New York Times - 09.15.2005

New York Times

Deal for Kiev company renews charges of abuse

Scandal and internal rifts have destroyed the political coalition that President Yushchenko formed to create a corruption-free government

By Steven Lee Myers

Kiev -- In the last weeks of Leonid D. Kuchma's scandal-tarred presidency, an American company reached an agreement with his government to take control of a state-owned chemical factory in eastern Ukraine under terms  that have been criticized as secretive and suspiciously generous. On Sept 2, dozens of men dressed in camouflage and body armor stormed and seized the headquarters of the factory, the Severodonetsk Azot Association. They were accompanied by officials of a new government, carrying an order signed by President Viktor Yushchenko.

The order was based on a court case filed by a fictitious company, on behalf of a politician who stood to gain from the seizure, according to a senior government official.

"Corruption exists in different countries, but in civilized countries there is prompt action against it," said Oleksandr Zinchenko, Mr. Yushchenko's chief of staff, who resigned, coincidentally, on the same day that the company was seized.

Three days later he went public with accusations of corruption among Mr. Yushchenko's senior aides, three of whom he named.

Mr. Zinchenko's resignation provoked a political firestorm that shows little sign of subsiding.

Last week Mr. Yushchenko dismissed his prime minister and the rest of her government, as well as the head of the customs service.

He also suspended or accepted the resignation of several members of his staff who are at the center of Mr. Zinchenko's accusations.

Even so, he has defended his aides, much as Mr. Kuchma called accusations against his own aides politically motivated. "There is an anecdote," Mr. Yushchenko said on Monday. "It does not really matter whether a man has a daughter or does not have a daughter. It is enough to say in public that his daughter does not behave herself well."

That has not stopped him, however, from accusing the departed prime minister, Yulia V Tymoshenko, of corruption herself.

After first striking a conciliatory note after her dismissal, Mr. Yushchenko accused her of siphoning $1.6 billion from the budget "in favor of private undertakings", coercing judges and improperly intervening in a dispute over an alloy plant, Nikopol Ferroalloys.

"It is very unpleasant for me to think what Yulia Vladimirovna could have received if Nikopol Ferroalloy would have been transferred into the hands of business groups," he said in another interview, on Tuesday, referring to Ms. Tymoshenko.

Mr. Yushchenko appointed a new prime minister, Yury Yekhanurov, and has since rallied political parties, including some that he opposed only a year ago, to form a sort of unity cabinet. He also created a commission to investigate corruption in his inner circle, but gave it only 10 days _ until next week _ to say whether the charges warrant further investigation. He has already suggested publicly that they will not.

The allegations, however, may prove difficult to sweep aside. Reports of bribery and corruption have swirled around Mr. Yushchenko's circle from the time of his inauguration in January. His son came under scrutiny this summer for receiving gifts and favors.

"Corruption is in the air," Ms. Tymoshenko said in an interview, citing complaints of businessmen forced to pay bribes to members of Mr. Yushchenko's administration. "This is the air we had to breathe."

A senior Western diplomat said he gave credence to reports that Mr. Yushchenko's aides had solicited payments for access to the president, for appointments to government positions, to influence court cases and to win control over state enterprises. He said a government official had told him of personally being asked for a bribe by one of Mr. Yushchenko's senior aides, whom he would not name.

Worldwide Chemical, a subsidiary of New York-based IBE Trade, agreed to invest $180 million in a new company with Mr. Kuchma's government in exchange for 60% of its shares.

James William Grant, Worldwide Chemical's vice president, said that within months the new investors, including Americans and Russians, had increased production, raised salaries and paid off the debts that had forced the former state enterprise into bankruptcy.

But a lawsuit filed in March in a district court in Kiev challenged that deal, and the court agreed. Neither the state nor the new company had the chance to mount a defense.

The government's role in the dispute is far from clear. In letters to American congressmen who voiced concerns, Mr. Yushchenko promised that the matter would be resolved in court.

Yet, despite Mr. Yushchenko's pledges, the minister of industrial policy, Valery Shandra, signed an order late last month returning control of the plant to what was left of the state enterprise.

Mr. Shandra, who was dismissed with the rest of the government, could not be reached for comment but his deputy, Viktor Baranchuk, said the ministry had to carry out the court's order, even though it was on appeal. "We are being made scapegoats," he said.

The men in camouflage _ Mr. Grant said it was never clear who they were or whether they were armed _ occupied the plant's headquarters for four days, as workers and company executives protested outside. On Sept 6, Mr. Yushchenko intervened, ordering that the factory be returned to Worldwide Chemical until the matter was resolved in court.

Mr. Grant, a former congressman from Florida, said the company remained concerned about the fate of its investment in what had promised to be a new Ukraine.

"We expected better," he said.