubts as to the unlawful nature of LiNOS privatization, thus, in my opinion, the State, having returned the Lisichansk Oil Refinery to the property of the State, could restore competitive environment in the oil refining industry of Ukraine and create prerequisites for real stimulation of prices on energy resources.
Matvey Z.: The fact that LiNOS has been privatized with violations of law is not doubted by anyone. Today it is quite difficult but, maybe, possible to improve the situation. How do you think, who must initiate this process with regard to the Lisichansk Oil Refinery? Is it real to return it? Won’t it give rise to a scandal in the Russian family?
Oleksandr Galkin:According to the effective legislation of Ukraine, the independent state, it is absolutely possible to return this block of shares. This process must be initiated by the Cabinet, the Office of the Public Prosecutor General, the public. In essence, our Internet conference is also an initiation. And if it is to be returned in compliance with all the respective rules, then within the framework of criminal proceedings the State of Ukraine must demand and obtain the unlawfully earned profit. Decisions of the Supreme Court of Ukraine clearly mention hundreds of millions of Hryvnya of excise tax, which has not been paid by LiNOS to the budget of Ukraine.
And the representatives of the Russian family, as you put it, or the representatives of "the Mafia post-communism" as Mr. Vaclav Havel more exactly described them – must judicially confirm their claims to this enterprise. For example, let them explain in a court of law: is it possible to call the theatrical performance, in which a block of shares is bargained by two participants connected with each other by one founder, "a commercial tender"? And for the purpose of waiving questions, representatives of competent international law bodies should be invited to take part in legal proceeding concerning such cases. To my mind, robbing of the State, which we see in the case of LiNOS, is a greater scandal. At that time "the Russian community" surprisingly had no objections. Thus, in reply to possible discontent of the Russian State Duma or business-community Ukraine should present an unbiased court decision. Or is "the Russian community" really in an indescribable state of "the Mafia post-communism", supporting itself by instruments of clannish lawlessness? So, everything is real.
Elena Potapova: In you opinion, can Yushchenko really be connected with the Russian energy business (as there‘s a persistent rumor)? If it is so, is it possible that he, having such advisers as Nemtsov and others, will restore justice and legality with regard to a domestic oil refinery?
Oleksandr Galkin: Dear Elena, no example of a president of a state (maybe, except L.Kuchma) ignoring the energy security of his country is known to me. And concerning "persistent rumors" that Yushchenko is sort of connected with the Russian energy business, including "Alfa" and, consequently, the Tumen Oil Company (TNK) - I think that these rumors are spread by these very companies with the intention of convincing that they are under cover and it is better not to disturb them.
But facts analysis gives different results. Let us take, for example, the project of the Odessa-Brody-Europe oil pipeline. It is well-known that Yushchenko is an ardent supporter of the European direction of this project, while TNK has lobbied the reversal variant in the Odessa direction. What is was done for? The thing is that reversal use of the pipeline is more consistent with the TNK-BP logic, turning a strategically important pipeline from the heart of an independent transport infrastructure into an appendage of a separate Russian company. Yushchenko understands it perfectly, as is confirmed by his intentions to reverse the pipeline in the direction of Europe. Furthermore, if President Yushchenko wants to reverse the country in the European direction as well, he understands that restoration of violated rights has much significance for this process.
As for Nemtsov, I think he is nothing more than an adviser. To my mind, development of a country in this or that period of time does not exclude both privatization and re-privatization. There is a great many examples. Great Britain, Italy, France – railways, energy complex, banks. Only the state was able to solve the problems that had arisen. And then to sell to private owners, such sales being done by way of fair procedures, and irrespective of that to nationalize again, when a state necessity arose.
Nadiya M.:Speaking of the income from the Lisichansk Oil Refinery, what amounts are meant? What is its profitability and who benefits from it?
