Yevgeny Pozhidayev. Donbass: blockade 2.0

A second month has passed since the Ukrainian “activists” blocked the Lugansk and Donetsk People’s Republics (LDPR) and the “blockade scenario” continues in Donbass. On February 27, the heads of DPR and LPR came out with a statement saying, “We have to declare that we will establish supervisory control at all the enterprises having Ukrainian jurisdiction and operating in the territory of DPR and LPR, unless the blockade is lifted by midnight of March 1 2017. We will stop supplying coal to Ukraine. We have neither capacity to supply coal nor payment schemes.”

The Ukrainian side responded immediately. Deputy Minister of Ukraine for Temporarily Occupied Territories Heorhiy Tuka said: “It is an attempt to frighten us a little. They are speaking about backbone enterprises that are operating in the vertically integrated companies and are both separate enterprises and units of the production chain.” “The production of these enterprises is not highly in demand in Russia. As for mines, there is more than enough coal there [in Russia], they do not know what to do with it and are closing down their own mines. Therefore, I don’t believe in it, whatever the say.” The “activists” who blocked the transportation called the actions of the LDPR leadership as “panic.” Simultaneously, rather bellicose statements were made. For instance, Alexander Turchynov said: “With the current alignment of forces we can mop up the territory of Donbass within a month.”

Let’s gain a deeper insight into the situation. The largest enterprises in the territory under control of Lugansk and Donetsk republics pay taxes to Kiev and carry out foreign economic activity as Ukrainian companies. By May 2015, those companies paid $1.4 billion taxes to Ukraine. There were attempts to revise the situation, but the issue disappeared from agenda for some rather serious reasons.

First, an unrecognized state cannot export its products legally. In 2015, there was semi-legal export through Ukraine-controlled Mariupol and Odessa with the help of Russian (formally offshore) mediators. In 2016, it was partially legalized and in June 2016 there were three official exporters of coal in LPR: Tsentralnaya (Anthracite) ore-mining and processing mill, Integrall LLC, and Rovenki-Uglepostach LLC.

Second, the frontline has split the single and inter-dependent industrial enterprises of Donbass with all what it entails.

LDPR controls the greatest part of Ukraine’s coal production. In general, Ukraine’s entire coal is concentrated in Donbass. Alternative sources are Lvov-Volynsk (15 coalmines initially) and Pridneprovsky (10 coalmines) fields. Recovery in western Ukraine is extremely inefficient and the number of operated mines is to be reduced to two. In Donbass, Kiev controls 35 pits, in LDPR – 53 pits.

As a result, 6 of the 14 large Ukrainian TPPs operate on anthracite coal and 9 million tons of total 24.5 million tons of the consumed coal is of “A” grade. It was in short supply yet before the start of the blockade. In 2016, Ukraine imported 900,000 tons of anthracite from Russia and SAR.

Besides, Ukraine feels shortage of coking coal (the production was consistently reduced). In 2010, Ukraine imported more than one-third of the consumption needs. In 2016, import reached 64% of total consumption, with Russia accounting for 66% of total import. The pre-war production was shared between the companies of Rinat Akhmetov “Krasnougol” (LPR) – 25%, Efim Zvyagilsky’s mine (DPR) – 30%. Another 15% went to the state-run companies Makeevugol, Donetsk coal energy company, and Artemugol (all located in DPR). The own production in the territory under control of Ukraine was limited by Pokrovskoe mine administration in the former Kransnoarmeysk. Before war, it accounted for up to 30% of recovery. However, two explosions in 2014 and 2016 almost halved the production. As a result, Pokrovskoe supplies only demand of Donetskstal Group that controls (the group belongs to Russian citizen Victor Nusenkis). However, it is necessary to “turn” the coking coal into coke. And the situation is certainly different here. In the territory LDPR there are following coke and chemical plants: Alchevsk (owned by Industrial Union of Donbass, with Russians holding 50%+2 shares in it), Gorlovsk (owned by Igor Gumenyuk), Yasinovsk, Makeevka (both owned by Donetskstal) and Donetsk (small plant belonging to Akhmetov). Before war, those plants accounted for over 40% of total coke production. Now their production has more than halved.

