Analyzing Corrosive Investments into Ukraine’s Economy as an Element of Hybrid Warfare

IDENTIFYING AND ANALYZING CORROSIVE INVESTMENTS INTO UKRAINE’S ECONOMY AS AN ELEMENT OF HYBRID WARFARE

Kyiv February 2023

Non-Governmental Organization Center for Analytical Studies and Countering Hybrid Threats

IDENTIFYING AND ANALYZING CORROSIVE INVESTMENTS INTO UKRAINE’S ECONOMY AS AN ELEMENT OF HYBRID WARFARE Analytical Report

Kyiv February 2023

IDENTIFYING AND ANALYZING CORROSIVE INVESTMENTS INTO UKRAINIAN ECONOMY AS AN ELEMENT OF THE HYBRID WARFARE

Edited by: Serhii Savchenko (Center for Analytical Studies and Countering Hybrid Threats) Project Expert Group: Anna Borshchevska Ihor Guskov, Ph.D., Oleh Hatyan

The publication is devoted to the analysis and methods of identifying corrosive investments of the aggressor country in the economy of Ukraine, as one of the methods of conducting a hybrid war against Ukraine. Given that the economic sphere is one of the “theaters of combat” of hybrid warfare, the publication is a continuation of the previous work of the Center for Analytical Studies and Countering Hybrid Threats regarding Russia’s use of hybrid aggression against Ukraine and the West in the political and informational spheres.

The publication is intended for a wide range of experts, journalists, and scientists who are focused on studying the Russian aggression against Ukraine and subversive activities of the Russian Federation against the West.

This publication was created with the support of the Center for International Private Enterprise (CIPE). The content of this publication represents the opinions, research and analysis of the authors and does not necessarily reflect those of CIPE or any of its employees. The information included in this publication is presented AS IS as of the date of publication.

CONTENT EXECUTIVE SUMMARY ......................................................................................................................................................... 6

INTRODUCTION ...................................................................................................................................................................... 8

CHAPTER 1. ECONOMIC WARFARE AND CORROSIVE CAPITAL AS A SEPARATE THEATER OF COMBAT OPERATIONS IN HYBRID WAR........................................................................................................................................ 11 1.1. Correlation of types of economic confrontation and hybrid war .................................................................... 11 1.2. Ways of conducting economic war ........................................................................................................................ 12 1.3. Corrosive investments as one of the methods of economic warfare ............................................................. 14 1.4. Subjects of corrosive investments .......................................................................................................................... 15 1.5. Negative consequences of corrosive investments ............................................................................................. 16 Conclusions to Chapter 1 .................................................................................................................................................. 17

CHAPTER 2. OBJECTS OF CORROSIVE INVESTMENTS ........................................................................................... 18 2.1. Strategic economic sectors ...................................................................................................................................... 18 2.2. Enterprises with strategic status for the economy and security of Ukraine: Quantitative indicators .... 19 2.3. Specific features of regulatory and legal support in development of the List of Strategic Enterprises of Ukraine ................................................................................................................................................................................... 22 Conclusions to Chapter 2 .................................................................................................................................................. 23

CHAPTER 3. CORROSIVE IMPACTS OF THE RUSSIAN FEDERATION ON UKRAINE’S TITANIUM INDUSTRY .................................................................................................................................................................................................... 24 3.1. Gradual establishment of control over the titanium industry of Ukraine before the start of open phase of a hybrid war (2001–2014) ............................................................................................................................................ 24 3.2. The role of the Ukrainian titanium industry for the RF ..................................................................................... 26 3.3. Ukraine's actions to eliminate hybrid threats of the RF in the titanium industry, and the transformation in the hybrid warfare methods of the RF after 2014 .................................................................................................. 27 Conclusions to Chapter 3 .................................................................................................................................................. 29

CHAPTER 4. CORROSIVE EFFECT OF THE RUSSIAN FEDERATION ON THE OIL REFINING INDUSTRY OF UKRAINE ................................................................................................................................................................................. 31 4.1. Soviet heritage that depended exclusively on Russian raw materials ............................................................ 31 4.2. Elements of negative dynamics for the strategic oil refining industry in Ukraine, and signs of hybrid impact from the Russian Federation ............................................................................................................................... 33 4.3. Stage 1 – Use of dumping by the Russian Federation to destroy the oil industry of Ukraine ................. 36 4.4. Stage 2 – Shutdown of refineries controlled by the Russian Federation: Corrosive investments .......... 37

4.5. Stage 3 - Stopping the oil supply ............................................................................................................................ 38 4.6. Stage 4 – Impossibility of diversification of supply by oil pipelines from other countries ........................ 38 Conclusions to Chapter 4 .................................................................................................................................................. 39

CHAPTER 5. CORROSIVE IMPACT OF THE RF ON UKRAINIAN STRATEGIC ENTERPRISES IN THE PULP & PAPER INDUSTRY ................................................................................................................................................................ 41 5.1. Company history, production volume and financial condition before bankruptcy ..................................... 41 5.2. Owners of Dnipropetrovsk Paper Factory JSC before bankruptcy ................................................................ 42 5.3. “Toxic” foreign assets of O. Tsarev ........................................................................................................................ 43 5.4. “Preparation” of Dnipropetrovsk Paper Factory JSC for bankruptcy............................................................. 45 5.5. Start of bankruptcy .................................................................................................................................................... 45 5.6. Consolidation of bankruptcy with the help of a Russian bank......................................................................... 45 5.7. Consequences of the bankruptcy of an enterprise that was strategic for economy of Ukraine ............. 46 Conclusions to Chapter 5 .................................................................................................................................................. 47

CHAPTER 6. CORROSIVE IMPACT OF THE RF ON A UKRAINIAN STRATEGIC ENTERPRISE OF THE ENERGY INDUSTRY ............................................................................................................................................................. 48 6.1. Brief background description of the enterprise .................................................................................................. 48 6.2. Formal liquidation of the enterprise by Volodymyr Yeliseev ........................................................................... 49 6.3. Avoiding raids of the masters of Donbass ............................................................................................................ 51 6.4. Using offshore entities that share an address and management structure with other companies serving Russian oligarchs .................................................................................................................................................................. 51 6.5. SRPA Impulse PJSC cooperation with RF affiliated structures ........................................................................ 53 6.6. Recruiting engineering personnel from the RF .................................................................................................... 54 Conclusions to Chapter 6 .................................................................................................................................................. 55

GENERAL CONCLUSIONS .................................................................................................................................................. 56

ATTACHMENT 1. .................................................................................................................................................................. 59

EXECUTIVE SUMMARY Hybrid warfare is a socio-political phenomenon, in which the achievement of the goal of aggression is carried out by conducting activities in the political, economic, and informational spheres, and military actions have a limited, auxiliary character. The war is conducted in the form of operations based on the strategy developed by the aggressor country, and therefore is not spontaneous but planned. This is hidden from the victim for as long as possible.

Economic warfare is a special theater in which the aggressor tries to inflict fatal damage on the economy of the victim country, using all available tools as much as possible. There are two ways of waging economic warfare: “collision” with the victim's economy and “penetration” into it. Within these ways, various methods can be applied, some of which become systems during the project.

“Collision” implies measures which are aimed at weakening the economy of the victim country without establishing control over its enterprises. Measures are aimed at stopping or complicating the flow of goods and technologies from the victim country to the aggressor country, or in the opposite direction.

“Penetration” into an economy implies establishing ownership or control of its enterprises, and corrosive capital is the most insidious method. It involves direct or indirect investments in enterprises in order to harm a victim country’s economy and national interests, and sometimes to the benefit of the aggressor's own economy. This ultimately has negative consequences for the victim country. Ukrainian exports of raw titanium, for example, are controlled by Russia, providing the aggressor material needed to produce weapons and military equipment used in an open war against Ukraine.

In other words, corrosive investments are investments in an economy that pursue not economic, but political goals, including destroying or subjugating the victimized state.

At first sight, the targets of corrosive investments are particular enterprises. But wider goals include destroying certain sectors of the economy and achieving political goals. The real goals of an aggressor become clear at the final stage of a specific operation, when preventing destructive consequences is difficult, and in certain cases, impossible.

In the 30 years since Ukraine's independence, out of more than 1,500 strategic enterprises about 42% have been liquidated or are in bankruptcy. The most vulnerable areas include manufacturing (in which about 50% of active companies have been liquidated), mining industry and quarry development (about 47%) and scientific and technical activities (about 35%).

Amid the presence of internal factors, such as unprofitability and corruption amongst domestic elites, research reveals the corrosive influence of the Russian Federation on both particular enterprises and entire industries, which were either destroyed or taken under the control of the aggressor.

From 2001 to 2014, the extraction and enrichment of titanium in Ukraine was actually under the monopoly control of a pro-Russian oligarch and the output was used to satisfy the needs of the Russian Federation. Even after the first phase of Russia's open invasion of Ukraine in 2014, when the state returned part of its production facilities, the aggressor improved its methods of influence, which allowed it to maintain covert control over the industry.

The hybrid influence of the Russian Federation in the oil refining industry led to just one of six oil refining enterprises able to function as of 2014, and it was unable to source crude oil from the Russian Federation. The industry was destroyed in four stages: inhibition of Ukrainian production of raw materials by dumping exported versions at low prices; stoppage of oil refining at enterprises, over which control was previously established by the Russian Federation; stopping the pumping of raw materials to other Ukrainian oil refineries; and countering the diversification of oil supplies to Ukraine from other countries.

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The liquidation by a pro-Russian politician of the only producer of offset paper in Ukraine at that time caused not only the increase of Ukraine's dependence on Russian imports of this product, but also obstacles in the work of Ukrainian publishing houses. At the same time, conditions were created for an increase in the flow of Russian printed materials, which contributed to a negative influence on Ukrainian society.

If the destruction of a Ukrainian enterprise can cause harm to the victimized country, Russia uses the method of establishing hidden control over this enterprise through the owners or top management of the enterprise (the research provides an example of a strategic enterprise in the energy industry).

The conducted research revealed that the main method of Russian influence on a victim’s economy, corrosive investments, is used in combination with other methods, such as penetration into the top management of enterprises without obtaining corporate rights, the termination of supply of strategic raw materials, or damage to infrastructure.

Based on the research materials, the project team provided a number of recommendations to the authorities regarding the timely detection of hidden corrosive investments in the economy of Ukraine useful to the Russian Federation, and the leveling of their destructive influence, and the improvement of state regulation and protection of strategic enterprises.

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INTRODUCTION In the modern global world, we observe a constant struggle between states, which, in our opinion, is conducted in four main domains – political, economic, information, and military.

The struggle is ongoing, even in when conditions are peaceful. It is based on and limited by the framework of laws and treaties. In the civilized world, ideally, it takes the form of a competition. From time to time, conflicts of interest aggravate the relationship and this struggle between the subjects can develop into a more acute phase, in which we observe outbreaks of economic, diplomatic and information wars or conflicts. But all of them take place within the framework of compliance with international treaties, rules and morality.

Contradictions are resolved at the level of international law with involvement of international institutions.

Learning the bitter lessons of large-scale bloodshed, humanity has developed mechanisms for resolving conflict.

Those mechanisms are complex and multifaceted, covering the entire range of possible conflicts from conflicts between states to conflicts between the state and an individual. They combine both the legislative base formed on the principles of international law and the organizational component – from the UN to international judicial bodies.

Such struggle turns into a war in conditions where a party to the conflict of interests is rejecting the existing norms of international law, moral restrictions and legal conflict resolution methods. At the same time, if the military solution, the use of armed forces, is chosen as the main tool for resolving conflict, war is the result, in its classical sense. But if the goal of aggression is achieved through complex measures in the political, economic and informational domains, and military actions are of a limited and auxiliary nature, then we are dealing with a socio-political phenomenon called hybrid warfare.

The above-mentioned measures in these areas are carried out by the states in the form of operations which have a planned nature and final goals that are consistent with the main goal of the aggressor state – destruction or subjugation of the victim country. Therefore, project analysts define these areas as operational lines.

These operational lines can be considered as separate “theaters of combat” of hybrid warfare. Often it is impossible to single out the one most frequently or regularly used. Under certain circumstances of interstate relations, the enemy can use any of the operational lines as a priority. On the one hand, operational lines are run comprehensively and complement each other, on the other hand, each of them has its own methods of fighting against the victim country.

The economic operational line is no exception. Here, the aggressor state uses a special type of economic “weapon”: “corrosive investments” to harm the economy of the victim country and sometimes also for the benefit of its own economy.

The purposes of this project were to investigate the methods, procedures and negative consequences of the corrosive effect of aggressor countries’ investments in the national economies of victim countries; to develop a methodology for identifying and analyzing potentially corrosive investments; and to develop proposals for improving the performance of state bodies countering the hybrid operations of the aggressor country.

This research included the study of specific examples of corrosive influence on the economy of Ukraine, a victim country, inflicted by the Russian Federation as the aggressor country. It also included the undisguised signs of the hybrid influence that became recognizable in Ukraine since 2004 and perhaps earlier.

Russia's open military invasion of Ukraine, which took place on February 24, 2022 (in fact, simultaneously with the start of this project), was clearly based on its past results in waging a long-term hybrid war against Ukraine.

To a certain extent, it illustrated the direction of the strategy of aggressive hybrid influence on the economy of Ukraine in the pre-war period.

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The processes of destruction and seizure of strategic objects of the Ukrainian economy were completed in the course of open wide-scale aggression.

The economic warfare was considered one of the main levers for achieving victory.

For example, at the initial stage of the open invasion, the Chernobyl and Zaporizhzhya nuclear power plants were seized.

The nature of the aggressor's actions indicates that the South Ukrainian nuclear plant was also one more potential target. The aggressor's troops advanced purposefully in this direction, wedged 250 km deep into the territory of Ukraine and were stopped by Ukrainian defense forces in the neighborhood of Voznesensk in Mykolaiv oblast only 30 km away from the plant.

Seizing and taking control of nuclear power plants provided an opportunity to decisively influence Ukraine's energy system and use it to stop resistance of the Ukrainian state to the aggressor.

As Moscow realized the failure of its planned blitzkrieg and the inability to defeat Ukraine quickly, attacks on strategic industrial enterprises began.

According to the Center for Economic Strategy, beginning in the first month after the onset of open aggression, Ukraine's economy suffered catastrophic losses.

Data collected by the Center for Economic Strategy confirm the extent of the damage to Ukraine’s economy within the first month of the attacks. Exports in March 2022 decreased by 50% as compared to February, to $2.7 billion. Imports fell by 30%, to $1.8 billion. Exports of metals stopped almost entirely, while that of agricultural products decreased fourfold. This in large part because Russia moved to block export routes out of the country. Russia imposed a blockade on Ukrainian ports on the Black Sea, shutting down maritime shipping, which had transported 62% of exports by revenue in 2021. Ground methods such as rail (23% of exports) and road (12%) were also curtailed.

