Graham Stack in Kyiv -
The Russian-backed insurgency in the Donbass region of east Ukraine is forcing numerous industrial giants to suspend operations. With the region accounting for over 25% of Ukrainian exports, the effect will hit hard currency revenues and the embattled hryvna.
The flashpoint marking the start of the industrial collapse in Donbass was the Lysychansk oil refinery, which in mid-July went up in a huge pillar of black smoke. Symbolic as that explosion at Ukraine's second-largest refinery was, however, it will actually have little impact since the facility had already been mothballed for over two years.
More troubling is the eerie emptiness in regional capital Luhansk, a formerly bustling industrial centre home to over 400,000. Half the population is estimated to have fled, with water, food and power shortages only compounding the constant shelling in recent weeks. Alongside hundreds of other companies, locomotive maker Luhanskteplovoz - the town's largest employer with a work force of around 6,000 - closed its doors early August after its power was cut.
Gorlivka, an industrial town of around 250,000 about an hour's drive from the city of Donetsk, is another industrial centre turned ghost town as it is surrounded by Ukrainian forces laying siege to rebels. The country's largest chemicals producer, Stirol, halted production in early May due to the risk of an environmental catastrophe, according to owner Ostchem - the holding group of oligarch Dmitro Firtash.
Ostchem categorically denies statements made on August 12 by the locally-based press secretary of Stirol, who spoke of a potential toxic disaster if Kyiv were to continue its offensive. Ostchem claims he spoke under pressure from the local rebel leadership.
However, those shutdowns only signified the start of a wider collapse in the former industrial heartland of Donbass caused by the Russian-backed insurgency and Kyiv's "anti-terrorist operation". The shutdowns have been snowballing as Kyiv's offensive has escalated through August, with damage to the power grid and rail links, and the collapse of security, paralyzing industrial giants.
That's bad news for cash-strapped Kyiv. With Donbass the motor of Ukraine's export economy, the collapse will impact the export revenues Ukraine desperately needs to achieve economic stablisation.
Among the latest casualties are Ukraine's largest coking coal producer, Avdeevka, which stalled production on August 18 due to a power outage resulting from shelling. "Electricians have no more than 24 hours to restore power supplies. After that irreversible processes will begin in the coking batteries that will lead to their full standstill. And there are no guarantees of the resumption of operations," owner Metinvest said in an ominous press release.
While Ukrainian forces have recaptured most of the town of Avdeevka, they're still battling rebels in the neighbouring railroad node of Yasinuvata. Metinvest also announced the shutdown of Enakievo Steel Works on August 13, to ensure workers' safety after the town came under artillery fire, and suspension of operations at two further Donetsk plants August 18.
Metinvest is the metallurgy division of System Capital Management, owned by Ukraine's richest man, Rinat Akhmetov and also incorporating DTEK. The power generator and miner announced Ukraine's largest mine, Konsomolets, will suspend operations after shelling on August 17 led to fire and power outages. Konsomolets mines 8% of the coal produced in Ukraine and employs 4,800. DTEK already suspended operations at six mines in the Luhansk region in July.
Another Donbass industrial giant, Alchevsk metal works, suspended operations on August 15, due to disruption of rail connections. According to reports in pro-Kyiv media, attempts to repair the rails ended when rebels opened fire on workers, killing one.
Statistics already show the inevitable economic collapse resulting from the conflict. Ukraine's industrial output declined 12.1% in July year on year. Donetsk saw a 28.5% in output, while there was an astonishing 56% collapse in the Luhansk region, according to the State Statistics Service. Among the worst affected sectors were the Donbass staples of mining and metallurgy, machine-building and chemicals.
That collapse is only deepening in August. Rail freight in Donbass fell 2.4 times in the first half of the month compared to June, according to Ukraine Railways. That illustrates another major problem for those companies still working, how to move output. The drop was due not only to falling production, but also disruption of the railway network. Luhansk's railroads have largely ground to a halt and the westward connection from Donetsk to Dnipropetrovsk and onwards is also disrupted.
In the context of a civil war the collapse is not surprising and could easily have been worse, but the hurt is multiplied because of the key economic role played by Donbass. The area - which groups the Donetsk and Luhansk regions - accounts for over a quarter of Ukraine's $70bn annual exports. Its real share may be even higher, according to economists, since many trading companies for Donbass producers are registered in other regions.
This means the local economic collapse will directly and swiftly impact the hard currency revenues Ukraine needs to shore up its economy. "Export is already falling, and it's mainly due to war. Export from Donbass may fall 2-2.5 times [during] these crisis months," says Concorde Capital's Aleksandr Paraschiy. "Cities such as Donetsk, Gorlivka, Luhansk, and Stakhanov - as well as the coal-producing districts of the southern Luhansk region - have no access to the outside world, which is being reflected in the weakened local currency."
Kyiv authorities, troubled by the ongoing slide in the value of the hryvna, are aware of the problem. "The industrial potential of the Donbass is being almost totally destroyed," President Petro Poroshenko told his security council on August 18, blaming the Russian-backed rebels. "They destroy infrastructure, substations, bridges, facilities. The terrorists and their foreign backers are guilty," he said.
The president called for new tactics to minimise the damage to the economy, but many are skeptical about the wisdom of such a move. "Unfortunately this would simply give the rebels more leverage over Ukrainian authorities," believes Dmitry Tymchuk, director of the Centre of Military-Political Studies.
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