How the Donbass blockade hit the empire of Rinat Akhmetov

As long as the DNR and LNR do not give up the control over the Ukrainian enterprises, Kiev will maintain the blockade of Donbass. The main victim became Rinat Akhmetov, who lost not only assets, but also leverage over Kyiv and Moscow.
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The decision of Kiev

Since March 15, the National Security and Defense Council of Ukraine has completely stopped rail and road transportation with the uncontrolled territories of Donetsk and Lugansk regions. The meeting of the Council was attended by the President of Ukraine Petro Poroshenko, who supported the decision of the National Security and Defense Council. Interior Minister Arsen Avakov at the meeting noted that the transport blockade would not affect the personal vehicles of Ukrainians wishing to enter the uncontrolled territory, as well as humanitarian supplies. "The sausage in the bags for the family", as the head the Ministry of Internal Affairs promised, wouldn't be touched; he stressed that it was only the supply of any industrial goods. However, even passenger buses passing through the self-proclaimed territories of Donetsk and Lugansk will be subject to a "special check", the adviser to the minister Zoryan Shkiryak specified.

Poroshenko said that Ukraine was forced to impose a blockade in response to Russia's actions, which recognized the documents of the so-called Donetsk and Lugansk republics, and later the seizure of Ukrainian enterprises that operated in the legal field of Ukraine. "After the seizure of these enterprises, we can not have any trade relations with these  "confiscated" enterprises. We will not allow any of their activities," Poroshenko said. In his opinion, these actions of Russia should become the basis for strengthening international sanctions against it. The blockade, he pointed out, can be lifted when the enterprises are returned under the control of Ukrainian owners. The decision on the introduction of external management in Ukrainian enterprises on March 1 was taken by the heads of self-proclaimed Donetsk and Lugansk republics. They explained their decision by the fact that earlier the Ukrainian radicals blocked the railway communication and the delivery of goods from the enterprises to Ukraine became impossible. Representatives of the Russian authorities have repeatedly stressed that Moscow has no relation to the decision of the heads of the rebellious repulics.

The source of RBC, close to the leadership of one of the factions of the Ukrainian parliament, says that the official support of the National Security and Defense Council is a very formal decision. "After some of the volunteer battalions and deputies imposed a blockade in February, the presidential administration actually closed their eyes to it, and the Ministry of Defense of Ukraine gave an unofficial order not to prevent the soldiers from wanting to take a "vacation "and go to block the Donbass," he said.

Poroshenko at the meeting admitted that "the actions of our blockade activists will cost Ukraine a pretty penny." He promised to expose the accounts not only to the self-proclaimed "Republicans", but also to the parties "Self-help", "Fatherland" and other instigators and promoters of the blockade.

Price for Kiev

Ukraine's losses in the trade balance will not exceed 5% of foreign exchange earnings, or about $150-170 million a month, said Alexander Parashchiy, an analyst at the Ukrainian investment company Concorde Capital. One of the interlocutors of RBC in the Ukrainian export market said that Ukraine would lose more than $3 billion a year because of the blockade. For comparison: the fourth tranche of the IMF loan to Ukraine is $1 billion.

A prolonged continuation of the current situation with the blockade of the railways in the Donbass will lead to the final rupture of production chains and the supply of finished products, the head of the National Bank of Ukraine (NBU) Valery Gontarev said on March 2. Consequences of the continuation of the blockade of Donbass, according to her, would be the reduction in the output of metallurgical products, coke, electricity and other products.

"According to the most pessimistic scenario, the continuation of the blockade before the end of the year could slow the economic growth of [Ukraine] by 1.3%, i.е. down to 1.5% this year," Gontareva said.

Radicals began blocking roads at the beginning of the year, but authorities did not prevent them, fearing retaliatory actions, explained earlier the Ukrainian experts to RBC. Supporting the decision to blockade on Wednesday, Poroshenko emerged from the situation as a winner: he strengthened his positions and withdrew domestic political tension, says Ukrainian political analyst Vadim Karasev. President's decision was influenced by the chairman of the National Security and Defense Council, Oleksandr Turchynov, and Minister Arsen Avakov. They showed the president that he can not control the radicals alone, but, supporting the blockade, he strenghtened his position, another Ukrainian expert Anatoly Oktysiuk agrees.

Akhmetov loses control

The main victim in this story so far is the businessman Rinat Akhmetov. On March 15, its SCM group (which includes DTEK and Metinvest) announced a complete loss of control over its assets in the territory of the Donetsk and Lugansk republics. As stressed the company, the SCM group has repeatedly stated that it considers it absolutely unacceptable to require the re-registration of its enterprises and the payment of taxes by the self-proclaimed republics.

Akhmetov was not ready for such a development of events, as earlier the head of one of the enterprises of the SCM group told RBC. According to the source, until the last moment there was a hope that President Petro Poroshenko would be able to resolve the situation with the trade blockade of the soldiers of Ukrainian volunteer formations and withdraw it. "For three years our enterprises, despite all the difficulties, worked exclusively within the framework of Ukrainian legislation, remaining a link between the controlled and uncontrolled territories of Ukraine," SCM said in a statement.