More than half of Ukrainian companies have stopped or suspended their activities: 57% according to the European Business Association, or 59% according to the Kyiv School of Economics (KSE) and a “Gradus” research company survey.

Damages from destruction as of the beginning of April 2022 had reached $80 billion, as assessed by the consortium of the KSE Institute, the Center of Economy Studies, the Anti-Corruption Center, the Institute of Analytics and Advocacy, Transparency International Ukraine and ProZorro.Sale. These are losses of transport, infrastructure, and housing.

About a hundred enterprises were damaged or destroyed, with losses valued at $6.7 billion. The 20 most impacted are Illich Steel & Iron Works, Azovstal, Ukrenergomashyny, Antonov’s, Avdiivkoksokhim, Odesa Refinery, Linik, Malyshev Plant, Rubizhne Cardboard Plant, Sumykhimprom, Zhytomyr Armored Vehicles Plant, Kharkiv Tractor Plant, Popasna Repair Plant, “Kharkivyanka” Confectionery and, Coca Cola Beverages, Obio, Kremenchug Refinery, “Zorya” Engineering, Mondelis Ukraine, Vetropak. The last four have been damaged beyond repair.

In terms of industries, the territories occupied in the initial period of the war accounted for 53% of ferrous metal production, 40% of machine building, 18% of rubber and plastics, 23% of agriculture, 16% of wood products, 20% of the chemical industry, 25% of the food industry, 17% of textiles and clothing, 30% of the mining industry, 29% of coke and oil refining and 12% of pharmaceuticals.1

1

https://forbes.ua/inside/vtrata-polovini-eksportu-ruynuvannya-promislovikh-gigantiv-ta-udar-po-derzhbyudzhetu-ekonomikaproyshla-pershiy-misyats-viyni-shcho-dali-golovne-zi-zvitu- tses-12042022-5408

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As an example, the destruction of the Kremenchuk oil refinery completed the process of the entire liquidation of the oil refining industry of Ukraine, which began and was effectively carried out by Russia during the hybrid stage of aggression.

By September 2022, when the aggressor lost the opportunity to conduct not only offensive operations but also defensive operations, because of strikes by the Armed Forces of Ukraine, massive strikes were launched on infrastructure facilities, primarily the country's energy supply systems. Russia’s goal was to destroy the country's life support system, create a humanitarian catastrophe and break the will of the Ukrainian people to resist.

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CHAPTER 1.

ECONOMIC WARFARE AND CORROSIVE CAPITAL AS A SEPARATE THEATER OF COMBAT OPERATIONS IN HYBRID WAR 1.1. Correlation of types of economic confrontation and hybrid war International economic relations are a global domain of mutually beneficial existence and of confrontation.

Analysis of expert materials in this field finds the use of a large set of definitions that include the word “economic”, such as economic competition, economic struggle, economic confrontation, economic war, economic opposition, and economic rivalry. It is very difficult to unambiguously arrange all these definitions according to a hierarchy that starts with initial stages and progresses to maximum escalation. And they can include one as part of another. Thus, the economic dictionary defines competition as “rivalry, struggle to achieve better results in the field of activity”2 The project analysts place all variants of economic confrontation within a spectrum that has “competition” and “war” at opposite ends, depending on two criteria: whether states are absent or present in such conflict, and the ultimate goal of the conflict, which can be economic or political.

Economic competition is not for the purpose of political goals on its own, but involves a change in market conditions by a business entity for its own benefit. The role of the state at this level is absent, or minimal, in the form of protectionism in the interests of the national producer.

Economic war is a social phenomenon in which a government uses economic measures to weaken the economy of another state. At the extreme pole of economic confrontation, it is conducted between antagonistic countries and involves the use of all possible types of “economic” weapons.

Of course, in the middle of this spectrum there are many options for economic confrontation, which can be used even by allied states to influence each other's economies. In 2019, for example, Japan imposed export restrictions on a number of chemical components to South Korea, which were necessary for the production of semiconductors, due to alleged suspicion of having them forwarded as dual purpose goods to North Korea.3 What is the relationship between different types of economic confrontation and “hybrid war”?

On the one hand, as mentioned above, the goal of hybrid war is the destruction or subjugation of the victim country, which can be achieved, among other ways, through the destruction of its economy. Economic war is the main tool of the aggressor country in the economic operational line. And this is understandable, since the maximum damage to the victim country can be inflicted by the maximum use of all possible types of “economic” weapons.

On the other hand, as also mentioned above, the aggressor country is trying to hide its role during hybrid war as much as possible. Therefore, as an example, the initial measures of a hybrid aggressor in the economy of the victim country can be disguised as competition (while the real goals are further occupation of the country, which is hidden).

Each of the stages of economic conflict may have signs of “hybrid threats”, the visibility of which increases with escalation, even though aggressors may wish to hide their culpability. The results of aggressive influence are

2

https://library.nlu.edu.ua/POLN_TEXT/KNIGI/KONDOR/EKONOMIC_SL_2006.pdf

3

https://focus.ua/uk/world/526164-tri-glavnye-problemy-v-otnosheniyah-yaponii-i-yuzhnoy-korei

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most fully manifested at the final stage of hybrid operations, when the destructive impact of the aggressor's policy becomes a concrete result in the form of destruction of key strategic enterprises, and most often, in the destruction of entire sectors of the economy. But the victim's response to such a result is often delayed, since the aggressor has achieved a devastating effect, establishing the victim country's critical economic dependence on the aggressor.

Thus, the challenge is acute: how to detect the hidden conduct of hybrid operations along the economic operational line in order to counter them at an early stage of implementation? How can potential victims distinguish between competition and economic warfare in the framework of hybrid aggression?

1.2. Ways of conducting economic war The aggressor country conducts economic war in two ways (Fig. 1.1): • •

the method of “confrontation” with the economy of the victim country the method of “infiltration” into the victim country's economy

Ways of Conducting the Economic War CONFRONTATION without establishing control over enterprises of the vicom country

INFILTRATION including establishing control over enterprises of the vicom country

Fig. 1.1. Ways of conducting economic war

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The method of confrontation with the economy by the aggressor country includes measures of the authorities and special services of the aggressor country aimed at weakening the economy of the victim state without establishing control over its enterprises, which can include: • • • • • • •

changing import and export duties changing import and export quotas trade embargos, including prohibiting, importing, exporting, or transiting goods supply of low-quality products complication of licensing, certification, and customs clearance procedures using price dumping anti-dumping investigations

For example, from 2014 to 2018, Russia banned the import of 46 types of goods from Ukraine4 while introducing a ban on the transit of goods to Kazakhstan5 and other countries.

Experts and scientists called these measures the main means of trade wars in different studies.

The method of infiltration into the economy includes the measures implemented by authorities and special services of the aggressor country aimed at weakening the economy of the victim state along with establishment of real or hidden control over the enterprises of the victim country, as well as measures to prevent or eliminate infiltration into its own economy. This method involves: • • • •

bans on investments in the aggressor’s economy (such as obtaining corporate rights to enterprises or financing) the seizure of financial assets of legal entities controlled by the victim country corrosive investments (obtaining corporate rights to enterprises for the purpose of further destructive use) covert agents infiltrating, in person, the top management of enterprises in the victim country

It should be noted that operations along the economic operational line are accompanied by operations in other operational lines.

In particular, in the political operational domain, covert agent infiltrations, in person, into the state management and regulation bodies of the victim country's economy, are carried out along with similar covert agent infiltration into bodies regulating international economic relations.

All operations in the economic operational line are, as a rule, accompanied by informational operations such as the discrediting or popularization of elements of a victim’s economy or oversight of it, such as a relevant regulatory body, business entity, industry, product, technology, management decision or economic policy.

It is also possible to separately consider the sabotage of critical infrastructure facilities as operations supporting economic warfare along the military operational line.

Thus, hybrid operations represent a set of operations along different operational lines. They are carried out in a coordinated manner, in line with a single plot and plan, under the leadership of a single decision-making center. Operations along the economic operational line constitute one of these components, and can be the main operation, depending on the purpose of the comprehensive operation, with operations along other operational lines serving complementary roles.

4

https://espreso.tv/news/2018/12/29/yaki_tovary_rosiya_zaboronyla_vvozyty_z_ukrayiny_spysok

5

https://www.bbc.com/ukrainian/news-39026928

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The toolkit for conducting hybrid war is shown in Fig. 1.2.

Fig. 1.2. Toolkit for economic warfare

1.3. Corrosive investments as one of the methods of economic warfare The term corrosive investment includes two words that define its essence.

“Investment” involves purchasing fixed assets, intangible assets, corporate rights, and securities in exchange for funds or property. In this case, it involves the acquisition of corporate rights of the victim country’s enterprises.

“Corrosive” implies negative consequences for the economy of the victim country or positive consequences for the aggressor country from such an investment.

Thus, corrosive investment is a method of economic warfare, which consists in making direct or indirect investments in the real sector of the state's economy in order to obtain corporate rights to the enterprises of the victim country, which are ultimately aimed at harming its economy and national interests.

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In addition to the above two main signs of corrosive investments, there is sometimes a third indicator – the level of antagonism in the international relations of the aggressor country and the victim country. The aggressor often attempts to hide this until a certain time.

For example, Russian propaganda and officials, including the president of the Russian Federation, claimed fraternal feelings towards the Ukrainian people, declaring that the two peoples are essentially one nation. The elusiveness and pacifism in these statements are disguising an aggressive denial of Ukraine’s right to exist.

1.4. Subjects of corrosive investments The first indicator of corrosive investment involves establishment of control over an economic entity of the victim country via control of a certain share of its stock or equity.

When considering the Russian Federation as an aggressor country, the project analysts distinguish 5 variations of infiltration agents (Fig. 1.3): • • • •

a Russian enterprise a citizen of the Russian Federation a third country enterprise or a Ukrainian enterprise controlled by the Russian Federation a pro-Russian public and political structure or its representative a third person covertly controlled by the Russian Federation, with no external signs of this connection

Fig. 1.3. Options for establishing control over an economic entity by the aggressor country

At the same time, the subjects of infiltration may have connections with the Russian special services.

The first two options can be called direct infiltration; the others are disguised. But it is possible to identify infiltration via state public registers.

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1.5. Negative consequences of corrosive investments Obtaining corporate rights to business entities of the victim country allows the aggressor country to implement the following actions through real or fictitious owners: •

artificial blocking or termination of the economic activity of enterprises, or the destruction of them with managerial actions, such as filing for bankruptcy despite positive financial indicators and profitability.

In 2008, the pro-Russian politician O. Tsarev, who controlled the only producer of offset paper in Ukraine, the Dnipropetrovsk Paper Factory, declared bankruptcy despite positive indicators of financial activity. This made Ukraine dependent on Russian imports of paper and finished printed products (described in section 5).

• •

theft of information about the controlled entity, such as its personnel, technologies, operations, counterparts, clients, data, or scope of cooperation use of economic levers to carry out operations along other operational lines, such as artificially creating a crisis to provoke a social unrest, or financing protest activities In 2014, the former Minister of Internal Affairs of Bulgaria, Tsvetan Tsvetanov testified in an interview to The Financial Times that in 2013 the protests against Chevron's shale projects in the country, as well as antigovernment demonstrations that led to the resignation of the ruling cabinet, took place according to a scenario developed by Russia and implemented with the help of Moscow-controlled Bulgarian businessmen.6

•

using a business of the victim country as a pretext for carrying out destructive or illegal activities, such as financing organized crime and terrorism, controlling political projects, or money laundering The report of the European Commission published in October 2022 on the risks of money laundering and terrorist financing indicated the existence of thousands of companies controlled by Russians (including subjects of EU sanctions) in EU countries in the fields of real estate, construction, hospitality, finance and energy that launder money, as well as sponsor destabilizing activities in other countries.7

•

using economic assets of the victim country in one's own economic interests with harmful consequences for the victim country, such as establishing control over the raw material base of the victim country to produce weapons of destruction Since the beginning of the 2000s, the Russian Federation has established control over the titanium industry of Ukraine, via the controlled oligarch D. Firtash, and used it exclusively for its own defense-industrial complex, primarily in the production of combat aircraft and helicopters. At the same time, the pro-Russian oligarch sabotaged the modernization of the Zaporizhzhia titanium-magnesium plant, which made it impossible to develop a domestic processing enterprise and, as a result, to obtain potential high profits from the production of finished titanium rolled products (described in section 3).

6

https://www.ft.com/content/e011d3f6-6507-11e4-ab2d-00144feabdc0?siteedition=intl#axzz3KkkKmaCQ

7

https://www.spiegel.de/wirtschaft/unternehmen/eu-noch-immer-31-000-firmen-in-russischer-hand-a-b2327912-50a9-4d34- 9aa9100643f3f9a3

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Conclusions to Chapter 1 1. Hybrid warfare is a complex socio-political phenomenon associated with conflicts between states, people, national and social groups. The efforts are focused on achieving the goal by conducting operations along political, economic, and informational operational lines. The involvement of the armed forces is of limited nature, in the form of special and peacekeeping operations. The aggressor tries to achieve its goal without declaring war or admitting its involvement in the events.

2. The goal of the aggressor state in hybrid war is the destruction or subjugation of the victim state. The actions of such aggressor states along all operational lines are carried out in the form of operations that have a hierarchical structure and are implemented comprehensively according to a single plot and plan.

3. Confrontations along economic operational lines feature levels of escalation, starting with competition and rising to economic warfare. Given that the aggressor country tries to hide its role in the hybrid war as much as possible, each of the stages of the economic confrontation may come with indicators of hybrid aggression, but its visibility increases as the escalation level of such confrontation increases.

4. The aggressor country conducts economic warfare in two ways: collision with the economy of the victim country and infiltration into the economy of the victim country. These methods are distinguished by the absence or presence of real or disguised control over enterprises, economic sectors, resources, or management bodies in the economy of the victim country.

5. One of the methods of infiltration into the economy of the victim country is corrosive investment, which consists of making direct or indirect investments in the real sector of the state's economy in order to control the enterprises of the victim country. These investments are ultimately aimed at harming its economy and national interests, and sometimes also ensuring the sustainable functioning of the aggressor country's own economy through additional damage to the victim country.

6. The main features of corrosive investments are: • • • •

presence of an infiltration agent that is directly or indirectly controlled by the aggressor country making decisions that are illogical from the point of view of commerce, which have negative consequences for the economic activity of enterprises subject to established control whilst individual corrosive investments may not on their own rise to a systemic threat, a group of them together can rise to that level of concern another country's attempt to connect resolution of economic issues in international relations with political matters.

