Golden Dugouts. Who Earns and Gets Rich Pickings from Construction of Fortifications

A scandal is raging around Kharkiv defense lines. What are the schemes that the authorities commissioning the construction of fortifications and private contractors use to steal budget money when purchasing wood? Does this concern only the head of the Kharkiv Regional Military Administration Oleh Syniehubov, and who, after all, is the “shadow accountant” in these schemes, whom the Security Service of Ukraine is now diligently trying to find?

In September 2022, the Government of Ukraine, by Resolution No. 1003, entrusted the entire state industrial forest resource for economic use to one monopolistic enterprise “Forests of Ukraine” (instead of the liquidated 156 individual forest farms). The creation in wartime of a single management and logistics center for the prompt solution of important tasks, primarily related to the construction of fortifications, appeared to be a reasonable step.

It is clear that the Ministry of Defense and regional military administrations, in the face of a catastrophic lack of time and budget money, found it expedient to work with one centralized supplier of logs in the form of a state-owned specialized enterprise that could guarantee their timely delivery in the quantities required, directly and at a minimum price without market tricks.

But practice has diverged from theory once again.

Buying for a thousand — reselling for five

People's deputies are in the process of establishing a temporary investigative commission under the Verkhovna Rada of Ukraine to scrutinize the use of budget funds in the construction of engineering barriers on the contact line.

The Department of the Security Service of Ukraine in the Kharkiv region is launching an active phase of the pre-trial investigation in the criminal proceedings opened on February 14 this year regarding “the creation by a certain group of persons of an illegal mechanism of inflating the actual value of the wood supplied for the construction of fortifications in the territory of the Kharkiv region.”

The other day, due to a court order, law enforcement officers demanded from the Kharkiv Regional Military Administration a complete package of documents (57,000 printed sheets) regarding the purchase of timber from a number of private companies. They assume that when the Kharkiv Regional Military Administration concludes agreements with these firms, there are signs of a criminal offense, namely: appropriation and embezzlement of someone else's property due to abuse of official position and obstruction of the legitimate activities of the Armed Forces of Ukraine. “In order to implement the specified illegal intention, separate enterprises with signs of fictitiousness were registered, which are controlled by ‘shadow’ accountants,” the document states.

In one of the schemes documented during the investigation, these companies supposedly bought logs from Kharkiv state forestry farms at a price of UAH 970 per cubic meter. Subsequently, the Kharkiv Regional Military Administration, represented by the housing and communal services department, repurchased the same cubic meter at a price of UAH 4,100. Moreover, according to the Security Service of Ukraine, a fictitious logistics component was included in the price.

The investigators are identifying the persons involved in the budget theft and calculating the final figure of “excessive” overpayments from the military budget, currently from the total amount of UAH 170 million, which is the worth of the concluded Kharkiv contracts that got on their radar.

Apparently, this is only one episode in the scheme of profiting from wood meant for fortifications being built in the frontline areas.

"You should be thanful that it's not 8 or 10,000 per cubic meter, as charged by other companies that transport wood to the Zaporizhia and Donetsk directions!” emphasized emotionally a representative of one of the private contracting organizations at a recent briefing at the Kharkiv Regional Military Administration.

“On average, we purchased wood for fortifications from private companies at a price of UAH 5,500 per cubic meter, including transport costs. Directly on the commodity exchange, someone may buy such wood for UAH 2,000. But we focused on market prices,” explains the deputy head of the Kharkiv Regional Military Administration Mykhailo Kharnam, who until recently served as director of the local Budivelnyk LLC.

All forest resources to shell companies!

The whole scheme of the irrational (let's put it this way) use of budget funds with a significant inflation of the cost of timber and its delivery to vital frontline facilities lies precisely in the answer to the question: how, at a critical juncture for the country, their required volume ended up with individual entrepreneurs, and not at a specialized state enterprise — a permanent forest user, the Forests of Ukraine State Enterprise, which owns almost all the felled trees and the wood harvested from them after the forest reform that began during the war?

“I didn't have time to go to the commodity exchange, look for logs all over the country and build logistics chains for their transportation from the Polish forests to Vovchansk and Kupiansk,” explains Oleh Syniehubov, head of the Kharkiv Regional Military Administration. “Of course, we first turned to the Forests of Ukraine State Enterprise, sent out letters to state forestry farms with a request to provide us with 50,000 cubic meters of timber, necessary for the implementation of the government task of urgently building the third line of defense. We received an official reply with the signature of Yurii Bolokhovets, the director general of this sectoral state-owned enterprise, saying that they do not have such volumes. There are, they say, only some remains in the amount of several dozen cubic meters in Chernihiv region, in the central and western regions, and only for pickup. We found the necessary wood in the ownership of individual entrepreneurs, who also undertook to ensure its delivery. Direct non-advance contracts were concluded with them, outside tender procedures, for which there is no time. Was the amount of the final contract overpriced? Let independent experts answer that question. After all, we report almost every day online to the government and the Presidential Office about the progress in the construction of fortification facilities. Every step we take, every contract and even every word in negotiations with contractors is under the control of law enforcement officials, who, let's face it, have the opportunity to point out our shortcomings in time and warn us against mistakes.”

