Wikileaks (2): Mogilevich and Ukrainian gas

In many ways, Semyon Mogilevich is an atypical Russian organized crime figure. He does not command an army of thugs, does not shake down storefronts or traffic drugs, does not even fit within any of the gangs or networks dominating the Eurasian underworld. Instead, he is first and foremost a service provider, a one-stop shop for laundering and moving money and criminal finance of every kind. However, he also has an interesting role within Russia’s gas industry, and especially exports to Ukraine, something noted, if not explored that deeply, in two new leaked US State Department cables published in the Guardian.

One from October 2008, is relatively general:

Thursday, 30 October 2008, 11:47
C O N F I D E N T I A L KYIV 002173
SIPDIS
DEPT FOR EUR/UMB,
EEB/ESC/IEC FOR SGALLOGLY AND LWRIGHT
DOE FOR LEKIMOFF, CCALIENDO, RBOUDREAU
DOE FOR NNSA: NCARLSON, CHUNSAKER, TKOONTZ
USDOC FOR 4231/ITA/OEENIS/NISD/CLUCYK
EO 12958 DECL: 10/30/2018
TAGS EINVENRGEPETPINRPRELUP
SUBJECT: UKRAINE: TOO EARLY TO WRITE OFF ROSUKRENERGO (RUE)
IN 2009
Classified By: Economic Counselor Edward Kaska for reasons 1.4 (b), (d)

1. (C) Summary. Prime Minister Yuliya Tymoshenko has repeatedly promised to remove all intermediaries in the gas trade with Russia, but Russia appears to be making direct gas dealings contingent upon obligations that Ukraine may not be able to fulfill. Tymoshenko and Russian PM Putin have signed a memorandum calling for direct gas trade, and the heads of state-owned oil and gas company Naftohaz Ukrainy and Russian energy giant Gazprom followed up with an agreement specifically removing shady intermediary RosUkrEnergo (RUE) from gas dealings between Russia and Ukraine. Ukraine must first pay off significant debts to Gazprom, however, which could be a tall order given the country’s current balance of payments crisis and its poor track record of paying its gas debts. The high level meetings did set some parameters for the 2009 gas trade, but no final agreement on price has been signed, and GOU sources tell us that Moscow may bide its time to see if snap parliamentary elections result in a new government more amenable to Russia. Hence, it is still too early to write off RUE, or the concept of shady intermediaries as a whole. Some commentators are speculating that the sides may even agree to replace RUE with another, recently established company called KazUkrEnergo. End summary.

Conditions Must be Met before RUE Removed

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2. (C) Gas intermediary RosUkrEnergo (RUE), could still play a role in Ukraine’s energy sector next year, despite the gas memorandum signed on October 2 by Ukrainian Prime Minister Yuliya Tymoshenko and Russian Prime Minister Vladimir Putin that calls for direct gas relations between Ukraine and Russia. Tymoshenko repeatedly has pledged to eliminate RUE and other gas intermediaries from the gas trade between the two countries. Gazprom owns 50 percent of RUE. Ukrainian businessmen Dmitry Firtash and Ivan Fursin nominally control 45 and 5 percent stakes, respectively, but Ukrainian media several times have reported that the circle of true beneficiaries of RUE is wider and includes Semyon Mogilevich, a Russian organized crime boss wanted by the FBI and currently in custody in Russia.

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How far is this a symptom of a wider criminalisation of the Russian and Ukrainian gas industries, how far the use of ‘Seva’ as a handy front man for government interests eager to make some money from the industry, and how far does it reflect Mogilevich’s apparent genius for making money as a middleman? More illuminating is the account of Ukrainian oligarch Dmytro Firtash, from the end of 2008:

Wednesday, 10 December 2008, 07:52
S E C R E T KYIV 002414
SIPDIS
DEPT FOR EUR/UMB
EEB/ESC/IEC FOR SGALLOGLY AND LWRIGHT
DOE FOR LEKIMOFF, CCALIENDO, RBOUDREAU
USDOC FOR 4231/ITA/OEENIS/NISD/CLUCYK
EO 12958 DECL: 12/10/2018
TAGS EINVENRGEPETPINRPREL, POL, UP
SUBJECT: UKRAINE: FIRTASH MAKES HIS CASE TO THE USG
REF: A. KYIV 2383 B. KYIV 2294
Classified By: Ambassador for reasons 1.4 (b) and (d)

