Donbas economy under fire



2014/07/26 • Analysis & Opinion, Featured

In a video posted online, a National Guard soldier is shown entering a store in the Donbas combat zone to buy food. When he asks if there is sausage, the clerk answers that it hasn’t been delivered for a long time and probably will not be delivered soon. This is a consequence of war and not the only one. In peacetime the store owners would not have gone for long without this core product so as not to lose out to competitors The fighting in the Donbas is not only constraining the lives of thousands of people, but it also is destroying the long-established operational systems of regional economy. War changes everything — manufacturing, deliveries, consumption, savings, investments.

The basis of the Donbas economy is mostly industrial and oriented toward the export of production. This has a major impact on the current economic situation in the region. Since local enterprises produce mainly intermediate — and often raw — goods (mainly coal, coke metal, fertilizers, etc.) rather than consumer and, more rarely , capital goods (heavy equipment), the terrorists do not have a direct interest in their production. Perhaps this is why most of the large factories of the Donbas are able to continue working in a more or less normal fashion. There are even cases of real boldness. For example, the Novokramatorsk heavy equipment manufacturing  plant (NKMZ), located in Kramatorsk, a city that until recently was at the epicenter of the fighting, did not stop working for a single day. On July 1, the directors of its divisions unanimously voted to continue working, despite the fact that at that time there was heavy fighting to liberate the city. On July 4, the company held a general meeting of management, the supervisory board, and the trade union, where it was decided not to stop production. Then, a day later, the city was liberated from the terrorists.

The large companies in the region are the primary providers for millions of residents of the Donetsk and Luhansk oblasts — a situation that will not change no matter who is in power. Perhaps, understanding this, the terrorists are not interfering with their work. However, there are exceptions. For example, at the same NKMZ plant, armed members of the Donetsk People’s Republic (DPR) seized several engineering machines, which they apparently considered useful during battles. It was also reported that, on July 15, terrorists went to the Lysychansk refinery (surprising since it belongs to the Rosneft Company, owned by Russian government — Ed.) and expropriated 40 vehicles. But these thefts of private property are not sufficiently extensive to affect the operation of the plants in the Donbas to any real degree.10570991_10152621372577679_1044202968_n

A significant reason why the militants do not destroy the manufacturing facilities is because of their owners. For example, in the morning on July 18, the media reported that saboteurs had captured the Avdiyivka Coke Plant (AKHZ), which belongs to Rinat Akhmetov. In a few hours, the plant itself published a denial, noting that representatives from the DPR did arrive at the checkpoint but then left after “a brief conversation with the CEO Musa Magomedov.” Civil society in Ukraine has often accused Akhmetov and other oligarchs who have assets in the Donbas of involvement in the war in the region, which allegedly they are supporting despite their own political and property interests. The “brief conversation” at the entrance to AKHZ provides yet another example that certain (oligarchs) even if they did not participate in the Donetsk and Luhansk “people’s republics,” certainly did not oppose the terrorists whose behavior demonstrates a friendly attitude toward the former “masters of life” in the Donbas.

There is another strange fact: the militants bombard the cities in the Donetsk and Luhansk oblasts mercilessly but somehow the missiles land on residential buildings and public infrastructure. On the other hand, cases of significant damage to plants and factories are rare. The Sloviansk “Donbas Energy” plant was destroyed, the Lysychansk refinery was shelled and set on fire, the AKHZ was substantially damaged by shelling and had to reduce production twice. However, this probably represents all the large-scale destruction of large enterprises in the Donbas. Shells and shrapnel were also aimed at the  Energomashspetsstal (manufacturer of special cast and forged products — Ed.),  the heavy equipment manufacturer Novokramatorsky Mashynobudivny Zavod (NKMZ), the Kramatorsk heavy machine-tool factory, the Luhansk Luhanskteplovoz (locomotive manufacturer), the Severodonetsk  “Nitrogen” etc., but it appears this was done casually without serious consequences for the companies. However, given the shabby conditions  of many large factories in the Luhansk and Donetsk oblasts, it probably would not be economically feasible to rebuild many of them  if they were completely destroyed during the fighting. The local oligarchs, who are ruthlessly exploiting the production assets to pump out profits abroad, see no possibility of rebuilding many of them. Therefore, they are doing all they can to save their properties and possibly maintain contact with the terrorists, whispering to them where they should and should not fire.

