The ARMA drama: Who is going to pay the state UAH 178mln in damages for non-transparent sale of russian potassium and ammonia

There are a huge number of assets in Ukraine linked to the russian federation and the republic of belarus. These assets are being seized by law enforcement as part of criminal proceedings, so they should benefit the state. But the media and the public have expressed concerns that this property is being sold inefficiently.

That is why the Parliament set up an Adhoc Inquest Committee. It addressed several issues that arose around the sale of russian ammonia and potassium after the Prosecutor General's Office transferred these assets to the Asset Recovery and Management Agency (ARMA) under Criminal Proceedings No. 7202200041000003.

Mind attended the AIC meeting on 4 April 2023 and found out about the reasons why, after the sale of the assets, the Odesa Port Plant has not yet been paid UAH 178 million in profit for the storage of ammonia, and dozens of potassium railcars have disappeared without a trace. And the most important thing, who is to blame?

As part of criminal proceedings, the Bureau of Economic Security (BES) seized more than UAH 40 billion of assets belonging to russian and belarusian businessmen over the year of full-scale war. All this property was then transferred to the ARMA to bring profit to the state.

5 April 2023 marks one year since the criminal proceedings on tax evasion on an especially large scale by russian entrepreneurs (Uralkali PJSC and Belaruskali LLC) were registered in the Unified Register of Pre-trial Investigations.

The case summary is as follows: russian entrepreneurs imported ammonia to Ukraine not paying taxes in excess of UAH 200 million. This caused the state to suffer losses. The crime is being investigated under Art. 212 of the Criminal Code "Evasion of taxes, duties (mandatory payments)".

The BES investigates the case. The body's head, Vadym Melnyk, says that russian and belarusian assets are almost always seized under the article on tax evasion. Commenting on the investigation into the potassium and ammonia fraud, he said that "the BES worked efficiently and promptly, and the case is moving towards serving the citizens of the russian federation with charges".

However, the Adhoc Inquest Committee members were not satisfied with this answer.

MPs were also surprised why a relatively simple criminal case of tax evasion was being investigated for a whole year.

"There are 20,000 railcars with goods travelling across Ukraine. We found out where they were and what material assets they had, and inspected them. Seizing the primary documentation is also a painstaking job. We are still examining," explained Anatoliy Pavlenko, Deputy Head of the Department in the Prosecutor General's Office, explaining the length of the investigation.

The court handed over the potassium cars to Ukrzaliznytsia (UZ) for "safe keeping". According to Andriy Miroshnikov, Director of the Commercial Department at UZ, the russian potassium was in 742 cars.

But during the AIC meeting, it turned out that some of the cars had disappeared.

"Reporting. At the Popilnia railway station, 25 cars with potassium were not found, at the Bakhmach station, 32 cars were missing, at the Koziatyn-2 station, 18 cars were not found, and at the Korosten station, 5 more cars were missing. Where have these cars gone?" Yaroslav Zhelezniak asked the audience.

No answer to this question was found during the discussion. A representative of the Prosecutor General's Office said that the office was unaware of these facts, claiming that "we have not received any such reports." Oleksandr Stankov, the PGO's procedural controller in the russian potassium case, said that all the cars were delivered to UZ under transfer and acceptance certificates. Therefore, the responsibility for their safety lies with the carrier.

The ARMA head, Dmytro Zhoravovych, was also clueless, saying that he had not contacted law enforcement about the situation: "A total of 18,000 cars were handed over to ARMA, including those with potassium. Ukrzaliznytsia was given the responsibility to store and use these cars. That is, while ARMA is looking for a manager, Ukrzaliznytsia has the right to use them."

"There will be 'Lynch courts' if these cars were stolen indeed," concluded MP Vadym Ivchenko from the Committee on National Security, Defence and Intelligence. "I would not want us to be unable to punish those who stole or turned a blind eye to the fact that the cars disappeared and the state did not receive any revenue from their sale."

After a heated discussion, the AIC members decided that they would return to the issue of the disappearance of the cars at a separate meeting.

On 13 July 2022, 30,000 tonnes of ammonia were transferred to ARMA. The asset was stored in the warehouses of Odesa Port Plant (OPP) JSC and then sold at auction. After that, a scandal erupted in the media due to the undervaluation of the ammonia sold.

In response to media criticism, ARMA undertook an internal audit. It concluded that the price was justified, "because after the purchase of ammonia at the auction, its value could have increased by 47.75%". That is, according to ARMA's logic, the buyer had to pay not only the cost of the ammonia itself, but also customs duties, VAT and cover the OPP's costs for storage and shipment of the cargo.

"Technical liquid ammonia is stored in isothermal storage facilities, and therefore storage, cooling, and shipment are paid for, which also affects pricing," reads the audit report signed by Oleksiy Tamozhansky, Head of the ARMA Asset Management Department, "Thus, the information about the understatement of the cost of technical liquid ammonia sold by ARMA (...) was not confirmed.

At the same time, the acting Head of the ARMA, Dmytro Zhoravovych, came to the AIC meeting with his own calculation of the Odesa Port Plant's costs for storing ammonia.

"The payment of these costs is necessary as compensation for the losses incurred by the state-owned enterprise for the storage of assets. The buyers (...) will be obliged to pay for the storage of assets, customs duties and VAT," Zhoravovych said in a note handed out to members of the Adhoc Investigation Committee.

In an attempt to prove their point, Zhoravovych and his subordinates insisted that due to the additional costs of storing the assets, the buyer ended up paying the market price rather than a reduced price.

