The National Resource Inquest Committee (AIC) that has been investigating the state of affairs in the forestry sector for six months, submitted an interim report on the results of its activities. The 27-page document was published on the Verkhovna Rada's website on 19 April. It documents large-scale violations, which, however, are hardly shocking. In six months, the AIC, consisting of 11 MPs, found that illegal logging, downgrading of timber and illegal exports exist in Ukraine's forestry sector.
All these sad problems had existed for decades and were partly built into the industry's architecture from the very beginning. The reason is that the legislator – consciously or not – has enshrined duplication of functions, conflict of competence and economic cannibalism in forestry.
The work of the AIC coincided with the practical implementation of the next reform in the forestry sector. Under this reform, the assets of forestry enterprises are to be transferred to the Forests of Ukraine holding, while the regulator, the State Forest Resources Agency of Ukraine, retains only a bureaucratic function. This factor also influenced and even determined the work of the AIC.
Mind has been looking into why there is such a great interest in the forestry sector and resource industries in general during the war, and why serious facts can turn out to be meaningless in form.
Disclaimer. The editors would like to clarify that they do not question the need for transformation in the forestry sector and assume that the accusations of abuse within it are fair. However, the processes that have been observed in recent months around the country's forestry sector can be classified as a 'two peas in a pod' story, where there are no positive characters. We, of course, reject the idea that there is a banal struggle for cashflows.
What does the Ukrainian forestry industry look like today? Forests account for 15% of Ukraine's territory. Before the escalation of 24.02.22, the figure was 17%.
The forestry industry had been decentralised even before it became mainstream. Real control over forest management was carried out locally, and not always by legal means. The head of a forestry enterprise is traditionally one of the most influential people in the region, along with the prosecutor and the head of the rayon administration. At the same time, Kyiv officials were too far away and changed too often to be taken seriously.
On 7 September 2022, the Cabinet of Ministers adopted a Resolution "Some Issues of Reforming the Forestry Management", which came into force on 10 September. It established the State Specialised Economic Enterprise "Forests of Ukraine", the legal successor to the property, rights, and obligations of specialised state forestry enterprises subordinated to the State Forest Resources Agency (SFRA).
There are 158 such forestry enterprises. In the course of the reform process, they acquired the status of branches, mostly retaining the same staff and management. In this way, local subjectivity was reduced and management of economic activities was centralised, being focused on the State Enterprise "Forests of Ukraine".
There are 158 such forestry enterprises. In the course of the reform process, they acquired the status of branches, mostly retaining the same staff and management. In this way, local subjectivity was reduced and management of economic activities was centralised, being focused on the State Enterprise "Forests of Ukraine".
At the same time, the industry still retains dual power, as the regional departments of the SFRA are responsible for implementing state policy in the industry and controlling forest users. The central executive body, the SFRA, acts as an arbiter between these verticals.
Yuriy Bolokhovets, who currently heads the SFRA and belongs to the orbit of Rostyslav Shurma, the Deputy Head of the Presidential Office, is to be appointed as the Director-General of the State Enterprise "Forests of Ukraine".
What is the primary goal of the reform? The declared goal is to implement long-overdue changes in the forestry sector, eliminate the corruption component, and clean up economic activity.
The assumed goal is the centralisation of management and control to concentrate the corrupt rent.
The projected one – theoretically, the assignment of assets to a state-owned enterprise makes it possible to transfer some of them for privatiіation through the State Property Fund. This version is well received by the average person, especially if it is reinforced by the promise of deforestation due to the transfer of forests to private hands.
The draft Law of Ukraine "On Peculiarities of Managing State-Owned Objects in the Forestry Sector and the Procedure for the Establishment and Operation of the Specialised State Forestry Joint-Stock Company ‘Forests of Ukraine’", posted on the State Forest Resources Agency’s website, clearly states that 100% of shares of the Joint-Stock Company "Forests of Ukraine" belong to the state. The company's shares are not subject to privatisation.
When was the National Resource Adhoc Inquest Committee formed? The Verkhovna Rada adopted Resolution No. 2686-IX on 18 October 2022. The AIC’s full name reads as For Investigation of Possible Facts of Ineffective Activities of the State Forest Resources Agency of Ukraine, the State Agency of Water Resources of Ukraine and the State Environmental Inspectorate of Ukraine, their regional offices, enterprises, institutions, and organisations under their management, which could lead to a decrease in revenues to the state and local budgets.
MP from the Servant of the People party Mykola Tyshchenko was appointed as the head of the AIC.
So what exactly did the AIC find? The report contains many impressive figures. So impressive that one can't help but question the artificial way of their formation. However:
– every second logging operation is not controlled by government agencies, i.e. is carried out illegally. According to various expert groups, the risk that the technological process of logging is not followed is between 39-60%;
– corruption is flourishing at the level of the SFRA, the State Enterprise "Forests of Ukraine" and regional offices;
– a comparison of the financial results of the State Enterprise “Radomyshl Forestry-Hunting Farm” and those of a similar privately owned enterprise has formed a clear vision of the signs of systemic criminal schemes in the industry:
– The industry's potential is almost UAH 900 billion per year. According to the report, "the average volume of logging according to official statistics alone is 20 million cubic metres per year, of which 9.8 million cubic metres are processed by state forestry enterprises and sold. Selling 9.8 million cubic metres at the market price would bring UAH 495 billion to the budget. And since, according to experts, there is a hidden surplus of another 15 million cubic metres at the state level. The cost of processing and selling it at the market price is estimated at another UAH 386 billion."
