Price of blockade. What is Ukraine losing?

Price of blockade. What is Ukraine losing?

Donbas blockade has persisted almost two months. Then suddenly it becomes official policy. Suspension of transportation to/from the occupied territories used to be the position of former members of “Aidar” military volunteer battalion who were supported by some “Selfreliance” members. But from March 13, President Petro Poroshenko, who had previously opposed the blockade, proposed that the National Security and Defense Council of Ukraine should introduce a temporary stop of the cargo movement. The NSDC adopted this decision.

What is the price of the blockade to Ukraine? How will it affect the economy? How does Ukraine do without coal from uncontrolled territories? UCMC tried to find answers to these questions.

What our losses are: statements. Throughout the occupied territories blockade Ukrainian officials were disapproving of it stating that the blockade would be costly to the Ukrainian economy. One of the last broad statements was made by Prime Minister Volodymyr Groisman in Vynnytsia “we lose 2-4 billion hryvnias a month. This is the price of losses due to the blockade.” The media presented different data on the Ukraine’s losses due to the trade blockade. Quite often they amounted to 36 billion hryvnias. But, according to experts, this figure is not true.

Lost taxes. According to the authorities, the main sources of potential losses due to the blockade are the lost taxes, because the main taxpayer in uncontrolled areas is SCM Group owned by Ukrainian oligarch Rinat Akhmetov. As a result of the blockade, on March 1, the “DPR” and “LPR” declared the “nationalization” of all Ukrainian enterprises, and on March 2, the “DPR” published a list of 43 “nationalized” enterprises, most of which belong to Akhmetov.

According to the SCM press service, in 2016, the SCM companies in the non-government controlled areas paid more than 3.5 billion UAH to the Ukrainian budget. This is about 10% of the taxes from all SCM assets in 2016. So, the topic of taxes is somewhat exaggerated: most Akhmetov’s companies will continue to pay taxes in Ukraine.

Broken industrial chains. The second component of the losses is broken industrial chains, which can lead to the steel industry decline. Critically important to the industry on both sides are some groups of products traded by Ukraine with the uncontrolled territories. According to “Ukrzaliznytsia,” in 2016, 13 424.7 thousand tons were transported from the controlled to uncontrolled areas. Iron ore (45.5%) and coal (44.5%) were mainly imported to the uncontrolled territory, whereas 19 422.4 thousand tons of cargoes were transported from the uncontrolled to controlled areas: coal (61.6%), ferrous metals (20%), coke (7.8%). Metallurgical enterprises in the non-government controlled areas are the elements of vertically integrated companies such as SCM. They cannot function independently. SCM capacities are not ready to such a break of raw materials chains. The experts emphasize that even if they find raw materials and solve the problem of logistics, they will lose the price advantage, become uncompetitive and thus will have to reduce production to the minimum level.

Foreign currency revenue and hryvnia stability. Will this affect the foreign currency revenue? According Оlexandr Paraschiy, head of “Concorde Capital” analytical department, Ukraine’s losses in the trade balance will not exceed 5% of the foreign currencye revenue and amount to 150-170 million dollars a month. If steel and iron ore prices do not decrease, then we will have a chance to increase exports nearly by 10% in 2017, believes the expert.

In general, the situation is unpleasant to the economy, but it will not collapse. According to the most pessimistic NBU’s scenario, the continued blockade can slow down the economic growth by 1.5% in 2017.

Anthracite dependence: will be any blackout? Anthracite units generate about 15% of Ukraine’s electricity. That is the share of the Ukraine’s energy sector that depends on anthracite coal from occupied territories. According to the Ministry of Energy and Coal Mining of Ukraine, since February TPPs and CHPPs have used 37.8 thousand tons of anthracite and 54.8 thousand tons of coal gas daily. With this consumption, over the blockade period the anthracite reserves should have reduced almost to zero, but they did not. Why?

Saving was ensured by several factors. 1. Reduction in daily electric power consumption. A daily electric power consumption decreased by 11.3%. This result was made possible by the increase in daylight hours. 2. Increase in the nuclear power generation share. Nuclear power generation increased by 12% – from 258 million kWh up to 291 million kWh; and on February 18, it hit record high – nearly 302 million kWh. 3. Increased productivity of HPPs and PSPSs in 2017 compared to 2016. Greater water supplies enable PSPSs to generate almost twice as much electric power in 2017 as in the same period of 2016. In 2017, HPPs and PSPSs generate 32.8 million kWh on average per day, whereas in 2016, – only 18.8 million kWh. On February 24, they generated 35.3 million kWh.

As a result, the thermal generation share in the daily balance of the energy system fell by 39% from January 26 to February 24. This has reduced the anthracite consumption by 59%: from 37.8 thousand tons on February 3 down to 15.4 thousand tons on February 24; and coal gas – by 37%: from 54.8 thousand tons down to 34.7 thousand tons. Thus, in early March, coal reserves of both anthracite and gas grades have decreased, but this decrease is not critical: by 12% and 3% respectively.

Thus, despite frightening statements made by the authorities, most Ukrainians do not feel any consequences. There are neither rolling blackouts, nor currency instability. According to experts, the blockade issues are associated with private and political interests of particular persons rather than with the economy in general.