Oleksandr Galkin:Concerning the OJSC LiNOS, the shares of which were purchased by citizens during the certificate privatization, it should be said that, first of all, as can be seen from the Auditor‘s Opinion, from the very beginning it was planned to place expenses and losses on LiNOS and transfer income to TNK. Now this LiNOS produces nothing, its office is located in the premises of a kindergarten. And the oil refining complex proper, following various manipulations, have been transferred to a limited liability company with a proud name "Lisichansk Oil Refinery" owned by several offshore companies. They are the ones who get profit – I have already mentioned that according to results of the past year the shareholders of TNK-BP calculated dividends in their own favor to the amount of USD 3,5 mlrd. We can only guess what part of those dividends was calculated at the expense of LiNOS, which is a significant part of TNK-BP assets, what part – at the expense of "minimization of taxes" in Ukraine, what part – at the expense of peasants who are overcharged for fuel every season. I have no opportunity to check everything, but somebody in the State has to do it, right? Likewise, the circumstances under which taxes were written off must be checked – here it is also a matter of tens of millions…
Maverick:What is your idea of this process? Considering a significant share of retail segment controlled by TNK through the network of its jobbers (it, by the most conservative estimate, being not less than 1000 filling stations) and taking into account the share of light oil production ensured by LiNOS, any disturbances related to the refinery may seriously destabilize the situation on the Ukrainian oil products market. During the "season" (sowing campaign) nobody needs it. It is a cooler thing than YUKOS in Russia, since "tankers" have a much greater influence upon the domestic market. Just imagine shipments from the refinery stopped and steles of all their jobbers displaying "zeros"! And taking into consideration "the cover" represented by "Anglo-Saxons" (BP) and our intention to join Europe… This government is not equal to such a task, is it?
Oleksandr Galkin:Please note – there is no big scandals with regard to other oil companies. Why is TNK always accompanied by negative unsolved problems? Isn‘t it because other companies paid a fairer price? At least such a price that was not considered exorbitant. And they did not violate the Ukrainian legislation in such a provocative manner.
And in the case of TNK – at first the State, grounding it by huge indebtedness of the oil refinery, bargained it away, having in mind that a future owner would repay the debts. And the new unlawful owner of the refinery heaped the debts onto the shoulders of the State again, making use of the loopholes arranged for it in violation of the legislation by several officials. So must the State restore justice in a court of law? To my mind it must. As Mr. Poroshenko put it in one of his interviews, the State has state power and corresponding resources attached to corresponding objectives.
The State will also cope with a possible situation of threats and blackmail described by you, since nobody calls upon to violate the laws – on the contrary, it is a matter of restoring legality.
But your question also contains a confirmation of the urgent necessity to ensure energy security of the country and protection against possible blackmail on the part of Russian oil refiners. The same refers to retail trade in oil products. Here we have no law regulating the jobber system of trading in oil products, which allows transnational companies to dictate their conditions and which does not further competition. You see, a jobber undertakes to buy gasoline, say, only from TNK, subject to its terms and conditions. I have already mention the example of Turkey, where despite a very big amount, at which the government valued an oil refining holding, the government nevertheless did not entitle the buyer to retail trade, where main profit from oil refining is formed. Thus, in order to exclude possible blackmailing, the government and the Parliament must fix retail trade conditions in a legislative way. This, among other things, will allow to some extent to minimize negative consequences of oil refiners’ cartel schemes. It must be done without fail if we are going to become a European country. And concerning "the Anglo-Saxon cover" in the person of BP, I do not think that the company is interested in a scandal, especially since in Great Britain it is accused of misuse of offshore schemes to the prejudice of minority shareholders. So the current government is equal to this task.
Petro:Will the re-privatization lobbied by you now have any effect on the crisis in the field of oil products, since 80% of fuel comes from Russia? Furthermore, TNK, which is the owner of the Lisichansk Oil Refinery, is already a member of the TNK-BP holding that also has British capital. Are your actions really in accord with the national interests of Ukraine and do they really have an objective of increasing the attractiveness of the State for investors?
Oleksandr Galkin: I know that the British company BP showed interest in the Lisichansk Oil Refinery since the beginning of the 1990s. It is by its request that in the middle of the 1990s an independent international assessment of the oil refinery was carried out. Calculations were very thorough because at that time the refinery actually stood idle but, all the same, the sum exceeding USD 950 mln was specified. Let us note that at that time the question of building a somewhat smaller oil refinery in Stavropol Region having the value estimated at USD 5 mlrd was under consideration.
It looks like the Britons were explained the methods of the Ukrainian privatization - they bought the Lisichansk Oil Refinery from the Russian TNK.