The statement of SCM is confirmation of the fact that the crisis caused Akhmetov's business a severe blow, his empire in the Donbass region came to an end, says expert Anatoly Oktysiuk. Having lost assets in the territories of the Donetsk and Lugansk republics, he loses hus influence in Kiev, in the Donbass and Moscow, Oktisiuk points out. The influence of Akhmetov has significantly decreased, although he still has business in Ukraine, Karasev says. Before the decision to introduce external management and blockade, the "joint peace" remained: Akhmetov continued to make profits from the enterprises operating in Donbass, workers received salaries from them, Moscow had no problems with providing people in the Donbass, says Ukrainian political analyst Mikhail Pogrebinsky. How will now unfold the situation in the Donbass, he said, it is difficult to predict. It should not be excluded that in the end a solution will be found that suits Akhmetov, Kiev, the self-proclaimed republics and Moscow, Karasev draws attention.

What did Akhmetov lose

In the territories of the rebellious republics, Rinat Akhmetov owned 47 enterprises. The key assets over which Akhmetov lost control are the coal mines Sverdlovanthracite, Rovenkyantratsit and Komsomolets Donbassa; in 2016 these mines produced 9 million tonnes of coal: one-third of DTEK's total production. DTEK Vostokenergo owns three power plants with a total capacity of 4.2 GW: Zuevskaya, Kurakhovskaya in the Donetsk region and Luganskaya TPP.

It is difficult to assess this business, since the holding is not public, say analysts of Renaissance Capital and Societe Generale. In 2015, Forbes magazine estimated Rinat Akhmetov's fortune at $6.7 billion, and in 2016, at $2.3 billion. In the first half of 2016, the holding's revenue was $2.2 billion. But DTEK suffered losses for the last three years, wrote Ukrainian Forbes. The holding also has impressive debts: at the end of the year they amounted to more than $2.5 billion.

The company found itself in a troubling credit situation due to dependence on foreign currency loans: 60% of the debt was nominated in dollars, 20% - in euros, wrote Forbes. DTEK owes the Ukrainian energy market 1.4 billion hryvnia, but in 2016 Ukrainian courts broke this debt. Taking control of Akhmetov's assets, the new leaders are likely to continue to supply coal to Ukrainian territory, said Sergey Pikin, director of the Energy Development Fund. There are two options: either the blockade will be lifted or the mines will sell coal to Russia, acting in fact as traders, and then this coal will be resold to Ukraine, however, it is already more expensive, the expert argues.

The main demand is in Ukraine, senior analyst at Dragon Capital Denis Sakwa agrees. It is unlikely that the new owners will earn a lot in the mines: the prime cost of coal mining is quite high, the analyst concludes.

Donbass and Minsk agreements on the break

The NSDC decision was taken on the day of the next meeting of the contact group for Ukraine in Minsk. Both the Russian and Ukrainian parties at the meeting accused each other of virtually completely disrupting the negotiation process. The authorities in Kiev turned out to be "more radical than the radicals themselves", the representative of Russia in the group Boris Gryzlov told reporters. "Against this background, there are fewer and fewer people who are able to believe that the Kiev authorities are seriously ready to implement the Minsk agreements,"  he said.

The decree of the Russian president on recognizing documents issued by illegitimate authorities in certain regions of Donetsk and Lugansk regions, "raider seizure of state and private property in the part of Donbass that is not controlled by Ukraine" is unambiguously read by the world community and Ukraine as a violation of the Minsk agreements and leads to their disruption," replied in Facebook the press secretary of the Ukrainian representative Leonid Kuchma Darka Olifer.

According to the interlocutor of RBC, who is close to the diplomatic community, neither side will dare to withdraw from the negotiating group. "But the situation is in the "clinch ", and the gap can occur at any time," he says.

The decision of Poroshenko, the statement of Akhmetov's companies show that concerns about the Donbass are shifting to Russia, Ukrainian political scientist Vadim Karasev believes. Poroshenko skillfully took advantage of the situation and, on the pretext of seizure of the enterprises, took a decision that effectively removes all responsibility from Kiev for the implementation of the Minsk agreements. Since the conclusion of the agreements in September 2014, it was clear that Ukraine can not fulfill them under the conditions prescribed in them, but Kiev could not have declared this first, otherwise they would have lifted sanctions from Russia, but Moscow made the mistake of recognizing the passports and not voicing against the nationalization of the companies, explains Karasev.

Political analyst Alexey Chesnakov, who is close to the Kremlin, believes that Ukraine will do everything to delay the Minsk negotiations. "Now, Poroshenko may say everything he wants. The time is lost. Further economic and political integration of the Donbass with Russia becomes inevitable. Even if Kiev changes its mind and removes the blockade," noted Chesnakov.