Following the Trilateral Contact Group (TCG) meeting in Minsk on June 5, Leonid Kuchma, who has recently been returned to the talks by President Volodymyr Zelenskiy, assured that the negotiations were “constructive” for the first time, “all parties tried to find a solution”, and rhetoric was “absolutely different from what was before ”and “ there was climate of mutual trust”. Events and information, which followed, showed that such changes are due to the fact that the Ukrainian side began to demonstrate willingness to do what the enemy wants. Today it is already obvious that the “trust” regarding both another attempt of forces separation near Stanitsa Luhanska and another cease-fire turned out to be fruitless. Yet, the most promising surrender, which Kuchma initiated on behalf of Zelenskiy, seems to be Ukraine’s refusal from the economic blockade of the occupied territories. According to the Special Representative of the OSCE Chairperson-in-office to the TCG, Martin Sajdik, this proposal “came from Kuchma, and it was supported by participants from the ORDiLO.” The termination of the blockade means that the new Ukrainian leadership agrees to remove perhaps the last serious tool to create discomfort for the Russian occupation administration in Donbas, to lighten the Kremlin’s burden of keeping these territories. It will also mean to test the Ukrainian society’s reaction to the next steps of the authorities in fulfilling the terrorists’ “desires”, that is, accepting these territories for Ukraine’s keeping while maintaining Moscow’s actual control over them.
The blockade has worked out
A war, especially long-lasting, and all the more hybrid confrontation, is always not only and not so much a military component as economic and informational ones. The function of the blockade of the ORDiLO two years ago was to stop supporting the economy of the occupied territories (that is, in fact, not to finance the war against ourselves). Although it was not declared, but no less important was the creation and maintenance of a direct relationship of issue – “since you fight against Ukraine you are going to have a lower standards of living within the territories under your control.” Even if it does some harm to Ukraine itself, such an approach is justified, especially if the enemy suffers much larger economic losses. The economic blockade of the ORDiLO, despite smuggling and “shady” schemes for supplying a number of goods in both directions, still leads to an increase of cost of living within the occupied territories, and at the same time reduces local incomes and inhibits the development of the local economy. This is an indisputable fact; such a situation forces the occupant to make additional compensation expenses and provides a favorable contrast with the territory of the country free from militants. The termination of the blockade without receiving anything significant in return is the undoubted loss of a strategically important advantage.
Despite the widespread notions about the allegedly incredible economic losses of Ukraine due to the breakdown of ties with the ORDiLO in 2017, the situation is in fact quite ambiguous. In part, Ukraine, on the contrary, received benefits for its enterprises and industries. Even before the cessation of full-scale trade with the ORDiLO, The Ukrainian Week drew attention to the fact that despite all attempts at intimidation by officials and oligarchs who had assets in the occupied territory, breaking ties with the ORDiLO could stimulate development in a number of industrial sectors in territories controlled by Ukraine. First of all, it concerns the metallurgical sector. And the last more than two years have confirmed these predictions. In total, on a nationwide scale over the period of 04.2017 – 04.2019, iron making increased from 1.47 mln t to 1.84 mln t, coke industry showed an increase from 0.74 mln t to 0.9 mln t (in January 2017, before the beginning of the blockade, only 0.73 mln t were produced, and together with the enterprises in the ORDiLO territories – 1.01 mln t). Steel making (1.98 mln t) exceeded the figure of pre-blockade in January 2017 by 6.6%, even taking into account the volumes of occupied enterprises. At the same time, enterprises in the territory under Ukraine’s control increased its production by a quarter – from 1.57 mln t to 1.98 mln t. The situation with coke and cast iron making is the most significant, since these types of metallurgical products were called as potentially vulnerable due to termination of economic ties with the ORDiLO. Considering that a significant part of coking coal, and coke itself, were supplied from there.
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Also, even before the blockade began, The Ukrainian Week, based on the analysis of the largest Ukrainian mining and metallurgical companies group reporting, justified why and how the production in the ORDiLO harmed even the same companies-owners in the free territory. In this situation, the total and export revenues from sales of products of enterprises in the occupied territories received by the companies were about the same that would have come from the greater capacity utilization of the plants located in controlled Ukraine. But instead, the production was reduced at the enterprises of the Dnipropetrivsk region or the free part of the Donetsk region in favor of production structures in the territories occupied by the enemy, for example, in Yenakiieve, Makiivka, Alchevsk.