Petr Andreyev: As far as I know, the refinery is meant to process 15 mln tons of oil. According to the information I have, today it processes about 6 mln tons. So what kind of an owner is it if utilization is 40% of nominal capacity? To what extent is it in line with the interests of the State?
Oleksandr Galkin: As a matter of fact, the Lisichansk Oil Refinery processed in 1989 23,8 mln tons, in 1990 — 21,8, in 1991 — 9,6 (!!!) mln tons, in 1992 — 10,6, in 1993 — 6,4 and after that 4,8; 2,1; 2,2; 3,2, and when the Verkhovna Rada of Ukraine in 1997 blocked the transfer of a 45% LiNOS equity interest to a Russian company at the price of just USD 2,6 mln, oil refining reduced to 1,7 mln tons altogether. As the then Chairman of the Parliamentary Commission for fuel and energy complex Mr. A. Kozhushko put it, " supply of oil to the Lisichansk Oil Refinery is deliberately blocked with the purpose of brining it into crisis". But during in the same "difficult" years the Kremechug Oil Refinery processed much greater volumes of oil. Thus Mr. Kozhushko turned to be right: LiNOS was deliberately lead to crisis in order to appropriate it for a trifling sum.
Today we can only remember the initial capacity of the Lisichansk Oil Refinery, which was 24 mln tons of oil refining per annum. A third of the company‘s facilities has been put out of action, another third has been stopped.
I think that when selling LiNOS, one of the conditions should be to guarantee to a future buyer that the utilization would not be less than 2/3 of initial capacity, i.e. 16 mln tons. But that was not the case.
And the refinery operates at the economically inadmissible capacity of 6 mln tons only because it easily shifts all its expenses to price, since there is no competitive environment. Such an investor can hardly be regarded as a strategic one.
Lawyer: What was the outcome of the bankruptcy proceedings regarding OJSC LiNOS, is there the final court award, have you received any property as a result of this case and if yes, to what amount?
Oleksandr Galkin:After TNK came to Ukraine, the bankruptcy proceedings were turned into a cynical farce. And affiliated structures of TNK were "appointed" the main creditors, in violation of the law, although LiNOS debts claimed by them according to the law amounted just to 2,8% of the total claims of creditors.
But as a result of numerous unlawful manipulations with regard to the Close Joint Stock Company Research and Production Association "Agropromcomplex", it was ousted from participation in those proceedings. Instead of receiving debt recovery, in 2004 we, as well as the state enterprise "Ukrnaftoproduct", received unvalued shares of some Linik appropriated to us. After that the corresponding meeting of Linik shareholders due to be held in the premises of TNK did not take place because the main shareholder of Linik – TNK-Ukraine - did not show up. We have repeatedly applied to TNK, as well as to other shareholders of Linik, with a request to buy these shares from us, but nobody became interested in those papers. That is why we unconditionally insist on debt recovery.
Igor Rogovoy, journalist: Why is it you who is so anxious about this question? Isn’t it the case that you would like to acquire "a tasty morsel" for you "family" (or as you call it, "clan"), especially since it is not one of the largest credit debtors among the Ukrainian enterprises, as it was before its privatization? All the more so, as it does not stand idle but works? Or have we already forgotten how we stood on roadsides with jerricans or bought them?
Oleksandr Galkin:I am concerned with LiNOS for the reason that it is in debt to our company for products of oil refining from the 375 thds tons of oil supplied by us in 1992-1993 to the Lisichansk Oil Refinery on a give-and-take basis. LiNOS, having taken the money for refinery at once, shipped oil products without haste, most often – to others, including for export. That is why we demand recovery of the debt. And if you think that today LiNOS "does not stand idle but works", than let it make settlements with us, with Goskomreserve (the State Committee for Government Reserves), let it stop creating problems for the Antonov Aeronautical Scientific and Technical Complex … The list can be continued.
And regarding the "jerricans on roadsides" – particularly to make peasants not stand on roadsides we supplied 375 thds of oil on a give-and-take basis to LiNOS in the period most difficult for it.
Pavlyuchenko I.A., Head of the Board for Domestic Policy of the Pryluki Town Council: In your opinion, is the review of privatization results a long-term period or a short-term campaign? Will the main aim of establishing social justice be achieved?
