Rocked by scandal: Can defense conglomerate Ukroboronprom regain some legitimacy?

WASHINGTON — In a December 2018 commentary written for Defense News, the director general of government-owned Ukrainian defense conglomerate Ukroboronprom, Pavlo Bukin, described Ukraine’s security situation as “defined by ongoing Russian aggression.” He pointed to Ukroboronprom as the means to implement strategies “that will reduce the ability of the Russian Army to threaten our country.”

Indeed, post annexation of the Crimean Peninsula from Ukraine in 2014, and post disinformation campaigns and cyberattacks credited to Moscow, Bukin and his predecessors presented Ukroboronprom expansion as Ukraine’s direct counter to Russian hybrid war.

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But only a couple months after that commentary published, Bukin was one of a number of individuals named by Ukrainian investigative journalists as being involved in a 2015 kickback scheme to smuggle Russian military hardware parts into Ukraine. Those parts were sold at an inflated cost to Ukroboronprom, with employees that orchestrated the buy taking a cut.

“When you connected all the dots together, it was unbelievable,” said Denys Gurak, former deputy director general for foreign economic activity of Ukroboronprom, who is now a senior fellow at the Potomaс Foundation. “In the public eye for years, everybody was corrupt, but law enforcement couldn’t prove it. The exact dirty stuff happening was never public. Nothing would be changed. There was this public disappointment — a chronological display of how ignorant and cynical people were. But when this one came out, it was really a big boom.”

Contradictory terms

The scheme, which was revealed in a series of articles by Ukrainian media outlet Bihus.Info, has called into question long-held claims made by government officials that Ukraine would rebuild its defense industry, rid itself of corruption, eliminate reliance on Soviet-era technology and bolster domestic security against Russia.

Instead, it reinforced skepticism that Ukraine has, or could, entirely cut ties with Moscow. And while on its surface the scheme seemed little more than an effort among a small pool of people to get rich, Gurak sees it as far more calculated.

“It would be too foolish to think Russian intelligence doesn't want Ukraine's industrial base to be destroyed,” he said. “I’m sure it’s actually their main goal. And it would be foolish to think that Russian spare parts can be smuggled outside without their control and knowledge.”

Regardless of whether the scheme was a tactic by Moscow to prevent Ukraine from moving beyond a Russian stronghold, “this scandal distorted the message,” said Gurak, whose primary goal while at Ukroboronprom was to enable a clean audit of the financials in order to provide assurance to Western allies that Ukraine was a trustworthy partner.

After former Director General Roman Romanov left the company, Gurak moved on in May 2018, doubting that new company leadership was committed to the effort that he felt implied a meaningful transformation of the company.

“This makes it harder now for us, for Ukraine, to attract investments and cooperate with the U.S., and that’s what we’re always trying to do,” Gurak said.

Now what?

The scandal rocked Ukrainian politics, with some arguing it was a major factor in the loss of the presidency by Petro Poroshenko, given that the son of his business associate Oleh Hladkovskiy is alleged to be a mastermind behind the scandal.

President Volodymyr Zelenskiy, inaugurated in May 2019, has sought to clean up the mess, among other things, by appointing a former minister of economy and trade, Aivaras Abromavicius, to the supervisory board of Ukroboronprom.

Abromavicius was elected to lead the supervisory board during a meeting earlier this month. In a news release about the meeting, he identified an audit of the company as a top priority.

“The appointment [of Abromavicius] is a good sign that President Zelenskiy is taking this seriously,” said Daniel Vajdich, who previously advised the Senate Foreign Relations Committee on Europe and Eurasia and now heads strategic advisory firm Yorktown Solutions. Yorktown was contracted by Ukroboronprom to help promote a clean audit of the company in Washington, but that cooperation ended when the audit slowed to a crawl.

“The situation hurt Poroshenko, and it could hurt Zelenskiy, too, and proved a liability,” Vajdich said. “If he can demonstrate he’s cleaning up the defense industry, it will benefit him. He and the folks he surrounded himself with are looking at this situation, and there are hopeful signs.”

Ukroboronprom ranked 72 last year on Defense News’ Top 100 list, reporting $873.45 million in defense revenue. The company did not submit its revenue numbers for this year’s list, though data from the U.S. Department of Commerce’s International Trade Administration estimates $2.09 billion in local defense production in Ukraine, and another $990 million in exports. Roughly 60 percent of national defense reportedly came from private companies.

The potential is not lost on Zelenskiy, who called for an immediate audit of Ukroboronprom in an attempt to regain some legitimacy at home and abroad. However, a state agency would likely perform the audit, rather than one of the big four independent audit firms — KPMG, Ernst & Young, Deloitte, and PricewaterhouseCoopers — as Vajdich and Gurak called for during Romanov’s tenure.

A state-run audit, Vajdich argued, would “mean nothing.”

Whether or not an audit does move forward, the scandal was a major step backward in efforts to lure increased cooperation from the United States. And actions taken during the aftermath did not help. On March 5, then-U.S. Ambassador to Ukraine Marie Yovanovitch called for the government to prosecute cases, saying that “turning a blind eye to corruption in the defense sector is taking food, medical treatment and weapons out of the hands of Ukraine’s brave soldiers.”

Soon after her remarks, Ukrainian Prosecutor General Yuriy Lutsenko claimed, without evidence, that the ambassador had outlined a list of people he should not prosecute when he first met her — only to take back the claim soon after. The Trump administration recalled Yovanovitch two months ahead of schedule.

To Gurak, only one thing is needed to enable recovery from the setback in Ukraine’s defense aspirations: political will for change.

“That was the only thing that always prevented Ukraine from becoming great again,” he said. “The potential is just enormous. There is big demand for our products, they have good quality. Everything else will come if there’s political will — political will for the transformation of the company, the industry, and for law enforcement to do its job properly.”

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