The past two years haven't been the most successful for Ukraine, and the decline in production was already evident. However, the forecasts for this year look bleak even under the most rose-colored glasses. According to the Ministry of Economic Development and Trade, GDP will decline by 4,7% in 2014, while the World Bank estimates closer to 5%, and the IMF's forecast is even more alarming: 6,5%. The budget deficit for January-July exceeded UAH 32 billion.
Meanwhile, Ukraine spends 70 million hryvnias daily on the ATO. The declared ceasefire has reduced these costs somewhat (at least temporarily). But it has also raised new questions for the government: where will they find the funds to restore the devastated region and its industry, which produced approximately 16% of the country's GDP and accounted for a quarter of its exports?
It is clear that the emergency situation in the East of the country has created extraordinary challenges for the “kamikaze government,” for which they have traditionally proven unprepared.
Industrial production indices plummeted by 30% in Donetsk Oblast and by 56% in Luhansk Oblast in July 2014. From January to July, declines in production volumes were recorded across all manufacturing sectors in the region. The hardest hit were light industry (a 46% decline), the chemical industry (41%), pharmaceuticals (19%), and mechanical engineering (34,4%).
Today, many enterprises are completely shut down, and those that remain operational have reduced production by 15 to 50%. Damage to power lines has knocked out power to entire villages and created massive water supply problems. Near the Kurakhovskaya Thermal Power Plant, all high-voltage towers have been blown up. Chemical and coke plants have been shut down. The shutdown of the Avdiivka Coke Plant alone—Europe's largest chemical plant, which produces a third of all Ukrainian coke—has practically paralyzed the metallurgical industry. The plant supplied a number of metallurgical plants with essential raw materials. Naturally, its shutdown also brought dependent production to a halt, including the Donetsk Metallurgical Plant and the Makeyevka Metallurgical Plant, while the Yenakiieve Metallurgical Plant has partially suspended operations.
Railroad tracks in the directions of Yasynuvata, Avdiivka, Krasnoarmeysk, and Debaltseve have been rendered inoperative. Most enterprises in the heavy engineering, metallurgy, energy, and coal industries cannot operate without the railway. "This concerns both the delivery of already produced goods and the provision of necessary raw materials. Metallurgists cannot import coke, ore, fluxes, and dolomite, while thermal power plants are receiving trainloads of coal that should have been shipped from the mines," Yuriy Makogon, director of the Donetsk branch of the National Institute for Strategic Studies, told ZN.UA. "Supposedly, railway workers began repairing these sections of the track on September 9. According to the most optimistic estimates, this will take them at least two weeks, assuming a cessation of hostilities."
But just yesterday, gunshots were heard in southeast Donetsk. The ceasefire is very precarious, as I understand it. Workshops at the Lisichansk Glass Factory and the Severodonetsk Azot Chemical Association have also been damaged. According to average estimates, over 60% of the mines are out of service. Miners are struggling to maintain them by pumping out water and methane. But they aren't always successful, and they don't always have the resources to do so.
The coal industry is perhaps in the most dire straits. The problems of previous years—instability of demand and underinvestment—are secondary in the current environment (although capital investment in the industry in the first half of the year amounted to UAH 1,1 billion, which, in current prices, is almost half the amount of a year ago). Today, the miners' primary goal is to prevent, if possible, catastrophic consequences for production and the environment. Losses in the past month alone amounted to UAH 297 million.
Many mines are idle due to broken power lines and the failure of transformer substations. Without a stable power supply, miners are unable to pump out water, and the mines simply flood. This, in turn, threatens the region with an environmental disaster akin to the Chernobyl nuclear power plant explosion, the aftermath of which would require colossal sums of money. Some mines have suspended operations due to a lack of explosives, which are produced at two plants in the region controlled by the so-called DPR and LPR. Coal production has fallen by 23%, reaching a decade-low of 2,4 million tons per month. Over 420 tons of coal have simply been lost.
Meanwhile, the share of coal in the region's fuel mix has increased to 50%. Ukrainian thermal power plants have consumed an average of 30 million tons of coal per year in recent years, and the region's mines accounted for more than half of the country's coal production. Furthermore, the region's coal industry employs approximately 130 people, most of whom are currently on unpaid leave.
Unemployment in the region has nearly doubled, with 15 registered unemployed people applying for every job. Last year, the average unemployment rate was eight people per job. According to the Luhansk Regional State Administration, over 30 people have already lost their jobs in the region, and if the standoff continues, approximately 85 Luhansk residents will be unemployed by the end of the year.
In the first half of the year, 51% of Donetsk Oblast enterprises suffered losses totaling UAH 31,6 billion. The region's share of Ukraine's overall losses was 10,7%. The deterioration in the enterprises' financial condition was affected not only by the decline in production, but also by a reduction in foreign exchange earnings from exports, rising prices for materials and fuel and energy resources, as well as unproductive expenses and losses caused by the fighting.