Oleksandr Galkin:I think that it should not turn into just another campaign, but if questions concerning privatization of this or that enterprise arise, an objective and unbiased analysis must be carried out. Court proceedings must be instituted concerning each of such cases, and if it is proved in a court of law that during privatization of a specific enterprise specific laws were violated and specific rights of shareholders, creditors and/or the State were infringed, the results must be reviewed. Because social justice is based on compliance with the law.
Vasyl Flyak: What would your attitude be, if LiNOS would be sold to other owners in an open tender at a real price, which, according to some data, amounts to USD 1 mlrd?
Oleksandr Galkin: At the moment we see current results of on-line Internet-polling regarding the question: "To your mind, now it is necessary to do the following concerning the giant of oil refining industry of Ukraine – the Lisichansk Oil Refinery, which is owned by TNK (Russia): a) to return it back to the property of the State – 63%; b) to sell to other owners (in an open tender at the real price of USD 1 mlrd) – 22%; c) to leave everything without changes – 13%; d) difficult to say – 2%. I completely support the opinion of the majority polled – LiNOS must be returned back to the property of the State.
V. Adamovych: What is your opinion of the role that the senior managers of the State Property Fund Mr. O. Bondar and M. Chechetov played in privatization of the Lisichansk Oil Refinery? Have they, to your mind, done any harm to the interests of the national security of Ukraine?
Oleksandr Galkin: Yes, I think that the actions of the senior managers of the State Property Fund Mr. O. Bondar and M. Chechetov during privatization of LiNOS have done harm to the interests of the national security of Ukraine. Furthermore, I think that it was a purposeful and time-scheduled move.
At the end of the 1990s oil deliveries to the refinery from Russia were deliberately restricted for the purpose of buying LiNOS for a trifling sum. It was planned to do that for the first time in 1997, when it was planned to sell 45% of LiNOS shares to Russia at USD 2,5 mln.
I am sure that people in the State Property Fund were informed of the letter addressed by the Russian Minister for Fuel and Energy Mr. P.Rodionov to the then Head of the Russian Government Mr. V.Chernomyrdin dated 11.11.1996, which referred to the guarantees of annual deliveries to LiNOS of 6 mln tons of oil through TNK "Runo", provided that "the Russian suppliers will buy 45% LiNOS equity interest, thus "maintaining and strengthening positions of Russian enterprises in Ukraine".
Then that transaction was blocked by the Verkhovna Rada, but the Fund was ready to give 45% of shares at USD 2,5 mln!
And in summer of the next year 1998 it was Leonid Kuchma who discouraged Ukrainian companies from supplying oil to LiNOS: on 13.07.1998 he not only grossly interfered in the court proceedings but also gave instructions to conduct an inspection of oil suppliers. Here is a quotation from the original materials of the bankruptcy proceedings: "Control. Golubchenko – personally responsible. Please create a commission, find out the particulars. If we have such courts, we will be left without any State property".
Under that resolution, by efforts of Mr. Derkach and Mr. Potebenko, large-scaled power "mask-shows" were immediately carried out in companies – suppliers of oil to LiNOS, i.d. "a complete mop-up of the object". But it is a topic for a separate discussion. Because here we speak of the role played by the State Property Fund.
O. Bondar, trying to make the Supreme Arbitration Court to unlawfully remove the ban on alienation of LiNOS shares, promised that the buyer would fully repay the indebtedness of the Oil Refinery. But the Fund not only did not include that obligation to the conditions of the contract, but also even "forgot" to show the property to the amount of USD 161,8 mln in the balance sheet.
And on the day of signing of the equity interest sale agreement the Fund attached to that Agreement an Appendix dated the same day (!) and sewn by the notary together with the very Agreement (!!) as one package, thus burdening the mentioned peasants with investment obligations of TNK, under which it must repay the debt owed to the West LB Bank (further information can be found in: Material "Comparison of Sale Agreement conditions…" [15]).
