The ul­ti­mate ben­e­fi­ciary:

De­spite the war and par­tial oc­cu­pa­tion of the Don­bas, Ri­nat Akhme­tov has pre­served his busi­ness em­pire and is in­creas­ing out­put

The Ukrainian Week - - CONTENTS - An­driy Holub

Ri­nat Akhme­tov’s busi­ness em­pire on both sides of the con­flict line

Some four years ago Ri­nat Akhme­tov’s role in Ukrainian busi­ness and pol­i­tics raised no ques­tions. He was the coun­try’s rich­est en­tre­pre­neur, owner of a busi­ness em­pire with as­sets in vir­tu­ally all sec­tors of econ­omy, and a full-fledged stake­holder in the most in­flu­en­tial po­lit­i­cal force, the Party of Re­gions. The PR’s iron grip on power seemed per­pet­ual and Akhme­tov’s in­flu­ence was such that even his fren­e­mies from the then pres­i­dent Vik­tor Yanukovych’s en­tourage, who had just started a large-scale re­dis­tri­bu­tion of mar­kets to suit their in­ter­ests, would not risk an open con­flict with “the mas­ter of the Don­bas.”

The sit­u­a­tion came to change with the rev­o­lu­tion and war. The for­mer sway of the Party of Re­gions lay in tat­ters. Bad news started to come in from econ­omy. While the 100%-Akhme­tov owned SCM Group is do­ing its best to re­struc­ture busi­ness, min­ing, met­al­lurgy and en­ergy re­main the mogul’s main sec­tors. These are united un­der Met­invest and DTEK re­spec­tively. In 2014, as global metal, ore and steel mar­kets be­gan to shift, the prices went in a down­ward spi­ral. That was just the be­gin­ning of the prob­lems, which were fur­ther ex­ac­er­bated by hos­til­i­ties. A large sec­tion of Met­invest and DTEK plants are in­te­grated in a sin­gle pro­duc­tion cy­cle. Ex­plained in sim­ple terms, coal from Akhme­tov’s coalmines goes to Akhme­tov’s coke and power plants. The out­put from these is shipped to Akhme­tov’s steel­works, where iron ore from Akhme­tov’s mines is al­ready wait­ing. Then, all this is ex­ported as metal and steel. Rev­enue in for­eign cur­rency is on the top of the pyra­mid. The split­ting of the Don­bas has com­pli­cated this scheme to say the least, as en­ter­prises are lo­cated both on the oc­cu­pied and Ukraine-con­trolled ter­ri­to­ries. For a while it caused sub­stan­tial dif­fi­cul­ties. The proof can be seen in statis­tics dat­ing back to the early months of the war. In the first half of 2014 Ukrainian en­ter­prises were still pro­duc­ing 2.4 to 2.8 tons of steel per month. In Au­gust, when hos­til­i­ties flared up and Rus­sia made an open in­va­sion at Ilo­vaisk, pro­duc­tion plum­meted by 28% to 1.7 ton. A num­ber of steel­works were now on the oc­cu­pied ter­ri­tory. The fact that in 2015 agri­cul­tural busi­ness ousted met­al­lurgy from its lead­ing po­si­tion in Ukraine’s ex­ports gives an idea of the scale of changes that took place dur­ing that pe­riod. Met­al­lurgy had for decades been the main source of cur­rency rev­enues for Ukraine. This sta­tus largely propped up the slo­gan “Don­bas feeds Ukraine.”

In 2015, Met­invest re­ported to­tal losses of $1bn com­pared to $160m rev­enue from the pre­vi­ous year. Along with the pub­li­ca­tion of the fi­nan­cial re­port, Met­invest an­nounced a de­fault in pay­ment and ini­ti­ated ne­go­ti­a­tions on debt re­struc­tur­ing with its lenders. Luck­ily for Akhme­tov, the dire sit­u­a­tion be­gan to look up. Early in 2015 the sec­ond Minsk Ac­cords were signed, and the sit­u­a­tion at the front sta­bi­lized. In April that same year growth in steel pro­duc­tion was first re­ported, con­tin­u­ing into the fol­low­ing month, and the in­dus­try again re­turned to the fig­ures above 2m ton per month.