Furthermore, the depreciation level of many regional production facilities was estimated at 60-80% long before the ATO. Most of them produce uncompetitive products for a narrow market segment, which they have already lost due to the conflict with Russia. For Donbas enterprises to be economically viable, simply resuming operations will not suffice; modernization and partial reorientation to other markets will be necessary. "Production was focused not simply on exports, but on exports to Russia. Now, rebuilding these enterprises without finding new export markets will yield absolutely nothing," explains Yuriy Makogon. "Furthermore, many production facilities are simply impossible to reorient, and they will not be able to operate without markets. Almost all of the equipment we produce for mines and quarries, and most of our metallurgical products, are in demand only by our eastern neighbors; these products are useless in the markets of developed countries."
Exports of goods from the region have already fallen by 15%. Moreover, trade with Russia, which until 2014 was Donbas's largest foreign trade partner, has declined by almost 50%, with Italy becoming the region's leading export partner, accounting for almost 14% of all exports. Turkey and Egypt also remain important strategic partners. However, the economic situation in Ukraine has also forced adjustments to the operations of those remaining operating enterprises. Despite a nearly five percent increase in ferrous metal exports outside of Ukraine (which account for 66% of regional goods exports), foreign exchange earnings from these products have halved, while mechanical engineering products have declined by 2,2 times, and chemical products by 4,5 times.
The state budget, which needs funds now more than ever, is also suffering colossal losses due to the region's problems. According to the State Fiscal Service, the Donetsk and Luhansk regions stopped paying taxes to the Ukrainian treasury in early summer. Due to the situation in the eastern regions, 4,4 billion hryvnias have been lost. In the Donetsk region, 397 legal entities ceased to exist, and in the Luhansk region, 196. Meanwhile, the ATO in the region required 1,5 billion hryvnias per month.
The introduction of a 1,5% "military" tax seems trivial against these figures. In August, tax authorities collected approximately UAH 287 million, and they plan to collect another UAH 500 million in September. By the end of the year, the State Fiscal Service expects to receive an additional UAH 2,9 billion from the new tax. This amount, unfortunately, won't even cover the tax losses associated with the military conflict in the region, let alone the costs of conducting the ATO itself and eliminating its consequences. The Luhansk region alone needs over
8,5 billion UAH
Just two months ago, Arseniy Yatsenyuk estimated the amount needed to restore the region at 8 billion hryvnias. He then revised his estimate and stated $8 billion, which, however, due to the lack of clear calculations, seems more like a play on words than a credible, sound calculation. The government's estimate of the funds needed to restore the region turned out to be an unfunny joke. The first figure is paltry, and there are no real sources for the second (or a list of specific purposes).
"Frankly, it's laughable to hear about seeking investment for Donbas," says Yuriy Makogon. "Money loves silence, but that's not the case with Ukraine. Financial investments require confidence in stable cooperation, and Ukraine has lost a huge amount of territory in six months and been drawn into a military conflict. Investors weren't lining up to contact us before, and now that it's become difficult to forecast anything even a month in advance, they're even less likely to want to deal with us."
Perhaps the only reason for any hope is the international conference dedicated to a donor fund for the restoration of Donbas, scheduled for September. Experts are highly skeptical of these initiatives. "Donor assistance shouldn't be expected, as the sums involved are colossal. According to our estimates, the region's industry needs at least 50-100 billion hryvnias," says Oleh Kanivets, a member of the Verkhovna Rada Budget Committee. "The Ukrainian budget cannot and should not support such expenses. Those responsible for its destruction should pay for the restoration of Donbas. International courts are needed to compel Russia to compensate for the damage caused by the military conflict. Assistance is needed from local oligarchs whose businesses are concentrated in the region, as they have a vested interest in its restoration and development more than anyone else."
However, there is no discussion yet of any specific sources of funding for the needs of the affected regions. Even if the necessary funds for industrial restoration are received, there are no guarantees that they will be used rationally and for their intended purpose, or that embezzlement and abuse by local and even central authorities will be prevented. After all, the assessment of losses is currently highly tentative, and the principle that "war will write everything off" applies. And the process of rebuilding Donbas always risks turning into a "great carve-up."
There's been no information from the government about the development of any kind of rehabilitation or recovery measures. Although the Cabinet of Ministers should be working on such issues day and night, as they say. Apparently, its current leadership has other priorities (for example, haggling over places on election lists or the name of a bloc). Of course, in the current circumstances, predicting the future developments of the situation, as well as developing countermeasures, is no easy task. But surely the enormous government apparatus isn't capable of at least a rough assessment of possible scenarios and response methods? Then why do we maintain it?
As this issue went to press, Deputy Prime Minister V. Groysman announced a new estimate of losses from the conflict in eastern Ukraine: UAH 11,9 billion. He noted, however, that this was only a preliminary figure. However, whether any fundamental changes have been made in the government's approach to addressing this issue, other than allocating UAH 884 per month in assistance to displaced persons from Donbas and establishing a special reserve fund for their immediate needs, remains unclear.
Yulia Samaeva, Mirror of the week
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