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The Donbas Apple of Discord

Experts weigh in on the implications of the ‘nationalization’ of Ukrainian companies in the rebel-eastern part of the country. From Hromadske.

by Yuri Petrushevski 29 March 2017

Until earlier this year, industries operating in Donbas, Ukraine's industrial heartland, had largely escaped the consequences of being located near the frontlines of the bloody, three-year-long conflict between pro-Russian separatists and the central government in Kyiv. But in January nationalist groups, backed by several members of parliament, imposed a blockade aimed at stopping both contraband and legal trade with the separatist areas. The two Ukrainian breakaway regions, the Donetsk People's Republic and Luhask People's Republic, retaliated by imposing “external management” on all companies registered in Ukraine that operate in the rebel areas. The immediate effect was the appointment of new administrators for the companies, and a loss in Donbas taxes for Kyiv. The more far-reaching impact of the blockade and company takeover, both for eastern Ukraine trade, and the rest of the country's economy, is still to come.


Since 1 March, authorities of the self-proclaimed Donetsk and Luhansk People’s Republics have taken control of all Ukrainian enterprises operating in the occupied territories by introducing “external management.” This “nationalization” was spurred by a blockade of railway traffic running to the self-proclaimed republics, imposed several weeks ago by former and sometimes still active volunteer militia.


Hromadske has been trying to understand how the so-called nationalization will affect ordinary Ukrainians.


According to Ukrainian tax authorities, 26 large, tax-paying companies operate in the occupied territories. Of these, 18 belong to Ukrainian oligarch Rinat Akhmnetov. The general director of the Popasnyansky car repair plant says that his company has also fallen under the militants’ sanctions. Though the owner of the plant is a Marina Beskrovnaya from Krivoy Rog [a city in the Dnipropetrovsk region of Ukraine], Akhmetov is among its founders.


According to local media, three more companies in the occupied parts of Donbas, which have been  paying taxes in Ukraine, are also under rebel control. All of them are linked to former President Victor Yanukovych [who fled the country after his government was toppled during the “Euromaidan Revolution” of 2014]. These are the Makiivka Coke Plant, the Yasynivsky Coke and Chemical Plant, and Donbassenergo. Until 1 March, the Zasyadko coal mine – owned by a formerly influential politician named Yukhym Zvyahilsky, a member of Yanukovych’s [largely defunct] Party of Regions – had also been paying taxes in Ukraine.


All this time, Luhanskteplovoz, co-owned by the French corporation Alstom as well as Russian businessmen Iskander Makhmudov and Andrey Bokarev, has been working without problems. Two Ukrainian state-owned plants, the Yuzhnodonbasskoye Mine Group No. 1 and the Donetsk Coal Energy Company, have been working without disruptions as well.


“Donbas forms a single industrial chain in Ukraine. Its enterprises are integrated into the Ukrainian export system and it is difficult to separate them overnight,” says Vitaly Sizov, an analyst at the Donetsk Information Institute. “The rebels cannot achieve [the separation from Ukraine] on their own and would need help from Moscow. They are trying to assess the current situation, though they do not fully understand what they have grabbed and how to make it work. All that Donbas industries produce is already abundant in Russia.”


Vitaly Sizov. Image via Hromadske.


“Nearly all Ukrainian products have been designed with the aim of being exported to Western markets,” Sizov continues, citing pre-war data that showed one-third exported to the West and a small part going to Asia. “However, once producers operate in unrecognized territory, nothing can be exported.”


“Until 1 March, everything functioned in a normal way,” he said. “That allowed acceptable living standards to be maintained in the occupied territories and, for Ukraine [proper], to keep its plants working. Now, let’s suppose the Avdeevsky Coke Chemical Plant’s operations are disrupted – for  example, they are short of raw materials, which have been partially supplied from the uncontrolled territories. Eventually, this will affect the operations of metallurgical plants in Ukrainian army-controlled Mariupol, which have already suffered losses. That, in turn, will cause social tensions in Mariupol, since this huge industrial city cannot survive without its metallurgical plants. Until now, this was the interdependence that both sides could not and did not want to tear apart.”


“The so-called blockade has become the sole factor that determines what decision should be taken in the near future in order to move forward,” Sizov added.


“State officials who support the blockade [have the power to] manipulate the energy and metallurgical industries,” says Gleb Vyshlinsky, the executive director of the Center for Economic Strategy, an independent think tank based in Kyiv. “This is especially true for energy-generating plants, as we talk about corruption and political interference in setting coal prices and eventually energy prices.”


Gleb Vyshlinsky. Image via Hromadske.


According to Vyshlinsky, “the ‘Rotterdam+’ [a strategy for coal supply diversification] was introduced to ensure that Ukraine does not rely on coal supplies from the occupied territories. But it led to increased energy tariffs both for ordinary consumers and for industries. Now, when the authorities claim that the blockade might cause chain blackouts, people get really angry. For a very long time, they had to pay a lot more for electricity to allow the authorities to import coal from South Africa and not from the occupied territories. Who pocketed the difference? Akhmetov and those Ukrainian politicians who lobbied for a green light from the National Energy and Utilities Regulatory Commission. The situation is completely different in metallurgy. The state has nothing to do with supplies, whose fate is decided by private businesses, on a competitive basis. Ukrainians can say that Akhmetov is an oligarch who has accumulated fortunes on the assets that belong to the citizens of Ukraine and that he moves a significant part of his profits abroad, including those from the enterprises in the occupied territories. This money may never return to Ukraine.”


“We understand what the implications are of the blockade and the consequences of tearing down production chains in the metallurgical industry for the economy of the territories under Ukraine’s control and Ukraine as a whole,” Vyshlinsky continued. “These are a decline in production; a possible devaluation of the national currency, the hryvnia; possible wage cuts; and a drop in living conditions for the employees who work at the plants in those territories,” Vyshlinsky says.    


He compared the latest moves to the establishment of the border between East and West Berlin, which at the time cut through a living city, separating public transportation lines and inner city roads. “The same is happening in Donbas. This industrial region was built by capitalists during the Russian Empire. The Soviet government continued building it, and now the Ukrainian oligarchs are exploiting it. It was built here for a reason – there are iron ore and coke coal deposits in the area, and there is a harbor in the immediate vicinity to export metallurgical products,” Vyshlinsky notes.    


Experts also say that importing coke can undermine the competitiveness of Ukrainian products.


National Bank of Ukraine head Valeryia Gontareva even predicted a decline in GDP if the blockade continues. “In the worst-case scenario, if the blockade lasts until the end of the year, it will slow down economic growth in 2018 by 1.3 points, or 1.5 percent of GDP. According to our estimates, the current trade balance will fall by $2 billion, and might negatively affect the interbank currency exchange,” she said.


Meanwhile, the rebel leaders have published a list of plants with temporary administration. The Security Service of Ukraine (SBU) has stated its belief that they will be directly managed from Moscow. 

Yuri Petrushevski is a Ukrainian journalist working for Hromadske. The original version of this article, in Russian, was published on Hromadske, an internet TV and multimedia organization created in 2013. TOL has done some editing to fit our style. Reprinted with permission. 


Homepage image via Wikimedia Commons. 

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