Outside Donbass, there are four coke and chemical plants: Dneprokoks, Bagleykoks, Deprodzherzinsky and Kharkovsky. They accounted for 36% of total production. Avdeevsky Coke and Chemical Plant belonging to Akhmetov produced another 23% of Ukraine’s coke.

As for final consumers, there are two large metallurgical plants, Alcheyevsk and Yenakievo, and two small metallurgical plants in LDPR. Alcheyevsk plant owns Industrial Union of Donbass. Yenakievo plant and its Makeevesk branch belong to Akhmetov, while Donetsk is owned by Donetskstal. In 2016, they produced 3.25 million tons of steel in total versus 24.2 million tons of all-Ukrainian produce. In other words, it is 13.4% of total.

Actually, the coal industry of Donbass is cut from its major consumers – the Mariupol-based metallurgical enterprises that produced 6.44 million tons in 2016. As a result, 70% of coal recovered in the republics is supplied to the Ukrainian side of the frontline (in 2016, recovery of anthracite and non-coking coal in LDPR increased by 49%). Metallurgy in LDPR fully depends on supplies of iron ore from the territories under control of Kiev.

The situation aggravates with “transboundary” interests of Ukrainian business groups – raw materials were supplied to “own” enterprises first. Thus, coking coal of Kransodonugol was supplied to Avdeevsk Coke and Chemical Plant that, in turn, “served” Mariupol, Yenakievo and Makeevka metallurgical plants. The production of Alchevsy Coke and Chemical Plant was supplied to the Dnepropetrovsk metallurgical plant owned by Industrial Union of Donbass. At the same time, Pokrovskoe coal supplies to Yasinovsk and Makeevka coke and chemical plans was interrupted by the Ukrainian side, which resulted in suspension of the Donetsk metallurgical plant.

At the same time, Donetskstal is just the top of the iceberg. LDPR has been suffering sluggish blockade. On August 20, 2016, the press-service of ATO reported seizure of “contraband” for a total of 56 million hryvnias. Here is what they reported: “In particular, in the area of Verkhnetoretskoye populated area, frontier guards stopped a Mercedes light vehicle with a Ukrainian license plate. The car drove to the uncontrolled territory. During inspections, concealed drugs worth over 30,000 hryvnias were found. Our compatriot and the products were transferred to cooperating divisions.” In other words, Ukrainian security officers blocked supply of medicines to LDPR, which is a military crime, and were trivially engaged in legalized robbery.

In mid-December, the blockade became evident.

On December 15, Ukraine’s Armed Forces launched offensive on Svetlodarskaya Duga.

On December 16, Donbass battalion made an ultimatum to LDPR demanding release of all captives and threatening with trade blockade. Needless to say that Kiev successfully breaches the exchange of “all for all” envisaged by Minsk-2. Due to “charity” of the republics, there is only 42 captives left in DPR versus 954 captives held in Ukraine. It is evident that most captives are civilians and Russian citizens captured by Ukrainian troops.

The blockade was an end in itself for the de-facto patrons, which was declared already on December 16. Turchynov said: “…I support that option – to ban any transportation of goods and freight activity. But they tell me: there are enterprises there that pay taxes to our budget and export products, Ukrainian banks receive the currency. Our people live there, they need to work etc. I think the experience of Croatia that was in a similar situation in 1990s would be useful here.” “My stance is as follows: there is war and everyone must work for victory. A full isolation of the occupied territory will hasten its liberation.”

On December 19, Attorney General of Ukraine Yuri Lutsenko reported that “an organized criminal group” was destroyed. “More than 500 tons of metal products from LPR, about 1 million hryvnias in cash, documentation, electronic data storage devices, business-related documents, computers, and other facts confirming supply of foodstuffs to the territory of DPR/LPR were confiscated.” In other words, supply of foodstuffs was deemed criminal in Ukraine despite all principles of the international humanitarian law.

On December 25, the railway (Lugansk-Popasnaya) was blocked except the near frontline area through which anthracite is still supplied to the Lugansk TPP. The plant is located in the territory under control of Ukraine, however, it is inherently an “island” isolated from the country’s power grid.

On December 26, the blockade was announced officially.