Wood processors have long been shouting about one of these shortcomings, which significantly raises the price of wood, explaining to forest reformers from the Presidential Office that the recognition of logs as an exchange commodity (by a separate government decree No. 1433 two months before the war!) does not contribute to the development of the forest sector in any way but only enables private exchanges to to get rich pickings from wood processing enterprises. And now also from the military budget. Exchange auctions, where the initial price of a cubic meter from the Forests of Ukraine State Enterprise can increase twofold or more, are definitely superfluous in the budget calculations between the state enterprise and state institutions when performing military tasks.

Given the need to account for every budget penny, the government must require that all managers of state funds comply with the requirements of its resolution No. 1275 regarding the specificities of defense procurement during the period of martial law, and therefore enter into direct contracts with the Forests of Ukraine State Enterprise.

On the other hand, the government must oblige the forest monopolist to reserve strategically important timber assortments and sell them directly to state institutions, not to private firms. And at a fixed price close to the cost of a cubic meter of wood.

How can there possibly be unfair market and exchange price markups on materials for the defense lines of a country at war?

Moreover, the Forests of Ukraine State Enterprise, created on the production and technical base of state forestry farms (which had their own machines for transporting timber, loading platforms with cranes and wood processing shops), could easily not only provide the entire logistics chain for the delivery of wood, but even build engineering and fortification structures. Without the help of all kinds of individual entrepreneurs and, therefore, without unjustified budget costs.

However, we will not be surprised if in a year and a half of the "forest reform" the state enterprise will no longer be able to boast of strong production and technical facilities. After all, the reformers of the industry made no secret of initiating the reform precisely for the purpose of introducing market relations of state-owned enterprises with private individuals in the execution of all types of works related to the forest at state expense. Well, they've made a lot of progress.

Fictitious logistics at the expense of the budget?

Oleh Syniehubov assured the attendees of the aforementioned press conference at the Kharkiv Regional Military Administration that he does not care who established seven private companies unrelated to the forest industry, which since 2023 have received from him more than 200 fortification contracts worth UAH 302 million. The main thing is that there should be no connection with the aggressor country and that 71,600 cubic meters of construction timber be delivered in the required volume within the stipulated time.

However, the head of the Regional Military Administration cannot but care about the price, precisely from the standpoint of national interests. And therefore, as the owner of the forest resources of Kharkiv region, he has all the authority, especially during the war, to set before the forest users (Forests of Ukraine State Enterprise and several Kharkiv state forestry farms subordinate to the State Agency of Forest Resources of Ukraine) the task of delivering forest for defense purposes with a clear definition of the volume and price.

Instead, the Kharkiv Regional Military Administration, as well as other military administrations of the frontline regions, as administrators of the fortification budget (almost UAH 7 billion in total), signed up to the scheme of private contracts with shell companies with a skyrocketing increase in the price of a cubic meter of timber.

“Having analyzed the stock market, I can confirm with documentary evidence that forest entities had the timber and the possibility of its delivery to the site of the construction of fortifications that Oleh Syniehubov and the heads of the Regional Military Administration of other regions needed,” says Daniil Malandii, an expert on the functioning of the wood market. “But a scheme was created in a centralized manner to legalize the sale of round timber for defense structures in favor of private companies. For example, in the Kharkiv region, the main buyer was Agro X LLC, registered in Volyn region. The company participated in all this year's stock exchange auctions of fortification assortments from local forestry farms. And these are thousands of cubic meters of softwood. 6,186 cubic meters of pine for fortifications were shipped to this LLC from the Izyum forest farm alone in the last two months. Then these cubic meters appeared in purchase-resale contracts to other companies, as a rule, connected to each other by the same founders. They increased the cost of the timber every time, including through fictitious logistics costs. The scheme operates not only in Kharkiv region. As a result, the entire ‘banquet’ was paid for from the budget of regional military administrations. Let the law enforcement officers find out who exactly is profiting from this bloody money.”

Why did Bolokhovets say no to Syniehubov?

It is not difficult to imagine the amount of probable budget losses on the schemes with fortification timber after the Forests of Ukraine State Enterprise has begun to urgently publish official information about its active participation in the direct supply of wood to the military directly from the lower warehouses, without the help of private shell companies.

The other day, for example, the forest entity won an MoD tender for 28,000 cubic meters of timber at a final price of UAH 3,750 per cubic meter, which included the price of product delivery, whereas in the estimates of regional military administrations, the figures range from UAH 5,500 to UAH 11,400 per cubic meter.

“Our enterprise is able to fully provide wood for the construction of fortifications. We consider it correct if the wood is delivered directly from the manufacturer. This will make it possible to optimize budget expenditures, guarantee the quality and timeliness of deliveries,” says Yurii Bolokhovets, who, according to Oleh Syniehubov, officially refused to provide him with timber for the construction of Kharkiv defense lines.

Read this article in Ukrainian and russian.