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Donbas trade blockade epilogue: Who would incur most losses

Author : Oleksandr Moyseyenko

13:13, 16 March 2017
Donbas trade blockade epilogue: Who would incur most losses

Author : Oleksandr Moyseyenko

In 2016, Ukraine "imported" 13 424.7 thousand tons of cargo to the uncontrolled territories by the railway. Mainly coal and iron ore

13:13, 16 March 2017

Read the original text at epravda.com.ua.

 

realist.online

Ukrainian officials voice various estimates of Ukraine’s economic losses, which are sometimes exaggerated. First it was about loss of foreign exchange earnings, now it is about "billions of hryvnias every month."

The blockade was dispersed. March 13, Security Service of Ukraine detained the main representatives of the protesters, who for the past two months, have been blocking the main rail routes and did not allow Ukraine to conduct trade with occupied territories.

After another night, Kramatorsk police arrested convoy of blockade activists, who were trying to break through to the east.

Now there are no obstacles to the restoration of trade with the occupied areas. However, during the blockade, the leaders of the militants took under their control the largest enterprises in the occupied territories, including mines and steel mills.

Related: Voice for all: Two sides of Donbas trade blockade

Recently, President Poroshenko said that Ukraine will not conduct any commercial activities with those enterprises, and on Wednesday the National Security and Defense Council of Ukraine decided to stop the movement of goods across the contact line. So the question of economic losses for the country is still on the agenda.

During the whole time of Donbas blockade, leading Ukrainian officials have expressed their opposition to the measure and insisted that the blockade would be too expensive for Ukrainian economy. One of the last high-profile statements was made by Prime Minister Groisman: "Each month we are losing 2-4 billion. This is the price of losses from the blockade."

Related: Police uses weapons to disperse checkpoint in Kostiantynivka, — blockade participants

However, despite intimidation by the authorities, most Ukrainians not feel any consequences, neither promised rolling blackouts nor unstable exchange rate took place. After all this does not refer to the people who work in the occupied territories.

The largest enterprises and mines located of Donbas have stopped. They have no market to sell their products. Companies that were previously owned mainly by Rinat Akhmetov, are now "nationalized." They also depend on the raw materials that came from the controlled territory, which made it impossible to work.

Industrial chains

Some groups of products are critically important to the industry on both sides. According to "Ukrzaliznytsia" in 2016, 13 424.7 thousand tons of cargo were transported by the railway to the uncontrolled territories. Ukraine mostly imported iron ore (45.5%) and coal (44.5%). Major shippers were "DTEK Pavlogradvuhillia," Pivnichnyi GOK and Ingulets GOK.

Related: Donbas trade blockade: Rallies, dispersal and seizure of Volyn Regional Administration

Ukraine obtained from the uncontrolled territory 19 422.4 thousand tons of cargo: coal (61.6%), ferrous metals (20%), coke (7.8%). Major shippers were "DTEK Rovenkiantratsit" Yenakiyevo MOH, "Donetskstal MZ".

Now most of these enterprises are idle. "Metallurgical enterprises of the uncontrolled territories are part of vertically integrated companies. They cannot function intrinsically," said the expert of economic discussion club Oleg Pendzyn.

However, not only the enterprises of the uncontrolled areas would feel the difficulties.

"It is impossible to restore the supply of coking coal and flux-dolomite raw. Without this link in the commodity chain, Avdiivka Coke plant might stop functioning. Because it depends on the supply of coal. As well as the steel mills in Mariupol and Zaporizhzhia, which depend on the coke and fluxes. Only "Arcelor Mittal" is integrated into an international company, so it has an alternative," says analyst Oleksiy Kushch.

Related: Losses due to blockade may amount to $3.5 billion and 75 thousand jobs, - Prime Minister

According to him, System Capital Management and Industrial Union of Donbas are not ready for destroying these commodity chains. "Even if they find raw materials and solve the problem of logistics, they will lose price advantage and become uncompetitive, forcing production to reduce the minimum indicators," said Kushch.

A similar opinion is voiced by the other members of the economic discussion club. "of course, Ukrainian metallurgy can fill the levels of (lost – Ed.) Donbas production, but it is the price issue. In terms of a competitive environment in our traditional markets, any increase in the cost of production might leading to the loss of this market," said Pendzyn.