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CHAPTER 2.

OBJECTS OF CORROSIVE INVESTMENTS There is no doubt about the fact that the aggressor country inflicts its main hybrid strikes on the objects of strategic importance in the economic domain of the victim country.

Ukrainian legislation uses two terms with the word “strategic”: industry and enterprise. This creates two methodical approaches to search for corrosive investments.

The first approach involves assessing the general indicators of the industry or sub-industry over time and identifying inherent interrelated negative dynamics. These can include indicators of corrosive investments such as decreases in production, the bankruptcy or liquidation of enterprises, a lack of supply of goods or services, or an increased level of dependence of the industry’s enterprises on a particular country. The first approach also involves seeking causes for these indicators, and the identification of enterprises, persons or countries that caused the negative consequences. This is the deductive approach, “from the industry to the enterprise”, because the signs of corrosive investments in specific enterprises of the victim country are identified at the final stage of research.

The second approach involves analyzing the fate of enterprises that are strategic for the economy and security of Ukraine, identifying the signs of corrosive investments made by the aggressor country, such as negative consequences for the enterprise and the presence of corporate and legal infiltration, as well as further analysis of their impact on the general indicators of the industry performance and its dynamics. This is the inductive approach, “from the enterprise to the industry”.

At the initial stage of the project, analysts focused on the second method, because detection of corrosive investments is directly related to the analysis of enterprises. However, this approach may not provide an overall picture, since some enterprises in the industry may not be defined as strategic by the Government. For example, there are more than 30 enterprises in the paper manufacturing industry but only three identified as strategic.

Therefore, at the second stage of research, the analysts switched to analysis of the negative hybrid impact on the strategic industry as a whole and, as a result, to identification of corrosive investments taking into account the negative trends in the industry itself.

2.1. Strategic economic sectors In 2020, the Ministry of Strategic Industries of Ukraine developed a draft resolution of the Cabinet of Ministers of Ukraine “On different matters of developing the industrial complex of Ukraine”, which lists 17 strategic industries and distribution of their accountability to state bodies.8 In particular, the following industries were identified: • • • • • • • •

8

defense industry fuel and energy industry transport industry agro-industrial complex aviation and rocket and space industry telecommunications and communications machine building metallurgical and mining industry

https://www.facebook.com/photo/?fbid=112621537336030&set=pcb.112621590669358

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• • • • • • • • •

chemical Industry food Industry light industry glass and porcelain and ceramic industry furniture production and woodworking industry publishing industry geological exploration construction and construction materials pharmaceuticals

In order to precisely assess the corrosive effect of an aggressor country (in our case, the Russian Federation), it is necessary to conduct a study of all above-mentioned branches of the economy according to a certain methodology. Such a study will reveal detail such as the dominant industries that were attacked, identify the mechanisms of the aggressor's actions in each of the industries as well as the actors who performed the infiltration into the industry.

It is impossible to conduct the study of all strategic branches of the economy for the presence of corrosive investments within the time available. Moreover, each of the branches may have dozens of sub-branches. The “fuel and energy industry” includes oil, gas, coal extraction and their transportation, oil refining, and fuel use, for example. The “metallurgical and mining industry” includes ferrous and non-ferrous metallurgy, metallurgy of rare earth metals and the mining of various types of ores. The specified sub-sectors may be the subject of research at further stages of the project implementation.

Thus, two sub-sectors were chosen as examples for the study of corrosive investments for which elements of Russia's negative impact were repeatedly covered in the informational domain,: titanium extraction (Chapter 3) and oil refining (Chapter 4).

2.2. Enterprises with strategic status for the economy and security of Ukraine: Quantitative indicators In accordance with the Law of Ukraine “On Management of State-Owned Entities”, the declaration of an enterprise status as “strategic for the economy and security” is made by the Cabinet of Ministers of Ukraine (CMU).

The project team selected for generalization 30 regulatory and legal acts of the CMU that declared, amended, and abolished this status.

There are more than 3,000 enterprises listed as strategic in the resolutions of the CMU from 1997 to 2021.

That total was halved by removing duplicate listings. After clarifying the operational status of all these enterprises, it was determined that as of the beginning of 2022, 879 enterprises (55%) are in operation, 16 are located in the occupied territory and have not been re-registered under Ukrainian legislation, 337 have been liquidated, and 289 have started a bankruptcy case (Table 2.1). Information on two enterprises was not found in open registers according to a preliminary check.

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Table 2.1.

Status

Number of enterprises

Operational.

879

Occupied. Not re-registered under Ukrainian legislation.

16

Bankruptcy case (resolution or termination).

289

Liquidated.

337

No information (not found).

2

TOTAL

1530

Thus, it is possible to note that in the entire period about 42% of enterprises were withdrawn from “operational” status, and were either liquidated or are at different stages of bankruptcy.

Based on their main activities, they belonged to 17 sections of the economy of Ukraine, according to the state classifications.

Reviewers analyzed seven sections of the economy with the largest number of enterprises included into the List of Strategic Enterprises.9 According to the general indicators, the most vulnerable sectors were the “processing industry”, with about 50% of enterprises now defunct, “mining industry and quarry development” (about 47% ) and “scientific and technical activities” (about 35%).

The main “strike” was “inflicted” on the processing industry thus depriving Ukraine of income from added value in production and also turning the country into a supplier of agrarian goods and raw materials to the world economy. Moreover, this led to a standstill or reduction of production at the respective enterprises along the supply chain of liquidated entities.

Destruction of one-third of the enterprises in the scientific and technical sector deprived the domestic economy of progress in development, led to Ukraine's dependence on foreign technologies (the cost of which in some cases exceeded the cost of products created using them), as well as the outflow of scientific personnel.

9

During the analysis, reviewers disregarded sectors with the minimum number of enterprises from the List of Strategic Enterprises, as well as the sectors considered “non-strategic”, including “agriculture” (7 enterprises), “activities in the sector of administrative and auxiliary services” (4), “mandatory social insurance” (6), “education” (3), “health care and provision of social assistance” (2), “wholesale and retail trade”; and “repair of motor vehicles and motorcycles”.

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*** The cessation of the existence of strategic enterprises is only type of damage to the economy and security of Ukraine.

Over the 25 years of existence of the List of Strategic Enterprises, several hundreds of business entities in various branches of Ukrainian economy have been excluded from it (Fig. 2.1). While the first edition in 1997 listed more than 1,100 enterprises, today there are only 285.

Operational

Liquidated

Bankruptcy

“Strategic” enterprises Enterprises excluded from the list of “strategic” ones

1245 337 Fig. 2.1

Naturally, mechanical mathematics does not allow making an objective picture. There are at least two established reasons for this: •

•

“Legal liquidation”, in which an enterprise changes its form (such as from a joint-stock company or JSC to a limited liability company, or LLC), name or registration number. The “old” structure is legally liquidated, while in fact the company operates and manufactures products (for example Lutsk Cardboard and Paper Mill PrJSC, which was a strategic enterprise, was liquidated and the Lutsk Cardboard and Paper Factory of Ukraine LLC was created instead). reorganization of individual small regional state enterprises into regional branches of a single enterprise (28 enterprises of “Ukrtelecom” became one enterprise with 27 regional branches)

Reasons for excluding an enterprise from the list may also include: • • •

elimination of an ineffective structure, which actually lost “strategic” status due to certain reasons, or because it requires significant maintenance costs transfers of its assets to controlled affiliated structures or the domestic oligarchy for the purpose of obtaining profits for the new owner instead of the state (enrichment of the oligarchy) transfer of its assets to another structure, which is interested not in production facilities, but in the land title, and the enterprise is liquidated by the new owner in order to use the land for another profitable project

Naturally, objective numbers must be searched for in the process of a detailed review of all excluded enterprises, which was not possible to do within the timeframe of the project.

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2.3. Specific features of regulatory and legal support in development of the List of Strategic Enterprises of Ukraine Analysis of legal and regulatory acts assigning strategic status to enterprises, as well as procedures for administering the List, proved the lateness, incoherence and unsystematic nature of this process.

Legal regulation was expected to include a sequence of the following actions: 1) The definition of the “strategic enterprise” concept from the perspective of exceptional importance for the defense and economic potential of Ukraine.

2) The development of criteria for assigning enterprises to the category “strategic for economy and security of the state”.

3) The development of requirements for state protection of strategic enterprises, such as limiting or forbidding private ownership.

4) Determination of the procedure for developing the List of Strategic Enterprises (authority of state structures, private sector, experts, etc.)

5) Development and administration of the list.

This process was not followed. A first list appeared in 1997, but the first criteria were not published until 2003.

Requirements were not introduced until 2009, and administrative procedures were set by 2010. As a result, we have: • • •

No clear and integral definition of the “strategic enterprise” concept Unsystematic regulatory guidance Lateness (6 years between some of the legal facts) What are the consequences of such disorganization?

1. Inconsistency between the privatization process and the identification of enterprises as strategic ones for the state caused the existence of two different lists: a “List of entities that are not subject to privatization due to their national significance” introduced in 1995, and a “List of enterprises of strategic value for the economy and security of the state” introduced in 1997.

As the comparison of both lists demonstrates, only 10% of strategic enterprises were identified as not subject to privatization. Thus, the vast majority of strategic enterprises remained potentially eligible for privatization by private, including Russian, businesses.

Based on results of research conducted by specialists of the Center for Economic Development, more than 11,000 medium and large enterprises were privatized from 1995 to 1998. The largest demand was enjoyed by enterprises of the metallurgical complex (26% of the total), the electric power industry (25%) and the chemical and petrochemical industry (19%).

Thus, after privatization a significant number of strategic industrial entities remained out of the focus of the government authorities developing the List of Strategic Enterprises. Even today almost one third of enterprises on the list are representatives of these industries.

2. Inconsistency of actions committed by the state authorities during development of the List of Strategic Enterprises resulted in the first edition of the list omitting 97 enterprises controlled by the State Committee on Oil, Gas and Oil Refining Industry of Ukraine, 25 entities under the Ministry of Defense of Ukraine, in particular aircraft and armored vehicle and tank repair plants, five entities under the Ministry of Transport of Ukraine including the State International Airport Boryspil, the Crimean National Center for Control and Testing of Space Engineering, the Sevastopol Institute of Nuclear Energy and Industry and others.

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Conclusions to Chapter 2 1. During hybrid war, the aggressor country is interested in bringing the strategic sectors of the economy of the victim country to a standstill or in establishing full control over such sectors for further use in its own interests exclusively. One of the effective methods is corrosive investments in enterprises of strategic industries. These are enterprises of strategic importance for the security and economy of the country.

2. The project used two research methods: a focus “from the industry to the enterprise” (assessing general indicators of the industry and its sub-industries over time, establishment of related negative dynamics, research of their causes, and identification of enterprises, persons or countries that caused negative consequences for the strategic industry), and a focus “from the enterprise to the industry” (establishing signs of corrosive investments by the aggressor country, negative consequences for the strategic enterprise, and analyzing their impact on the general indicators of the industry and their dynamics, including negative ones.)

3. It was not possible to conduct such studies for approximately 70 to 80 sub-sectors and more than 330 destroyed strategic enterprises because of the amount of time allotted to conducting the study.

At the same time, it is relevant to consider the possibility of conducting studies of strategic industries within the framework of further stages of the project, which will facilitate identifying the general regularities of the process and finding indicators of destructive hybrid operations.

4. Analysis of liquidated strategic enterprises in Ukraine from 1998 to 2021 shows that the most vulnerable sectors were the “processing industry” (about 50% of enterprises were liquidated), the “mining industry and quarry development” (about 47%) and “scientific and technical activity” (about 35%).

5. Analysis of legal acts regulating the endorsement or revocation of strategic status to an enterprise, as well as the procedure for managing the list of such enterprises, identified the lateness, incoherence, and unsystematic nature of this process, which led to establishment of control over strategic enterprises by the oligarchy and representatives of the aggressor country. The list-development process was disrupted by corruption on the part of Ukrainian authorities. When conducting comprehensive operations in the economic and political domains, the aggressor used both the shortcomings of Ukrainian legislation and the corruption component (directly or under cover) to achieve specific goals of corrosive infiltration into strategic industries. Corrupt manifestations of Ukrainian officials and the power of the oligarchy are favorable factors for implementation of hybrid operations of the aggressor country. They also negatively affected the prospects for Ukraine's membership in the EU. Both factors must be accounted for if European integration of Ukraine is to become a possibility.

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CHAPTER 3.

CORROSIVE IMPACTS OF THE RUSSIAN FEDERATION ON UKRAINE’S TITANIUM INDUSTRY Extraction and processing of titanium is one of the strategic industries of Ukraine. The metal is used in aircraft, rockets, and shipbuilding, and only seven countries produce it: Ukraine, Kazakhstan, the U.S., Japan, China, India, and Russia.10 Ukraine has 20% of global ilmenite reserves, from which titanium is extracted. There are more than 40 deposits in Ukraine, of which 12 have been explored in detail and industrial extraction has begun.

3.1. Gradual establishment of control over the titanium industry of Ukraine before the start of open phase of a hybrid war (2001–2014) Until 2014, the titanium industry of Ukraine, which included extraction and refining into intermediate goods, was under the monopoly control of oligarch Dmytro Firtash. The formation of his “titanium empire” started in 2001 and over the next 10 years he gained control over key enterprises in this industry.

The first acquisition was Mezhyrichensk Mining and Processing Plant LLC. It was registered in Zhytomyr oblast in January 2001. The beneficial owner is Dmytro Firtash,11 and the company held a special permit for the extraction of ilmenite ore from a 492-hectare section of the Mezhyrichne deposit. The estimated capacity of the enterprise is 180,000 tons of ilmenite concentrate per year. Valky-Ilmenit LLC was registered in Zhytomyr oblast, in March 2001, with Firtash as beneficial owner through a Cypriot company called Balmat Holdings Ltd.12 It’s permit allows use of the resources of the Valky-Gatskivske deposit, and the estimated capacity of the enterprise is 65 thousand tons of ilmenite concentrate per year.