After the breaking of economic ties with the ORDiLO, there was a rapid replacement of the capacities captured by the enemy within the largest mining and metallurgical group in Ukraine – Metinvest (its managers at one time were perhaps the most ardent critics of the blockade). In the first quarter of 2019, compared to the same period of the pre-blockade 2016, cast iron production at the Mariupol combines of the company increased by 24%, steel – by 29.3%. This increased production in the free territory of Ukraine led to the almost complete replacement of the capacity of the Yenakiieve Metallurgical Plant located in the occupied territory (which in 2016 provided about a quarter of the company's total metal production). Before the blockade, the opposite tendency was observed. In 2013, the Mariupol combines produced 9.5 mln t of steel and 8.91 mln t of cast iron, but in 2015 the volumes dropped to 5.85 mln t and 6.4 mln t. Simultaneously in 2015-2016 there was an almost doubling of iron and steel production at EMZ (Yenakiieve Iron and Steel Works), which is in the occupied territory, and this against the background of almost unchanged production volumes at the enterprises of the territory under control, and the potential of the Mariupol combines was far from being used to full capacity.
A similar situation is with the extraction of power station coal by another industry monopolist – DTEK. Its annual report for 2015 showed that, whenever possible, the company tried to support mining in the mines of the occupied territories, while simultaneously slowing down production in free territories. The electricity requirements of Ukraine in the coal-fired electricity stations have decreased, but instead of increasing the production share of those blocks that operated on gas-coal, the company tried to increase the production and import of anthracite coal from the occupied areas. DTEK’s reporting of those years clearly shows that the reason for the refusal to replace electric power units operating on anthracite from the occupied territories with units using gas-coal mined in the territories controlled by Ukraine, was precisely the desire to restore full-scale deliveries of anthracite from mines in ORDiLO. In particular, during the second half of 2015, 2 mln t of anthracite coal was supplied to DTEK’s thermal power plants from the occupied territories – 160% (or 1.4 mln t) more than for the same period of 2014. And in the pre-blockade 2016, the trend became much more noticeable. The DTEK report on production performance for the three quarters shows the practice when within the company, coal production preferences were given to the mines of the occupied territories causing its decrease in the free territories. The production of anthracite in the ORDiLO increased by 63.6% (or 2.1 mln t), while the production of gas-coal in the free territories reduced by 1.5 mln t (9%). Thus, there was a clear replacement of coal production in the territory of the Donetsk region controlled by Ukraine, as well as in the east of the Dnipropetrivsk region, with coal from the ORDiLO. This led to losses for mines in the free territory of at least $ 70-80 mln and at the same time to additional revenues for the DTEK mines in the ORDiLO.
The ORDILO blockade at the beginning of 2017 radically changed the situation in favor of enterprises in the territory controlled by Ukraine. Top management of Akhmetov’s DTEK, which until the last minute opposed the blockade, radically changed its priorities in the direction of increasing fuel production in the mines of the free territories and switched blocks of its thermal power plants to gas-coal. And in June 2017, the results of these mines exceeded by 7.2% the volumes that were reached in the same month of 2016 together with the ORDiLO enterprises. Thanks to the blockade, we nevertheless received a refusal from the lion's share of anthracite, which until then had been actively imported from the ORDiLO and had ousted gas coal in the free territories of Ukraine. Both the state-owned Tsentroenergo and the largest private electricity producer at DTEK coal blocks continue to switch their capacity to the use of gas-coal. The share of this fuel, extracted in the mines in the territories controlled by Ukraine, is steadily growing.
On the other hand, the use and import of anthracite is being reduced (although slower than it should be). Due to this, the extraction of power station coal in the free territory of the country is developing quite rapidly. So, in 2017 it grew by 1.23 mln t, in 2018 – by another 1.28 mln t and reached 27.5 mln t (against 24.9 mln t in 2016). And this despite the fact that the production of electricity in thermal power plants (and hence coal consumption) in 2018, on the contrary, decreased by 16.6%, if compared with 2016 (from 72.9 to 60.8 billion kWh). Still, the effect of breaking economic ties with the ORDiLO could have been better if there had been an appropriate state policy of replacing the capacities lost in the ORDiLO and the development of alternative industries in Ukraine. Despite this, even under the following circumstances the positive significance of the blockade on the development of coal mining in Ukraine is obvious.
Industrial regions in the Southeast Ukraine have gained obvious benefits from the blockade of the ORDiLO. Their industrial sector in recent years has been developing at an accelerated pace compared with other regions. So, if nationwide industrial production for the first four months of 2019 exceeded its volumes for the same period in 2017 by 3.2%, then in the controlled part of the Donetsk Oblast – by 8.6%, in the Dnipropetrivsk Oblast – by 10.2%. Moreover, the production in the mining and metallurgical sector and the production of power station coal have increased after the end of competitors' access to the market from the ORDiLO.
