Donbass Blockade: Quo Vadis?

Arsen Avakov kept his word. On 13th March, the Minister of Interior did send his police forces against the activists running a blockade of railroads in the area of Toretsk (former Dzerzhinsk). At least 43 armed persons were arrested on the spot. The move has sparked anger across Ukraine. Several demonstrations were organised in different cities on 13th March. Namely in Kyiv and in some Western cities. At the time of publication, a few hundred demonstrators hold a rally on Kyiv Maïdan Nezalezhnosti.

Per say, the Donbass “blockade” that was initiated in late January has not been broken up. Police has dismantled only one camp. Three are left untouched along the frontline:

  • the crossing « Svitlanove-Shepilove » in Luhansk region,
  • a crossing near Bakhmut (former Artemivsk) in Donetsk region
  • the motorway near Karbonit in Luhansk region.

Why the sole Toretsk transportation hub has been cleared remains an open question as of now.

Watch here the video of the Sherbynyvka blockade breakup

In essence, the 13th March police intervention does not change much. Trains and trucks are blocked on some routes and continue to cross the frontline on other spots, just as it was before.

Nevertheless, the government is considering declaring a “state of emergency” in the energy sector and warns of power cuts for industries and households in a near future because of a shortage in coal. “Ekonomishna Pravda” estimates that at least 800,000 tons of coal are exported from separatist-held territories to the rest of Ukraine. The exports may amount to some 10 million tons per year.

In any case, activists plan to extend the scope of their actions.

  • A railroad between the two countries was blocked for a few hours in Sumy oblast on 4th March.
  • A group walled the Kyiv headquarters of “Sberbank Rossiy” on 13th March in protest to the persistence of economic and financial relations between Ukraine and Russia.
  • Both actions made mere symbolic moves yet they both fall under the logics of installing a full-scale blockade with Russia and its proxy republics of Louhansk and Donetsk.
  • Blockade’s coordinator Anatoliy Vynohrodsky has warned his activists were ready to block all connections “when we’re ready”.
  • Since their first actions in late January, they have started an open conflict with the Ukrainian authorities and the President Petro Poroshenko.

To stop the “trade in blood”

“We want to stop the “trade in blood”, a tall war veteran nicknamed “Vlad” told me on 12th February in Sherbynyvka. He is himself exiled from the separatist-held territories. Two days before, he and his companions had set up a camp by the railroad that connects government-controlled Kostyantynivka and separatist-held Yasynuvata. This installation was among the ones dismantled on 13th March. In purchasing coal and anthracite coal mined in so-called DNR and LNR, Ukraine “finances their war against us. Some oligarchs and war profiteers benefit from it”, Vlad explained.

Vlad insisted also on denouncing the “Kyiv DoubleSpeak”. That is to say:

  • In the third winter of the conflict, the Donbass war is still not called a war. It is referred to as an “Anti-Terrorist Operation”.
  • Diplomatic relations with the Russian Federation are not broken.
  • A recently adopted “plan of reintegration of occupied territories” does not point to Russia as the occupying power.
  • When it comes to the trade links between separatist-held territories and the rest of Ukraine, the government is not explicit enough on the details of the deals. Back in September 2015, former U.S. ambassador to Ukraine Geoffrey Pyatt was already calling for “transparency in coal purchases in the anti-terrorist zone and abroad”, which came as an evidence of murky deals. The continuous uncertainty surrounding these deals feeds all kind of speculations.
  • Poroshenko’s blurry policy in dealing with the war and the peace negotiations is further put under question because of the recent multiplication of peace plans. Obscure political figures have pushed their own proposals up to the Trump presidential administration, in parallel to Kyiv’s official diplomacy. It leads to confusion as to the real intentions of Petro Poroshenko, as well as to his authority to lead an efficient diplomacy.

Nonetheless, the blockades have raised questions too.

  • Vlad assured me that he was “supported by citizens and patriots”. His company was nevertheless connected to the “Donbass battalion” and the “Samopomych — Self-reliance” party.
  • MPs Semen Semenchenko and Oksana Syroid have acted as main organisers and spokespersons of the blockades.
  • “Narodniy Front — Popular Front” and “Radikalna Partiya — Radical Party” have also been active in supporting the blockades.
  • Critics believe some strong financial interests are behind the blockades, namely competitors of the oligarch Rinat Akhmetov.