1. (S) Summary and Comment: Controversial Ukrainian oligarch Dmytro Firtash, best known as co-owner of gas intermediary RosUkrEnergo (RUE), called upon the Ambassador on December 8. Firtash did not explicitly state why he requested the meeting, nor did he ask the USG for anything, but he spoke at length about his business and politics in a visible effort to improve his image with the USG. The soft-spoken billionaire, arguably one of Ukraine’s most powerful people, expressed strong support for President Yushchenko and equally strong contempt for Prime Minister Tymoshenko. He claimed that he had thwarted a coalition between BYuT and the Party of Regions (PoR) at the last minute, and was now working to build a coalition between Yushchenko’s supporters and the PoR. In a lengthy monolog, Firtash described his evolution as a businessman from his beginnings as a food trader to the creation of RUE. Firtash claimed that Tymoshenko was working with Russia to eliminate RUE, and cited examples meant to prove that she was making political concessions to Russia to gain its support to do so. He acknowledged ties to Russian organized crime figure Seymon Mogilevich, stating he needed Mogilevich’s approval to get into business in the first place. He was adamant that he had not committed a single crime when building his business empire, and argued that outsiders still failed to understand the period of lawlessness that reigned in Ukraine after the collapse of the Soviet Union. He said he cared truly about Ukraine, and saw Russian business interests overtaking the economy as the biggest threat to the country’s security. Comment: Firtash’s arguments and allegations are clearly self-interested; he sees Tymoshenko as a clear threat to his business. End summary and comment.

<snip>

Ties to Russian Organized Crime

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18. (S) The Ambassador asked Firtash to address his alleged ties to Russian organized crime bosses like Semyon Mogilievich. Firtash answered that many Westerners do not understand what Ukraine was like after the break up of the Soviet Union, adding that when a government cannot rule effectively, the country is ruled by “the laws of the streets.” He noted that it was impossible to approach a government official for any reason without also meeting with an organized crime member at the same time. Firtash acknowledged that he needed, and received, permission from Mogilievich when he established various businesses, but he denied any close relationship to him.

19. (S) Firtash’s bottom line was that he did not deny having links to those associated with organized crime. Instead, he argued that he was forced into dealing with organized crime members including Mogilevich or he would never have been able to build a business. If he needed a permit from the government, for example, he would invariably need permission from the appropriate “businessman” who worked with the government official who issued that particular permit. He also claimed that although he knows several businessmen who are linked to organized crime, including members of the Solntsevo Brotherhood, he was not implicated in their alleged illegal dealings. He maintained that the era of the “law of the street” had passed and businesses could now be run legitimately in Ukraine. He underscored the importance of unifying Ukraine politically in order to reduce the influence of Russian organized crime bosses on Ukrainian businesses.

TAYLOR

So Firtash would like to present himself as, in effect, a victim of Mogilevich’s, someone forced to pay off a powerful gatekeeper or else be locked out of the business. Another cable, though, gives a different take:

Friday, 21 November 2008, 14:48
C O N F I D E N T I A L KYIV 002294
SENSITIVE
SIPDIS
DEPT FOR EUR, EUR/UMB, EEB/OMA
TREASURY PASS TO TTORGERSON
EO 12958 DECL: 11/21/2018
TAGS EFIN, EREL, ETRDPGOVPRELXH“>XHUP
SUBJECT: UKRAINE: FIRTASH USES CRISIS TO EXPAND INTO BANKING
REF: A. A) KYIV 02080 B. B) KYIV 02207
Classified By: Acting Economic Counselor William Klein for reasons 1.4 (b) and (d)

