A years-long dispute between Ukraine’s defense industry and a shady U.S.-based company that failed to fulfill its multimillion-dollar contract obligations has finally ended in a victory for Ukraine.
Back in April, a Stockholm arbitration court ruled that Ukraine deserves full restitution for its losses — over $8.3 million, including claim fees and penalties — from Gray Fox Aviation and Logistics, Inc.
The American company was supposed to produce critical equipment for Ukraine. Instead, it turned out to be a fraudulent dummy firm that never intended to fulfill its obligations.
UkrOboronProm, Ukraine’s massive state defense production monopoly, revealed the successful outcome of the Gray Fox case on July 15.
But the story of the defense deal gone wrong offers a shocking window into some of the corrupt contracts that have plagued Ukraine’s defense industry for years.
In the deal with Gray Fox, Ukraine poured millions of dollars abroad into a murky, clearly detrimental contract with dodgy entities, as the Ukrainian Armed Forces continued to wage war against Russian-backed militants in the Donbas.
Now, Ukraine has prevailed in court. But a question remains: Can the country manage to recover its money from the void of fraudulent schemes?
A serviceman with Ukraine’s National Guards Azov Regiment carries out calculations during artillery live-fire exercises near the town of Urzuf in Donetsk Oblast on Aug. 3, 2017. (Volodymyr Petrov)
Raw deal
The ill-fated contract was signed in March 2018. According to it, the American contractor was supposed to provide the Kyiv-based Artem plant, one of Ukraine’s key defense enterprises, with equipment to produce heavy-caliber artillery shells.
Ukraine lost its only ordnance factory when Russian-backed militants occupied the city of Luhansk in 2014. It now relies on aging — and increasingly hazardous — stocks of Soviet-era munitions in the war. For this reason, producing its own shells was of strategic importance.
The government offered the classified, non-tender contract to Gray Fox. The American firm immediately received 50% of the payment as an advance: $8.3 million. Nonetheless, a year later, the contractor hadn’t even started delivering its production to Ukraine.
“The American company initially tried to alter the amount and the value of the equipment, as well as the terms of delivery,” said Mustafa Nayyem, deputy director-general of UkrOboronProm, in a statement on July 15.
“Also, it was discovered that one of the main components that the American company insisted on replacing in contract provisions had not been produced at all for over 20 years,” Nayyem said. “The (Artem) plant blocked all unsubstantiated attempts to alter the contract, as (these proposals) envisaged replacing almost all of the ordered equipment with cheaper alternatives.”
In fact, the contractor insisted on altering the whole process of manufacturing artillery shells. That would effectively render the production significantly less effective and slower for the same price.
Eventually, the U.S. contractor, which had to fulfill its contractual obligations by Dec. 30, 2019, stopped communicating with the Ukrainian party.
Soon the SBU security agency launched an investigation.
Unpleasant discoveries
In May 2019, the Ukrainian side turned to the international arbitration court — and the trial revealed many surprising details in the case.
For instance, although the Ukrainian plant’s representatives visited the company in the U.S. several times and inspected its manufacturing facilities, it turned out that the contractor wasn’t even a legal entity, but a brand name belonging to and acting on behalf of yet another U.S.-based company, Nayyem said.
Moreover, it became known later that Ukraine had sent $8.3 million to private bank accounts of the American company’s employees and their family members.
As the legal battle began, the contractor’s shady background became more than obvious.
The SBU investigation also started yielding results. In October 2019, Yuriy Brovchenko, Ukraine’s former deputy economy minister, was arrested on charges of striking a bad deal with Gray Fox, a fake company that had no intention of actually producing artillery shells in the first place.
Moreover, Gray Fox’s chief operations director, who was responsible for the Ukrainian project, was charged in the U.S. with international fraud and eventually sentenced to 12.5 years in prison and a $7-million fine, UkrOboronProm stated on July 15.
A boy hangs on a self-propelled howitzer barrel during the Power of the Undefeated arms exhibilitin in Kyiv on Aug. 23, 2017. (Oleg Petrasiuk)
To be continued?
When cracked, the case kept surprising investigators: In late March 2020, the Artem plant got a surprise letter from Rokit-M, a Ukrainian-registered limited liability company.
According to Nayyem, the letter suggested that the Ukrainian company had purchased the equipment supposedly produced by the U.S. company for the Artem plant as part of a “classified contract.”
But UkrOboronProm discovered that Rokit-M was co-founded by Gray Fox International, LLC, and Ukrainian oil refining firm Naftokhimik Prykarpattya. Notorious oligarchs Ihor Kolomoisky and Gennadiy Boholyubov were listed as the ultimate beneficiaries of the latter company.
“In other words, the Ukrainian company is the very same disreputable American venture,” Nayyem said. The Artem plant strongly denied any wrongdoing.
“How did a recently-formed Ukrainian firm manage to acquire the provisions of a classified state contract…?” Nayyem asked.
While that question remains unanswered, what happened in the court was a formal victory.
The Artem plant is currently working to make sure the Stockholm decision will be enforced, so that the Ukrainian side can receive compensation, UkrOboronProm said.
In his statement on July 15, its director-general, Aivaras Abromavicius, said the total value the reimbursement — the contact’s worth and all legal expenses — may reach nearly $9 million.
“But the most important thing is that, after all the legal battles, Artem will be ready to carry out the contract with a new equipment provider: to build a manufacturing line and to launch serial production of artillery projectiles,” Abromavicius said.