Useful idiots and liars?

One of the first arguments authorities oppose to these critics is quite a sound one: “it is naive to believe separatists will run out of weapons and ammunitions if we cut trade routes, since we all know they are supplied by Russia”, Yuriy Grimchak told me in the Ministry of Temporary Occupied Territories in Kyiv. Himself in exil from Donetsk, he is a advisor to the Minister, Vadym Chernysh.

There is no evidence that a full-scale blockade would weaken the pro-Russian and Russian forces nor that it would give local populations some incentives for reintegration with Ukraine. A similar “citizen blockade” of the border from Ukraine with Russia-annexed Crimea had last for a few months in late 2015. The peninsula residents had suffered from shortages and power cuts. Yet the blockade did not produce any sign that Crimea could ever go back to Ukraine.

The official policy of the Kyiv government is to abide by the Minsk Peace Agreements and to prepare for the reintegration of the separatist-held territories within Ukraine. In that perspective, Petro Poroshenko and his team have repeatedly opposed any form of “isolation of these territories, which de facto leads to give them as presents to Russia”. “This land is neither to take, nor to give”, he stressed in mid-February. The fact that no less than 25,000 civilians try to cross daily from one side to the other of the contact line is seen as an encouragement for reintegration. So are trade links.

It has to be noted here that the idea of a blockade has been voiced by Oleksandr Turchynov in late 2016. He is nevertheless the Secretary of the National Council of Security and Defence and a reliable collaborator of Petro Poroshenko. Such a declaration, followed by effective blockades a few weeks after, leads some analysts to believe Oleksandr Turchynov in fact supports the blockades and pursues his personal political ambitions.

Another of the authorities’ arguments is that « this trade does not finance separatists, as most of the companies selling coal to our plants are registered in Kyiv and pay taxes to us”, Yuriy Grimchak adds.

  • According to him, companies operating in so-called DNR and LNR and registered in Ukraine have paid up to 32 billion hryvnias (about 1 billion euros) of taxes in 2016. For the same year, the Ukrainian military expenses amounted to 65 billion hryvnias (about 2,2 billions euros). “These companies have financed half of our 2016 war effort!”, Yuriy Grimchak asserts.
  • Yuriy Grimchak does not take into account here that these companies automatically have to pay some kind of compensation to separatist authorities. As blockade-supporters stress, it is not thinkable that these companies could keep operating without any control from Donetsk and Luhansk. This is one of the “grey zones” surrounding the trade with so-called DNR and LNR.

Another argument that is opposed by Yuriy Grimchak and Kyiv authorities is that a full-fledge separation of separatist-held territories from Ukraine would prove impossible and dangerous.

  • When it comes to the case of water supplies, the canal “Severskiy Donets-Donbass” starts in Ukraine-held territories. It flows southwards through the city of Donetsk and ends up in the port city of Mariupol. “We could cut the water supplies to Donetsk, for sure. Yet it would also mean cutting water supplies to our Marioupol”, Yuriy Grimchak explains.

The same kind of interdependency goes for many of the energy and industrial infrastructures across the region.

  • The Schastye power plant is located on the Ukrainian side of the front line in the North of Luhansk. It supplies power to rebel-held Luhansk itself, while in turn being supplied with coal from mines in separatist-held districts of the Luhansk and Donetsk regions.
  • Steel plants such as the Enakievo Steelworks in the separatist-held Donetsk region depend on supplies of coke from the Avdiivka coke plant on Ukrainian side. Avdiivka in turn is supplied with coking coal from a mine in separatist-held Krasnodon.

According to Yuriy Grimchak, anyone who believes “in a complete separation by tomorrow is either a liar, or an idiot”. As for the activists on blockades, he considers them as “useful idiots … I mean, maybe they are no idiots. But they are definitely useful to someone”.

In late February, pro-blockade political groups failed to registered a bill “On the Occupied Territories” at the Verkhovna Rada (Parliament). The bill was meant to prohibit the trade between the separatist-territories and the rest of Ukraine. Yet their failure shows that proponents of the blockades remain a political minority.

