The "DPR": appreciation of the project for the Russian Federation

The attempt to bring into operation the metallurgical enterprises grabbed by the Donetsk separatists in Yenakiieve and Makiivka has increased the monthly expenses of the Kremlin for the maintenance of the "DPR" project.

It still remains economically insolvent and subsidized 2 years after the end of active phase of armed hostilities. The same applies to the "LPR" created in Luhansk.

Financing of the work of metallurgical plants was added to the constant costs for the maintenance of armed formations and social payments on the controlled territories.

And this is hardly a cheap pleasure. But most importantly – it is absolutely meaningless from the economic point of view and more aimed at the propaganda effect for international community.

The main obstacles for the resumption of the work of Ukrainian metallurgical enterprises under the flag of the "DPR" are providing them with raw materials and selling finished products.

There are mines with coking coal on the territory of the unrecognized "republic", as well as coke plants. The question is how to replace the iron ore which was previously delivered from Kryvbas.

Ore rebus

Ostrov had noted earlier that Metalloinvest holding company of Alisher Usmanov could organize its deliveries from the nearest Kursk Magnetic Anomaly in the Russian Federation, but this is fraught with international sanctions for his business.

The same can be said about Severstal and Eurochem which have mining assets in Karelia. Eurochem is also interested in supplying mineral fertilizers to Ukraine.

Furthermore, Karelia is much farther from the Donbass than the Central Nonblack Soil Zone geographically and it is sizeably more expensive to transport iron ore from there.

Ural deposits where Vysokogorsky and Kachkanarsky Mining and Processing Integrated Works of the Evraz group operate are even farther.

Therefore, no one considered this option seriously. Moreover, Evraz has business in Ukraine: Dnipropetrovsk Iron and Steel Works and Suha Balka Mining and Processing Integrated Works, as well as Pivdenne Coking Corporation (Kamianske, formerly Dniprodzerzhynsk).

The threat of losing this business would be too great for the owner of Evraz Roman Abramovich. He understands this perfectly. In the Kremlin – too.

So in fact the only more or less suitable supplier of iron ore raw materials to the Donbass is Industrial Metallurgical Holding group.

IMH belongs to the family of the ex-deputy of the State Duma of the Russian Federation Boris Zubitskiy and, unlike the above-mentioned groups, does not have either any external assets that can be penalized in case of trade with the "DPR" or interest in Ukraine.

Then again, the position of IMH looks much more vulnerable in terms of financing. The group's debt at the beginning of 2017 was $943 million with consolidated annual revenue of $1.008 billion.

For reference: the same Severstal has correlation of $2.85 billion to $5.916 billion. Moreover, Severstal is in fact an internationally oriented company. Its owner Alexei Mordashov is such a Russian counterpart to the Ukrainian oligarch Victor Pinchuk who demonstrates pro-Western orientation and commitment to the Western business standards.

As for the owner of Metalloinvest Alisher Usmanov, he permanently lives in London and was even officially deprived of the status of a tax resident of the Russian Federation in October 2016 for this reason.

Therefore, the business of A.Mordashov and A.Usmanov is much less dependent on the leader of the Russian Federation Vladimir Putin than the business of the Zubitskiy family.

For example, Severstal had floated a 3.85% loan for $500 million in February this year, 86% of the bonds of which were bought by Western investors.

By the way, the owner of the Russian Aluminum holding Oleg Deripaska had done in a similar vein. Without agreeing on acceptable terms of credit with the Russian state-owned banks, he borrowed $600 million from western banks through a bonded loan in early 2017.

In turn, IMH of the Zubitsky family is not able to afford such a luxury. Getting an entrance ticket to the international capital market requires a lot of money and time. The company does not have them. And the state-owned banks of the Russian Federation may definitely help IMH with new refinancing loans right now – if there is the highest order from the Kremlin.

Then again, the opinion of the expert of the ACRA Russian Analytical Credit Rating Agency Maxim Khudalov about the IORM supplies by Severstal and Metalloinvest can be quoted.

"Companies have external assets and liabilities, and given the high level of protectionism in the steel market of Europe and the USA, local producers will certainly take advantage of the opportunity to ban supplies from Russia under any pretext", — he said.

And this is decisive for skepticism regarding the reports about ore supplies to the Donbass by Severstal, Metalloinvest and Eurochem.

Theoretically, the Kremlin is quite capable of "forcing into submission" their owners, - it has the levers of influence. But not fools are sitting there. The plans of these people certainly do not include cutting a chicken that laid golden eggs.

So, it is the KMAruda Belgorod Combine which is part of the IMH and looks like a more or less real supplier of iron ore for the grabbed Ukrainian metallurgical enterprises in the "DPR".

As for the Russian media reports about the allegedly started deliveries of iron-ore concentrate from the Kovdorsk Mining and Processing Integrated Works of Eurochem to the Federal State Reserve Agency with actual delivery to the "DPR"-controlled Uspenskaya station on the border of the Russian Federation and Ukraine – this may be a PR-cover operation.

After all, it is not necessary for the local media to "flash" the real freight forwarder. The Kremlin may use them to divert attention. Moreover, it is difficult to judge the reliability of such reports with reference to certain anonymous sources.

OstroV had previously noted that Eurochem also has external assets and foreign registration, as well as the interest in supplying its main products, mineral fertilizers to the Ukrainian market.