Thus the Donbas plants, for the most part, do not have problems managing production. Otherwise the industry statistics for June would be much worse than they are. Problems in the enterprises are due to something else. First, many people are taking unpaid leave in order to leave the ATO (antiterrorist operation) zone before  battles. For example, the NKMZ plant changed its work schedule to allow people to come to work and go home during daytime. The plants arranged bomb shelters and instructed employees on their use. Personnel problems are being currently addressed by means of existing reserves, but if fighting escalates, this problem may become more acute. Second, due to the fact that terrorists regularly blow up roads, trains, and bridges, there are difficulties with logistics. For the most part, the large companies have alternate routes and modes of transportation. However, even they have problems, and the problems faced by small and medium businesses are even greater. For example, the Luhansk power station risks being without fuel because of the destruction of the bridge and railway line used to transport coal. Several days ago the power station moved to an economy schedule, however the risk remains that it may soon be shut off altogether. Third, there are many ecologically hazardous industries in the Donbas. If the power supply of any coke plant stops even for two hours, coke oven gas will be released. In the case of the Styrop plant, it is ammonia that will be released. All these are daily risks that become much more severe under warlike conditions and which can have extremely negative consequences.

However, the rest of Ukraine receives certain dividends from the fighting in the Donbas and from the Russian occupation of Crimea. The defense industry enterprises have increased their workload substantially. The Shepetivsk Repair factory, the Mykolayivsk Diesel Locomotive Repair, the Konotop Aircraft Repair plants repair defense equipment that has been idle for decades, but which is now needed in the ATO zone. The recreational areas in the Carpathian Mountains, near Odesa, and near the Shatsky Lakes are overflowing with Ukrainians, especially the displaced people from the Donbas who probably never even suspected that these vacation spots existed. The economic performance of the other regions of Ukraine points not to a deep crisis but rather to an adaptive recession, which is normally followed by rapid development and economic growth.

Trade and banks in a combat zone

The biggest difficulties are experienced by sectors of the economy that deal with everything required by the militants. First of all, this is retail (food, consumer goods) and banks (money). For example, the METRO supermarket in Donetsk has been completely looted and remains closed. But that is not all. The regional manager of one of the retail chains, who did not want to be identified, told this publication that, because of the fighting in Luhansk and problems with logistics, the only supermarket of this retailer has been closed. The biggest problem is logistics. Since the terrorists often steal cars with their cargo certain products simply never reach their destination. Moreover, the “government of DPR” established a list of vehicle numbers permitted to enter territories controlled by the militants. If a truck is not listed, the militants will fire on the cargo. Therefore, the stores receive incomplete and damaged goods. It is for this reason that the decline in retail trade in the Donetsk and Lohansk oblasts in real terms is larger than in industrial production.

A similar situation exists with the  banks. Organizing their safe operation is impossible at present. Employees of the financial institutions are often evacuated or moved. The working day is reduced in many branches. The terrorists routinely attack the armored cars. Therefore, the local entrepreneurs have difficulties depositing receipts, which forces them to reduce the volume of activity. In territories controlled by Luhansk and Donetsk “republics” there is a huge problem with cash for the civilian population. Limits have been set for cash withdrawals even for clients — according to one banker, around UAH 200 per day in Luhansk and UAH 800 in Donetsk. Hold-ups are possible upon receipt of salaries, pensions and other benefit payments. Local residents are afraid to carry cash because terrorists steal it, as they steal cars or anything else they fancy.

By Liubomyr Shavaliuk,, July 25, 2014
Translated from Ukrainian by Anna Mostovych




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