Alternative supplies

The argument of the interdependency raises the question of the development of reform of the energy sector and the search for alternative supplies of energy. When it comes to anthracite coal, 99% of the Ukrainian consumption comes from the ATO zone, that is from non-controlled territories for the main part. The anthracite power-generating units produce about 15% of Ukraine’s electricity. Prime Minister Volodymyr Hroissman has publicly feared that, were the blockades to continue, Ukraine would loose 75,000 jobs and up to 3,5 billion dollars.

The government has recently assured that it would have to compensate the shortages of coal from separatist-held territories with imports from Russia. As such, it seems like a good argument against the ambitions of the activists of a full-fledge separation. Yet it raises some more questions:

  • Analysts have raised suspicions over the past three years that parts of the coal mined in DNR and LNR was purchased on formal basis by Russian companies only to be further sold to Ukrainian and European consumers. If the contact line is closed to the “trade in blood”, the same coal may travel to Ukraine through different transit points.
  • Imports from Russia are not the only alternative Ukraine has, experts point out. Back in 2014–15, some coal were imported from South Africa, despite some murky details surrounding the deal. As of now, Ukraine has the possibility to import coal and anthracite coal from Australia, the U.S.A., and Vietnam.
  • Government says that attempts to set up imports based on competitive price have not been yet successful. At the same time, some experts are sceptical about the statement. A 2015 “BNE Intelligence” report had discovered that contracts of coal imports involved some offshore company based in Cyprus, as well as at least three “fictive” companies registered in the Kyiv region. Nowadays, details of energy imports to Ukraine remain suspicious to many analysts.
  • The underlying fear is that the Kyiv authorities are more keen on preserving a status quo and Rinat Akhmetov’s economic interests than to diversify energy supplies.

The search of alternative sources of energy supplies is not the only option considered.

  • A logical alternative to separatist coal may the reduction of energy consumption and the increase of energy efficiency of the whole system of production and distribution. The government is officially engaged on this path. Yet results are long to take effect as environment activists denounce.
  • The modernisation of power-generating units so as to have them running on a different type of coal or on other sources of energy such as gas or fuel. A program of modernisation was adopted back in 2015 and was supposed to be completed by summer 2017. Results are also not obvious.

The fact that Ukraine is still dependent on coal and anthracite coal mined in separatist territories causes uproar in the Ukrainian society as citizens contributed to the program of modernisation of power-generating units.

  • Tax payers were burdened with an extra 10 billion hryvnias (about 3,5 billion euros) from March 2016 onwards. According to the so-called “Rotterdam +” formula, Ukrainian consumers started paying more from March 2016. “Rotterdam +” means the price of coal at the Rotterdam port + transportation. The electricity bills were meant to include such a formula, although the coal was in fact imported from so-called DNR and LNR.
  • The extra revenues both the state and energy suppliers generated was meant to support the modernisation of power-generating units.
  • The fact that these units have not yet been modernised and adapted raises suspicions as to where the extra revenues went to.
  • According to the Ukrainian Crisis Media Center (UCMC), the suspicions run high that both state players and Rinat Akhmetov’s energy companies made huge profits on these schemes.
  • In that perspective, the UCMC calls the warnings of forced coal imports from Russia a mere “intimidation of the public opinion”.

Separatist ultimatum

On their side of the front line, separatist authorities have also reacted negatively to the blockade. The activists’ initiatives endanger the economic situation in these territories, both in terms of revenues for the local authorities and in terms of employment.

Amid some new warmongering declarations, separatist authorities have requested the companies operating on territories they control to change their registration from Kyiv to Donetsk and Luhansk.

  • They placed some 40 companies under “external control” in late February and set a 1st March deadline for registration.
  • An an official statement by the System Capital Management (SCM) holding, owned by Rinat Akhmetov, the oligarch has refused to register his companies in separatist-held territories. Some 20 of the 40 seized companies depend on SCM, as well as some 20,000 employees.
  • Donetsk and Luhansk have since started the process of nationalisation of these companies.