As for M. Chechetov, I would like to say that it was under his guidance that this lawlessness took place (further information can be found in: Material "Analysis of violations … [1]). I would also like to give an official estimate of the Fund‘s operation under the guidance of M. Chechetov, which was expressed last year in the report of Ms. Valentyna Semenyuk, Chairwoman of the Verkhovna Rada Control Commission for control and privatization, made by her at the parliamentary session: "Another way of anti-national privatization, which is carried out by the Power, is "giving property away as gifts to the persons connected with it"… Highly remunerative and attractive for investment enterprises, in modernization of which the State invested huge amounts of money, were privatized first of all. And the price, at which such enterprises were sold, actually never corresponded to their real market value… The main problem of the Fund and of its Chairman Mykhaylo Chechetov is that the interests of the State and their own interests do not meet on the noble field of public service". Is it necessary to add anything to this estimate?
Roman: Why do you accompany the ambitions of the new Power in the best traditions of Bolsheviks-Communars? "Take away and dispossess"? Right, the Lisichansk Oil Refinery has been privatized with violations. Even if those violations were gross or criminal. But actually all the large objects have been separated from the State IN A SIMILAR MANNER! The only difference is that at the moment when TNK was in the process of buying LiNOS, the situation in the Ukrainian oil refining complex was absolutely deplorable. …TNK has saved this oil refinery from complete collapse, and you should be glad that you managed to get at least something for it! Also, Yushchenko seems to have said that the legality of privatization will be checked concerning the period of the last two years… Did it look not enough for you?
Oleksandr Galkin:I do not think that I accompany the ambitions of the new Power. My position was the same one year ago, five years ago. But if you yourself do not deny that LiNOS was privatized "with criminal violations", by the Kuchma clan, as I would like to specify, mustn‘t we restore legality? And I was not "blind" during the "fake" privatization of LiNOS. I applied to courts of law, which since mid-2000 unlawfully denied me consideration of numerous claims. By the way, the unlawful character of those denials was established by award of the Kyiv Arbitration Court in 2003. But the award was made too late, after LiNOS assets had been taken out.
And I do not accompany "the ambitions of the new Power in the best traditions of Bolsheviks-Communars" and do not propose to "take away and dispossess" – I proposed and I propose now to act according to the law.
The same was said by me in 2000 to the gentlemen from TNK when they visited the Oil Refinery.
The privatization commission deliberately resorted to violation of law. It did not allow a single competing company to take part in the tender. Actually, there was no tender as such. The commission recognized only two companies as participants of the tender. Both companies were connected with TNK: Company with Foreign Investments "TNK-Ukraine" and Limited Liability Company "Prodintorg" with a "man of straw" – Mr. Kredentser O.G. The third company, a Gasprom‘s "Siberian-Ural Oil, Gas and Chemical Company" (Sibur), represented by Ukrgasbank, a close associate of Neftegas Ukraine, was not allowed to the tender. For the sake of propriety, another enterprise connected with TNK was also denied participation in the tender. As for the Ukrainian candidates, the preliminary mop-up of the field around LiNOS before the privatization was done personally by Leonid Kuchma. Such actions are undoubted violation allowing to raise the question of re-consideration of the results of the tender.
However, first of all, privatization of LiNOS, as a matter of fact, was not in accord with the objective of privatization carried out in Ukraine – namely, the search of an efficient proprietor. You see, just recently, in 1989, the Lisichansk Oil Refinery processed 23,8 mln tons of oil, which was 99,17% of its official capacity of 24 mln tons. Such a result is only possible when an enterprise is provided with up-to-date equipment and operates at the highest level.
How was it possible to set a condition of the tender that the Lisichansk Oil Refinery‘s facilities must be provided with crude oil of just 4 mln tons per annum?
Even if we imagine that according to some unthinkable calculations it was decided to utilize just one of three processing lines with nominal capacity of 8 mln tons, it means that the search of an effective proprietor was orientated at the utilization level of 50%? What for? For re-sale of the object, which did take place.
And self-praising by TNK for the achieved level of 6 mln tons of oil refining – and this is utilization of the oil refinery at just 25% – is a profanation. Such a result in no circumstances evidences the effectiveness of production or the achievement of the object‘s privatization goal.
Oil refining at the level from 4 to 6 tons was achieved only in view of the provided opportunity to work for a long period of time under conditions of "minimization" of taxes.