However, instead of UAH 881 billion last year, the State Forest Resources Agency of Ukraine received UAH 23.3 billion in revenue from the sale of timber products, which is 40 times less.
The full text of the report is available here.
How were these findings received? Foremost, it's fair to say that Mykola Tyshchenko is a brave man. Given the well-founded rumours about the criminal nature of the forestry industry, there would have been few people willing to walk around forestry enterprises with an inspection. Perhaps he was simply unaware of the level of danger, as he is unlikely to have a deep knowledge of forestry.
However, the ambiguous image of this very lawmaker does not contribute to raising the status of any work he does, as commentators regularly point out.
In addition, the AIC chairman’s teenager-style communication is difficult to compare with a serious inspection of one of the most complex sectors of the national economy.
"For 30 years of independence, no lawmaker has ever set foot here…", "Trust and delegate powers – this principle was also in my business, in MasterChef", "A mess, all the leftovers rot, and then into the groundwater!!! They poison my people. No, it will not happen, the President does not want it to happen" (the author's spelling and punctuation were preserved – Mind). Constant references to the head of state and dramatic stories with photos of how he personally chased illegal loggers "7 km on foot, 5 of which were on a steep hill, and even in the rain" are read like a comic book, and even for a loyal reader, they are difficult to take seriously.
Who is to blame, according to the AIC members? As Mykola Tyshchenko posted on his Facebook page, the Head of the SFRA, Yuriy Bolokhovets, who is awaiting transfer to the State Enterprise "Forests of Ukraine", and his supervisor in the Presidential Office, Rostyslav Shurma, who failed President Zelensky's forestry reform, are responsible for the systemic problems of the industry.
Thus, did they close in on themselves? 'They' are not all the same, so no, they did not.
Mykola Tyshchenko also has people in the Presidential Office who are not unfamiliar with him – his child’s godfather Andriy Yermak. And he may have a suitable candidate for the post of head of the forest monopoly.
What is the assessment of the illegal sector in forestry? According to the data provided by the AIC members, illegal deforestation is equivalent to $780 million a year. Mykola Tyshchenko voiced a clearly unrealistic figure on his Facebook page – $40 billion a year, which goes to the hands of the 'forest mafia'.
Another estimate of losses for the economy is $300 million.
What is this presidential forestry reform, which has been failed by the State Forest Resources Agency, according to the AIC? It does not exist as a coherent concept, but only as isolated statements designed to have an immediate effect. These include the "billion trees" and the "Green Country" initiative.
Referring to these statements, many projects can be implemented, including personal enrichment.
How do foresters themselves comment on the findings of the AIC? The SFRA has provided detailed comments on the findings of the AIC. And it is a masterpiece of intellectual humiliation.
As for the form of the inspection: the work of the AIC "was accompanied by unethical behaviour of some of its members towards forestry workers. The foresters filed numerous complaints about insults, humiliation of human dignity, threats, intimidation, and illegal demands from some members of the commission."
It is easy to believe, given the way Mykola Tyshchenko speaks.
As for the essence of the audit findings, the State Forest Resources Agency considers them "groundless, unconfirmed and unreliable". One of the main results of the interim report of the AIC is the calculation of the so-called annual revenue potential of the industry, the same UAH 900 billion. The conclusion is based on a comparison of the income of the State Enterprise “Radomyshl Forestry-Hunting Farm” branch from the processing of timber products with the income of XXX LLC and scaled to the industry.
The AIC alleges that Radomyshl Forestry-Hunting Enterprise sells timber for export at a price three times lower than the market price, and secondary wood products (waste) at a price 20 times lower than the market price.
However, it does not sell timber for export at all. All products – processed and unprocessed timber – are sold through the Ukrainian stock exchange at the market price.
"It follows from the calculation provided by the AIC that Radomyshl Forestry-Hunting Enterprise receives almost 20 times more money for processing a cube of wood than a private processor. On what grounds does the AIC accuse the branch of the State Enterprise ‘Forests of Ukraine’ of inefficiency and even extend this accusation to the entire industry?" the State Forestry Agency said in a comment.
The exemplary and efficient XXX LLC mentioned in the report operates in the Dnipropetrovsk Oblast, and is engaged in construction and installation works (in 2022, the company suffered UAH 35,300 in losses).
The figures for wood processing also do not coincide with reality. The annual volume of processing by the branches of the State Enterprise "Forests of Ukraine" is not 9.8 million cubic metres, as stated by the AIC, but less than a million cubic metres. For example, in the Q1 2023, the State Enterprise "Forests of Ukraine" sold 106,000 cubic metres of timber and received UAH 607 million. The company's branches sell 100% of the processed timber through stock exchange auctions.
"It's hard to comment on the report's final conclusions. It is beyond common sense. What and by what did the AIC's analysts multiply to get almost UAH 900 billion in revenue? Where did the 15 million cubic metres of additional timber come from? Can the AIC members explain how it is possible to hide about a million railway carriages with timber? It's hard to call this manipulation or fake. It's crazy," the response reads.
The full text of the commentary is available here.
What to expect next? As long as the Head of the State Enterprise "Forests of Ukraine" is not appointed, the cabinet wars for this chair will continue. The AIC can work for a very long time, 'checking' or trying to take control of any environmental resources.
However, even if we put aside the personnel goal, the inspections are not in vain, as they allow us to partially reveal the problems of the industry and, albeit optionally, solve them.