Kyiv Housing Scam Raises Questions, Fuels Distrust

KIEV, Ukraine -- At least 1,500 apartment buyers were left with nothing but worthless deeds this month when the organizers of a $100 million real estate investment scheme fled the country in late January.

But the documents they were left with lead back to the Kyiv Mayor’s Office, indicating top officials were either negligent or complicit in the alleged scam.

Oleksandr Volkonsky, the director of Elite-Center, and his deputy Oleg Shestak, fled Ukraine on Jan. 30, according to Ukrainian police. Some of the people who had partially or fully paid in advance for apartments in one of eight projects promoted by Elite-Center had already begun to ask for their money back when the two fled.

One building, at 34/32 Otto Schmidt Street, in Shevchenkivsky district, was to be completed in the second quarter of this year, but just over 20 percent of the work has been completed to date.

The Elite-Center investment-construction group, which heavily advertised all over the capital, never actually existed as a legal entity. Instead, it worked through at least 14 other companies, some of which were set up over night and run by Volkonsky or Shestak.

One of these companies is called the Building & Engineering Company, or BIK, which was registered in 1994 but only acquired by Volkonsky in 2004. Along with BIK Volkonsky got the all-important city permits to build an office center at 34/32 Otto Schmidt.

But instead, Volkonsky decided that it would be more profitable to build an apartment block, especially as he and his associates apparently intended to sell the same flats to more than one buyer.

Another likely motivation in Volkonsky’s decision was the skyrocketing price of real estate in the capital.

“Volkonsky took advantage of the unstable political situation, when people didn’t know where to put their money,” said Ihor Tsygonok, who acknowledged selling Volkonsky 50 percent of BIK, and claims to hold a 20-percent stake in the Otto Schmidt building.

A company that Tsygonok currently heads, Elite Center Limited Liability Financial Construction Group, is listed as one of the 14 companies under Volkonsky’s unregistered group. However, ever since Volkonsky and Shestak disappeared, Tsygonok has made an effort to distance himself from the two men.

For example, Tsygonok said that he didn’t found BIK but rather bought and resold the 50 percent share package to Volkonsky, who got the other 50% from a different company that he (Tsygonok) has no connection to.

Regarding the inclusion of his company in Volkonsky’s group, Tsygonok said he wasn’t concerned at first “but then I wrote him some letters.”

“I never gave him permission to use the name,” Tsygonok emphasized, but couldn’t do much about it, as he hadn’t registered it as a trade mark himself.

“I have also been deceived, along with other investors … and I lost more than anyone else,” said Tsygonok.

According to the Committee of Investors, a group of bilked apartment buyers who has banded together at one of the former offices rented by Volkonsky to analyze contracts and coordinate their actions, much of the estimated $100 million collected by Elite Center was sunk into the Otto Schmidt project alone.

Tsygonok now says that he would like to take over development of this project, keeping on the original general contractor hired by Volkonsky. According to his estimates, it should cost another $10 million to complete. But the offer goes - buyers must invest another $250 per square meter, which isn’t unreasonable, as they bought into the project at below market rates in the first place.

As late as November of 2005, Volkonsky’s group web site was offering an 11 percent discount in return for a 100 percent down payment on flats. But not everyone is convinced that Tsygonok’s recent offer is in their interest.

“You can’t say that they offered us a particularly good deal,” said Natalia Stoyko, who invested $30,000 into an Elite Center project on Heroyiv Stalinhrada Street.

“The price was lower because construction hadn’t been started yet. Other developers had been making similar offers at the time,” she added.

According to Tetyana Zagorodnya, who invested in a different Volkonsky project, any developer who would take on one of the eight Elite Center projects stands to earn a profit without receiving any additional payments from those bilked, as many of the flats in other building projects still haven’t been sold. However, the Kyiv Mayor’s office would have to support the project, that is to say, not charge the developer for permits.

One Kyiv developer, who preferred to remain anonymous, said a building in the center of the city costs around $700 per square meter in production costs. Of this, around $200 goes to bribes for permits. If you already have the paperwork, as Volkonsky did with the Otto Schmidt site, you can start offering the public to buy in advance at a reduced price, with the understanding that the price will keep going up.

But Volkonsky apparently lacked complete paperwork for almost all of his projects, including the Otto Schmidt site, as he had changed it from an office center to an apartment block almost immediately. Nevertheless, documents obtained by the Post show that the Mayor’s office had allowed some paperwork to go forward.

“These companies (in Volkonsky’s group) existed legally,” said Zagorodnya, “receiving no small amount of documentation from the city of Kyiv.”

Banks like Aval and Prominvestbank, two of the country’s largest banks, were forthcoming with consumer credits and mortgage loans. On average, investors sunk around $70,000 into each apt. About 70 percent was paid in cash, committee members reported. Volkonsky and his associates then funneled the money through various bank accounts.

At least one of these associates, one A.V. Terentyev, listed on documents as an accountant at one company and the director of another, has been detained by police, who reported that a warrant has since been filed with Interpol for the arrest of Volkonsky and Shestak.

Kyiv Mayor Oleksandr Omelchenko has come across less sympathetic to the fate of defrauded buyers. Ukrainian media quoted the mayor as blaming investors for being too trusting. However, the Committee Of Investors counts top police officials and prosecutors among those who signed deals with Elite Center.

People like Stoyko and Zagorodnya are working together to make sure their claims count for no less. They believe that the Mayor’s office and even some law-enforcement agencies may be implicated.

Tetyana Zagorodnya, for example, said she received a letter from the Interior Ministry’s economic crimes department last month stating that they had found nothing wrong with the Elite Center’s operations.

In fact, it was only Jan. 14 – just two weeks before Volkonsky and Shestak left town - that a law was passed making it illegal for construction companies to raise their own financing for building projects. Another law passed in 2005 stipulates that construction funds must henceforth obtain licenses.

“They should have signed that law (of Jan. 14) a year ago, and the mayor’s office had every opportunity to help this along,” said Oles Dovhiy, a spokesperson for Parliament deputy Leonid Chernovetsky, a foe of Kyiv mayor Omelchenko.

“The law prevents the mayor’s office from handing out plots of land by hand to an inner circle of people who have no intentions to build houses, but simply sell the permits to investors in shady deals,” he added.

“I know one man with a wife and four kids who sold his flat to buy another place for cheaper, and now he can just torment himself for putting his family in such a predicament,” said Andriy Farada, who himself invested $40,000 into an Elite Center project back in 2004.

Source: Kyiv Post