The equipment of LiNOS is the property of some offshore structures. Now Trading House "TNK-Ukraine" is occupied with taking the assets out to the Cyprus offshore zones, as the Anti-Monopoly Committee of Ukraine notified on January 27, 2005. Last year criminal proceedings were instituted against the management of LiNOS for tax evasion on a particularly large scale.
It is also incorrect to state that Yushchenko promised to check legality "concerning the period of the last two years". Most likely, it is you own interpretation of the widely available information. You see, there is a generally accepted understanding of legal relationship. And the new Government should not be ascribed unworthy powers of giving some indulgences. For the last time in the history of independent Ukraine these were given out "on Bankova Street".
Marina Kravets: It is interesting to know whether Leonid Kuchma had any relation to the artificial bankruptcy of the Lisichansk Oil Refinery? If yes, must he than answer for the damage inflicted by him on our Ukraine?
Oleksandr Galkin:Particularly the unlawful acts of Prime-Minister Leonid Kuchma at first and then – of President Kuchma resulted in LiNOS facing a threat of bankruptcy.
Speaking of the debts that the Oil Refinery owes to our company, it was the then Prime-Minister Kuchma, who signed the unlawful telegram received by the Refinery on October 10, 1992, which contained the following demand:
"IRRESPECTIVE OF THE SOURCE FROM WHICH OIL STOCK IS RECEIVED, ALL THE GASOLINE AND DIESEL OIL PRODUCED IN OCTOBER-NOVEMBER MUST BE DIRECTED ONLY TO THE STATE NEEDS PRIME-MINISTER LEONID KUCHMA".
However, as it turned out later, a part of oil products was exported, smart officials earned money on such a transaction, and our contracts with manufacturers of agricultural products remained unexecuted. As a result, we bore huge losses.
Despite that, we hoped that the problem of the debt owed to us would be solved in a civilized way. But when in 1997 attempts to transfer shares of the Oil Refinery to Russian oil producing companies for a trifling sum and without consideration for the debts owed to creditors of LiNOS came to light, we had nothing to do but to go to a court of law with a petition in bankruptcy.
It should be borne in mind that not only at that time but also now we declare that our only aim was to draw the attention of state authorities to our problems and achieve repayment of debts. As we saw later, the Power did not even intend to comply with the laws – after the corresponding resolution issued by L.Kuchma we faced a real terror directed against us, decisions of courts were unlawfully broken. The objective was one and the same – to pull off a deal with LiNOS.
For that purpose a "theatrical tender" of equity interest sale was organized. Although the results of that illegal tender became officially known only in July 2000, L. Kuchma actually knew the name of the "winner" as early as on March 20, 2000 – when he received a letter sent by the management of LiNOS, which specified that "practically it has determined its priorities concerning the plant "Tyumen Oil Company".
Thus, having ignored the priorities of Ukraine, its President, if one may call him so, encouraged the implementation of TNK priorities, giving away the oil giant valued at least at USD 1 mlrd at USD 10 mln. Thus, as we can see, the activities of L.Kuchma had as a goal to bring the Oil Refinery into bankruptcy and hand it over to the Russians. So, to my mind, he undoubtedly must answer for the actions that have inflicted huge damage on Ukraine and its citizens.
I.Vertes, Odessa: My question is about the Odessa-Brody oil pipeline. New leaders of our country V.Yushchenko and Yu. Timoshenko maintain that this pipeline‘s flow should be directed to western countries. At the same time in the interview to "The Kiewskie Wedomosti" (23.02.2005) the First Vice-Prime-Minister A.Kinakh said that "today the reversal is the most optimum alternative in order to utilize the Brody-Odessa line " and "… it is necessary to be guided by clear and pragmatic calculations rather than by emotional political statements". A question arises, isn‘t Mr. Kinakh lobbying the interests of the Russian TNK and, in particular of "Alfa-group", its leader Mr. Fridman? And mustn‘t in such a case the First Vice-Prime-Minister resign if his views contradict the position of the President and the Prime-Minister? And in general, was there any necessity to sign contracts with TNK for reverse use of the Odessa-Brody pipeline? Who benefited from that?
Oleksandr Galkin:The statement that the Odessa-Brody pipeline should work in the European direction is not disputed by anyone. Moreover, it seems to me that everybody understands why it works in the reverse regime. Here it is easy to draw an analogy with the situation about LiNOS, when oil supplies were blocked at first and then the enterprise was bought for a trifling sum.