Statis­tics show that good news came from com­mod­ity mar­kets, too. Prices had stopped fall­ing. Ac­cord­ing to Metal Bul­letin, the price of iron ore al­most dou­bled in 2016. The year saw also a growth in steel prices, de­spite the fore­casts from ex­perts on the mar­ket. Af­ter Jan­uary to Septem­ber 2016 Met­invest re­ported $989m EBITDA. An­other sign of an im­prov­ing sit­u­a­tion is the be­gin­ning of in­vest­ment in pro­duc­tion. In par­tic­u­lar, the Il­lich Steel and Iron Works in Mar­i­upol in­vested over 1.6bn UAH in own pro­duc­tion. On 30 Jan­uary it was re­ported that the Met­invest min­ing and pro­cess­ing plants had paid 19bn UAH in div­i­dends to the own­ers. Ac­cord­ing to the re­port, the share­hold­ers’ div­i­dends will be used “to serve the Met­invest debts and as part of cap­i­tal in­vest­ment in pro­duc­tion fa­cil­i­ties.”

In most cases, in­vest­ments in pro­duc­tion and debt pay­ment are de­manded by the lenders, who once agreed to re­struc­ture the Met­invest debt. How­ever, the fact of such fund­ing shows that the state of Akhme­tov’s busi­ness is far from crit­i­cal, in fact, it has fully adapted to the new con­di­tions and is de­vel­op­ing. That a part of the pro­duc­tion fa­cil­i­ties are now on the oc­cu­pied ter­ri­to­ries did not sever the links with them. Mines and met­al­works are run­ning like clock­work for the owner’s ben­e­fit, all thanks to the change of the fa­cil­i­ties’ reg­is­tered ad­dress. For in­stance, the Ye­nakieve Met­al­works is now reg­is­tered in Mar­i­upol. By the way, the Rus­sian own­ers of the Alchevsk Met­al­works did the same and reg­is­tered their firm in Siverodonetsk. The sta­tus quo af­ter al­most three years of war might look com­i­cal, if it were not for the un­der­ly­ing tragedy. En­ter­prises which are work­ing vir­tu­ally in oc­cu­pa­tion, but are nom­i­nally reg­is­tered on Ukraine-held ter­ri­to­ries, duly pay taxes to the state.

Ac­cord­ing to the SBU, in 2016 they paid more than 31bn UAH, of which 777,445,908.57 was the mil­i­tary tax pro­vid­ing for the needs of the Ukrainian Army. More­over, En­ergy and Coal Min­is­ter Ihor Nasalyk says that 50,000 minework­ers from the oc­cu­pied re­gion are legally em­ployed on Kyiv-con­trolled ter­ri­to­ries, where they also re­ceive their wages. These have paid 1.9bn UAH in taxes.

Mean­while Ukraine’s gov­ern­ment has failed to in­tro­duce trans­par­ent rules in the mat­ter of trade with the oc­cu­pied re­gions. The “smug­gling in Don­bas,” which has be­come a sta­ple item in the news, does not in fact break any laws. In­stead the only ones who are ef­fec­tively pun­ished for con­tra­band are the or­di­nary in­hab­i­tants of the oc­cu­pied re­gions who smug­gle rel­a­tively small amounts of food.

“When I worked in Luhansk oblast, I had trou­ble ex­plain­ing why a per­son may not carry 100 kg of cheese in the boot of his car, while bor­der guards de­tained a freight car with elec­tronic de­vices and all the nec­es­sary pa­pers on the way to the oc­cu­pied ter­ri­to­ries. I could not fathom it. Nor could I un­der­stand how to ex­plain this to the bor­der guards, from whom I de­manded com­pli­ance with the re­stric­tive or­ders. They did not un­der­stand it ei­ther. Be­cause there is not a grain of logic to it,” said the for­mer head of the Luhansk Oblast State Ad­min­is­tra­tion He­orhiy Tuka in his in­ter­view

to The Ukrainian Week in Septem­ber 2016 (see in Is.10 (104) of Oc­to­ber 2016 at ukraini­an­week.com).

Coal has be­come the ad­dic­tive in­jec­tion which cap­tured the Ukrainian gov­ern­ment giv­ing it an ar­gu­ment against the block­ade of the oc­cu­pied ter­ri­tory to throw in the face of the vot­ers. The coun­try has 12 co-gen­er­a­tion sta­tions or ther­mal elec­tro sta­tions (TESs) run­ning ex­clu­sively on high grade an­thracites which are not mined on the Ukraine-con­trolled ter­ri­tory. The elec­tric­ity pro­duced by those TESs is not only con­sumed by in­dus­try, it is also used to light and warm homes. Ac­cord­ing to min­is­ter Nasalyk, Ukraine is work­ing on the di­ver­si­fi­ca­tion of sup­plies and re-equip­ment of the fa­cil­i­ties so they can use other fu­els. In par­tic­u­lar, a pilot pro­ject is al­ready launched at the Zmi­ivska TES. How­ever, over these three years the gov­ern­ment has failed to fully cover the coun­try’s need in en­ergy with­out an­thracite.

