Donbas enterprises are escaping from terrorism.
The armed confrontation in Donbas has been ongoing for over two months. Economists were hopeful that the circumstances would steadily become more stable after the presidential vote. Yet, this has not transpired thus far. According to some projections, the anti-terror operation may extend until the close of the year or even further. Market players are pointing out that, owing to the extraordinarily ambiguous state of affairs in the locale, a capital drain has already started. “Capital is departing. Enterprises are accompanying their proprietors as they exit these areas. I've repeatedly heard from diverse individuals that they have either already relocated to Kyiv or are planning to do so in the coming days,” observes Andriy Onistrat, Chairman of the Supervisory Board of National Credit Bank. Financial specialists are indicating that, in contrast to the commencement of the prior year, financial activity in the Luhansk and Donetsk regions has decreased by 30-40%.
The majority of enterprises have chosen a passive approach and are essentially not engaging in active operations.
Towards the close of May, regional business owners appealed to parliament with a request for a “tax break” for small and medium-sized businesses in the Luhansk and Donetsk regions during the ATO and for a year subsequent to its termination. They are requesting a scheduled tax and fee payment system and the abolition of fines for overdue payments. Members of parliament pledged to assist. In the intervening period, the Luhansk and Donetsk Chambers of Commerce and Industry are dispensing “certificates verifying force majeure events” to anyone who makes a request.
Donbas contains 2,400 bank locations. During April, inhabitants of the area withdrew a combined 3.3 billion hryvnias from deposits in the Donetsk and Luhansk regions, as well as in the adjacent Kharkiv region. Moreover, this progression is ongoing. Lending, understandably, has also been practically put on hold. “It's uncertain how this will ultimately be determined. Following Crimea’s abrupt cessation of being a constituent of Ukraine, bankers are cautious about providing loans in the eastern areas, given that a similar risk is present there,” expresses dismay from the deputy chairman of the board of a prominent bank. Owing to the deceleration in expansion, bankers are diminishing their presence in the locale: since the beginning of the year, 31 branches have been shut down in the Donetsk region and 33 in the Luhansk region.
Furthermore, the NBU is anxious about the cash deficiency, which is presently severely hampered in the eastern part of the nation due to recurring attacks on cash transporters. “In the Donetsk and Luhansk regions, there is presently sufficient cash for merely one to two days,” stated National Bank Governor Stepan Kubiv.
Retailers, who likewise routinely manage substantial cash amounts, are encountering comparable challenges. “It's crucial for retailers not solely to vend merchandise but as well to gather cash. Nevertheless, as is widely known, in the East, this is precisely what is problematic,” asserts Alexey Doroshenko, Director of the Association of Retail Chain Suppliers.
However, in spite of the pillaging of one of the three Metro megamarkets in Donetsk, not a single retail chain has yet declared it is discontinuing its activities in the region.
EXODUS OF THE REGIONS
Relocation to neighboring areas might constitute a resolution for numerous enterprises under the prevailing circumstances. Medium-sized enterprises will be the initial ones to depart from crisis-stricken areas, given that closing or transferring large ones is considerably challenging. However, not everyone is capable of simply leaving. “In the event that someone already possesses a business in other areas, relocating and concentrating more on the advancement of their business in other areas will be straightforward. Conversely, for those who operate exclusively in precarious areas, relocating is practically unfeasible. To accomplish this, they would either be compelled to vend their business, which is unattainable given the current context, or initiate from the ground up, which is arduous,” conveys Alexander Parashchy, Director of the Analytical Department at investment firm Concorde Capital.
The most alluring destinations for internal migrants will be the neighboring regions and Kyiv, which entrepreneurs traditionally favor relocating to. “The procedure of enterprise relocation has already gotten underway. It cannot occur swiftly, but the more protracted the military conflict in the Donetsk and Luhansk regions endures, the greater number of entrepreneurs will resolve to depart. Kyiv and the Kyiv region are, unquestionably, the most sought-after. Western regions are considerably inferior to the capital in this respect. I anticipate the Dnipropetrovsk and Zaporizhzhia regions will be preferable for numerous individuals,” elucidates Andriy Onistrat.