Even in the "Arcelor Mittal", which in 2014 switched to imported raw materials, is afraid of the consequences of the blockade. "The blockade threatens stable supply of coal enterprise, energy supplies, and raw materials necessary for production," the company notes.

Related: Donbas trade blockade: pros and cons

Energetics

The blockade in terms of consequences for energy is less urgent problem than it is described by the politicians. Usually, Ukrainian thermal power plants are using coal, but can run on gas and fuel oil. Statistics shows that "coal" power station (without CHP) provide about 30% of Ukraine's electricity.

According to the Economic Club Discussion, TPP consume about 24 million tons of coal a year. Of these, 9 million tons mean anthracite, which is produced in the occupied territory only. Seven out of 14 thermal power plants are working so, Krivyi Rih, Prydniprovia, Slovians, Starobeshivska, Luhansk, Zmiivskaya and Trypilia.

"In the short term, rejection from the" occupied "anthracite means finding its replacement. Reducing consumption of anthracite requires modernization of 50 units, 15 of which belong to the state owns. We should not forget about import, which takes 50 days," says Pendzyn.

Remains of coal and the ability to burn fuel oil allow Ukraine to block this period of time and start buying coal from the other sources, the expert adds. 

Related: Russia is surprised with "unwillingness" of Kyiv to stop trade blockade with Donbas

In parallel, he said, "Tsentroenerho" PJSC began to reequip boilers №2 and №5 of Zmiiv TPP from anthracite coal to gas. The cost of work is 240 million UAH, term of implementation includes five to seven months.

Let us also remember about power station boilers, which belong to Akhmetov’s DTEK holding. But the owners do not feel special interest in reequipping the enterprises, because they have much mines producing anthracite on the uncontrolled territory.

"According to DTEK, renovation of the units requires 300 days. Work of the third and fourth blocks of Prydnistrovska TPP are estimated 600 million USD. In the near future DTEK has no plans to prolong these works. If necessary, it would load the "gas” blocks more,” says Pendzyn.

He adds that in terms of a firm political will for a year or two Ukraine may switch to alternative sources of coal and refuse from the trade with occupied territories.

Related: Gontareva believes GDP will decline to 1.5% if blockade continues

However, this scenario is complicated by the fact that Ukraine has a tariff on coal "Rotterdam +," which allows its beneficiaries enrich by 0.5 billion monthly through trade with the occupied territories.

Conclusions

There are different figures on how much Ukraine would lose from trade blockade. State Fiscal Service ignored our question on how many taxes did the firms from occupied territories pay to Ukrainian budget. The press often voiced the figure of 36 billion UAH, but it is not even close to reality.

The main taxpayer in Donbas uncontrolled territories is Akhmetov’s SCM. According to the press service of SCM, in 2016 the enterprises situated on the uncontrolled territories paid more than 3.5 billion UAH to the Ukrainian budget. This is about 10% of the taxes paid by all assets of SCM in 2016.

"For three years of Donbas conflict, our companies from the uncontrolled territory paid 10 billion UAH of taxes to the Ukrainian budget," tells the SCM press service.

Related: Ukraine’s law enforcers to detain all armed supporters of Donbas blockade

So, the topic of taxes is somewhat exaggerated: most SCM businesses would continue to pay taxes in Ukraine. Another thing is economic growth. One of the biggest problems is called the problem of the trade balance.

According to the head of analytical department of Concorde Capital Olexander Paraschiy, a total loss of Ukraine in the trade balance does not exceed 5% of foreign exchange earnings and amounts to 150-170 million dollars a month.

"If you add up everything, you would get 1.8 billion net effect on the trade balance. This is quite a small figure. In addition, if the price of steel and iron ore does not fall, then we will have a chance to increase exports for almost 10% in 2017," the expert believes.

General situation for economic growth is unpleasant, but it would unlikely collapse. Even in terms of the most pessimistic scenario, if the blockade is continued by the end of the year, the economic growth in 2017 will remain at 1.5%.

Related: Militants about blockade: We don’t care

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