But the AIC members noted that ARMA contradicted itself in these explanations. For example, Oleksiy Tamozhansky, Head of the Asset Management Department of ARMA, wrote in an application for the transfer of assets to the auction organiser Prydniprovye 2021 LLC that "the value of the asset does not (!) include payment of customs duties, as well as payment for the reception, cooling, storage and shipment of assets".

However, during the AIC meeting, it turned out that the four winning bidders did not incur these additional costs. Instead, according to the AIC, the winners quickly resold the ammonia at a much higher price. They also avoided taxation through a series of fraudulent schemes. As a result, the state budget suffered multimillion-dollar losses.

According to trade analysis by the Ministry of Justice, in three ammonia sales transactions, the Odesa Port Plant was to receive UAH 225.9 million for storage and shipment. The head of the plant gives a different figure – UAH 178 million.

"Before the next lot, we informed ARMA about our storage costs," said Kovalsky, acting Head of the OPP. "I don't know if the client was informed publicly. I did not see it. Maybe there were unofficial conversations."

Kovalsky said that he had appealed to the Cabinet of Ministers and the State Property Fund and asked what to do with counterparties who did not want to pay for the storage of goods, considering the price too high. Without waiting for a response, the plant gave the goods away to the buyers, leaving itself with nothing.

And during the AIC meeting, in response to the question "Have you agreed with your counterparties on the amount of compensation of UAH 178 million?" Kovalsky shrugged his shoulders: "No, I haven't."

Dmytro Zhoravovych also stressed that ARMA has no mechanisms to control whether taxes have been paid on the goods sold at the auction.

When asked by the AIC members whether it was true that in order to buy a lot of ammonia at a cheaper price, it was necessary to discuss this issue personally with Rostyslav Shurma, Deputy Head of the Presidential Office, Zhoravovych replied: "This is the first I've heard of it."

Listening to Zhoravovych's explanation, the AIC members did not hold back, saying, "Don't pretend you didn't know about the price of care and custody."

"Your own (!) document says that there is no (!) provision for payments to be made as compensation for the storage of assets. That is, the cost of storage is not mandatory," Zhelezniak said, quoting the documents provided by ARMA to the ASC. "Then in the same document, you write that the cost includes (!) the cost of storage. Then you sold ammonia at a lower price. You are misleading us. The sale took place at a deliberately low price because the price did not include these costs. ARMA and the State Property Fund understood this, but did nothing."

Many questions were also raised about the pricing of potassium. When asked why ARMA sold potassium at a price almost twice as low as the market price, Oleksiy Tamozhansky, Head of ARMA's Asset Management Department, said that "there were questions about the quality of potassium": "ARMA imported potassium in January 2022 without certificates of origin and quality. Therefore, it is impossible to determine its quality characteristics. This affects the value of the asset. It needs to be purified in Ukraine before being sold. And this is an additional cost."

The AIC also asked why ARMA put up for sale very large batches of potassium, rather than breaking it up into smaller lots. After all, there are only a few companies in Ukraine that can afford to buy such a large amount of potassium.

As Tamozhansky explained, "if there were several lots, there would be additional procedures for evaluation and preparation of various packages of documents..."

The official ARMA website does not contain information on which seized assets are currently up for sale. It is also difficult to find the right auction on the two trading platforms with which the agency cooperates – SETAM and Prydniprovye 2021.

Zhelezniak, the head of the Adhoc Investigation Committee, says he spent several hours on his tablet trying to find at least some info on the sale of potassium and ammonia by russia.

"I went to the Prydniprovye 2021 website. I type in the word 'potassium' and find nothing. Then I have to go to another link, and only by changing the security settings on my tablet can I see its content – otherwise I get an 'access error' on the site.

And if I want to find information about the auction on Google and type in 'potassium', I see nothing. By trial and error, I found out that I had to enter the phrase 'potassium chloride 16' to find out that this lot had been sold. But for that I need to know the lot number. Question to ARMA: 'How many buyers do you think knew about these searches? And how does this help to sell russian assets?'

In 2022, ARMA held about 20 auctions through SETAM and Prydniprovye 2021. The platform earns 5% of the lot price for organising the auction, but not exceeding the amount equal to 200 subsistence wages. Prozorro. Sale, with which Dmytro Zhoravovych publicly promised to start cooperation back in August 2022.

"In the middle of the year, we received a letter from ARMA with a proposal to come to the competitive selection," explained Sergiy But, Acting Head of the Board of Prozorro. Sale. "But our statutory activity does not include the functions of storing and evaluating lots. We only ensure the operation of the Prozorro.Sale system."

Sergiy But says that ARMA can still enter assets into the Prozorro.Sale system. And then information about the auction will appear simultaneously on 50 online platforms. But Prozorro.Sale Company cannot enter into an agreement with ARMA on the sale of goods.

However, ARMA requires that such a platform also organise the evaluation of goods, their storage and transportation.

According to Yaroslav Zhelezniak, the National Anti-Corruption Bureau of Ukraine will manage to give a proper account of all the materials collected by the AIC. As far as investigating crimes committed by officials at the head of state body level is the Bureau's jurisdiction.

After this story was published, Dmytro Zhoravovych, the ARMA acting head, contacted Mind and shared his perspective on the procedure for selling ammonia and potassium. He also made an attempt to explain the mechanism of the auction. 

Mind will closely monitor further developments and invites other stakeholders to openly express their views on the pages of our portal.