In 2004, Dmytro Firtash took control of three additional enterprises, which since 1997 have been on the “List of state-owned entities of strategic value for the economy and security of the state”: •

Crimean Titan PrJSC, the only producer of titanium dioxide in Europe, and was established in August 2004 after the sale of 49% of its shares to the German company Ostchem Germany GmbH. That company’s beneficial owner is Firtash.13 In 2012, 100% of the shares went to Ostchem Germany GmbH.14 Even though after the occupation of Crimea, Crimean Titan PrJSC was re-registered in Kyiv under the name Ukrainian Chemical Products, it continued operating exclusively within the RF legislation. Dmytro Firtash retained the ownership of enterprise via the Cypriot firm Letan Investments Ltd. and the Russian company Titanium Investments LLC.15 In December 2021, according to the press service of Firtash’s Group DF, the assets of Ukrainian Chemical Products were sold to Russia’s Titanium Investments LLC.16 Estimated capacity of the enterprise is 200,000 tons of titanium dioxide per year, while up to 120,000 tons were actually produced before 2014).

10

https://uifuture.org/reports/strategiya-tytanovoyi-galuzi-ukrayiny-2030/

11

https://youcontrol.com.ua/catalog/company_deta36ils/305979

12

https://youcontrol.com.ua/catalog/company_details/31280048

13

https://ukrrudprom.ua/digest/Sploshnoy_front.html?print

14

https://zn.ua/ECONOMICS/firtash_kupil_kontrolnyy_paket_krymskogo_titana.html

15

https://news.finance.ua/ru/news/-/506529/firtash-prodal-titanovyj-biznes-v-krymu-rossiyanam

16

https://investigator.org.ua/ua/investigations/239039

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•

Irshansk Mining and Processing Plant and Vilnohirsk Mining and Metallurgical Plant (both leased by Crimean Titan since 2004). The estimated capacity of Irshansk MPP and Vilnohirsk MMP is 450,000 and 200,000 tons of ilmenite concentrate per year, respectively).

In 2012, the titanium empire of Dmytro Firtash expanded with another strategic enterprise: Zaporizhzhia Titanium & Magnesium Plant, the only producer of sponge titanium in Europe. The Cypriot company Tolexis Trading Limited, which belonged to Group DF of Dmytro Firtash, purchased 49% of the company. Despite the fact that the state retained a controlling 51% stake, the company itself was transferred to the oligarch's management. The estimated capacity is more than 20,000 tons of sponge titanium per year.

In fact, before the Russian invasion of Ukraine in 2014, the business structures of Dmytro Firtash had effective monopoly rights both to extraction of titanium ore and production of ilmenite concentrate and to the production of titanium products. His businesses had a market share of between 90% and 100% in each of these areas.

By 2014, more than 50% of the ilmenite concentrate produced at Firtash's enterprises was exported to the RF, and Crimean Titan PrJSC supplied about 30% of supply to the Russian titanium dioxide market.17 The key customer was the Russian metallurgical company VSMPO-AVISMA Corporation PrJSC. A quarter of its shares belong to the Russian state corporation Rostech of S. Chemezov, one of the closest associates of the President of the RF, Vladimir Putin. It supplies titanium products used in production of helicopters and other Russian military equipment, 18 19 20 as well as bulletproof vests and bulletproof helmets for servicemen of the Armed Forces of the RF. In fact, for many years, the titanium industry of Ukraine, while represented by business structures controlled

by Firtash, largely worked in the interests of the defense complex of the RF.

17

https://infomalin.biz/news/ekonomika/zhitomir/yakshcho-irshanskiy-gzk-ta-vilnogirskiy-gmk-ne-postavlyat-sirovinu-krimskiy- titanzupinitsya.html

18

https://ru.wikipedia.org/wiki/ВСМПО-Ависма

19

https://fedpress.ru/urfo/econom/news_kompany/id_209291.html

20

http://gurkhan.blogspot.com/2017/10/blog-post_3.html

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3.2. The role of the Ukrainian titanium industry for the RF Supplies of Ukrainian ilmenite are critically important for Russia (Fig. 3.1). According to Russian experts, domestic consumption of titanium ore and concentrates in the RF amounted to 216,000 tons in 2021, of which only 8.8 tons were Russian raw materials. The share of imports was about 97%. Ukraine was and now remains the main supplier of ilmenite concentrate, at roughly 80% of the total. Another 38.7 thousand tons came from Vietnam (17.9%) and other countries – less than 2 thousand tons.21

Fig. 3.1. Sources of ilmenite concentrate for processing industry of the RF

Russia has a very potent titanium mineral and raw material base, with 12.5% of the global reserve. But currently only the Tugansk Mining and Processing Plant is engaged in the production of ilmenite in the RF. Due to low industrial capacity, a lack of necessary financing, as well as the lower quality of titanium raw materials in terms of chemical composition as compared to Ukrainian ilmenite, the intensification of production at the Tugansk MPP continues too slowly. According to the most optimistic forecasts of Russian experts, Russia will be able to reject the imports of Ukrainian titanium ilmenite completely no earlier than 2035.22 That is why the Kremlin is extremely interested in preserving Dmytro Firtash's titanium empire and in the further predatory use of Ukraine as a raw material appendage of Russia's titanium industry. Evidence of this can be seen in the continuation of direct supplies of ore and ilmenite concentrate to the RF by the Ukrainian enterprises controlled by Dmytro Firtash even after the beginning of the Russian invasion of Ukraine in 2014.

Moreover, until 2018, Ukrainian exports to Russia accounted for about 40% of Ukrainian exports and about 80% of Russian supply. (see Attachment 1. Volumes of Ukrainian extraction and exports of titanium ores and concentrates by country in natural units in 2014–2022), and decreased significantly in the last 4 years only.

21

https://dprom.online/mtindustry/rossijskij-titan-ot-legend-k-realnosti/

22

https://www.vedomosti.ru/business/articles/2021/06/01/872351-litsaholding-rosatoma

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3.3. Ukraine's actions to eliminate hybrid threats of the RF in the titanium industry, and the transformation in the hybrid warfare methods of the RF after 2014 Since 2014, the titanium business of Dmytro Firtash and its relationships with Russia has been the focus of attention of the senior management and law enforcement agencies of Ukraine. Despite the excessive lateness in making governance decisions, the authorities have implemented a number of specific actions over the past eight years to stop the trade in strategic raw materials with the aggressor country: •

•

•

•

•

• • • •

•

•

In 2014, after the end of the lease term of Irshansk MPP and Vilnohirsk MMP by Crimean Titan PrJSC of Dmytro Firtash, the Cabinet of Ministers of Ukraine and the Ministry of Economic Development of Ukraine endorsed the government’s right to make both enterprises subsidiaries of the state enterprise United Mining and Chemical Company.

In 2016, the Security Service of Ukraine initiated criminal proceedings against officials of Zaporizhzhia Titanium & Magnesium Plant LLC for supplying sponge titanium to the non-controlled territory of Ukraine under Art. 258–5 of the Criminal Code of Ukraine (financing of terrorism).23 In June 2016, the Specialized Anti-Corruption Prosecutor's Office of Ukraine initiated the return of the entire property complex of Zaporizhzhia Titanium & Magnesium Plant LLC to the full ownership of the state by terminating the contract with the Cypriot company Tolexis Trading Ltd., controlled by Dmytro Firtash, due to failure of the latter to fulfill investment obligations. The final court decision in favor of the state was adopted in May 2022.24 At the beginning of 2017, the Military Prosecutor's Office of Ukraine initiated criminal proceedings against companies controlled by Dmytro Firtash for supplying titanium to occupied Crimea through Mezhyrichensk Mining and Processing Plant LLC and Valky-Ilmenite LLC.25 In June 2018, following the decision of the National Security and Defense Council of Ukraine, special economic sanctions were applied to Russia-based Titanium Investments LLC, which helped business structures of Dmytro Firtash to legalize the operations of the illegally withdrawn capacities of Crimean Titan PrJSC in the temporarily occupied territory and in the interests of the aggressor.26 In June 2021, following the decision of the National Security and Defense Council of Ukraine, personal special economic sanctions were applied directly to Dmytro Firtash.27 In July 2021, the State Geology and Subsoil Service of Ukraine revoked the special permit of ValkyIlmenite to extract the apatite and ilmenite ores in the Stremyhorod deposit in Zhytomyr oblast.28 In August 2021, the State Geology and Subsoil Service of Ukraine revoked the special permit of Mezhyrichensk Mining & Processing Plant LLC to use the resources of the Selyshchansk deposit of titanium ores.29 In January 2022, the Antimonopoly Committee of Ukraine initiated a legality audit of the sale of assets of Crimean Titan, which had been renamed Ukrainian Chemical Products, to Russia-based Titanium Investments LLC.30 In October 2022, the State Bureau of Investigations appealed to the Cabinet of Ministers of Ukraine to initiate proceedings by the National Security and Defense Council of Ukraine to sanction the forced

23

http://zp.nashigroshi.org/2018/02/12/sbu-rozhlyadaje-versiyu-pro-finansuvannya-kombinatom-firtasha-teroryzmu/

24

https://finbalance.com.ua/news/sap-sud-ostatochno-zabrav-u-firtasha-zaporizkiy-titano-mahniviy-kombinat

25

https://www.epravda.com.ua/news/2017/04/6/623525/

26

http://iplex.com.ua/doc.php?regnum=89977248&red=10000399fe217d0f7c5902fa494d0ea20d6fa3&d=5

27

https://www.president.gov.ua/documents/2662021-39265

28

https://nadra.info/2021/07/10-special-permits-from-the-decision-of-the-national-security-and-defense-council-were-revoked/

29

https://suspilne.media/154714-kompania-firtasa-vtratila-titanove-rodovise-cerez-finansuvanna-terorizmu/

30

https://www.facebook.com/amc.gov.ua/posts/299321375567197

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confiscation of property and application of special economic sanctions against Mezhyrichensk Mining and Processing Plant due to it “belonging to Russian structures or citizens”.31 The actions taken by Ukraine had significant positive consequences – in 2022, because of problems with supply of ilmenite ore from Ukraine, Crimean Titan PrJSC was forced to reduce its own production by 50%.32 In fact, in 2021–2022, the direct export of Ukrainian titanium raw materials to Russia stopped completely.

However, the management of Ukrainian titanium industry companies controlled by Dmytro Firtash resorted to the use of so-called “ilmenite schemes”, according to which up to 50% of titanium concentrate was exported to the RF through the temporarily occupied territory and foreign dummy companies.

Thus, analysis of the table “Volumes of Ukrainian extraction and exports of titanium ores and concentrates by country in natural units in 2014–2022” (Attachment 1) indicates a significant increase in supplies of ilmenite concentrate to the Czech Republic, Turkey, and Egypt. There were more than 50 incriminating materials published in domestic and Western mass media, which clearly demonstrated that in most cases the exporting companies of the specified countries acted in the interests of Russia in order to satisfy the titanium needs of the aggressor state.

In 2016, Valky-Ilmenite LLC owned by Dmytro Firtash sent at least 130,000 tons of ilmenite concentrate to Russia directly from the Ukrainian port of PIvdennyi. The scheme changed in 2017, as identified by investigative journalists, when ilmenite exports began to be routed through Turkish ports. M28ore than 85,000 tons of Ukrainian ilmenite concentrate went to Crimea33 via the Turkish city of Samsun alone.

Also, in 2014–2015, according to the information revealed by SBU, Zaporizhzhia Titanium & Magnesium Plant LLC controlled by Dmytro Firtash delivered 2,778 tons of sponge titanium worth UAH 352 million to the temporarily occupied territory of Donetsk oblast. Later, some was re-exported to the RF, and the rest was used for financing the terrorist activity of illegal armed formations of the RF in the territory of Ukraine.34 According to the published investigations of Ukrainian and foreign journalists, several times ilmenite concentrate of Ukrainian origin arrived in Russia from the Ukrainian state enterprise United Mining and Chemical Company (SE UMCC), which was established in 2014 by merging former assets of Dmytro Firtash – the Vilnohirsk Mining and Metallurgical Plant in Dnipropetrovsk oblast and the Irshansk Mining and Processing Plant in Zhytomyr oblast. Moreover, investigative journalists have repeatedly noted that this is happening due to the preserved influence of Dmytro Firtash over the management of SE UMCC.35 Since 2020 the Czech company Belanto Trade has become one of the buyers of ilmenite concentrate produced by the SE UMCC. A Czech corporate structure was used because Czech law allows for trading companies of this type to be incorporated with very little dedicated capital: just 120 Czech crowns, or USD 5.40 according to foreign-exchange rates as of February 2023. Journalists revealed that the company was purchasing ilmenite concentrate produced by the Irshansk MPP in October 2020, which was later unloaded at the port of occupied Feodosia. At the same time, the Security Service of Ukraine sent an official letter to management of SE UMCC to stop shipping products under the contract with Belanto Trade but the warning was ignored.

31

https://dbr.gov.ua/news/dbr-peredalo-do-kmu-spisok-rosijskih-kompanij-ta-gromadyan-shhodo-vklyuchennya- ih-do-sanacijnogospisku

32

https://gmk.center/ua/news/krymskomu-titanu-ne-hvataet-ilmenitovoj-rudy-iz-ukrainy-2/

33

https://investigator.org.ua/ua/publication/207396/

34

http://zp.nashigroshi.org/2018/02/12/sbu-rozhlyadaje-versiyu-pro-finansuvannya-kombinatom-firtasha-teroryzmu/

35

https://biz.censor.net/resonance/3233668/skandali_ta_koruptsya_scho_vdbuvatsya_v_obdnanyi_grnichohmchnyi_kompan

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From November 2020 to March 2021, as part of eleven shipments, SE UMCC shipped more than 78,000 tons of ilmenite concentrate to the Czech company, which, according to customs documents, were allegedly sent to Turkey, but also ended up in the occupied Crimea.

In April-May 2021, the UMCC once again shipped ilmenite concentrate to occupied Crimea via Belanto Trade.

Ilmenite was delivered to the railway station in Russian Belgorod, and from there to the port of Kavkaz, and then to occupied Crimea. Cameras recorded transshipping of the ilmenite in the Southern Sea Trade Terminal of the port of Kavkaz on April 14 of the same year.36 In March 2021, the research group SeaKrime discovered that 11,800 tons of ilmenite were exported by the ship Yunus Emre from the port of Chornomorsk, Ukraine, to Damietta, Egypt, where it was later transferred to the Syrian ship Laodicea and sent to occupied Sevastopol for Crimean Titan PrJSC.37 In 2019 and 2020, SE UMCC directly supplied Russian enterprises with titanium products worth almost UAH 732 million.38

Conclusions to Chapter 3 1. Due to the poor development of the titanium mining industry since the times of the USSR, Russia has a critical dependence on Ukrainian raw materials. This led the aggressor country to establish full control over the Ukrainian ilmenite mining industry. By carrying out hybrid operations, Russia addressed two objectives in the economic domain at once – preferential provision of strategic raw materials to its own military industrial complex and making impossible the development of the Ukrainian titanium processing industry independent of influence from the Russian Federation. As a result, dual control in the economic domain has become one of the many levers of Russia's political control over Ukraine.