Here is how the influential Washington Times estimated the situation on June 30, 2004:
"Russia does not want the plans of Odessa-Brody pipeline extension to come true. It considers them to be a threat to the Russian monopoly for transportation of Azerbaijan oil through the Baku-Novorossijsk pipeline … TNK-BP continued its attempts to change the direction of oil flow in the Odessa-Brody pipeline and make this flow reverse, while Russia exerted pressure on potential suppliers of oil to the pipeline (among which there also was Azerbaijan). With regard to this question Russia and TNK were assisted very actively by Ukrainian lobbyists, including, unfortunately, L.Kuchma. As it is known, TNK has won. And Ukraine even did not find it necessary to notify Poland about that, thus undermining confidence between the partners along the European route of the pipeline".
And what did Ukraine actually get? When in 2004 the pipe was filled with process oil, they read more attentively and understood that TNK promised not 9 mln tons but "up" to 9 mln tons. And as soon as in the 4 th quarter of 2004 instead of 2,5 mln tons TNK pumped only 1,2 mln tons. Moreover, irrespective of a kind of an additional pipeline, the total amount of oil pumped by Russia through Ukraine decreased. That means that the oil that flew in the Odessa direction would be pumped through another Ukrainian pipelines anyway. Thus no increase in the promised proceeds occurred.
And it is hardly necessary to expect profit this year, since recently Russian-British TNK-BP said about deterioration of cost efficiency of the Odessa-Brody pipeline‘s use in the direction of the Yuzhny terminal (Odessa).
By the way, as far back as at the end of 2004 a Russian oil publication "Petroleum Argus" reported that "the exporters‘ interest in supplies through the Yuzhny port is still low". As it is said, here we are. I think that the current Power understands it as well.
Nevertheless, it will not be difficult to "reverse" the Odessa-Brody pipeline. And there‘s no need to look back to the fact that Ukraine borrowed USD 108 mln from TNK to fill the pipe with oil. Losses inflicted to Ukraine as a result of the economic activity of TNK in our country are many times as much as the amount of the loan.
UPECO: It is a surprising metamorphosis – all the fighters with "the tankers" have united around Galkin, that is evidenced by rhetoric concerning the Odessa-Brody reversal. You see, dear gentlemen Todiychuks and Galkins, there is no need to mislead the participants of the conference. In summer of 2004 the President of Ukraine Mr. Viktor Yushchenko said that it is criminal and inadmissible that the Odessa-Brody pipeline stood idle and, not refusing from extension of the pipe to Plozk, in winter of 2005 confirmed that the pipe would work in the reverse regime. Does it mean that the President of Ukraine is a protégé of the Russian oilmen??? Tymoshenko, Yushchenko and Kinakh are pragmatics concerned with security of Ukraine and not of separate companies of Mr. Todiychuk… And when the time comes, they will reverse the pipe, but for that real oil is needed, not virtually demagogic or stupidly ecstatic one. In this connection there is such a question: how to distinguish demagogy from democracy? And is it possible to reason about the strategy of energy security possessing no basic knowledge of oil production and transport?
Oleksandr Galkin:It is true that Tymoshenko, Yushchenko and Kinakh are pragmatics, who, to my mind, will be able to ensure the energy and economic security of Ukraine. In particular, today they say that Ukraine will benefit if the reversal is refused, and they take certain steps for the fastest reversal of the pipeline in the European direction. And this position origins not from interests of particular companies but from the Agreement between the Cabinet of Ukraine and the Government of the Republic of Poland on the utilization of the facilities of the Odessa-Brody system and on its integration with the Polish facilities, which has been ratified by the Verkhovna Rada of Ukraine on 14.01.2004 and which has statutory force.
At the same time "undercover" arrangements between Kuchma and TNK-BP had no prospects to be approved by the Parliament, that is why they took the form of obscure commercial deals under cover of the old regime. And today the PR-strategists of TNK-BP explain the non-fulfillment of undertaken obligations concerning pumping of oil along the Odessa route by dissatisfaction with harbor dues and make them dependent on "volume discounts". But of what discounts can it be spoken when as of today only 1,6 mln tons of oil instead of 9 mln promised by TNK-BP have been pumped through?
