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In Ukraine’s east, Soviet-style economy withers under onslaught


By Lina Kushch, Elizabeth Piper and Natalia Zinets.A man walks past a coal mine in the eastern Ukrainian city of Donetsk, July 8, 2014. CREDIT: REUTERS/MAXIM ZMEYEVA man walks past a coal mine in the eastern Ukrainian city of Donetsk, July 8, 2014. CREDIT: REUTERS/MAXIM ZMEYEV.

(Reuters) – After pro-Russian rebels took 720 kg of explosives, 360 detonators and almost 1 km of wiring, the Skochinskiy coal mine, an ageing stalwart of the economy in Ukraine’s Donbass region, was put out of action.

Fierce fighting and rebel requisitioning have stopped work at many of the coal mines in and around the strongholds of Donetsk and Luhansk. Without the fuel, nearby steel factories and electricity plants across Ukraine are struggling to work.

Many in Ukraine’s western and central regions see the industrial east as a burden, home to an outdated Soviet economy of monolithic factories that offer little to the rest of a country where other sectors and smaller firms are more common.

But officials say with a budget unable to finance the Ukrainian army after losing revenues from Crimea, annexed by Moscow in March, Kiev not only needs the contributions from its east but also its heavy industry, albeit in a modernised form.

“There’s a war in Donetsk and Luhansk and practically all revenue from these regions to the state budget has fallen. Plus they annexed Crimea,” said Mikhailo Noniak, deputy minister for revenue and duties at Ukraine’s tax agency.

“The reality of the financial situation is pretty bad at the moment because of Russia’s aggression. A lot of money goes to defence.”

Ukraine is virtually bankrupt, running wide external deficits and struggling to cover state wages, never mind feed and equip an army whose numbers have risen as fighting against rebels who want independence for the Donbass intensifies.

Western lender, the International Monetary Fund, has thrown a financial lifeline, stumping up $17.1 billion as part of a two-year bailout package. Kiev has received $3.2 billion so far and hopes to get an additional $1.4 billion in late August.

Oligarchs, who became wealthy in the chaos following the fall of the Soviet Union and own much of the country’s private economy, have also stepped in, with one, Ihor Kolomoisky, financing and arming several battalions fighting the rebels.

But while financing from businessmen is unsustainable, Western funding demands that a reluctant Ukrainian parliament make some tough changes to its economy, where the state has long subsidised energy bills and has a bloated state sector.

Much of that budget spending goes to its east, especially Luhansk and Donetsk, impoverished regions where a flat panorama of pot-holed roads and grassy fields is punctuated by slag piles or mining machinery.

EASTERN DRAIN

Donetsk contributed 11.7 percent, or 170.8 billion hryvnias UAH=, to Ukrainian gross domestic product last year and Luhansk contributed just over 4 percent, at 38.9 billion hryvnias. Continue reading

#Economy: Russian execs fear lasting damage from plane crash


FILE - In this Monday, July 21, 2014 pool file photo Russian President Vladimir Putin listens during a meeting in Samara, Russia. Having for months dismissed Western sanctions on Russia as toothless, business leaders here are now afraid that the crash of the Malaysian jetliner will bring about an international isolation that will cause serious and lasting economic damage. The U.S. and EU are still playing something similar to “good cop, bad cop” with Russia, said Chris Weafer of the Moscow-based Macro-Advisory, but it remains to be seen whether the Malaysian plane crash will be a game changer for Russia’s economy. (AP Photo/RIA-Novosti, Alexei Nikolsky, Presidential Press Service, File)FILE – In this Monday, July 21, 2014 pool file photo Russian President Vladimir Putin listens during a meeting in Samara, Russia. Having for months dismissed Western sanctions on Russia as toothless, business leaders here are now afraid that the crash of the Malaysian jetliner will bring about an international isolation that will cause serious and lasting economic damage. The U.S. and EU are still playing something similar to “good cop, bad cop” with Russia, said Chris Weafer of the Moscow-based Macro-Advisory, but it remains to be seen whether the Malaysian plane crash will be a game changer for Russia’s economy. (AP Photo/RIA-Novosti, Alexei Nikolsky, Presidential Press Service, File)

MOSCOW (AP) — Having for months dismissed Western sanctions on Russia as toothless, business leaders here are now afraid that the crash of the Malaysian jetliner will bring about an international isolation that will cause serious and lasting economic damage.

