Feed­ing the en­emy:

Main­tain­ing so­cio-eco­nomic ties to the oc­cu­pied ter­ri­to­ries of Don­bas is of du­bi­ous value to Ukraine, but makes life a lot eas­ier for the ter­ror­ists run­ning them

The Ukrainian Week - - CONTENTS - Olek­sandr Kra­mar

Can Ukraine stop trade with the oc­cu­pied parts of the Don­bas?

The Rus­sian Fed­er­a­tion spends be­tween one and two bil­lion dol­lars a year to sup­port its prox­ies in the Donetsk and Luhansk Peo­ple’s Re­publics (DNR and LNR) run­ning the oc­cu­pied ter­ri­to­ries of Don­bas. But Ukraine’s di­rect and in­di­rect sup­port for the “bud­gets” of these self-pro­claimed re­publics is also es­ti­mated to be around US $1 bil­lion a year. Rus­sia is pay­ing for the op­por­tu­nity to ex­er­cise “ef­fec­tive con­trol” over the ter­ri­to­ries, whereas Ukraine seems to be pay­ing for use­less ex­pec­ta­tions that they might soon re­turn to Ukraine’s con­trol. Given that this might be pos­si­ble only un­der two cir­cum­stances—ei­ther Ukraine ca­pit­u­lates and ac­cepts Rus­sia’s con­di­tions for a dis­as­trous rein­te­gra­tion of ORDiLO, as the oc­cu­pied coun­ties of Donetsk and Luhansk Oblasts are called, or Rus­sia it­self goes through a ma­jor shake-up or falls apart al­to­gether—, shap­ing poli­cies in the hope that this will hap­pen any time soon drives Ukraine off-track and wears the coun­try down. And this is ex­actly what Moscow is count­ing on. Worse yet would be to sim­ply take back ORDiLO and sup­port and re­build it en­tirely in re­turn for a for­mal recog­ni­tion of Ukraine’s sovereignty while the Krem­lin con­tin­ues to run it for all in­tents and pur­poses. The Ukrainian Week an­a­lyzes what could be the po­ten­tial cost of stop­ping all eco­nomic ties with the oc­cu­pied ter­ri­to­ries.


Ac­cord­ing to the Main Statis­tics Bureau in Luhansk Oblast, of the UAH 34.58bn in goods and ser­vices sold by en­ter­prises reg­is­tered on Ukraine-con­trolled ter­ri­tory, UAH 11.6bn-worth was sold in the oc­cu­pied ter­ri­to­ries in 2015. Statis­tics for 2016 are not avail­able yet. What’s more, over UAH 1bn in salaries were paid to 21,800 of their em­ploy­ees in the oc­cu­pied ter­ri­to­ries. Ac­cord­ing to the Main Statis­tics Bureau in Donetsk Oblast, com­pa­nies reg­is­tered in Ukraine but ac­tu­ally lo­cated in the oc­cu­pied part of the oblast sold goods and ser­vices worth UAH 115.54bn there, and UAH 210.1bn in the rest of Ukraine. Of­fi­cially alone, they paid UAH 7.69bn in wages to 107,600 em­ploy­ees. To a large ex­tent, in­dus­trial pro­duc­tion on the oc­cu­pied ter­ri­to­ries, es­pe­cially the steel in­dus­try, is run­ning at a loss and is cov­ered by coun­ter­part en­ter­prises in the rest of Ukraine (see Sleep­ing with the En­emy: How Ukrainian big busi­ness op­er­ates in the oc­cu­pied ter­ri­tory in Is­sue #12(104), De­cem­ber 2016 at ukraini­an­week.com). Count­less man­u­fac­tur­ers that de­pend on sup­plies of raw ma­te­ri­als and re­tail chains that sell con­sumer goods in­clud­ing food from other parts of Ukraine—which are all con­sid­er­ably cheaper than sim­i­lar sup­plies from Rus­sia—also play a ma­jor role in sup­port­ing the economies of the oc­cu­pied ter­ri­to­ries. This kind of co­op­er­a­tion with the oc­cu­pied ter­ri­to­ries can­not be ac­cu­rately mea­sured to­day, but it is clearly prof­itable for Ukraine as well. Af­ter all, we’re talk­ing about vol­umes that once cov­ered a sin­gle Ukrainian mar­ket over more than two decades. How­ever, it is also clear that stop­ping this trade will not be crit­i­cal for any do­mes­tic pro­duc­ers, ei­ther.