Nevertheless, there is still a little likelihood of using namely this group for the IORM supplies to the Donbass, if we take into account the fact that natural gas is the main raw material for the production of mineral fertilizers, while the main extracting company in Russia is the Gazprom State Concern.

The deputy of the Verkhovna Rada from the Narodnyj Front Dmytro Tymchuk had earlier noted that Eurochem is one of the key structures in the chain of providing the "DPR" with material resources. But it was an issue of supplying mineral fertilizers to agricultural enterprises on the territory controlled by the separatists through the Donetsk intermediary firm Sphera-Service. If so, then the supply of iron ore from Eurochem through intermediaries is also theoretically possible.

But even then it must be remembered that the main output of the Kovdorsk Mining and Processing Integrated Works is apatite concentrate, raw material for phosphate fertilizers.

And IORM is a by-product for the Kovdorsk Mining and Processing Integrated Works. It cannot provide deliveries in the volumes necessary for metallurgical manufacture in Donetsk, Makiivka and Yenakiieve even at the level that was before the blockade.

The realities of external management

As noted by Russian media with reference to the sources in Donetsk, almost nobody of previous middle and senior managers remained at the enterprises in the "DPR".

That is, the heads of shops and the senior personnel of Metinvest moved to the territory controlled by the Ukrainian authorities. This is confirmed by the holding itself.

People were and remain the main capital of any company – it is proved by numerous examples in business.

For example, according to sources, Yenakiieve Iron and Steel Works is now being run by the former chief engineer of the enterprise. Perhaps, he is able to solve the problem of technical launch of workshops. But ensuring the supply of raw materials and marketing is a task of a completely different league and the new director is unlikely to cope with them.

2 months after the "nationalization", the production volumes of the plant remain symbolic. Russian media reported about 2700 tons of steel per month as of "victory" – but only the John Hughes' metallurgical plant worked with such volumes in the late 19th century.

We will recall that the production capacity of the plant allows smelting of 2.7 million tons of steel per year in 3 converters. It turns out that the load was 0.1% of the annual capacity during that month.

For comparison: in 2016, when the plant remained under the management of the Ukrainian group Metinvest, 1,954 million tons of steel were smelted.

It is absolutely clear that even 30-50% of this indicator cannot be achieved. Even 10% seem unlikely.

As follows from the message of an anonymous source in the "temporary administration", the products of the Yenakiieve Iron and Steel Works are going to be used for the needs of the "republic".

In particular, 1 thousand tons of wire rod was shipped to the Silur hardware plant in Khartsyzk and another 4000 tons are planned to be shipped. Steel ropes for local coal mines will be manufactured from it.

As you know, most of them were stopped after the war began, and some of them are not even subject to restoration.

Therefore, it is very naive to consider the mines in the "DPR" as consumers with steady demand for metal products.

For example, the authorities have pompously arranged the shipment from Silur to Makiyivvuhillya only... 22 tons of steel rope.

It is easy to calculate that with such volumes of orders even those 5 thousand tons of wire rod received from the Yenakiieve Steel Works, Silur will use for 3-4 years at least.

And where should Yenakiieve metallurgists export the rest of the steel? It is not bought neither by Rosrezerv nor by Russian metal traders – the Russian market is overstocked with the products of its own enterprises.

Therefore, the figures for Donbass production, voiced in the Russia media, can be considered close to a sad reality. We are talking about the production of 5-20 thousand tons of steel and rolled products per month, not more. Needless to say, with such volumes, the work of enterprises in Yenakiieve and Makiivka is profoundly unprofitable.

At the same time, Gazprom will sponsor the gas supply, the supplies of iron ore will be paid from the federal budget of the Russian Federation through the Federal State Reserve Agency. In the same way as with coke – metal plants have no money to buy it.

It is likely that Russian state-owned banks will be offered to participate in the PR project "the revival of the production potential of Donbass". They will not be able to give it up.

They will have to give loans to purchase coke, limestone, etc., knowing in advance that these loans will not be paid back later. But, as they say, art requires sacrifice.

And the losses of state banks will again be covered from the federal budget, albeit at the expense of underfunding of some important social programs.

But even so, there are doubts that under the "external management", the seized plants will be able to earn for at least salary for the workers - their volumes of production are miserable.

Will this additional burden be beyond the federal budget of the Russian Federation? No, it will not. However, the burden of the "Russian spring" will be noticeably heavier and this is a fact.

Much will depend on the future scenario for the Russian economy – will its performance worsen or not. Now it has stabilized.

If the fall resumes, then the Kremlin, willy-nilly, will consider leaving the "Donbass Russian Spring" project.

In addition, the "nationalization" once again vividly demonstrated the inability of the current authorities in Donetsk and Luhansk to revive the lost economic potential.

Take at least the latest visit of the "DPR" head Alexander Zakharchenko to the "nationalized" Donetsk Electrotechnical Plant on May 26. Yes, he came, looked at the empty workshops, said a few general phrases.

"To date, the plant concludes contracts for the supply of equipment to our enterprises, in the future we aim to provide the whole republic with the products, as well as export it to the Russian Federation", - he said.

With whom it concludes the contracts, in what volumes and where will idle factories take money for the purchase of the equipment – A. Zakharchenko, of course, did not mention such "insignificant" details. His task was different – to promise that everything would be fine. Once upon a time. In some future. Tableau.

The factor of economic insolvency of the "DPR" will not be decisive for the future of the uncontrolled regions of the Donetsk and Luhansk oblasts. But it will play its part.

Vitaliy Krymov, OstroV