To support the terrorists?
To lift the ORDiLO blockade under the current conditions means to level the achieved positive changes. Significant amounts of coal (including coal extracted from makeshift illegal mines, with unregulated working conditions, and therefore cheaper one) from the ORDiLO will undermine the positive tendency of increasing of gas-coal production at mines in free Ukraine, exacerbate the problem of wages and work for miners, in general, it will strengthen socio-political tension. And such social situation can be used by the enemy. Opening access for metallurgical enterprises from the ORDiLO to the Ukrainian market will lead to a reduction in production by enterprises in the free territories. In addition, there will likely to be a decline in production due to the increase of exports from the ORDiLO. And the leaders of the terrorists will be able to take an advantage of this situation, convincing the population that their confrontation policy with Ukraine is correct, because even being in a state of war, they have managed to achieve favorable conditions for “their” enterprises.
Lifting the blockade from the ORDiLO also means taking part in the financing of terrorists, helping the Kremlin in their maintenance. First, the militants of the “LPR” and “DPR” appropriate a significant part of the funds, which in various ways go to the occupied territories. All enterprises, including those mines and metallurgical combines, which the terrorists confiscated during the 2017 blockade, work primarily in their interests and belong to them either directly or through related business structures. Secondly, these enterprises in any case deduct “taxes” in the so-called budget of the “LPR / DPR”. The tax system determines an extensive list of fees, due to which the hryvnia, ruble or dollar, getting into the occupied territories, eventually end up in the hands of terrorists. For example, “The Law of the LPR on the tax system”, signed by the leader of Luhansk terrorists Ihor Plotnitskiy on December 28, 2015, includes the list of 10 “republican taxes and fees” alone and five more “local” ones. Moreover, both “residents and non-residents who carry out and / or do not carry out activities in the territory of the LPR” are recognized as payers. Therefore, any trade of Ukrainian companies with structures from the ORDiLO means filling their “common funds”, from which then financing of military operations and sabotage and terrorist acts against Ukraine will be carried out.
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In terms of article 69 of “The Law of the LPR on the tax system”, for those who carry out “operations with non-residents” – for example, a business entity which trades with companies registered in Ukraine – the tax amounts to 10% of the transaction amount in the case of product purchase and 20% of the transaction amount in the case of work delivery or provision of services. There are also fees for the transit, sale and export of certain types of goods, which include ferrous and non-ferrous scrap, coal and coal products, all sorts of flour and food grade wheat of I-III types. Consequently, for the export of coal products to the free territory of Ukraine by rail fixed charges of 400 UAH / t (coking coal) and 180 UAH / t (power station coal) are established. In the case of export by road, the flat rate will be 400 UAH / t regardless of the grade of coal. The export of ferrous metal scrap brings to the terrorists of the “LPR” 200 UAH / t, non-ferrous – 1.5 thousand UAH / t. There is also a fee “for the use of subsoil”, which is 11 rubles / t for coking coal and 16 rubles / t for anthracite. From the makeshift mines, which the terrorists interpret as “coal artels”, they charge “simplified tax”. If the annual sales of products do not exceed 240 mln rubles, then the “artel” deducts 3% of the amount.
To lift the blockade from the “DPR-LPR”, as well as other possible concessions, is a one-sided game, which Kuchma, obviously, begins to follow Volodymyr Zelenskiy’s instructions, and this will not have any positive outcome for Ukraine. The conviction that the unblocking “will pull at heartstrings of the ORDiLO’s citizens,” who, due to the limitations of the relationship, allegedly felt alienated from Ukraine, or it would tie ORDiLO to Ukraine economically, is an irresponsible and even hostile manipulation. The decision on the fate of the occupied territories is still taken in the Kremlin. And the issue of the Russian Federation for us is not in “bad Putin” or his regime, but in the mood of the Russian people. Putin’s regime and his foreign policy are aimed at fulfilling the demand of the majority of the Russian population to restore the empire and revenge. As the data of the last Levada-Center survey showed, 56% of Russians support the occupation of the Southeast Ukraine or the formation of a separate quasi-state there, and only 14% agree that the ORDiLO should become part of Ukraine on pre-war conditions. The return of the territories occupied by Russia under such circumstances is impossible, except for the complete surrender of Ukraine or the collapse of the Russian imperial project itself. Any attempts to test these concessions to the enemy “empirically” will only worsen the position of Ukraine itself and raise the price of “peace” for it.