Ac­cord­ing to data from late 2014 col­lected un­der the Yat­se­niuk Gov­ern­ment, ex­pen­di­tures on the bud­gets and so­cial funds of the oc­cu­pied coun­ties of Donetsk and Luhansk Oblasts ex­ceeded rev­enues by UAH 19.6bn and UAH 14.6bn. At that point, a de­ci­sion was made to stop is­su­ing pay­ments to the oc­cu­pied ter­ri­to­ries. Still, all this did was change the mech­a­nism. Res­i­dents of ORDiLO who reg­is­tered tem­po­rar­ily dis­placed per­sons on nonoc­cu­pied Ukrainian ter­ri­tory con­tinue to re­ceive gov­ern­ment ben­e­fits un­der law and ad­di­tional sup­port as IDPs. Not long ago, IDPs, like other cit­i­zens of Ukraine, were al­lowed to regis­ter or trans­fer their pen­sions to any of­fice of the Pen­sion Fund that was con­ve­nient to them.

Of course, the state has to take care of Ukraini­ans who have been flee­ing the war in Don­bas. How­ever, most of these peo­ple are ac­tu­ally fake refugees. Data for the be­gin­ning of 2017 is not avail­able yet, but if we com­pare in­di­ca­tors, we can see that the num­ber of pen­sion­ers reg­is­tered in Ukraine-con­trolled Donetsk and Luhansk Oblasts was 2.12mn at the be­gin­ning of 2014 and shrank to 1.15mn by the be­gin­ning of 2015. How­ever, it then grew to 1.4mn by the be­gin­ning of 2016.

In some of the coun­ties next to the oc­cu­pied ter­ri­to­ries the num­ber of pen­sion­ers reg­is­tered dur­ing 2015 grew at an as­ton­ish­ing rate. For in­stance, the num­bers nearly dou­bled in Bakhmut—for­merly Artemivsk—and county, go­ing from 59,850 on Jan­uary 1, 2015 to 113,400 by Jan­uary 1, 2016. In Slo­viansk, the num­ber of reg­is­tered pen­sion­ers went from 61,800 to 84,800, in Kos­tiantynivka it went from 46,700 to 67,200, in Kram­a­torsk from 79,800 to 92,500, in Ly­man—for­merly Kras­niy Ly­man—from 22,100 to 29,800, in Mrynohrad from 26,300 to 32,200, and in Sel­dynov from 32,700 to 38,700.

The num­ber of pen­sion­ers reg­is­tered in these towns amounted to more than half, and in some cases even two thirds, of the pop­u­la­tion of those ter­ri­to­ries. These rel­a­tive pro­por­tions sug­gest that the ma­jor­ity of mi­grant pen­sion­ers have fic­tively reg­is­tered ei­ther them­selves or through in­ter­me­di­aries only to get their pen­sion ben­e­fits, but most of them, in fact, con­tinue to live in the oc­cu­pied ter­ri­to­ries. In 2016, the SBU es­tab­lished nearly 4,000 cases where some­one con­tin­ued to take money through the pen­sion cards of in­di­vid­u­als who had ac­tu­ally died in ORDiLO, an amount that added up to nearly UAH 8mn a month. More­over, SBU staff found in­stances when the money trans­ferred to a dead pen­sioner’s ac­count was ac­tu­ally be­ing taken out by LNR of­fi­cials. All told, the SBU cal­cu­lated that it stopped pay­ments of ben­e­fits to

450,000 ques­tion­able pen­sion­ers and only 80,000 filed re­quests with their lo­cal pen­sion of­fice to re­in­state their pen­sions over the course of three months.


How­ever, the power in­dus­try has be­come the big­gest Achilles’ heel in eco­nomic con­tacts be­tween Ukraine and ORDiLO. Hav­ing got rid of its de­pen­dence on Rus­sia for gas, Ukraine re­mains hostage for the last three years in an ar­ti­fi­cial de­pen­dency on the ter­ri­to­ries oc­cu­pied by Moscow when it comes to elec­tric­ity. The most crit­i­cal yet the eas­i­est to re­solve is the sit­u­a­tion in Ukraine-con­trolled Luhansk Oblast. Its power grid was cut off from the rest of the Ukrainian power grid af­ter Rus­sia oc­cu­pied the south­ern cor­ner of the oblast and cur­rently op­er­ates as a power is­land, com­pletely de­pen­dent on the Luhansk TES, a co-gen­er­a­tion plant lo­cated right on the line of con­tact in the town of Shchas­tia. This TES can only op­er­ate on an­thracite, a coal that is in short­age in the rest of Ukraine. But this prob­lem can eas­ily be re­solved by build­ing a power trans­mis­sion line that joins into the power grid of non-oc­cu­pied Luhansk oblast, the north­west­ern part of Donetsk Oblast, or south­ern Kharkiv Oblast.