2. Until 2014, corrosive investments served as the main method of establishing control, both in the form of direct establishment of control over enterprises of the titanium industry through obtaining corporate rights as well as in the form of leasing enterprises of this industry from the state. Such investments were made when Ukrainian prime ministers were friendly to Russian interests, such as Viktor Yanukovych and Mykola Azarov. The period was characterized by the export of more than 50% of ilmenite concentrate produced at enterprises owned by Dmytro Firtash to the Russian Federation and the export of titanium dioxide from Crimean Titan PrJSC to the Russian Federation. This provided for about 30% of the Russian market of titanium dioxide; as well as the actual lack of investments in the only processing enterprise in Ukraine, the Zaporizhzhia Titanium & Magnesium Plant.

3. After the start of the first phase of Russia's open invasion of Ukraine in 2014, Ukrainian authorities took measures to return part of titanium assets owned by Dmytro Firtash back to state ownership, applying sanctions against Russian enterprises in the industry, and initiating criminal proceedings against officials of domestic enterprises controlled by Dmytro Firtash. These measures had a partial effect, as Crimean Titan PrJSC was forced to reduce its own production by 50%). In order to maintain covert control over the Ukrainian titanium industry and exports to the Russian Federation, Russia used new methods: •

•

The export of raw materials to the Russian Federation via the occupied territories of Donetsk and Luhansk oblasts. Until 2017, there was no ban on transporting goods to the occupied territories in Ukraine.

The establishment of new transportation routes for the raw materials from Ukraine via Egypt and Turkey using dummy companies.

36

https://genichesk.ipc.org.ua/uk/2021/11/ilmenitova-shema-firtasha-cheska-lanka/

37

https://usm.media/obyski-v-chernomorskom-morportu-gbr-arestovala-partiyu-ilmenita/

38

https://investigator.org.ua/ua/investigations/236675/

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•

Covert agents representing Dmytro Firtash infiltrated the top management of SE UMCC. Management of SE UMCC does not formally have the authority to check the buyers of its products, which is an additional enabling factor facilitating the exporting of Ukrainian ore and ilmenite concentrate to the Russian Federation.

4. Addressing the problem requires a comprehensive approach, which should include: • • • •

accelerating investigations based on established facts concerning the trade between business structures of Dmytro Firtash and the aggressor country replacing corrupt members of the SE UMCC management team approval from the Cabinet of Ministers of Ukraine of special criteria for selection and admission of intermediary firms to the domestic market for exporting Ukrainian titanium raw materials and products expanding powers and strengthening the responsibility of the State Service of Expert Control of Ukraine to track the end consumers of titanium raw materials and products of Ukrainian origin.

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CHAPTER 4.

CORROSIVE EFFECT OF THE RUSSIAN FEDERATION ON THE OIL REFINING INDUSTRY OF UKRAINE 4.1. Soviet heritage that depended exclusively on Russian raw materials Ukraine's oil refining industry inherited from the former USSR was represented by six oil refineries and a trunk pipeline system built to pump oil from fields located in the former USSR. The total nominal capacity of primary refining in Ukrainian refineries was more than 51 million tons of oil per year, which exceeds the combined similar capacities in Poland, Hungary, the Czech Republic, and Slovakia (Fig. 4.1). The refineries were able to produce 50 types of petroleum products.

Figure 4.1 Nominal capacity of Ukrainian refineries (million tons per year, % of total)

The provision of raw materials to Ukrainian refineries was carried out by a system of three main oil pipelines that pumped oil from the Russian Federation, Belarus, and domestic fields39 (Fig. 4.2, Table 4.1). The pipelines were operated by Ukrtransnafta. Secondary methods included supply by rail, sea, and road.

39

http://www.irbis-nbuv.gov.ua/cgibin/irbis_nbuv/cgiirbis_64.exe?I21DBN=LINK&P21DBN=UJRN&Z21ID=&S21REF=10&S21CNR=20&S21STN=1&S21FMT=ASP_meta& C21COM=S&2_S21P03=FILA=&2_S21STR=aprer_2011_7%282%29 24

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Figure 4.2 The oil transportation system of Ukraine (source: enkorr.ua).

Table 4.1.

No. in fig. 4.2

Oil pipeline name

1

“Druzhba” section of the oil pipeline in Ukraine

2

Pridniprovskiy oil pipeline

3

Samara – Lysychansk – Kremenchuk

4

40

The Odesa – Brody pipeline

Inlet Capacity

Outlet Capacity

mln. tons

mln. tons

Consumers

2540

Hungary, Slovakia, 2 Ukrainian refineries in Drohobych and Nadvirna

80

16,5

Transit to Ukrainian oil terminals on the Black Sea (Odesa), 4 Ukrainian refineries in Kremenchuk, Lysychansk, Kherson, and Odesa

No data available

No data available

2 Ukrainian refineries in Kremenchuk and Lysychansk

14,5

It was meant to transit Caspian oil to Europe, bypassing the Russian Federation, but construction thus far ended at the city of Brody, in western Ukraine. With the exception of in 2007 the pipeline has not been used at full capacity, and since August 2010 it has not been used at all.

34

14,5

Including the additional capacity of the Odesa-Brody oil pipeline built during the independence of Ukraine

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Thus, Ukraine inherited Soviet-era oil transportation infrastructure but with Russian retained control over the oil import routes to Ukraine.

Looking ahead, we would like to note that for some time Ukrainian refineries responsible for 52% of the nominal capacity were controlled by Russians.

In order to create alternative routes for oil supply to Ukraine and transit to Europe in 2001, the Odesa-Brody oil pipeline was constructed (No. 4 in Fig. 4.2). It could not fully provide an alternative to the transportation of Russian raw materials in terms of capacity. Throughput capacity was 9 million to 14.5 million tons per year.41

4.2. Elements of negative dynamics for the strategic oil refining industry in Ukraine, and signs of hybrid impact from the Russian Federation Analysis of indicators of consumption and production of petroleum products obtained by the project analysts for two periods of time, 1998 to 2005 and 2012 to 2021, indicate a crucial change in the situation between these time periods (Fig. 4.3, 4.4).

Dynamics of domestic production and consumption of petroleum products in Ukraine during 1998-2005

Fig. 4.3. Diagram of production and consumption of petroleum products in Ukraine (1998 to 2005 according to the State Statistics).42

Dynamics of domestic production and consumption of petroleum products in Ukraine for 2012–2021

Fig. 4.4. Diagram of production and consumption of petroleum products in Ukraine (2012 to 2021 according to the State Statistics).43

41

https://www.pravda.com.ua/news/2004/05/27/3000165/

42

http://www.ukrstat.gov.ua/

43

https://map.ua-energy.org/uk/resources/41a1e792-ff7e-4819-a04d-f9083286cdb0/

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During 1998–2005 the average level of production was more than 14.1 million tons with consumption of about 10.1 million tons, which allowed Ukraine to accumulate strategic stock and export products. In the second period of time there was a sharp decrease in the production of petroleum products from about 4 million tons to almost zero.

This trend (after 2012) took place under the following conditions (the list is not exhaustive): • •

• •

The dominance of the Russian Federation in the control of oil import routes to Ukraine (specified in section 4.1).

Russia waging a hybrid war against Ukraine without the use of a military operational line. An undisguised sign is Vladimir Putin's statement on Ukraine during the NATO summit in 2008 regarding the interests of RF in the southern and eastern regions of Ukraine. Particularly, he mentioned that a third of Ukraine’s population is ethnic Russians living in territories “illegally” transferred by the USSR to Ukraine.44 The preparation for the use of troops to occupy Crimea and Donbas in late 2013 and early 2014.

The oil refining industry is a strategic industry to ensure the defensive capacity of the victim country, so its destruction was one of the goals of the aggressor country in the economic (hybrid) war.

The above factors provide grounds for the statement about the involvement of the Russian Federation in the elimination of the oil refining industry of Ukraine, and cause to investigate the use of the Russian corrosive investments or other methods of economic warfare.

The analysis of oil imports to Ukraine from the Russian Federation and other countries (Fig. 4.5.) shows that the first significant decrease in the import of Russian oil occurred in 2008, the same year Ukraine became a member of the WTO, that pro-Western authorities declared Euro-Atlantic intentions, the Russian war in Georgia, and Putin's speech at a NATO summit. Before that, the Russian Federation was almost the sole importer of oil to Ukraine, in which the economy still had pro-Russian orientation of the economy since the USSR time and the presidency of L. Kuchma.

Dynamics of raw oil market structure in Ukraine

Fig. 4.5. Summary diagram of the structure and dynamics of the oil raw materials market in Ukraine from 2006 to January 2022 (primary data received from the State Statistics Service: own production; and the State Customs Service: total imports, imports from the Russian Federation, imports from other countries, exports; estimations: oil raw materials for processing by Ukrainian refineries)45

44

https://www.unian.ua/politics/110949-vistup-volodimira-putina-na-samiti-nato-buharest-4-kvitnya-2008-roku.html

45

https://map.ua-energy.org/uk/resources/?ordering=-publication&paginate_by=20&subject=14&energy_resource=24&coverage_ date_range_start=&coverage_date_range_end=&cost=; https://trendeconomy.ru/data/commodity_h2?commodity=2709&indicato r=TV&trade_flow=Export,Import&time_period=2005,2006,2007,2008; http://www.ukrstat.gov.ua/

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Such a state of affairs in 2008 had a negative impact on the production (and, among other things, export) of petroleum products and, accordingly, on the profits of the refineries. The exceptions were refineries owned by Russian oligarchs, the profits of which increased significantly.

This challenge to this strategic industry of Ukraine prompted the pro-Western government of Ukraine during the presidency of V. Yushchenko to make certain efforts to find alternative importers of raw oil. Oil from Azerbaijan, Kazakhstan, Turkmenistan and the Middle East appeared on the Ukrainian market.46 This allowed, against the background of a gradual decrease in Russian imports and a drop in domestic production by 2010, an increase in the volume of raw oil for the refineries and, as a result, more oil refining in Ukraine.

With the arrival of pro-Russian President Viktor Yanukovych and Prime Minister of Ukraine Mykola Azarov in 2010, there was a decrease in the volume of alternative oil imports against the background of a gradual cessation of imports from the Russian Federation.

The final collapse of import volumes of Russian raw oil for Ukrainian refineries took place in 2012. The main alternative suppliers and importers were Kazakhstan, Turkmenistan, and Azerbaijan. And the total volume of imports did not exceed 2 million tons, which, in combination with its own production (no more than 4 million tons), did not allow Ukraine to supply the country with refined products. The small sized of imports were due not only to the terms of supply contracts but also to the condition of the transport system, the destruction of which was also associated with Russia.

In fact, at the beginning of the military aggression of the Russian Federation against Ukraine in 2014, Ukraine was unable to produce strategic goods like fuel, including for military needs.

General information on the artificial reduction of imports of Russian raw oil, the activities of the pro-Russian authorities are the preliminary signs of the hybrid influence of the Russian Federation. What specific methods did Russia then apply?

The operation to destroy the refining industry of Ukraine, according to analysts, was comprehensive and included several stages, each of those being a lower-level operation by itself.47

46

https://map.ua-energy.org/uk/resources/829a72bd-1bf2-4463-b819-692a81417d37/

47

These are preliminary stated stages. An in-depth study of all aspects of destruction of the oil refining industry (including the presence of miscalculations of the Ukrainian authorities) requires expansion of the study that is planned to be carried out during the next stage of the project.

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4.3. Stage 1 – Use of dumping by the Russian Federation to destroy the oil industry of Ukraine In 1995, Ukraine adopted the government's “Oil and Gas Program of Ukraine until 2010”, which provided for an increase in oil production to 7.5 million tons per year by 2010. But its implementation was disrupted, and Ukraine's production has been decreasing since 2007 (Fig. 4.6).48 Oil production in Ukraine (including gas condensate)

Fig. 4.6. Oil production in Ukraine49

At the same time, a comparative analysis of data on the prices of Russian oil for Ukraine from 2004 to 2007 and the market price of oil produced in Ukraine indicates a worsening situation for the country.

For example, on August 18, 2004, Russia and Ukraine signed a long-term oil transit agreement, under which oil from the Druzhba oil pipeline was delivered to the terminals of the Ukrainian port of Pivdennyi. In accordance with the signed agreement, TNK-BP took the responsibility to pump about 9 million tons of Urals oil annually through the pipeline from 2005 to 2007. Ukraine's profit from these supplies was estimated at $92 million. In addition, TNK-BP provided Ukrtransnafta with a commodity loan — 450 thousand tons of oil worth $108 million at 8% per annum.50 Under the terms of the contract, the average price of Russian oil was about 1212 UAH/ton.

Such a pricing policy of the Russian Federation for oil is also confirmed by data from Russian sources51 (Table 4.2).

48

https://www.epravda.com.ua/news/2011/10/14/301924/

49

http://www.ukrstat.gov.ua/

50

https://www.kommersant.ru/doc/552952

51

http://lib.ieie.nsc.ru/docs/buren%26neft.pdf

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Table 4.2.

Year

Average price for CIS countries

Average price for “far abroad” countries

2004

1045,20 UAH/t

1233,03 UAH/t

2005

1275,79 UAH/t

1738,29 UAH/t

2006

1556,97 UAH/t

2171,12 UAH/t

2007

1908,98 UAH/t

2450,84 UAH/t

At the same time, the price of Ukrainian production oil in 2006 was at the level of 1890 UAH/ton.52 As can be seen from the above examples, the price of Russian oil was lower than both the world prices and the Ukrainian oil production prices.

Such a dumping policy made it commercially attractive for Ukrainian refineries to buy oil from the Russian Federation because of the lower price, and to keep the profits from Ukrainian production at a level close to cost. The volume of production was reduced and the exploration of promising oilfields was not carried out.

The abandonment of Ukrainian oil production was facilitated by the fact that during this period 52% of the refining industry was owned by Russian oil companies, which naturally worked on their own raw materials produced in Russia.

4.4. Stage 2 – Shutdown of refineries controlled by the Russian Federation: Corrosive investments Studying the fate of Ukrainian refineries shows that three of them were owned by Russian structures before the shutdown. The sequence was as follows: •

•

52

2005 – Kherson Refinery. From 1996 to 2006, the facility was under control of the Ukrainian branch of Alliance Group, a Russian company owned by Chechen businessman Musa Bazhaev, who was close to V. Putin. The official reason for its shutdown was reconstruction, which was not really carried out.

