The Russian government asked Usmanov and Mordashov to help Donbass

The government recommended metallurgical holdings to consider iron ore supplies to companies in the Donetsk and Lugansk Republics, as RBC found out. The plants there were left without raw materials after the introduction of Ukrainian blockade of railway communication with the self-proclaimed republics.
Origin source
Ore for Novorossiya

In early March, Deputy Prime Minister Dmitry Kozak met with representatives of industrial groups, RBC told a source in the metallurgical market. In particular, representatives of holding companies Metalloinvest (Alisher Usmanov) and Severstal (Alexey Mordashov) were invited to attend. At the meeting, according to the interlocutor of RBC, the supply of iron ore to the enterprises of the self-proclaimed Donetsk and Lugansk People's Republics was discussed.

"The companies expressed their readiness to start deliveries to the republic's enterprises in the near future," the source added.

Another interlocutor of RBC, close to one of the holdings, confirmed that the meeting was held, and its participants "were invited to pay attention to a new sales market".

Iron ore to the plants that were stopped due to war and blockade of railway communication was supplied to the metallurgical plants in the region: Enakievo and Makeyevka metallurgical works (part of the Metinvest group owned by Rinat Akhmetov) and Alchevsk Iron and Steel (part of ISD group belonging to Russian investors); the supplies were performed by the holding's enterprises "System Capital Management" of Rinat Akhmetov. Inguletsky, Central and Northern mining and processing plants, located on the territory controlled by Kiev, were used as raw materials suppliers.

The demands of Enakievo and Makeevka plants (located in the territory of the Donetsk Republic) is about 2.6 million tons of ore; Alchevsk Iron and Steel (located in the Lugansk Republic) - another 1.6 million tons, analyst of the Ukrainian investment company Concorde Capital Alexander Parashny estimates. Another consumer of ore is the Donetskstal plant, which was partially idle the whole of last year and bought only a few tens of tons of ore, adds Paraschy.

Severstal in 2016 shipped to consumers 14.9 million tons of iron ore. The largest Russia's supplier of iron ore, Metalloinvest in 2016 produced 40.7 million tons of raw materials.

"The fact that the desire of Russian companies [to supply iron ore to Donetsk enterprises] is an obvious thing. But it's too early to discuss this publicly," plenipotentiary representative in the Minsk Group Vladislav Dainego said in response to a question about possible agreements with Metalloinvest and Severstal on the supply of iron ore.

Severstal denied the information about the company's participation in the meeting. "There were no meetings, discussions and proposals between the management of Severstal and the Russian government regarding supplies to the Donetsk and Lugansk republics," a representative of Severstal told RBC.

Metalloinvest, too, denied the participation in the meeting. "Metalloinvest does not negotiate the supply of iron ore raw materials to the Donetsk and Lugansk Republics. The management of the company did not participate in the meetings of the government of the Russian Federation on this issue," the representative of Metalloinvest emphasized.

A spokesman for the Russian president Dmitry Peskov, as RIA Novosti reports, described the information that the Russian leadership recommends that Metalloinvest and Severstal start deliveries of iron ore to factories in the Donetsk and Lugansk Republics, untrue.

Schemes of supply

Logistical problems with the supply of iron ore from Russia to unrecognized republics should not arise, said the director of corporate ratings ACRA Maxim Khudalov. There are at least three branches of the railway linking these republics with Russia, which are under the control of unrecognized republics, he recalled.

These are the ways of Matveyev Kurgan - Amvrosievka, Gukovo - Anthracite, Millerovo - Lugansk, lists the associate professor of the All-Russian Academy of Foreign Trade Andrey Golubchik. All these ways, he clarifies, are theoretically ready for the transportation of industrial goods from Russia. Traditionally, these ways didn't have global loads; there were passenger trains, but in Gukovo, for example, there is a powerful sorting station, adds Golubchik.

The Donetsk Republic has the opportunity to import and export industrial goods through the railway in Ilovaisk, RBC was told by a source close to the leadership of the Donetsk railway. "In 1991, this was the main way connecting Ukraine with the Caucasus. Since then, the volume fell four times, but the railway is in good condition and there is an opportunity for transportation," the source said.

According to the source, to ensure maximum capacity, up to 13 trains per day, it is necessary to allow the movement of trains also at night. The necessary rolling stock and repair base are available to the Donetsk authorities, and the railway section leading to Ilovaysk is protected from military operations. "Everything is decided by political will and agreement," the source sums up. Golubchik believes that 13 trains per day isn't much for the industrial hub. Usually for such regions, the load is two trains per hour".