De­pen­dence on an­thracite that is mainly found in the oc­cu­pied ter­ri­to­ries but is needed for TESs is a bit harder to re­solve, but hardly im­pos­si­ble. Ob­vi­ously, this can’t be done in a week or two or even in a month, so the block­ade by ac­tivists could gen­uinely cause se­ri­ous prob­lem with power sup­plies to the rest of the coun­try. How­ever, the real prob­lem lies in the fact that con­vert­ing the sta­te­owned co-gen­er­a­tion plants to work on coal gas, of which there is a sur­plus, rather than un­avail­able an­thracite is hap­pen­ing only when some­one is ready to wield a stick. Last year, En­ergy Min­is­ter Nasalyk an­nounced a dead­line for con­vert­ing the Zmiyiv TES in Kharkiv Oblast from an­thracite to coal gas, but those dead­lines were ig­nored and so this has not com­pen­sated for the deficit of an­thracite so far. The sit­u­a­tion with the largest pri­vate power gen­er­a­tion com­pa­nies operating on coal, op­er­ated by Ri­nat Akhme­tov’s DTEK, is still worse. This cor­po­ra­tion, which owns a slew of ma­jor buy­ers of an­thracite on nonoc­cu­pied Ukrainian ter­ri­tory—Pryd­niprovsk, Kryvyi Rih and Luhansk TESs—still hasn’t con­sid­ered trans­fer­ring at least some por­tion of their power blocks to coal gas, which doesn’t need to come from the oc­cu­pied ter­ri­to­ries. But this is hardly sur­pris­ing, as DTEK has three huge coal com­pa­nies on the oc­cu­pied ter­ri­to­ries: RovenkyAn­trat­syt, SverdlovskAn­trat­syt and the Kom­so­mo­lets Don­basu Mine, with a to­tal ca­pac­ity of over 10mn tonnes a year.

The only way DTEK can be forced to stop ship­ping coal from them is by re­quir­ing all co-gen­er­a­tion plants in the rest of Ukraine to switch to coal gas. This, de­spite some spec­u­la­tion, can be done with­out ma­jor cost and is com­pletely re­al­is­tic, based on the cur­rent Rot­ter­dam+ rates be­ing paid.


In­deed, even with­out switch­ing TESs to coal in gas group, which is plen­ti­ful on non-oc­cu­pied Ukrainian ter­ri­tory, the use of an­thracite from the oc­cu­pied ter­ri­to­ries could be re­duced sev­er­al­fold. Look­ing at re­cent months, when the use of elec­tric­ity is at a sea­sonal peak, con­sump­tion over De­cem­ber 2016-Jan­uary 2017 28.77bn kWh of power was re­leased on the Whole­sale En­ergy Mar­ket (ORE), whereas a year ago dur­ing those same months con­sump­tion was 27.16bn kWh. More­over, power out­put at TESs in­creased from 7.38bn kWh to 8.77bn kWh dur­ing this same pe­riod last year, while out­put from AESs shrank from 15.61bn kWh to 15.35bn kWh. Some­times the share of power gen­er­ated by AESs through the ORE fell to 50% and in the last week of Jan­uary was only 52%, while in pre­vi­ous years it was up to 60% and more.

If Ukraine’s AESs were to pro­vide 60% of all the coun­try’s power through ORE to­day, pur­chases from TESs could be cut to 6.8bn kWh, al­though 8.77bn kWh is ac­tu­ally be­ing used. This would in turn re­duce the coal be­ing used by 22-23%, of which 35-40% is an­thracite, mean­ing that de­mand for black coal could be re­duced nearly 67% based on cur­rent con­sump­tion vol­umes. Al­to­gether for 2016, coal ex­trac­tion at DTEK mines in ORDiLO grew 77% to 8.03mn t, com­pared to 4.54mn t in 2015. Over this past De­cem­ber-Jan­uary, DTEK com­pa­nies RovenkyAn­trat­syt and SverdlovskAn­trat­syt in Luhansk Oblast and Kom­so­mo­lets Don­basu in Donetsk ex­tracted 1.86mn t of an­thracite, which is 310% more than they did in the pre­vi­ous heat­ing sea­son. Cu­ri­ously, armed con­flict along the con­tact like has not stopped nor in­ter­rupted so­cio-eco­nomic links, let alone com­pletely iso­lated the oc­cu­pied ter­ri­to­ries from the rest of the coun­try. Still, such steps will mean shift­ing the en­tire bur­den of sup­port­ing them to Moscow and its lo­cal prox­ies. At the same time, stop­ping com­mer­cial ties might cause losses to those who sup­ply and consume goods from ORDiLO, but it will be felt much more in the oc­cu­pied ter­ri­to­ries. This will raise the cost of sup­port­ing ORDiLO for Rus­sia and push it to look more ac­tively for ways to re­solve the sit­u­a­tion. Mean­while, this will re­duce costs for Ukraine and in­crease its ca­pac­ity to a longer stand-off with Rus­sia. On one hand, ad­di­tional re­sources will ap­pear to fi­nance de­fense and strengthen the line of con­tact. On the other, it will re­duce the scale of econ­o­miz­ing needed across the coun­try. Af­ter all, just the cost of pay­ing out pen­sions to res­i­dents of the oc­cu­pied ter­ri­to­ries will save the Pen­sion Fund far more than even a very sig­nif­i­cant in­crease in the re­tire­ment age of Ukraini­ans in the rest of the coun­try.

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