Reznikov

Prices For Ukrainian Army Food Supplies Inflated, Investigation Finds

April 10, 2023
7 mins read

KYIV — Roughly two months after a high-profile scandal over a contractor’s prices for military food supplies tested Ukraine’s anti-corruption mettle, Schemes has found that at least four additional major contractors also charge the Defense Ministry above-market rates for the provision of key foodstuffs to Ukrainian troops.

The findings by Schemes, the investigative unit of RFE/RL’s Ukrainian Service, are based on the companies’ 2023 contracts, worth an estimated $1.14 billion, that Schemes acquired from multiple sources with ties to the Defense Ministry. All but two of these contracts have not previously been made public.

The prices at which suppliers are prepared to deliver potatoes, apples, cabbage, and eggs to the Ukrainian armed forces, for example, often range from two to three times the level of the purchase prices reported to tax officials in December 2022 and January 2023, State Tax Service documents reveal. Complete tax data was available for five of the eight food contractors.

The revised prices still allow for a 30-to-70 percent sales margin, the difference between an item’s sale price and cost to contractors to acquire, Schemes estimates.

The government, under pressure from the European Union and other Western backers to fight corruption, contends that no irregularities have occurred. But the price problem remains.

Secret Suppliers

Since the start of Russia’s full-scale invasion in February 2022, the Ukrainian military’s contracts had not been published and the names of its contractors have been kept classified.

That changed in January 2023 with the publication of an investigation by the media outlet Dzerkalo tyzhnya that found that one military supplier, the Kyiv-based Aktyv Company, was charging the government nearly 2 1/2 times the retail price for eggs.

Since then, only one other supplier, the Dnipro-based Harna Strava, the focus of a March 13, 2023 procurement investigation by Bihus.Info, has been named publicly.

The six remaining suppliers, whose names Schemes obtained from their Defense Ministry contracts, did not agree to Schemes’ disclosure of their identities.

A Defense Ministry spokesperson commented that naming military contractors without their consent threatened Ukraine’s national security and creates “favorable conditions” for a Russian attack on parts of the Ukrainian military’s logistical system that could cause “human casualties.”

Schemes has used contract numbers, rather than corporate names, to identify these six food suppliers in this article.

How The Supply System Works

Suppliers and the Defense Ministry itself insist they are not charging the Defense Ministry for food, but for a service — the provision of food to assigned military units, wherever they deploy.

Most of the companies that are the focus of Schemes’ report make large-volume deliveries to military warehouses in nonfrontline positions that can vary daily.

From these warehouses, the Ukrainian military takes the food to the troops.

A Ukrainian serviceman prepares food in a dugout near the front line in eastern Ukraine. (file photo)
A Ukrainian serviceman prepares food in a dugout near the front line in eastern Ukraine. (file photo)

But to Anastasia Radina, chairwoman of the Ukrainian parliament’s Anti-Corruption Committee and a lawmaker from the ruling Servant of the People party, this system’s organization “is the source of procurement abuses.”

The Defense Ministry states that the suppliers’ “service” includes a choice of 409 products from a catalogue, along with delivery, refrigeration, and product replacement, she continued. But, in reality, Radina said, “military units receive products from Ministry of Defense suppliers — and, in fact, far fewer items than the catalogue includes — and not ready-made meals.”

Some units buy their own food supplies and come up with their own meal plans, she added.

Consequently, what the Defense Ministry buys “under the guise of services is many times more expensive than the same products purchased by the Border Service or in retail chains,” Radina charged.

She believes the military should purchase food products, rather than “an artificial service,” and set the maximum prices based on the prevailing market price.

A Defense Ministry spokesperson said that “specialists” were examining the feasibility of purchasing food products “separately” from the purchase of “logistics services, storage, and replacement of stocks., etc.” Standardized menus for the armed forces’ meals are already under discussion.

How Cheap Is Cheaper?

Dzerkalo tyzhnya’s investigation cost the Defense Ministry: The public outcry led to the firing of the ministry’s suspended procurement chief, Bohdan Khmelnytskiy; the resignation of Deputy Defense Minister Vyacheslav Shapovalov, who oversaw supplies for rearguard forces; and State Bureau of Investigation (DBR) investigations into several individuals involved in ministry purchases.

Short-lived speculation also arose about the fate of Defense Minister Oleksiy Reznikov.

Against that backdrop, after initially denouncing Dzerkalo tyzhnya’s investigation as a smear campaign, the Defense Ministry pivoted, and emphasized its efforts to correct the problem. On February 20, it announced that it had shortened the length of food-supplier contracts to three months so that companies could not factor “inflation and other risks” into the prices they charged the ministry.

Published contract appendices, which identify suppliers only by their contract numbers, show the revised prices.

The contracts list the prices at which the companies are prepared to provide food items. Schemes attempted to obtain invoices from military units that show the prices at which contractors actually supply food to troops, but the Defense Ministry did not provide this information in time for publication.

The ministry claimed that its shortened contracts meant lower food prices for the armed forces, but Schemes did not find that all prices decreased uniformly for all food categories.

Eggs

Eggs lay at the center of the January food procurement scandal. Defense Minister Reznikov’s claim that a “technical error” led to their being priced at 17 hryvnyas ($0.46) per egg instead of per kilogram in the Aktyv Company contract became the butt of social-media jokes.