On February 2, Minister of Fuel and Energy Pavel Malgin announced about contracts on delivery of coal to Crimea (3.5 million tons) and far-abroad (2 million tons). As it was reported above, export of LDPR coal outside Ukraine is not an extraordinary event. However, it is for the first time this is stated almost officially given that Ukraine is not the transiting country.

On February 10-11 transportation via another two railways was blocked. The authorities of LDPR said Ukrainian enclaves should be reregistered in LDPR by March 31, otherwise external control will be established at enterprises. Denis Pushilin, the head of the DPR parliament announced a decision to amend the Laws on Taxation System of DPR and LPR, as the above enterprises pay no taxes to the budgets of the republics and do not observe the requirements of the tax codes of the People’s Councils of the republics.

On February 14, supplies of iron ore raw materials were curtailed, which suspended iron smelting at the Alchevsky metallurgical combine.

On February 15, Ukraine’s authorities announced emergency situation in energy field and risks of power cuts in Kharkov, Dnepropetrovsk, Kievsky, Chernigovsky, Zaporozhsky, Sumsky and Cherkassky regions. Interior Minister Arsen Avakov said: “In such regime, how many days will Avdeevka Coke and Chemical Plat work? I know how many – 9 days. Afterwards, we will turn stoves down. Afterwards, another week will pass and we will have to stop all the plans in Mariupol, then in Krivoy Rog etc.”

On February 16, the first motorway was blocked. Spokesperson of European Commissioner Federica Mogherini Maja Kocijancic said those responsible for the blockade must stop it immediately and the authorities must solve the problem as a matter of priority.

The U.S. Embassy made a statement regarding disruption of the coal supply: “The relevant parties need to come together to find a way forward in the short term that allows legitimate goods from Ukrainian companies to transparently cross the Line of Contact in order to prevent hardship to the people of Ukraine on both sides of the line.”

On February 17, two of the four production shops of Avdeevka Coke and Chemical Plant stopped operating. Metinvest Company belonging to Akhmetov made a statement saying, “‘Nationalization’ or reregistration of enterprises under jurisdiction of DPR/LPR will result in full termination of their exports. The given actions will result in suspension of enterprises and their further closedown.”

On February 18, power generation at the NPP has reached the maximum level during the last thirteen years. The share of nuclear power generation in the power balance increased from 47% to 60%.

On February 20, Yenakievo Metallurgical Plant and Kransougol were shut down. The first was experiencing shortage of iron ore raw materials since the beginning of the blockade. Afterwards, the Makeevka Metallurgical Plant and Khartsynzsk Pipe Plant were shut down. TPPs in Kiev shifted to economy regime.

On February 22, Russia initiated direct supplies of coking coal (it might be its own coke) to Donbass. Earlier, the supplies were via the territory of Ukraine.

On February 23, Azovstal Iron and Steel Mill was loaded by 55%, Mariupol Metallurgical Plant was load by less than 50%.

On February 26, the Donetsk-Mariupol blockade stated.

On February 27, deficit of iron ore suspended Donetsk Metallurgical Plant.

As it was mentioned above, the leadership of LDPR confirmed its ultimatum. What will the blockade result in? Here is the situation with power-generating coal. In the period from February 12 to 19, total coal reserves at TPP storages decreased by 1.6% to 1,506 million tons. Anthracite reserves decreased by 4.8% to 802,000 tons. In the period from February 20 to 27, total reserves increased by 5% to 1,581 million tons. Anthracite reserves fell to 789,8 thousand tons (-0.3%), reserves of gas coal increased to 791.7 thousand tons (+1-.8%). In other words, anthracite reserves have stabilized and the gas coal reserves keep growing.

However, there are some “nuances.” Anthracite was supplied to the Lugansk TPP that is isolated from the main power grid, where 35% of its reserves were concentrated as of February 24. The dynamics of reserves at storages of TPPs decreased by 2.2% (2,5 thousand tons) to 109,7 thousand tons within a week. As a result, anthracite coal reserves totaled 55.2 thousand tons on February 27 (-21% by February 20), gas coal – 54.5 thousand tons (+28.8%). In other words, anthracite reserves, except those at Lugansk TPP, are decreasing dramatically. By one power units operate at “Anthracite” plants after economy measures, which is fraught with automatic blackout in case of any emergency.