“Should the ATO zone be to­tally cut off, we will have to re­sort to rolling black­outs. There will be a cer­tain adap­ta­tion pe­riod. We have de­vel­oped a sched­ule. The cur­rent sup­plies are suf­fi­cient to last roughly through the end of March,” said the min­is­ter. He added that the ship­ping time to get an­thracites from Aus­tralia, South Africa, China, or the US (the coun­tries pro­duc­ing this type of coal) would be 50 to 55 days. This should be the pe­riod when rolling black­outs would be ap­plied. Most TESs in Ukraine are pri­vate prop­erty. Nasalyk claims that the gov­ern­ment ne­go­ti­ated with the own­ers, but to no avail.

“It is very hard to force a pri­vate owner into do­ing things. Be­sides, it in­volves sig­nif­i­cant costs. If the re­con­struc­tion of the Zmi­ivska TES cost us 240m UAH, the bill for re-equip­ping Block 7 at the Slo­viansk TES will stand at 500m UAH or even higher. The ma­jor­ity of own­ers in­sisted on re­con­struc­tion costs to be in­cor­po­rated in en­ergy prices, so that they might com­pen­sate the costs. But there is no room to raise the prices any fur­ther,” said he at a press con­fer­ence on 7 February. Out of the 12 TESs run­ning on an­thracite only three be­long to Akhme­tov’s hold­ing: the Luhansk TES in Shchas­tia and two in Kryvyi Rih and Dnipro. Yet there is solid ev­i­dence that they consume the most an­thracite im­ported from the oc­cu­pied ter­ri­to­ries. In March 2016 the Ukrainian Cy­ber Army, a hacker group, re­ported hack­ing into mail­boxes of the so-called trans­port min­istries of the self-pro­claimed Donetsk and Luhansk “Peo­ple’s Re­publics” (in fact, the fa­cil­i­ties of the Donetsk Rail­ways on the oc­cu­pied ter­ri­to­ries). Ac­cord­ing to their data, most coal con­tain­ers from the oc­cu­pied ter­ri­to­ries went to those par­tic­u­lar TESs: 2,203 freight cars (132,000 ton) to Shchas­tia and 4,452 cars (267,000 ton) to the fa­cil­i­ties of the DTEK Dniproen­erho (which in­cludes the TESs in Kryvy Rih and Dnipro). That very month coal was also shipped to six more TESs, but the to­tal of only 3,741 freight cars is al­most the half of what was shipped to Akhme­tov’s three fa­cil­i­ties.

A self-ful­fill­ing prophecy here is that not only big in­vest­ment costs, but the struc­ture of the busi­ness hin­der the re-equip­ment of en­ergy-pro­duc­ing fa­cil­i­ties. For Akhme­tov, ty­coon and owner of TESs, giv­ing up an­thracite would mean giv­ing up his own prof­its. In the mean­time coal pro­duc­tion on the oc­cu­pied ter­ri­tory grew con­sid­er­ably over 2016: DTEK Rovenky An­thracite in­creased an­thracite pro­duc­tion by 43% last year, up to 2.2m ton, and DTEK Sverdlov An­thracite by 30%, up to 2.3m ton. Even three years af­ter the change of gov­ern­ment Ukraine’s rich­est busi­ness owner still holds sway over pol­i­tics in the coun­try. His busi­ness is vir­tu­ally adapted to the cur­rent “nei­ther war nor peace” sit­u­a­tion. Re­gard­less of per­son­al­i­ties, any ty­coon’s money loves si­lence and once adapted, a busi­ness is least in­ter­ested in se­ri­ous change. Since the sta­bi­liza­tion of the di­vi­sion line in Don­bas, sta­ble fi­nan­cial flows and com­mer­cial routes have come into be­ing. Chang­ing this would be prob­a­bly the trick­i­est task for Ukraine’s gov­ern­ment, if the de-oc­cu­pa­tion of Don­bas is re­ally a pri­or­ity. Since the Minsk Ac­cords were signed, more than 400 civil­ians and 500 troops have been killed there.

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