1. (C) Summary. Dmitry Firtash, one of Ukraine’s most wealthy and notorious oligarchs, plans to buy a controlling stake in Nadra Bank, Ukraine’s seventh largest bank. The acquisition of Nadra, which will join Firtash’s international holding company (Group DF) when the deal is final, would be Firtash’s first foray into Ukraine’s banking sector. The purchase of Nadra Bank continues a recent trend on Firtash’s part to diversify his asset base beyond Ukraine’s politically risky energy sector. He may also hope to use Nadra to service Group DF subsidiaries, or he may simply see the bank as a financial investment, bought on the cheap in a time of crisis, that can be sold once economic conditions improve. Before establishing himself as a billionaire gas trader in the late 1990s, Firtash managed a failing food processing company. He later broke into the gas trade and established himself as an intermediary through connections to key Ukrainian officials and reportedly to Russian organized crime figure Semyon Mogilevich. As co-owner of gas intermediary RosUkrEnergo (RUE), Firtash is widely believed to be serving as a front man for far broader interests. In the case of Nadra, Firtash is sufficiently cash-rich to finance the purchase on his own, but the suspicion remains that in his major business dealings he remains at least politically indebted to the forces that helped him rise so quickly. End Summary.

<snip>

Firtash’s Ascent, the Mogilevich Connection

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7. (C) The Ukrainian media have reported widely on how Firtash got his start in energy through a network of personal connections to some of the biggest players in Ukraine’s gas sector. These included Ihor Bakay, founder and former Chairman of Naftohaz Ukrainy, Yuriy Boyko, the Party of Regions deputy and former Fuel and Energy Minister, and Oleksandr Volkov, a former Prime Minister and Kuchma advisor. Before entering the gas trade business Firtash with his spouse reportedly owned a canned food company called KMIL. By the end of the 1990s KMIL was in deep financial trouble. Firtash subsequently broke into the gas trade business as “food for gas” barter schemes between Ukraine and Turkmenistan increased when Ukraine did not have sufficient foreign exchange to pay for its gas imports. Firtash’s firms delivered food products to Central Asian suppliers and received gas in return. They subsequently sold the gas on Ukraine’s domestic market for domestic currency, or through other, often complex barter schemes.

8. (SBU) This barter business established Firtash as a gas trader, and the subsequent growth in the business brought to light his reported ties with Mogilevich. The two have been linked through ostensible joint holdings in off-shore vehicles, and through mutual personal relationships. In May 2000, for example, Firtash’s KMIL received a license to sell natural gas at unregulated prices. A company called Highrock Holding Ltd was registered in Cyprus in 2001 to facilitate this business. Firtash and his spouse together reportedly owned 33 percent of Highrock. About 34 percent of Highrock was owned by a firm called Agatheas Trading Ltd. Semyon Mogilevich’s ex-wife, Galina Telesh, reportedly was the director of Agatheas Trading from 2001 to 2003. Firtash in 2003 became the director of Agatheas Trading. In addition, Firtash and Mogilevich also have shared the same lawyer, Zeev Gordon, also known as Vladimir Averbukh, to represent their business and personal interests. Moreover, Ukrainian media report that former Hungarian Minister of Culture Andras Knopp XXXXXXXXXXXX became business partners with the Firtashs when Dmitry Firtash periodically resided in Germany during the 1990s. Knopp reportedly is the managing director of EuralTransGas.

<snip>

I think it is important to stress that what may be true of Semyon Mogilevich is not necessarily true of all Russian gangsters. Although arrested (perhaps by mistake and probably soon to be released), Mogilevich is uniquely well-connected and in the unusual situation of being useful to people throughout the underworld, from corrupt politicians to outright mobsters. But these cables do help bring to life the degree to which even a strategic Russian industry — and Gazprom is the next best thing to a ‘ministry of gas’, for all the pretence of being a private company — can be thoroughly penetrated by corruption and criminality.

More to the point, there is a dynamic and mutually-beneficial relationship between the players. Firtash needed Seva; Seva needed him; they both needed the krysha, the ‘roof’ or protection, of senior government figures and interests. None of these were without power or agency, no one was forced into their situation. It is something of a hobby-horse of mine, but this illustrates the intellectual paucity of formulations like ‘the gas industry is controlled by OC’ or ‘the Russian state controls OC’. The reality is an anarchic marketplace in which a range of entrepreneurs deploy a range of resources, from money and muscle to access and legitimacy, in the pursuit of power and profit.

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