Although in 2006 the shares of the non-operating enterprise were bought by the Ukrainian businessman I. Yeremeyev, the enterprise was not launched due to the absence of the main technological installations decommissioned by the former owner before the modernization, which never took place.53 2010 – Odesa Refinery. From 1999 to 2013, the facility was under control of Russia’s Lukoil, and from 2013 to 2017 by the pro-Russian oligarch S. Kurchenko, who is currently hiding in the Russian

https://www.epravda.com.ua/eng/publications/2012/12/18/351426/

53

https://nashigroshi.org/2021/05/31/vid-al-ians-enerho-treydu-do-putina/ http://ruporzt.com.ua/ukraina/1879-xersonskij-npzvidklav-zapusk-virobnictva.html; http://www.liga.net/infografica/76177_koroli-benzokolonok-komu-prinadlezhat-ukrainskie-npz. htm; https://www.academia.edu/38485641/СУЧАСНИЙ_СТАН_ПРОБЛЕМИ_І_ПЕРСПЕКТИВИ_СТВОРЕННЯ_В_УКРАЇНІ_НАФТОВОГО_ТА_ЕНЕРГЕТИЧНОГО_РЕЗЕРВІВ

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•

Federation. Since 2017, it has been owned by the state. In 2019, the State Property Fund of Ukraine established that production would not resume as a result of equipment failure.54 2012 – Lysychansk Refinery. From 2000 to 2012, it was under control of TNK – BP, an entity 50% owned by Russian oligarchs and sanctioned in Ukraine, the EU, the U.K. and other jurisdictions. Since 2012 its owner has been Russia’s Rosneft, which stopped the enterprise immediately after the acquisition of shares.55

Thus, the Russian owners stopped half of Ukraine's refineries, which had a total nominal capacity of 26.7 million tons per year, or 52% of total capacity, using the corrosive investment method.

4.5. Stage 3 - Stopping the oil supply The shutdown of half of the refineries between 2006 and 2013 drastically reduced the production of petroleum products, while three other refineries could potentially produce fuel. Therefore, the Russian Federation stopped pumping oil to other refineries – Drohobych, Nadvirnyansky, and Kremenchuk.56 The first two refineries were shut down, while transit to Europe by the Druzhba oil pipeline continued, which may indicate that the halted flow to Ukraine’s three remaining refineries were due to non-technical reasons.

Production was resumed only at the Kremenchuk refinery, with imports from Azerbaijan and Kazakhstan supplied by sea, and then by rail and road transport.57

4.6. Stage 4 – Impossibility of diversification of supply by oil pipelines from other countries Although the Russian Federation stopped pumping its own oil to Ukraine, theoretically there remained a possibility of using 3 entrances to the Ukrainian oil transportation system (that go through the territory of the Russian Federation) to transport oil from Azerbaijan, Kazakhstan, Turkmenistan.

In order to make such supplies physically impossible, Russia in 2012: • •

filled the branch of the Michurinsk-Kremenchuk oil pipeline (No. 2 in Fig. 4.2) with substandard technological oil that led to Azerbaijan's refusal to supply oil by this route58 after the cessation of oil supply to the Lysychansk refinery, it dismantled a part of the Samara – Lysychansk pipeline (No. 3 in Fig. 4.2) on its own territory.59

There were also Russian measures taken to block Ukraine's receipt of alternative oil through the Odesa-Brody oil pipeline, reserving its capacity for Russian raw materials and for use by Belarus.60 Thus, the Odesa-Brody oil pipeline was idle from the moment of construction until 2004 due to the lack of guarantees for the supply of Caspian oil. Russia sought to use this area in reverse mode for the supply of

54

https://web.archive.org/web/20210514233123/https://www.2000.ua/v-nomere/derzhava/resursy/speckonfiskacija-bezdarnajaibespowadnaja.htm; https://web.archive.org/web/20220528134413/https://zn.ua/ukr/energy_market/odeska-intriga-_.html

55

https://web.archive.org/web/20220622140031/https://file.liga.net/companies/lisichanskii_npz

56

https://biz.censor.net/resonance/3075515/tamnits_kremenchutskogo_npz_chomu_kompanya_kolomoyiskogo_hova_nformatsyu

57

https://biz.censor.net/resonance/3075515/tamnits_kremenchutskogo_npz_chomu_kompanya_kolomoyiskogo_hova_nformatsyu

58

https://neftegaz.ru/news/incidental/252274-28-km-arestovannogo-v-ukraine-nefteprovoda-michurinsk-kremenchug-mogutvzorvatsya-v-lyuboy-moment-ek/; http://oilnews.com.ua/news/article11173.html?hl=0YPQutGA0YLQsNGC0L3QsNGE0YLQsA

59

https://sd.ua/news/13101

60

https://focus.ua/economics/152928

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Russian oil to the Mediterranean ports. On August 18, 2004, a long-term oil transit agreement was concluded between Ukraine and Russia, under which oil from the Druzhba oil pipeline would be delivered to the terminals of the Ukrainian port of Pivdennyi. This deprived Ukraine of the opportunity to receive oil from alternative sources of supply through the Odesa Maritime Terminal and to supply it to Ukrainian refineries.61 The oil pipeline operated until 2010, when the Ministry of Energy of the Russian Federation officially reported that there were no guarantees of oil transit due to the lack of cost effectiveness.62 Oil transit was stopped.

Since 2011, the pipeline has been operating in reverse mode for the supply of Venezuelan oil to Belarus (Mozyr). However, this contract for 8 million tons per year for the period 2011–2013 was prevented by Russia, which offered Belarus more favorable terms for oil supply within the Customs Union (in fact, the capacity was reserved but the volumes were minimal). Since the end of 2011, deliveries under this contract have been discontinued.63 In 2011, Ukrtransnafta failed to ensure pumping from the Odesa terminal of an experimental batch of oil purchased from Azerbaijan for a refinery in the Czech Republic. This was due to blocking from Rosneft in Slovakia. As a result, oil was processed in the territory of Ukraine with losses of about 400 million hryvnas.64

Conclusions to Chapter 4 1. The refining industry of Ukraine, inherited from the former USSR, was represented by six oil refineries.

During 1996–2000, Russian structures established control over three refineries, in Kherson, Lysychansk, and Odesa.

2. Ukraine took over Soviet oil transportation infrastructure with 100% control of oil import routes to Ukraine by the Russian Federation.

3. Before the arrival of pro-Western political forces after the “Orange Revolution” in 2005, the dynamics of the prevalence of a high level of oil production over the level of consumption is traced. Since 2008, there has been a sharp decrease in the supply of oil from almost the only source – the Russian Federation.

Meanwhile, measures of pro-Western governments to establish the supply of alternative raw materials were curtailed in 2010 after pro-Russian forces came to power in Ukraine.

4. The oil refining industry is a strategic industry to ensure the defense capability of Ukraine, so the goal of its destruction by the Russian Federation is quite natural.

5. Analysis of the processes with regard to the enterprises of the industry, the volume of supply of raw materials to Ukraine and the fate of oil pipelines provided grounds to believe that the industry was being purposefully destroyed by Russia in stages by conducting successive operations: • • • •

Stage 1 – Dumping Russian oil at low prices to stunt Ukrainian production Stage 2 – Shutdown of refineries controlled by the Russian Federation using the corrosive investment method Stage 3 – Stopping Ukraine’s oil supply via trade embargo Stage 4 – Blocking alternative routes for supply of raw materials to Ukraine by supplying low-quality goods, sabotage, and reserving pipeline capacity for Russian needs).

61

https://zn.ua/ukr/energy_market/budemo_pratsyuvati_mozhlivo,_nad_pomilkami.html

62

https://www.epravda.com.ua/news/2010/06/19/239123/

63

https://web.archive.org/web/20200930230518/http://news.tut.by/economics/311617.html

64

https://web.archive.org/web/20160829040215/ http://delo.ua/ukraine/speshka-ukrtransnafty-stoila-goskompanii-400-mln- grivenubytkov-169115/

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6. In fact, at the beginning of the military aggression of the Russian Federation against Ukraine in 2014, Ukraine was unable to produce strategic goods including fuel for military needs. The minimal production at the Kremenchuk refinery, which was set up in 2016, is no longer available because of repeated missile attacks by the Russian Federation after February 24, 2022.

7. The obtained data can serve as a basis to develop a recovery strategy for the industry after the end of the open phase of war of the Russian Federation against Ukraine. The main pillar of that strategy is to avoid dependence on the aggressor country.

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CHAPTER 5.

CORROSIVE IMPACT OF THE RF ON UKRAINIAN STRATEGIC ENTERPRISES IN THE PULP & PAPER INDUSTRY Of all the industries where enterprises were identified as strategic for the economy and security of the state, paper production does not seem to be an industry that is directly responsible for the national security of Ukraine, when compared to mechanical engineering, energy, or telecommunications. Thus, only 10 enterprises of the paper production industry were defined as strategic by the Government of Ukraine at different times.

Technically, among those 10 enterprises in the paper industry, which were determined by the Government of Ukraine as strategic, three were apparently liquidated: Poninkivskyi Cardboard and Paper Mill JSC, Lutsk Cardboard and Paper Mill PrJSC and Dnipropetrovsk Paper Factory JSC. Later, it was established that the first two joint-stock companies were liquidated only “legally” in fact. Rather, the companies’ corporate structures were changed from JSC to LLC, and the profile remained unchanged. Thus, Poninkivskyi Cardboard and Paper Factory LLC and Lutsk Cardboard and Paper Factory in Ukraine LLC, which currently are not strategic, produce and export products and pay taxes to the state budget of Ukraine.

At the same time, analysis of the influence of the Russian intelligence on destruction of Dnipropetrovsk Paper Factory JSC is a vivid example of an operation aiming to inflict damage along several operational lines of hybrid warfare (not only economic, but also political and informational), which will be discussed below.

Therefore, the paper industry is considered by reviewers as one of the economic clusters where hybrid operations along the economic line should contribute to achievement of political goals of the aggressor country. The destruction of the paper factory caused Ukraine's dependence on RF not only in terms of importing paper, but also finished printed products.

*** In 2015, Dnipropetrovsk Paper Factory JSC was finally liquidated, although production stopped approximately back in 2010.

An interesting feature of this factory is in the fact that it was in the orbit of an ex-member of the Party of Regions of Ukraine, collaborator Oleg Tsarev who acted in the interest of Russian authorities and special services, especially since 2014.

5.1. Company history, production volume and financial condition before bankruptcy The factory was founded in 1914 and produced various volumes of paper products until the collapse of the USSR. During the economic crisis in 1990–1998, the factory was not operational. In 1998, the enterprise resumed its work as a JSC (joint-stock company).

In the 2000s, for the first time in Ukraine, the factory started producing offset paper weighing 60, 70, 80, 100 and 120 g per m.65

65

https://esu.com.ua/search_articles.php?id=22248

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The uniqueness of the Dnipropetrovsk Paper Factory in producing such a variety of goods is confirmed by archival data of the Ministry of Economic Development and Trade of Ukraine for 2007. At that time, the share of Dnipropetrovsk Paper Factory JSC in the production of writing and printing grade paper in Ukraine was 85% (15,000 tons).66 Taking into account the company's virtual monopoly in offset paper production, as well as taking into account the Ukrainian demand for offset printing paper at about 75 thousand to 85 thousand tons per year, it is possible to note the persistent demand for the products of Dnipropetrovsk Paper Factory JSC in Ukrainian market and, as a result, the stable flow of revenue.

This is confirmed by the analysis of the company's financial status during 2003–2007 (according to the YouControl system) with a positive balance of assets and revenue against liabilities (Fig. 5.1).

Fig. 5.1. Financial status of Dnipropetrovsk Paper Factory JSC during 2003–2007

Analysis has also been applied to results of legal disputes between OJSC Dnipropetrovsk Factory and counterparts, which were not controlled by the owners of the paper factory itself, regarding the debt settlements starting with 2006 and until the moment of bankruptcy.

During this period, Dnipropetrovsk Paper Factory JSC won court proceedings on debt collection in its favor in the amount of over 1.3 million UAH, and lost only about 47 thousand UAH. Therefore, the company's financial condition before 2008 can be considered favorable in terms of profit and development opportunities.

5.2. Owners of Dnipropetrovsk Paper Factory JSC before bankruptcy There is no information in the open registers about the owners back in the 90s. Given that the factory resumed operations in 1998 as a JSC, it is possible that until that year the company was gradually corporatized and probably privatized.

During 1998–2000, Oleg Tsarev was the Chairman of the board of Dnipropetrovsk Paper Factory JSC. Among the available archival data, as of 2003, owners of the enterprise were the Ukrainian State Joint Stock Holding Company UkrPapirProm (30%) and the Dnipropetrovsk Computer Center LLC with Foreign Investments (60%). The latter company was founded by the offshore High Tech Group, Ltd from the Marshall Islands, which, according to investigation of Ukrainian anti-corruption structures, was related to Oleg Tsarev.67

66

http://www.ukrexport.gov.ua/ukr/p%0Arom/ukr/25.html

67

https://bankruptcy-ua.com/news/300

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From 1995 to 1997, O. Tsarev himself was the Deputy Director, and later the Director of the Dnipropetrovsk Computer Center LLC with Foreign Investments (Fig. 5.2).

From 2008 to 2010, abovementioned 60% of the shares of Dnipropetrovsk Paper Factory JSC were already owned by 3 individuals related to O. Tsarev.68 Thus, as of the end of 2007, Dnipropetrovsk Paper Factory JSC was under control of the pro-Russian politician

Fig. 5.2. Enterprises controlled by O. Tsarev

5.3. “Toxic” foreign assets of O. Tsarev One of the founders of Dnipropetrovsk Paper Factory was the American firm High Tech Group Ltd, of Little Rock, Arkansas.

Management of this company included a Latvian citizen, Erik Vanagels.69 It was later established that he, as well as another Latvian, Stan Horin, were found to be involved by a media investigation by the Ukrainian anticorruption project “Our Money”, in 2011. That was a case regarding the purchase of the Black Sea oil rigs by the Ukrainian enterprise Chornomornaftogaz at an inflated price. Y. Boyko, the Minister of Energy of Ukraine at that time and a pro-Russian politician, according to media reports, used the intermediary offshore company Highway Investment Processing LLP, managed by E. Vanagels and S. Gorin, in that transaction, and actually earned USD 150 million

68

https://www.smida.gov.ua/db/owners/00278698/2009/4

69

https://opencorporates.com/companies/us_ar/800060593

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via the margin between the purchase and sale prices.70 However, the investigation later noted that there was no evidence of Y. Boyko's involvement in the corruption scheme.71 In general, the name of E. Vanagels was found in many offshore companies created by the Latvian company IOS Group, which has offices in Dublin, Riga, Moscow, and Kyiv. Only 2% of company clients are residents of Latvia.72 In 2018–2019, IOS Group was subject to investigation conducted by the international anti-corruption organization OCCRP, as well as one conducted by US financial control authorities. Over the entire period of its existence (1992–2017), it created thousands of shell companies in Great Britain, the Virgin Islands, Panama, Cyprus, Hong Kong, and other countries with the purposes of hiding assets and real owners from regulators and money laundering (Fig. 5.3). The company was associated with the large Latvian offshore bank ABLV, which was liquidated in 2019 following the statements made by the US Ministry of Justice (“the basis of the bank's business is money laundering”).

