Special Report: How scams and shakedowns brought Ukraine to its knees

Thu Aug 7, 2014 10:47am EDT
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By Steve Stecklow, Elizabeth Piper and Oleksandr Akymenko

KIEV (Reuters) - Late last year, Ukraine’s consumer protection agency began filing lawsuits against Foxtrot, the country’s largest electronics retailer. By early March, Foxtrot faced at least 231 separate suits that demanded fines totaling more than $150 million.

Many of the suits accused the company of minor violations of Ukraine’s labeling law – such as not placing a "quality seal" on tiny memory cards and wafer-thin batteries inside mobile phones. Foxtrot said it placed the seals on the external packaging, which the law also allows.

Viacheslav Povroznick, Foxtrot’s CEO, said agency officials proposed a deal – pay $1 million in cash and the lawsuits would disappear. "We said no," he said. "It was like a kind of extortion." Today, the company still faces a mountain of litigation.

Six months after a popular uprising toppled President Viktor Yanukovich, Ukraine’s new leaders are fighting wars on two fronts. One struggle is against Russian-backed insurgents in the east. The other is against staggering corruption that top officials say infected every level of government - and continues to this day.

"It is hard to name an agency that was not involved in any of the scams," said Vitaliy Kasko, a deputy prosecutor general who is trying to recover billions of dollars in assets allegedly stolen and stashed overseas. Prosecutors say they believe that Yanukovich and a circle of associates stole vast sums of government money and profited from illicit schemes. Last week, the prosecutor's office detained a deputy head of the central bank on suspicion of involvement in the theft of more than $170 million in state funds.

Corruption has plagued Ukraine since the country gained independence from the Soviet Union in 1991. But under Yanukovich, it grew far worse. The sheer scale of the graft – involving tax evasion, fraudulent value-added tax claims, bribery and extortion – helped set off the chain of events that has embroiled Ukraine in a separatist war.

A Reuters examination of the rampant tax and extortion rackets finds that the toll on the Ukrainian treasury was so great that the state was mortally weakened, leaving it at the mercy of outside powers. Top government officials told Reuters that by the time Yanukovich fled to Russia in February after four years in power, Ukraine was bankrupt. That is why the country sought and took a $17 billion bailout this year from the International Monetary Fund.

Igor Bilous, a former investment banker who now heads Ukraine’s tax agency, said in an interview that the government lost between $6 billion and $9 billion last year through just one scheme - a complex "tax minimization" racket that had the tax office’s blessing.   Continued...

Then Ukrainian President Viktor Yanukovich arrives to sign an EU-mediated peace deal with opposition leaders at the presidential headquarters in Kiev in this February 21, 2014 file photo. REUTERS/Konstantin Chernichkin/Files