Aktyv’s revised price list, published by the Defense Ministry, now sets the price at 9 hryvnyas per egg; a discount of 47 percent. The table below shows that that price is still, however, 64 percent over the purchase price reported to the State Tax Service from December 2022-January 2023.

No price change occurred in the revised contracts for the military’s four other egg suppliers. Their prices remain at 8–9 hryvnyas per egg, a markup of between 43 to 67 percent over the purchase prices.

Potatoes

Potatoes provide some of the most telling indicators of potential overspending by the Defense Ministry.

Before the procurement scandal, suppliers’ prices ranged from 17.7 to 27 hryvnyas ($0.48-$0.73) per kilogram. After the revision of prices, one supplier kept the old price, while the remaining four lowered their prices between 29 and 38 percent.

Tax documents obtained by Schemes show, however, that, even after the price revisions, the prices at which four out of five suppliers now sell potatoes to the army are 40-50 percent higher than their purchase prices reported to the State Tax Service in December 2022 and January 2023.

These revised rates are twice as expensive as average market prices, based on Schemes’ review of prices in Kyiv at more than five national supermarket chains. A March 13 investigation by Bihus.Info reporter Alisa Yurchenko found the same.

Apples

An invoice from an unnamed military unit, posted on Facebook by veteran journalist Tetyana Nikolayenko, indicates that Aktyv Company’s price inflation for potatoes extended also to apples. The March 8 document, whose authenticity has not been disputed, lists apples for the armed forces at 51 hryvnyas ($1.38) per kilogram.

But Aktyv Company’s monthly tax documents show that the business itself paid 15 hryvnyas ($0.41) per kilogram for the fruit.

The Ukrainian armed forces, therefore, are paying a markup of more than three times the purchase price. With other contractors, they have paid twice the purchase price, a comparison of tax documents shows.

Cabbage

Cabbage is sold to the Defense Ministry at between two to three times its purchase price, the graphic below shows.

Under the revised prices, Aktyv Company sells the ministry cabbage for roughly twice the price that its two other competitors do.

What The Suppliers Say

Schemes asked five of the contractors cited in this investigation to explain how they set their prices for the armed forces and how they calculate the costs that can impact those prices.

The journalists also asked them to assess their sales margins after the February 2023 revisions to their Defense Ministry contracts and to explain how they managed to lower the prices of some food items.

The Defense Ministry attributes the above-market prices to the need to anticipate replacements for spoiled or destroyed food items. Reznikov asserts that the increase in food-service prices for 2022 was lower than the 26.6 percent rate of inflation.

Aktyv Company Director Valeriy Melesh attributed the prices charged to the Defense Ministry to the company’s need to pay for fuel for deliveries to multiple locations, product storage, and salaries for employees. Melesh said that Aktyv lowered its prices in February 2023 since its own purchase prices had fallen as well.

Supplier No. 5 — contract No. 286/2/22/80 — listed similar costs: product packaging, shipping, logistics, wages for delivery staff, company utilities, and transportation to military units.

In his interview with Bihus.Info, Harna Strava’s director of procurement, Denys Ushakov, stressed the danger of making deliveries to Ukrainian military warehouses in eastern Ukraine’s largely Russian-occupied Donetsk region, “where no one agrees to go because there’s a risk of losing the vehicle.”

Mileage in the region, he added, “is measured not in a straight line but by [the number of] pontoon crossings.”

The Defense Ministry conceded that the prices for contractors’ food services reflect the potential need for product replacement if a warehouse is hit “by an enemy shell” or perishable food items spoil.

Alone among the suppliers with which Schemes or Bihus.Info spoke, supplier no. 4 — contract number 286/2/22/78, which delivers food to the Odesa region, claimed that the company supplies tomatoes, cucumbers, onions, and other food items to the armed forces at below cost.

Nonetheless, the representative claimed that the firm was “constantly looking for ways to reduce the price of products for our soldiers.”

Other companies did not respond to Schemes’ requests for comment by the time of the investigation’s publication on March 17.

An E-Solution?

On March 21, President Volodymyr Zelenskiy signed into law a bill that mandates, as of June 20, the publication of prices for all military purchases, apart from weapons, in the electronic procurement platform ProZorro.

ProZorro, suspended in early January because of Russian attacks on Ukraine’s energy infrastructure, provides instant access to the “public purchasing data” for all government tenders.

Parliamentary Anti-Corruption Committee Chairwoman Radina sees it as a way to encourage public competition between suppliers that “can give the best prices.”

But one of the creators of ProZorro, Maksym Nefyodov, who ran Ukraine’s Customs Service from 2019 until 2020, cautions that the portal alone will not solve Ukraine’s long-standing food-procurement problems.

“This is a systemic problem that requires a solution that begins well before the tender process,” Nefyodov said in a January 24 interview with RFE/RL’s Ukrainian Service. “Because with the system of food organization that exists now, even if the tender is personally organized by the pope or Mother Teresa, the results will still be very doubtful.”

Written by Elizabeth Owen based on reporting by Heorhiy Shabayev, Valeria Yehoshyna, Nadia Burdyey, and Natalie Sedletska of Schemes

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