The move is explained by a few factors:

  • Ukraine has been competing with Russia on the metallurgical market, so weakening Akhmetov’s positions by Russia has been just a matter of time.
  • Russia may switch from the model of funding “DPR” and “LPR” to the model of their “self-financing.” Nationalisation of these companies may be a way to increase the level of “local” revenues.
  • Russia may also be interested in energy instability in Ukraine and decline in its steel industry.
  • It may be part of a targeted attack on the economic empire of Rinat Akhmetov. His charity network of delivering humanitarian aid to the separatist-held territories have also been seized alongside his companies.

Rinat Akhmetov: An oligarch under threat?

In this blockade issue, Rinat Akhmetov is an unavoidable actor as the developments of the situation threaten the industrial and financial networks he had managed to preserve since 2014. He remains the richest man in Ukraine despite some significant losses since the Revolution of Dignity. He has played a dubious game since, which may come to an end because of the blockades.

According to the estimates of the investment company Dragon Capital, the SCM holding loses 5 to 10 million dollars a month because of the blockade. Were the “nationalisation” of his DNR-LNR companies to become effective, he would loose much more.

Rinat Akhmetov owns 70% of Ukrainian thermal power plants.

  • Since March 2016, Ukrainian consumers pay their bills to these plants according to the “Rotterdam +” formula.
  • Yet the plants have been using anthracite coal from so-called DNR and LNR.
  • Rinat Akhmetov has not implemented the plan of modernisation of power-generating units in his plants.
  • SCM has not made public the real purchase price for its coal. Hence speculations run high that the price of produced electricity is not justified by the price of purchased coal, which may be extremely low.
  • Some experts believe that part of this coal comes from so-called “kopanki”, that is illegal mines. Both Rinat Akhmetov and the Yanukovych “Family” had an intensive use of kopanki before the war that was meant to embezzle state subsidies and artificially raise prices.
  • It is thus fair to assume that SCM holding has made huge profits on such a scheme.
  • This has automatically been done with the government’s tolerance, if not approval.

Rinat Akhmetov’s interests and perspectives are endangered by the developments of the blockade situation.

  • On the Ukrainian side, he may be forced to finally comply with the 2015 modernisation program and to give up on his artificially-generated profits.
  • On the separatist side, he has a lot to loose when it comes to his well-integrated industrial networks.
  • A re-registration of his companies in non-recognised DNR and LNR would ruin his perspectives of export across the world.
  • His political influence on both sides of the frontline would also be endangered.
  • Although it remains to be seen whether separatists and Russians would effectively complete the nationalisation of Akhmetov’s assets. In doing so, they would need some strong financial capacities in order to ensure the paiements of salaries and the running of the plants. They would also need to secure export markets for their production.
  • Aside of the industrial assets, Rinat Akhmetov’s monopoly fixed-phone operator “Ukrtelekom” had to shut off part of its network in Donetsk oblast on 1st March. This followed the seizure of the Donetsk offices by separatist authorities on 1st March. Some 200,000 phones went off. This is a net loss for the company.
  • The processus of nationalisation of Akhmetov’s assets, along with many other Ukrainian oligarchs’, takes also place in Russia-annexed Crimea. It remains unclear whether the oligarch obtained any compensation for his losses.

Ukrainian medias and experts question whether this may be the end of Akhmetov’s empire.

To be continued

As economist Timothy Ash states, the blockades “have developed a dynamics on their own, which may be hard to stop”.

As the police intervention on 13th March has showed, the Kyiv authorities may move to break up the blockades in the near future, as they did with the Crimea “citizen blockade” in late 2015. Yet the underlying issues remain.

  • The Ukrainian energy sector has not been effectively reformed.
  • Ukraine is still dependent — some would say « taken hostage » — on coal from separatist-held territories as well as on large financial interests such as Akhmetov’s.
  • Petro Poroshenko faces more and more domestic opposition, which questions his authority and his ability to conduct an efficient policy. Blockades’ proponents swear to take down what they describe as an “oligarchic-kleptocratic” regime, which is now the “first trade partner” of Russian-backed separatists.
  • More troubles from these protesting groups are to be expected.

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