That is why I hold by my opinion that the main task of the reversal lobbyists was to turn a strategically important and independent from Russia oil pipeline into an appendage of a separate Russian company. Obviously, flavored with talks that there is no real oil, such a situation was expected to be retained "over the centuries".
T.Aliev: Let me express my respect for you and ask you such a question. What is your opinion of the possibility to construct the trans-Turkish pipeline "Ceyhan-Samsun" intended for deliveries of Iraq oil for the Odessa-Brody pipeline, with its subsequent processing at the Ukrainian oil refineries?
Oleksandr Galkin:Thank you for an interesting question concerning the very essence of our conference.
I think that construction of the trans-Turkish pipeline "Ceyhan-Samsun" intended for deliveries of Iraq oil for the Odessa-Brody pipeline is a project having much importance for Ukraine. Turkey has also supported it, since it envisages oil transportation bypassing the problematic Bosporus strait.
In 1997 the parliaments of Turkey and Ukraine ratified an inter-state agreement on the implementation of this project, under which it was intended to construct an oil terminal in the Turkish Samsun (the coast of the Black Sea) and a pipeline from it to the Mediterranean Ceyhan. The project particularly envisaged carrying Near-Eastern oil over to Samsun via the territory of Turkey, with its further delivery by tankers to the Odessa terminal.
In such a case Ukraine, in addition to Iraq oil transportation through the Odessa-Brody system (let‘s not forget that initially this pipeline was intended particularly for these two purposes and not for Caspian oil), would receive another source of oil to be processed at domestic oil refineries, such source being independent from Russia.
Such an economically and geopolitically balanced decision would be in line with Ukraine‘s aspiration to become a full-value participant of contemporary global relations. But the Russian oil lobby with the assistance of Ukrainian officials blocked this project and soon after that the turn of domestic oil refineries came – they were almost completely given away to Russia.
Today an opportunity presents itself to correct these, to put it mildly, mistakes. In addition, refining of the quality Iraq oil at Ukrainian refineries opens real prospects of domestic oil and chemical industry development, creation of up-to-date polymers production.
If this project is implemented, Ukraine will get an opportunity to supply quality oil products and polymers to the neighboring countries, including to the European Union. I think that the new Ukrainian Power should resume work in this direction.
Materials with regard to the unlawful privatization of the Open Joint Stock Company LiNOS:
- Analysis of violations of the Ukrainian legislation during the commercial tender with regard to sale of the OJSC Lisichansknaftoorgsyntheses equity interest — conference.osp-ua.info/materialy/text.php?m=porushennya
- History of debt of the Lisichansk Oil Refinery // newspaper "Golos Ukraini", 10.09.1998
- Feudal law // newspaper "Golos Ukraini", 08.10.1998
- Feudal law –2 // newspaper "Golos Ukraini", 08.10.1998
- Special operation Sanation // newspaper "Golos Ukraini", 02-03.08.2002
- Special operation Sanation-2 // newspaper "Golos Ukraini", 28-29.08.2002
- Why pay more // newspaper "Golos Ukraini", 31.10.2002
- Position of Law Department Director of the Company with Foreign Investments TNK-Ukraine // newspaper "Fakty", 09.04.2002
- Chechetov told about "Ruslan" - www.tnk.ua/tnk/press/media/2003/07/23/-07 (official web-site of TNK-Ukraine).
- Arrest of Ukrainian "Ruslans" in Canada and Belgium continued - www.korrespondent.net/main/103819
- TNK-Ukraine takes assets out to offshore. - www.obkom.net.ua
- Whose honor, dignity and business name has been damaged than? // newspaper "Zerkalo Nedeli", 27.03.2004
- O.Galkin. LiNOS privatization as an example of clannish economic terror // Economic Journal-XX. 2002. ¹ 6.
- Is privatization to be blamed for the rise in prices for gasoline? - www.korrespondent.net/main/103819
- Comparison of conditions of Equity Interest Sale Agreement. - www.conference.osp-ua.info/materialy/dogovor-linos.pdf
- Annals of struggle for return of the Lisichansk Oil Refinery to the Ukrainian people. - conference.osp-ua.info/materialy/text.php?m=lisichansk-borotba
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