It is worth noting that the offshore structures created by the IOS Group were involved in illegal schemes, the implementation of which was deemed impossible without Russian special services support, namely money laundering in the interests of the highest political leadership of the Russian Federation and Russia’s illegal supply of weapons to Sudan.73 Further taking into account the previous research by Yu. Felshtinskyi, who noted the establishment of overseas enterprises in the late 80s and early 90s by the Soviet special services, and later by the Russian special services, seeking to support external operations in Western countries (IOS Group was established in 1992 in Ireland), it is possible to make an assumption on the type of “assistance” that the Russian special services provided in creating foreign structures for O. Tsarev to control a strategic enterprise in Ukraine.

Fig. 5.3. “Toxic” offshore company of O. Tsarev and its possible connection with the RF

70

https://far.chesno.org/case/341/

71

https://www.pravda.com.ua/news/2018/02/2/7170377/

72

https://www.pravda.com.ua/news/2011/11/22/6776207/

73

https://www.occrp.org/ru/troikalaundromat/how-ios-group-supersized-the-shell-company-game

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5.4. “Preparation” of Dnipropetrovsk Paper Factory JSC for bankruptcy In 2007, the Dnipropetrovsk Economic Court enacted the decision recognizing the debt of Dnipropetrovsk Paper Factory JSC to Dnipropetrovsk Computer Center LLC with foreign investments in the amount of UAH 25.5 million,74 which the factory was expected to settle by confiscating property, since the paper company's accounts were out of funds.

In such a way, O. Tsarev transferred assets from one structure under his control to another, “artificially” preparing a strategic enterprise for further bankruptcy.

5.5. Start of bankruptcy In 2008, the “Papir” Manufacturing Enterprise LLC filed a lawsuit with the Dnipropetrovsk Economic Court to declare Dnipropetrovsk Paper Factory JSC bankrupt due to a debt of about UAH 160,000. The court declared the factory bankrupt and ordered the liquidation procedure by its resolution dated 09 October 2008.75 Investigators of the “Nashi Groshi” Project published data confirming affiliation of the “Papir” Manufacturing Enterprise LLC in O. Tsarev's orbit.76 Thus, a pro-Russian politician handled an “artificial” bankruptcy of a strategic enterprise that was a monopolist in the offset paper production market.

Due to the fact that 30% of the factory was owned by the state consortium Ukrpapiprom, the public structures subsequently initiated a court procedure to prevent bankruptcy. At the same time, the “insurance shot” in this story, in our opinion, was delivered by a subsidiary structure of the Russian bank VTB.

5.6. Consolidation of bankruptcy with the help of a Russian bank In 2015, the Commercial Court of Dnipropetrovsk oblast enacted the final court decision declaring Dnipropetrovsk Paper Factory JSC bankrupt after a long litigation following the claims of VTB Bank against the structures of O. Tsarev in the amount of about UAH 135 million (Fig. 5.4).77

Fig. 5.4. Claims of VTB Bank - Ukraine to O. Tsarev's enterprises for debt collection via court as of 2013

74

https://opendatabot.ua/court/963221-4e83f0f420a4ad85e321415e09ebab59

75

https://gorod.dp.ua/news/14730

76

https://nashigroshi.org/2014/02/17/ridni-firmy-tsarova-zaborhuvaly-rosijskomu-banku-bilshe-100-miljoniv/

77

https://www.epravda.com.ua/news/2014/02/17/420285/

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5.7. Consequences of the bankruptcy of an enterprise that was strategic for economy of Ukraine From 2008 to 2020, production of printing paper in Ukraine decreased by almost eight times. The “twofold” reduction took place in 2011 and 2014, when the court decisions declaring bankruptcy of Dnipropetrovsk Paper Factory JSC were finally enacted.

Such a state of affairs caused Ukraine to become completely dependent on offset paper imports. According to the Association of Ukrainian Paper Industry Enterprises UkrPapir, during 2019–2021 alone, the main factors directly affecting imports into Ukraine were the following: 1) EU paper export quotas because of: o o

reduction of imports from China; repurposing a number of European factories from production of offset paper to packaging and cardboard. Such production is more profitable, less complicated, cheaper and meets the EU requirements in a transition to paper packaging materials in view of the polymer packaging ban;

2) doubled price of paper due to decreased production in EU countries; 3) increased maritime transportation prices, which made it unprofitable to import paper from Asia or America.78 Such factors established the dependence of Ukraine on the imports of offset paper from Russia, which amounted to about 40%. At the same time, this actually was a direct effect, since Russia's acquisition of leverage in the format of paper supply capacity directly created conditions for limiting Ukrainian publications by manipulating the volume, pricing, and timing of the paper supply. The consequences of this may be fewer Ukrainian books published and an increase in Russian printed products to manipulate the public opinion of Ukrainians.

At the same time, the hybrid nature of such actions also resulted in causing the split in Ukraine between authorities, publishing houses and manufacturers on account of dependence on Russian paper.

Thus, in November 2021, the Association of Ukrainian Paper Industry Enterprises UkrPapir appealed to the Cabinet of Ministers of Ukraine to ease the requirements banning the paper product imports from the Russian Federation. The association justified its position by the lack of Ukrainian industry’s capacity to produce the required quantity of paper, by the higher price of European paper, at premiums of 30% to 50%. This led to the bankruptcy of numerous publishing houses, the dismissal of employees and the failure to fulfill program requirements for printing Ukrainian textbooks.

78

https://biz.censor.net/r3316342

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Conclusions to Chapter 5 In this section, the project reviewers used the example of Dnipropetrovsk Paper Factory JSC to reveal a scheme that led to the Russian Federation’s corrosive influence on the Ukrainian economy via establishing control over a profitable and promising enterprise and driving it to bankruptcy, which increased Ukraine's dependence on Russian paper suppliers and created conditions for conducting disruptive hybrid operations along political and informational operational lines.

The scheme includes a sequence of the following actions: • • • • • •

establishing control over the respective enterprise, the owner being either a Russian, a pro-Russian person or a person recruited to the role establishing contractual relations between that Ukrainian enterprise and another that is secretly controlled by the same people establishing financial relations with a Russian bank, including a loan or a third party liability assurance artificial failure of the Ukrainian enterprise to comply with the terms of relations with the one secretly controlled by the same beneficiaries a court judgement against the Ukrainian enterprise including the payment of debts using the enterprise’s assets in the event of a bankruptcy appeal by the public authorities of Ukraine, further consolidation of the bankruptcy by means of a Russian bank filing civil lawsuits against the Ukrainian enterprise to seek the settlement of debts

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CHAPTER 6.

CORROSIVE IMPACT OF THE RF ON A UKRAINIAN STRATEGIC ENTERPRISE OF THE ENERGY INDUSTRY As mentioned above, one of the industries in which about 36% of strategic enterprises were formally liquidated is science and technology.

Impulse OJSC was a focus for this project as an entity with a powerful scientific and technical base since Soviet times that was subsequently liquidated. As it turned out in the course of further research, this powerful enterprise and critical element of Ukrainian economic infrastructure was formally liquidated, but actually reorganized with the aim of shifting full control to the leader of the hitherto unknown to the general public V. Yeliseevs’ Financial and Industrial Group (coming from the RF and Donbass). At the same time, appropriation of such a profitable pearl remained unnoticed by both “political elites” and oligarchic clans, which were snatching state property as predators, and not typically minded to leave unattended enterprises even much less significant than Impulse OJSC. Historical research conducted on the establishment process of the company revealed another possible scheme to boost RF’s hybrid influence on a strategic enterprise in Ukraine. There are cases when destruction of a Ukrainian enterprise can cause damage to the aggressor country itself, for example, a Ukrainian enterprise relied on to service systems or equipment in the RF. In such instances Russia can use the method of establishing control over the enterprise (including using clandestine options) to ensure the security of its own enterprises, obtain intelligence information from the Ukrainian enterprise, and redirect financial flows in the interests of the aggressor country.

In the case of Impulse OJSC – now known as SRPA Impulse PJSC – the project reviewers identified this kind of activity, even after the large-scale military invasion of the RF.

6.1. Brief background description of the enterprise Impulse dates back to 1956 as the Lysychansk branch of the Moscow Special Designing Bureau No. 245 (developer of automated control systems - ACS - for the national economy and the military-industrial complex).

In 1982, it was designated as the leading organization in R&D of such ACS for the nuclear power plants (NPP) of the USSR. From 1985 to 1994, it took part in installation of control systems at 22 nuclear power units in different countries of the former socialist bloc in Central Europe. After Ukraine gained independence, it was reorganized into an open joint-stock company (OJSC), which developed and installed ACS, including at Russian facilities both nuclear and non-nuclear (Kolsk and Kursk NPPs, Kirishi and Berezovka HEPPs and Production Association Mayak).79 Within Ukraine, nuclear facilities have been targets of Russian aggression during the current war.

Today, the enterprise continues steady operations in line with its profile and participates in tenders for development and installation of products at critical infrastructure facilities not only in Ukraine, but also abroad.

79

https://webcache.googleusercontent.com/search?q=cache:pKWX1C4V1ukJ:https://impulse.ua/index.php/ua/istoriya- predpriyatiyaua&cd=1&hl=ru&ct=clnk&gl=ua

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6.2. Formal liquidation of the enterprise by Volodymyr Yeliseev The company's activities led to its inclusion into the List of enterprises of strategic value for the economy and security of the state by the Cabinet of Ministers of Ukraine in 1997. At the same time, in 2007, the operations of Impulse OJSC were terminated as a result of “voluntary liquidation”.80 In the course of research, reviewers found out that the liquidation was purely formal, since the company's assets were officially transferred to another structure with a similar name, SRPA Impulse PJSC, with the aim of establishing full control over the enterprise by V. Yeliseev.

There is very little information about Volodymyr Yeliseev on the Internet. He was born in 1956 in the Belgorod oblast of Russia. V. Yeliseev does not disclose any details about his education.

V. Yeliseev became an Impulse employee at the age of 25 in 1981, and by 1989 he occupied the position of Vice President.81 Such rapid career advancement was probably related to support from his wife's father – Vasyl Mykhailovych Somkin,82 a leading specialist in the sector of industrial automation of the USSR and a native of the RF. For a long time, Somkin occupied executive positions in the mother structure of Impulse in Russia. When considering the company profile, this career path must have been noticed and supported by the KGB structures of the USSR. V. Yeliseev established full control over the enterprise in 2002–2003 by transferring the assets of Impulse OJSC to the newly created SRPA Impulse PJSC , of which he owned 100% (Table 6.1).

Table 6.1.83

Name of the legal entities that owned shares of Impulse OJSC

1.

2.

3.

Nitropuls LLC (13387839) Severodonetsk

BM-Invest JSC (13379018) Pervomaysk

BDC “Liga-brok” (21821497) Pervomaysk

Shares, 2002

5,58%

Shares, 2003

Notes

-

Controlled by a subsidiary of the Hungarian company Cyklo-Trade and russian AMR JSC, which was affiliated with O. Deripaska.

-

V.V. Belikov, member of the Party of Regions as of 2002.

7,64%

11,41%

80

Based on data of Unified Public Registry of the Ministry of Justice (received via the Youcontrol system)

81

https://esu.com.ua/search_articles.php?id=17637

82

https://www.computer-museum.ru/histussr/npo_impuls_2.htm

83

Based on data of Unified Public Registry of the Ministry of Justice (received via the Youcontrol system and Smida: https://smida.gov.ua/db/prof/00229760)

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Name of the legal entities that owned shares of Impulse OJSC

4.

5.

SRPA “Impulse” JSC (31393258) Severodonetsk

Other shareholders (<5% shares)

Shares, 2002

Shares, 2003

-

79,817%

Notes

75,37% (1001 shareholders)

20,183%

Labor team

Analysis of financial indicators for the period from 2001 to 2007 suggests that V. Yeliseev gradually transferred the company’s HR capacity, asset base and contracts from the old corporate structure to the new one, which was entirely under his control (Fig. 6.1). This explains the subsequent “voluntary liquidation” of Impulse OJSC,84 which had strategic value for the security and economy of Ukraine.

Impulse OJSC (thousand hryvnias)

SRPA Impulse PJSC (thousand hryvnias)

Fig. 6.1. Financial indicators of Impulse OJSC and SRPA Impulse PJSC confirming the transfer of assets85

According to estimates of the project reviewers, taking into account the equity of Impulse OJSC, V. Yeliseev likely spent at least UAH 950,000 on the organization and reorganization of enterprises, or about USD 175,000 based on the foreign-exchange rate at the time.

The amount could have been lower due to the possible use of administrative tools by V. Yeliseev, such as inducing the labor team to sell shares at a reduced price in exchange for maintaining labor relations.

84

https://www.epravda.com.ua/publications/2012/08/2/331082/

85

Based on data of Unified Public Registry of the Ministry of Justice (received via the Youcontrol system)

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However, given a lack of information about Yeliseev’s wealth at that time, it is impossible to make a conclusion regarding any financial support, for example from the RF, in exchange for future loyalty of the management of the company.

Therefore, project reviewers identified other factors that may indirectly reveal or suggest covert connections between Yeliseev and the RF.

6.3. Avoiding raids of the masters of Donbass The company is located in the city of Severodonetsk, Luhansk oblast, which has always been a fiefdom of the pro-Russian Party of Regions. That party was taking over profitable business of aliens. It is not clear if V. Yeliseev is a party member.

In an interview by the Ukrainian publication “Censor” in 2017, V. Yeliseev commented that, “seeking protection against raider captures by the regionals [representatives of the “Party of Regions”, a pro-Russian political party chaired by Ukraine’s ex-President Viktor Yanukovych],” he transferred the company’s assets to the Cypriot offshore company Industrial Devices & Systems Ltd.86,87 Although such “protection” was not impregnable for the clan of regionals of that time.

The above may indicate that V. Yeliseev had more powerful patrons from the RF who could influence and instruct the ruling Party of Regions and its leadership.

6.4. Using offshore entities that share an address and management structure with other companies serving Russian oligarchs It was identified that at least in the period from 2012 to 2021, V. Yeliseev used an offshore structure to cover ownership of SRPA Impulse PJSC. The address and management of it matched similar structures of a sanctioned Russian oligarch, O. Mordashov.