Throughout the Ukrainian crisis, U.S. and European sanctions had mainly targeted a handful of individuals, sparing economic ties. Then last week the U.S. imposed penalties on some of Russia’s largest corporations. And when the airliner was shot down just a day later in Ukraine, allegedly by separatists with Moscow’s support, concern grew in Russia that the sanctions would only get worse as President Vladimir Putin showed little sign of cooperation.

“Over the past few months, there was a sense that Mr. Putin acted decisively, forcefully, and correctly, and that everybody else in the world would accommodate themselves to that reality and we’d get back to something like business as usual,” said Bernard Sucher, a Moscow-based entrepreneur and board member of Aton, an independent investment bank. “Now we’re talking about real fear.”

When Russia annexed Crimea in March, triggering a deep freeze in relations with the West, stock markets in Russia dropped but later rebounded as investors understood that the country’s lucrative trade relations would remain largely unscathed. Europe, which is in frail economic health, dared not block energy imports from Russia or the trade in goods such as cars or heavy machinery. Oil companies like BP and ExxonMobil continued their operations in Russia, with some even signing new deals.

The U.S. took a tougher stance, but until last week was also careful to limit sanctions to asset freezes on individuals who were perceived to have had a hand in supporting eastern Ukraine’s insurgency.

On July 16, the night before the Malaysia Airlines jet crash, Russian markets appeared to have fully recovered from the crisis in Ukraine, with the MICEX benchmark index adding roughly 23 percent since March 1.

Then last week, the U.S. announced new sanctions that had investors in Russia fear a turn for the worst. The U.S. shut off its financial markets for a broad swath of defense companies as well as Russia’s largest oil company, Rosneft, gas producer Novatek, which is half-owned by a close Putin ally, and a major bank, VEB. The move offered investors a glimpse of what they had thought would never happen: serious international isolation of Russia’s powerhouse corporations.

According to Alexis Rodzianko, president of the American Chamber of Commerce in Russia, those sanctions were the first to really pack a punch because they were “broader and more specific: they went beyond the symbolic.”

Rodzianko said anecdotal evidence suggests that in some cases investment decisions have been delayed “particularly when people were just considering coming in to the market.”

When the Malaysian airliner went down one day later, investors worried conditions would only get worse.

The stock market has fallen 5 percent since Thursday last week. That is expected to see investors keep pulling money out of the country. They withdrew $74.6 billion in the first six months of the year, a figure forecast to reach $100 billion for the whole of 2014 — almost twice the $60 billion in withdrawals seen last year. Continue reading

Sanctions finally find #Russia’s Achilles heel


Russia’s President Vladimir Putin gestures as he chairs a government meeting at the Novo-Ogaryovo state residence outside Moscow, June 25, 2014Russia’s President Vladimir Putin gestures as he chairs a government meeting at the Novo-Ogaryovo state residence outside Moscow, June 25, 2014. REUTERS/Alexei Druzhinin/RIA Novosti/Kremlin

Russian President Vladimir Putin and President Barack Obama were reportedly engaged in a heated telephone conversation last Thursday when Putin noted in passing that an aircraft had gone down in Ukraine. The tragic crash of the Malaysian airliner in rebel-held eastern Ukraine continues to dominate the headlines, but it is important to remember what agitated Putin and prompted the phone call in the first place — sanctions.

Sanctions against Russia have been the centerpiece of the U.S. response to Putin’s interference in Ukraine. While they primarily have been directed against prominent friends of Putin and their businesses, the underlying target has been a weak Russian economy.  The sanctions have definitely found Russia’s Achilles’ heel, and with harsher sanctions looming in the aftermath of flight MA17, Putin is finding it increasingly difficult to craft an effective reply.