The extensive departure of Donbas enterprises was additionally documented by Dnipropetrovsk Regional State Administration Deputy Governor Boris Filatov. On his Facebook page, the official penned that Donetsk food industry business owners had visited the administration with offers to re-register their businesses in Dnipro. Furthermore, Filatov reported that Donbas entrepreneurs are in contact with him daily. Moreover, the situation is not restricted to small and medium-sized businesses. According to Filatov, even DTEK has transferred its coal division personnel from Donetsk to Pavlohrad. However, these are most likely the corporation's management and engineering staff.
LOAD COAL IN BARRELS
When debating the independence of eastern Ukraine, proponents of the DPR place their principal emphasis on the region's developed energy sector. It is challenging to dispute this assertion: for example, last year, the Luhansk and Donetsk regions generated a combined 63 million tons of coal, accounting for 75% of the nation's total. Evidently, transferring coal production capacity from these regions to other regions is unattainable owing to their dependence on the ore deposit. However, this does not preclude companies within the industry from shifting the concentration of their investment initiatives.
The crux of the matter is that if Donbas continues to uphold the position of secession from Ukraine, Kyiv will possess every justification to cease financially subsidizing the mines situated there. The figures are immense: according to computations by “k:,” the state annually allocates in excess of 11 billion hryvnias to the Donetsk and Luhansk regions solely to compensate for the disparity between the cost of coal production and its selling price. If these funds are rerouted towards the advancement of mines in the remainder of the nation, a substantial surge in black gold production can be anticipated.
The most sensible location to concentrate on is the existing mines in the Dnipropetrovsk region, which already yields over 18 million tons of coal annually (20% of the national total), as well as the Lviv and Volyn regions, which encompass the Volyn coal basin. Present coal production volumes there are symbolic: up to 2 million tons are extracted in the Lviv region, whereas no more than 0.5 million tons are generated in the Volyn region. However, these volumes can readily be expanded thanks to the mineral’s 1.6 billion tons of reserves. Furthermore, the Novovolynska No. 10 mine (Lviv region) is situated in this locale. Its construction commenced in the late 1980s but remains incomplete owing to inadequate funding. According to official data, the mine necessitates just over 1 billion UAH to be operational. Therefore, if the mine is redirected to the requisite funds, withdrawing them from Donbas subsidies, Ukraine could possess a contemporary mine with a capacity of 1 million tons of coal per year by the conclusion of this year.
The planned Chervonogradska No. 3 mine appears equally auspicious. Its design capacity is 1.2 million tons of coal per year, and the requisite investment is approximately UAH 6 billion. However, considerably more cost-effective alternatives exist: for example, by equipping the Stepna mine (Lviv region) with contemporary equipment, its coal production could double to 1 million tons per year.
The instance of these enterprises demonstrates that in Western Ukraine alone, there are a sufficient number of mines whose production potential can be elevated to peak performance with comparatively modest investments. Plainly, this capacity will not be adequate to comprehensively offset the coal losses in the Luhansk and Donetsk regions. But in reality, the situation is not so acute.
Primarily, Ukraine can augment import volumes. Local metallurgists will be appreciative of this, as they will possess unrestricted access to high-quality raw materials. Secondly, Ukraine can curtail its coal requirements by several million tons at any juncture. This can be attained by simply activating two million-horsepower nuclear power units, which are presently idle solely to ensure thermal generation operates at full capacity, thereby satisfying coal demand.
Kyiv is in no hurry to extract this money from Donbas miners. But the preliminary steps in this direction are already being undertaken: last week, a bill was registered in the Verkhovna Rada proposing a reallocation of the Ministry of Energy’s expenditures in 2014. The document proposes a reduction of UAH 180 million in funding for the state program for partial coverage of finished commercial coal production costs and the redirection of this amount “to finance the construction and technical re-equipment of coal mining enterprises.”
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