The Cypriot offshore company Industrial Devices & Systems Limited controlled by V. Yeliseev was located88 at the same address in Limassol, Cyprus, as at least 21 other structures in the orbit of O. Mordashov.89 The same address was used in registration of another offshore entity, Biscone Ltd., which was sanctioned by the decision of the NSDC of Ukraine on January 21, 2022. The offshore company owned by V. Yeliseev has the same managers as the similar structures of O. Mordashov called Astroshine Ltd., Loranel Ltd. and Varndell Ltd. (Fig. 6.2).

86

https://biz.censor.net/r3023286

87

https://impulse.ua/download/struktura_vlasnosti/shema_struktura_vlasnosti_2021.pdf

88

https://opencorporates.com/companies/cy/HE311264

89

webcache.googleusercontent.com/search?q=cache:-o3hFputMJkJ:https://www.e-disclosure.ru/portal/FileLoad.ashx%3FFile id%3D1694115+&cd=17&hl=uk&ct=clnk&gl=de; webcache.googleusercontent.com/search?q=cache:GSi35W-whhkJ:https:// textarchive.ru/c-2605583-pall.html+&cd=27&hl=uk&ct=clnk&gl=de; https://static.istories.media/uploaded/documents/fa3a 5c61792044acb6fdec04d5b62336.pdf; https://opencorporates.com/companies/cy/HE311264; https://opencorporates.com/ companies/cy/HE239494; https://opencorporates.com/companies/cy/HE239790; https://i-cyprus.com/company/264898

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Offshore Companies of V. Yeliseev and O. Mordashov Registered to the Same Address

Fig. 6.2.

An additional and indirect factor confirming the connection between V. Yeliseev and O. Mordashov is the latter's interest in Ukrainian enterprises that serve nuclear energy sector. O. Mordashov owns (as of October 2021) 5.6% of the Ukrainian company Turboatom, through the Cypriot offshore company Biscone Ltd., and also owns the Russian company “Power Machines” OJSC, which is a competitor to Ukrainian enterprises.90

90

https://suspilne.media/175037-kabmin-proponue-vvesti-sankcii-proti-akcionera-harkivskogo-turboatoma/

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6.5. SRPA Impulse PJSC cooperation with RF affiliated structures It has been established that SRPA Impulse PJSC has dealership relations with at least two foreign companies related to the RF: Bulgaria’s Spartak-B, also a dealer and official representative of the Russian R&D company Elemer; and Czechia’s Škoda JS a.s., controlled via a Dutch structure by the Russian group United Machine Building Plants, whose beneficiary is Yu. Kovalchuk, who is close to Putin.91 It should be noted that in separate tenders for supply of products manufactured by SRPA Impulse PJSC the above-mentioned dealers take part and win, whereas work is performed by SRPA Impulse PJSC as a subcontractor. This may indicate a conspiracy between SRPA Impulse PJSC, its dealers affiliated with the RF, as well as corruption links with the state institution conducting the tenders (Fig. 6.3) allowing for bid rigging.

Fig. 6.3. Connection of SRPA Impulse PJSC with structures related to the RF

91

https://or.justice.cz/ias/ui/rejstrik-firma.vysledky?subjektId=714241&typ=UPLNY

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6.6. Recruiting engineering personnel from the RF On May 6, 2022, SRPA Impulse PJSC used the Russian online job board at employment-services.ru to post a full-time programming engineer job in the city of Severodonetsk and with payment in rubles for a trial period92 (Fig. 6.4). The job was not posted on Ukrainian job search portals such as work.ua, grc.ua and jobs.ua.

Fig. 6.4. Screenshot of personnel recruiting attempts in the RF

This creates favorable conditions for penetration of Russian special services into a domestic enterprise working in the interests of critical infrastructure facilities of Ukraine.

92

http://employment-services.ru/vacancy/?action=read1&id=12535724

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Conclusions to Chapter 6 1. Currently, relying on open sources information to confirm V. Yeliseev's direct connection with Russia is complicated.

2. However, the presence of such a connection can create the following threats: •

•

•

•

Partial withdrawal of capital to the RF. Assessing specific amounts through open sources would be difficult, since information on contractual relations between Škoda JS a.s. and SRPA Impulse PJSC is confidential.

Leaked information about critical infrastructure, including features of the technological processes of managing energy and transport facilities. The latter threat makes it easier for the aggressor to commit crimes, block technological management processes and committing sabotage or terrorist attacks on critical infrastructure.

The withdrawal scheme is based on participation of nominally Ukrainian or Western structures that have Russian beneficiaries in the state tenders and on the presence of Russian influence such as family relations and covert operations in Ukrainian structures, which can be market leaders or monopolists of products and services aimed at, primarily, critical infrastructure.

The elimination of such threats requires the prohibition of participation in state tenders by business entities that have direct or disguised beneficiaries related to the aggressor country as well as those chaired by citizens of the RF.

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GENERAL CONCLUSIONS 1. The economic war against Ukraine should be considered as a component of the hybrid war waged by the Russian Federation.

It is carried out in the form of operations based on the strategy developed by the aggressor country and therefore is not spontaneous but planned in nature, and disguised from the victim for as long as possible.

At first glance, the targets of aggressive actions are individual enterprises. But in reality, the totality of affected economic targets promotes achieving the goal of destroying certain sectors of the economy and sometimes also achieving certain political goals. The real goal of the aggressor becomes clear at the final stage of the operation, when preventing destructive consequences is difficult or in certain cases impossible.

2. The covert nature of these operations creates a challenge: how can Ukrainian authorities determine what are aggressive actions of the aggressor country and what is simply unfair competition or bad economic decisions by entrepreneurs? How can they to detect such operations at an early stage and ensure effective countermeasures? The countermeasures should include both legislative measures that are taken in advance and form barriers to aggressive attacks on the economy, as well as systematic monitoring work for the timely detection of disguised aggressive intent in the implementation of attempts to circumvent these legislative barriers.

3. These operations have common features because of the limited number of ways and methods available to implement the plot. A complete list of techniques and methods of the aggressor’s actions can be developed by analyzing a significant number of economic hybrid operations. Understanding such ways and methods will help identify regular signs of the aggressor’s operations, which in turn will inform the design of tools and methods for detecting them.

4. This study of the aggressive impact on strategic enterprises of Ukraine showed that the “processing industry” suffered the most severe losses, as about 50% of enterprises lost their operational capacity or initiated bankruptcy procedures, followed by the “mining industry and quarry development” (about 47% of losses) and “scientific and technical activity” (about 35%).

The strike inflicted on the processing industry deprived Ukraine of income from added value from the production of end user products and also turned the country into an agrarian and raw material appendage of the world economy. Furthermore, this led to a stoppage or reduction of production at the respective enterprises supplying the liquidated enterprises, creating a loss of production chains.

The destruction of one-third of the enterprises in the scientific and technical sector deprived the domestic economy of progress in development, led to Ukraine's dependence on foreign technologies (the cost of which in some places exceeds the cost of products manufactured using them), as well as the outflow of experienced personnel.

5. Understanding the losses and admitting mistakes makes it possible to determine priorities when planning the economic recovery after the war ends. Titanium extraction and processing is an example (Chapter 3).

Analysis of other sectors and sub-sectors of the economy will show promising areas for capital investment.

6. The aggressor’s operations along the economic operational line have an economic impact but also maximize the impact of other, non-economic elements of the hybrid war. The destruction of the Dnipropetrovsk Paper Factory is an example of that (Chapter 5).

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7. Factors contributing to successful conduct of hybrid operations along the economic operational line include: • • • • •

Incompetent authorities; corrupted power structures in all branches of government; seizure of the state by the aggressor through covert infiltration of authorities, including establishment of covert control over regulatory institutions, particularly those overseeing the economy; carrying out support operations along other operational lines; insufficient study of the very phenomenon of hybrid war, which contributes to a misunderstanding of the processes taking place.

8. Immediate actions are required in order to protect the national interests.

•

The Cabinet of Ministers of Ukraine should urgently revise the approach to managing the Register of Strategic Enterprises: o

o o o

•

The Verkhovna Rada of Ukraine: o

o

•

Accelerate the development and regulatory definition of the “strategic enterprise” concept from the perspective of the importance of economic entities to ensure the needs of state defense and the protection of national interests, primarily during conditions of full-scale war; develop new criteria for recognizing entities as having strategic importance for the economy and the security of the state, regardless of the ownership type; fully assess all economic and industrial potential available in the state, based on the regulatory definition of “strategic enterprise” and established criteria; provide legislative consolidation of the balance of interests between the state and business regarding the assets of strategic enterprises in the private sector of the economy, which work for the defense of Ukraine. This is to ensure uninterrupted production of the necessary defense industry products. In particular, introduce a ban on repurposing or artificially stopping production during war; normalize the possibility of introducing a temporary state administration at those enterprises that have already stopped their work or are at different stages of bankruptcy.

legally prohibit granting ownership rights to the assets of strategic enterprises, regardless of their ownership type, to citizens and legal entities from the Russian Federation, Belarus or other states that supported Russian aggression in Ukraine. legally enshrine the forced return to state ownership of the assets of strategic enterprises directly or indirectly owned by citizens of Ukraine where personal economic sanctions have been imposed by the Decree of the President of Ukraine on the basis of decisions declared by the National Security and Defense Council of Ukraine if the ultimate beneficiaries are citizens of Russia, Belarus and other states against which some personal sanctions have been imposed by the EU, the UK, Canada or the USA due to Russia's invasion of Ukraine.

The CMU in cooperation with the Verkhovna Rada of Ukraine: o

o

develop a targeted program of financial support for innovative activities by strategic enterprises in the state sector of economy, including the implementation resources of projects funded by the financial institutions of the EU, the U.S. and other countries contributing to the “Ukraine Recovery Program”.

In August, the project implementation team submitted the above proposals to the National Security and Defense Council of Ukraine (NSDC), which forwarded them to the Cabinet of Ministers of Ukraine for consideration.

9. The study results indicate possible directions of efforts to restore the economy of Ukraine.

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Soon after completion of the research and analytical work on the project, a significant event took place, which was directly related to the problem under study and largely reflected the views of the authors of the study.

A decree of the President of Ukraine dated October 19, 2022 (#727/2022) enacted the decision of the National Security and Defense Council of Ukraine titled “On application of and amendments to personal special economic and other restrictive measures (sanctions).”93 This decision imposed sanctions on more than 250 businessmen, more than 1,500 companies and 4,000 propagandists, collaborators, and related companies. This enabled the confiscation of the assets of these legal entities and individuals for the benefit of the state.

The sanctions applied via these acts are bringing to a standstill or significantly complicate the conduct of hybrid operations along the economic operational line.

At the same time, the legitimate mechanism for deciding the future of these assets, although simplified as much as possible, involves a certain legal procedure. And this is natural for a lawful state, which Ukraine is.

Taking into account the intense pressure exerted by the aggressor, as demonstrated in the case of struggle of the Ukrainian authorities to regain control over the titanium industry, we anticipate a furious struggle at the stage of implementation of the decisions made.

In collecting the evidence for making a decision in favor of the state at the stage of case filing to the court, the Ministry of Justice can involve all necessary institutions of Ukraine, in particular the State Security Service and intelligence, as well as analyze public sources of information. The latter opens wide opportunities for participation of public organizations in the process. Moreover, taking into account the scale of work and certain limitations of time available for its implementation, such involvement becomes extremely essential.

93

https://www.president.gov.ua/documents/7262022-44481

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ATTACHMENT 1.

Volumes of Ukrainian extraction and exports of titanium ores and concentrates by country in natural units in 2014-2022 * – percentage of shipments in monetary value 2021

6 months of 2022

100% 553,05

100% 157,3

20,96% 112,51

14,07%*

52,18%*

-

11,9% 63,86

18,17%*

6,71%*

-

-

-

-

-

3,29% 20,39

-

-

3,98% 23,20

9,92% 59,46

14,1% 87,34

21,99% 118,08

6,9% 20,35

6,29% 42,90

16,5% 96,20

11,48% 68,85

10,7% 66,17

-

-

1,58% 4,67

8,59% 39,8

19,4% 113,3

22,99% 137,83

-

6,9% 37,27

-

-

-

-

-

51,38% 157,60

11,42% 61,32

2014

2015

2016

2017

2018

2019

2020

Production of ilmenite concentrate thousand tons

240

250

350

230

373

380

470

Exports of titanium ores and concentrates thousand tons

100% 328,51

100% 295,02

100% 463,40

100% 583,70

100% 599,49

100% 620,91

100% 536,87

Russia thousand tons

36,7% 120,43

36,4% 107,57

42,23% 195,70

12,8% 74,50

15,54% 93,18

17,23% 107,01

8,36% 44,89

Czech thousand tons

25,8% 88,66

24,6% 72,54

16,62% 77,00

19,4% 113,30

20,27% 121,50

22,7% 140,89

China thousand tons

18,3% 60,09

12,6% 37,24

14,9% 69,10

15,1% 88,20

5,08% 30,43

Great Britain thousand tons

6,13% 20,15

-

-

-

Kazakhstan thousand tons

6,1% 20,08

-

-

Mexico thousand tons

-

7,06% 20,84

USA thousand tons

3,07% 10,07

Turkey thousand tons Egypt thousand tons

21,23%* 15,28%*

The source of information on extraction volumes is data of the US Geological Survey. The State Geological Survey and the State Statistics Service of Ukraine do not publish information on extraction volumes due to the fact that this data is classified as the state secret.

6 months 2022 – hAps://ua.interfax.com.ua/news/economic/846974.html (the share of exports to other countries does not exceed 6.71% of shipments in monetary value) 2021 – hAps://open4business.com.ua/ukrayina-skorotyla-eksport-rud-shho-mistyat-tytan-na-42-vyruchku-na-12/ (the share of exports to other countries does not exceed 14.07% of shipments in monetary value) 2020 – https://eiti.org/sites/default/files/attachments/ukr_2020_ukraine_eiti_report.pdf 2019 – https://eiti.org/sites/default/files/attachments/report-eiti_ua_2019_final.pdf 2018 – http://mpe.kmu.gov.ua/minugol/doccatalog/document?id=245552601 2017 – https://eiti.org/sites/default/files/attachments/ukr_2017_eiti_report_full_ukraine.pdf 2016 – https://eiti.org/sites/default/files/attachments/ukrainian_and_english_2016_ua_eiti_report_short_version.pdf 2015 and 2014 – https://www.ukrnafta.com/data/Page_Documents/UAEITI_2014-2015_Report_UKR_final.pdf

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