Obama had raised the ante for Russia the day before the Malaysian airliner disaster by unexpectedly announcing a new round of sanctions. The designated enterprises included several major Russian banks (Gazprombank, VEB), energy companies (Rosneft, Novatek) and arms manufacturers. They were not, however, the full sectoral sanctions that Putin dreads the most. These would essentially exclude Russia from the international financial system and restrict major technological transfers. Though key Russian banks and energy companies are now prohibited from receiving medium or long-term dollar financing, U.S. companies are not otherwise prohibited from conducting business with them.

But even by hinting as to what sectoral sanctions might look like, Obama has upset Russia’s economic calculations. Obama is often criticized for not backing up the “red lines” that he draws. But in Ukraine, Obama essentially has drawn a “gray line” — demanding Russia take certain actions to end the crisis. No one knows when this gray line is crossed, however. So these new sanctions only heighten the uncertainty — and risk — of doing business in Russia. Continue reading

Separatists cause economic slump in Donbas


The long-running political crisis in Ukraine has had a negative impact on the country's economy overall.The long-running political crisis in Ukraine has had a negative impact on the country’s economy overall. © DW/F.Warwick

The armed conflict is taking a heavy toll on the economy in Donbas, Ukraine’s industrial heartland. Infrastructure has been damaged, fewer product orders are coming in, and exports to Russia have slumped.

The long-running political crisis in Ukraine has had a negative impact on the country’s economy overall. But out of all of Ukraine, the Donbas region in the southeast of the country has been affected the most. And the situation is only deteriorating as pro-Russian separatists continue to destabilize the region.

According to the Donetsk office of the Ukrainian Statistics Bureau, in the first quarter of 2014, losses by companies in the region were 37 percent higher than the national average. Losses in the Donbas region in the first three months of this year alone were estimated to amount to the equivalent of 1.8 billion euros ($2.4 billion) – more than the reported losses in all of 2013 (1.3 billion euros). Compared to the same period in 2013, industrial production dropped by 13 percent. That’s due to a decline in export orders as well as weakening domestic demand.

Large companies are still producing

Managers of large factories in the eastern Ukrainian crisis region said their production is still running normally. But the forecasts for the next two months are disappointing. “We’re still doing normal operation for now. But the order situation has of course deteriorated,” Volodymyr Shooliy, head of marketing for the Novo-Kramatorsk machine factory, told Deutsche Welle.

A road block in Kramatorsk after fightingA road block in Kramatorsk after fighting

The city of Kramatorsk is situated in the area where Ukraine’s government forces are involved in an anti-terror operation. Since April, they have been fighting against pro-Russian separatists in the southeastern regions of Donetsk and Luhansk who have proclaimed “people’s republics” there. Shooliy blamed the companies’ dire economic forecasts on the separatists. “Which foreigners will come to us if they have to pass 13 road blocks first?”

Massive slump in trade with Russia

Several orders have been cancelled because of the unstable political situation in the country, Yury Makohon from the Ukrainian National Institute for Strategic Studies told DW. New orders will be difficult to procure in Donbas in the near future, he added. “The most important heavy industry firms are still producing, but they’re no longer used to capacity.”

Factories in eastern Ukraine have focused on the Russian market, he said. But they’ve now lost access. “Trade volume between Russia and the Donetsk region has seen a massive slump since the beginning of this year,” Makohon said. Industry and freight traffic were experiencing extreme differences because the railway system has been damaged in the areas of the fighting.

Air traffic has come to a complete halt, incurring major losses for the region’s economy. The airport of Donetsk, a city of several million inhabitants, is to remain closed until June 30th, according to Ukrainian authorities. Travel operators have said all flights for the entire summer have been cancelled. “Our staff can’t access the airport safely at the moment,” Dmitry Kosinov, the airport’ spokesman, told DW, adding that shots are still being fired regularly near the airport.