Growth of coal reserves is actually connected with the economy regime, first. A 10.6% power generation reduction is anticipated at TPP for March, which will be covered by the power generation at NPP and HPP and perhaps with trivial imports. For instance, in January Ukraine imported coal for a total of $170.9 million. Ukraine’s power grid is already facing risks – in case of emergency power cuts at the NPP, it will be impossible to cover the electricity shortage.

Prospects in the metallurgical field are not optimistic. The leadership says the load of Mariupol based metallurgical plants may be reduced to 30%, while Dnepropetrovsk metallurgical plant may be suspended. If blockade continues, Ukraine will face worsening of the trade balance and reduction of tax revenues due to “nationalization” in Donbass and suspension of metallurgical enterprises or falling profitability in the field.

Actually, the blockade has a negative effect on Ukraine, so why did the authorities impose it and do not harry to lift?

First, it is evident that “amateur actions” of “activists” help increase tensions in Donbass and contribute to the attempts of Ukraine’s Armed Forces to break into the defense line of LDPR. Judging by the flights of Global Hawk drones over the republics’ borders that preceded the blockade, it was coordinated with the former administration of the United States. Noteworthy that the U.S. Embassy’s statement was a kind of poorly veiled ban on forced dispersal of “activists.” Inside Poroshenko’s Administration, the lobbyists of those plans were traditional “hawks” from the People’s Front (Turchynov, Avakov).

Second, let’s identify the “activists.” The so-called Donbass Battalion and personally Semyon Semenchenko were backed by tycoon Igor Kolomoisky, who has preexisting grudge against Akhmetov and Poroshenko, including financial discrepancies with the first. To recall, Kolomoisky controls three out of four ferroalloy plants in Ukraine. Their profitability depends on the cost of electric power (Ukraine’s electro-metallurgy and Kolomoisky are almost synonyms). As a result, the price conflicts between Kolomoisky and Akhmetov’s DTEK, the largest private energy structure of Ukraine, go back to “pre-revolutionary” period. The electricity price preferences received from Azarov’s cabinet in 2012 were successfully opposed by Akhmetov’s structures. The situation grew even more tense with price hikes. Eventually, it became extremely important for Kolomoisky to press Akhmetov to reduce the electricity price (with the help of members of “Dnepropetrovsk clan” in the Ukrainian political elite). Noteworthy that Boris Filatov from Kolomoisky’s team proved the only head of big cities to support the blockade.

By some moment, it was favorable for Poroshenko too – weakening of Akhmetov’s positions was part of the measures to mop up the political field and the reduction of electricity prices helped certainly reduce the social tension that would grow with new requirements of IMF. Naturally, he was the supporter of “sluggish offensive.” However, the effects of the blockade proved too much for Poroshenko. “Mopping up” of “activists” in the current situation means to accuse them of working for separatists and Moscow, which will boost the rating of the opposition, including Kolomoisky’s puppet party “Samopomich.” Lack of such measures will worsen the economic situation, and the greatest part of the population will blame no one but “guarantor” for it.

Although in Russia everyone knows that Kiev trades with who it publicly calls “terrorists,” in Ukraine the “patriotic public” was surprised to learn that it extremely depends on supplies of coal from LDPR. Part of the public refuses to accept that fact and slams Poroshenko for personal interests, while others blame the “guarantor” for failing to ensure Ukraine’s energy independence from the “aggressor.” In other words, Poroshenko is losing, while the opposition is gaining political dividends anyway.

Another matter what Poroshenko considers the lesser of the two evils. Besides, there is addition threat – consolidation of the national-radicals that is taking shape currently (under slogans against trade with LDPR and Russia). This reflects consolidation of their sponsors against the current regime. It is hard to make any forecasts, as the sponsors of the blockade seek to prolong it at least until there are first signs of serious economic problems and cataclysms. When there are such, the blockade will be “kindly” lifted. This will be enough to discredit Poroshenko, weaken Akhmetov and make a self-PR.

As for LDPR and Moscow, they have evidently got prepared for such scenario and planned transfer of the major enterprises of Donbass yet long ago.

Yevgeny Pozhidayev for EADaily