Unrecognized republics will have to finish building a railway, political scientist Roman Manekin is sure. The Donetsk railway is the largest in Ukraine, but after the withdrawal of Igor Strelkov's company from Slavyansk and Kramatorsk, large railway junctions remained in the territory controlled by Kiev, reminds Manekin. "Hence the need to rebuild the railway or to conquer the territory of Donbass. Both options, of course, will affect the real cost of the final product."

Traders will take advantage of the difficult situation of enterprises in Donetsk and Lugansk and increase the cost of ore, but given the short distances to the main deposits of Metalloinvest, the price will be acceptable, Khudalov believes. In his opinion, the iron ore smelters of Metalloinvest (Mikhailovsky and Lebedinsky MPPs), NLMK and the Koks group are the most successful from the point of view of logistics to the Donetsk and Lugansk Republics.

A representative of NLMK declined to comment, but specified that all its ore is used at its enterprises.

MPP stop

The source of RBC in Metinvest connects the meeting of Russian industrialists with Kozak with the blockade of the railway tracks by the Ukrainian authorities. The blockade of roads by veterans of the antiterrorist operation (ATO) began on January 26 in the Lugansk region, and later spread to the Donetsk region. Veterans of the ATO protested against smuggling supplies through the contact line.

The blockade of the republics was retaliated by the introduction of external management at private enterprises in the region. On February 27, the heads of the Tonetsk and Lugansk Republics Alexander Zakharchenko and Igor Plotnitsky announced the possible nationalization of all enterprises located on the territory of the republics, but registered in Ukraine. The introduction of external management in enterprises of Ukrainian jurisdiction in the breakaway republics began at midnight on March 1.

"For us, this is a forced measure connected with the economic blockade on the part of Ukraine, which continues against the Minsk accords and which only intensified the blockade of the railway communication, which led to the stoppage of large industrial enterprises," said Denis Pusilin, chairman of the People's Council of the Donetsk Republic.

According to him, the temporary management does not violate the right of ownership and will help to save tens of thousands of jobs and production facilities. Now the leadership of the DNR is responsible for the operation of these enterprises, the launch of stopped plants and the development of anti-crisis procedures, concluded Pushilin.

The decrees of the heads of the Donetsk and Lugansk Republics largely remain a formality, and there are no strong changes in the work of the factories. All enterprises of Metinvest in territories not controlled by Ukraine are managed by the managers of the holding, the source close to the management of the holding told RBC. Senior and middle managers moved to the Ukrainian territory, and operational management is carried out by the remaining leaders of the lower ranks. "Sometimes people just go to the walk-through enterprises with weapons and sit at the entrance. This is called external control. They can not all disperse and hire new cadres," the source in Metinvest described the situation.

DTEK enterprises [the energy division of the Akhmetov holding] are working in the unregulated territories not controlled by Kiev, said Irina Milutina, communications director of DTEK Energo.

Interrogated by RBC, the employees of the Zasyadko mine told that the representatives of the Donetsk and Lugansk Republics were asking the miners to sign a paper to work for the state enterprise. What for it is necessary, miners and workers of other enterprises do not know. "We have not been told anything yet, we have received and are working on a salary. What's the difference?" said one of the workers of the Donetsk Electrotechnical Plant.

In the Ministries of Coal and Energy of the both republics, which, according to the decree, control the companies of the DTEK group, declined to comment on the situation. "The situation is complicated, we do not fully understand how these enterprises will work and develop," a source in the department told RBC. According to him, the settlement of all issues will take up to two months.

How to avoid sanctions

Deliveries of Russian industrialists to companies in the DNR and LNR are fraught with risks of sanctions, Maxim Khudalov from ACRA believes. "Companies have foreign assets and liabilities, and given the high level of protectionism in the steel market of Europe and the United States, local producers will certainly take advantage of the opportunity to ban shipments from Russia under any pretext," he said.

The most likely option Khudalov sees is the use of small traders who would purchase ore lots at Russian enterprises and independently send it to the enterprises of the self-proclaimed republics.

The Republics of Donbass have been recognized by South Ossetia. Accordingly, the supply of raw materials, as well as the sale of finished products are carried out through this republic, commented Pushilin. To keep jobs at the enterprises, it is necessary to provide them with raw materials, as well as ensure the sale of products, agrees Danego. "There is complete dependence on Russian markets, as well as South Ossetia," the representative of the Lugansk Republic said.