Many small business owners have taken flight

Small and medium-sized companies have been worst affected by the crisis in the Donbas region. Makohon said they make up some 10 percent of the region’s economy. One in two has shut down over recent weeks due to increasing tension, leading to a considerable rise in unemployment.

Separatists raiding a bank in DonetskSeparatists raiding a bank in Donetsk

There are reports that separatists have pressed business owners for money, raided shops and kidnapped people. Many small business owners have left the region as a result- to avoid assaults by militants from the so-called Donetsk People’s Republic, social scientist Yaroslav Pasko told DW.

Developments in Donbas have seen a negative trend since 2008, economic expert Makohon pointed out. “But, of course, the political crisis and the fighting make the situation more difficult,” he said. Even if there is a swift and peaceful solution, Makohon said it may take years before the economy in the Donbas region can return to its 2013 level.

DW.DE

UkraineForUkraine

Markets love prospect of peace in Ukraine, no new sanctions on Russia


A picture shows the damage on a building's facade in the aftermath of combats between pro-Russian militants and Ukrainian forces in Slavyansk, southeastern Ukraine, on June 8, 2014UKRAINE, Slavyansk : A picture shows the damage on a building’s facade in the aftermath of combats between pro-Russian militants and Ukrainian forces in Slavyansk, southeastern Ukraine, on June 8, 2014. Ukraine’s new Western-backed President Petro Poroshenko vowed Sunday to halt by the end of the week nearly two months of bloodshed in the separatist east that have threatened the very survival of the ex-Soviet state. AFP PHOTO / Andrey Krasnoschekov © AFP

The market is clearly all buoyed up on the prospect of peace in Ukraine, and no new sanctions on Russia – that seems to be the consensus now, albeit I am not entirely sure this is all going to be smooth sailing.

Reading over President Petro Poroshenko’s speech at his inauguration – see this version from the Kyiv Post which is considered the best version – the theme of securing peace certainly comes across as a big theme. But herein we provide a quick summary of the key take-outs from the speech:

  • A call for disarmament;
  • The offer of immunity for all those who don’t have blood on their hands;
  • Safe passage for Russian fighters back across the border;
  • Peaceful dialogue, but only with peaceful citizens, and seemingly not with the leadership of the separatist movement in Donetsk and Luhansk, and not with “bandits”;
  • Early parliamentary elections – as Poroshenko indicated that the Verkovna Rada is currently not representative of the changed face of Ukraine;
  • Decentralisation of some powers to the regions;
  • Defence of the territorial integrity of Ukraine, promised this year via constitutional amendments;
  • No federal structure for Ukraine, with the unitary state maintained;
  • Not accepting of the loss of Crimea, and a pledge to return it to Ukraine;
  • Ukrainian will be the state language, but rights guaranteed for use of other languages, including Russian (he spoke part of his speech in Russian);
  • Re-equipment and rearmament of the Ukrainian army;
  • Fight against corruption;
  • Priority to create jobs, back business but ensure social justice;
  • Signature of new document to replace the Budapest Memorandum to ensure the territorial integrity of Ukraine;
  • Delivering on the European choice for Ukraine – signing the association agreement/deep and comprehensive free trade act as soon as possible.
  • Seeking visa-free travel to the European Union, and regards the association as the first step towards EU membership for Ukraine.

Reviewing the above, Poroshenko does not appear to offer that much to Moscow, affirming the EU orientation, no move to federalism and no official status for the Russian language – he also affirmed that he will push for the return of Crimea. There was, however, no mention of NATO membership for Ukraine. Poroshenko still has a difficult path to navigate as Ukraine has changed over the past few months, after street protests to remove President Viktor Yanukovych, invasion in effect of Crimea, annexation of Crimea, and then near-civil war in a further two oblasts. But it seems to have hardened sentiment in Ukraine to defend Ukraine’s unity, and its pro-European agenda, away from Russia.  Continue reading