Donbass Blues

Economic News

22 Jul 2010
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With parliamentary elections approaching fast, the blue banner of Donbass is once again flying high in the regional capital Donetsk. Many in this heavily industrialised area in the east of Ukraine, synonymous with pro-Russian miners and die-hard enemies of the Orange Revolution, are hoping for a rematch in March after last year's presidential elections.



Yet, despite its deep-seated historical differences with Kiev, the resentment in the Donbass region is not only about cultural differences, but also about the many unresolved dilemmas of post-communist transition - the need to restructure loss-making enterprises, heavy reliance on state subsidies, social spending and low living standards.



"If people had more money in their pockets, half of these disagreements would disappear," Yulya Mostovaya, a renowned Ukrainian political commentator, told OBG recently.



"What is the difference between Ukrainians and Russians?" Mostovaya asked rhetorically. "Well, unlike Russians, Ukrainians care more about their family and their material well-being, rather than national ambitions, such as a nuclear weapons programme."



Gennadiy Chizhykov, president of the Donetsk Chamber of Commerce and Industry echoed these sentiments.



"The talk of splitting the country", he said, "would indeed disappear, if the living standards in our region were higher. We need to reduce our dependency on former Soviet energy resources and change the base of our economy."



Nonetheless, there is a natural temptation in the region to hark back to the former "glory days" of the Soviet Union, a tendency that provides fertile ground for populists. Many people in Donbass still remember when their region was a prized jewel in the crown of the Soviet industrial complex, feeding its vast industrial ambitions with everything from coal and steel to plant machinery.



Even today, Donbass's citizens feel that the rest of their country owes them a debt of gratitude, given that they provide 20% of the country's GDP, with only 10% of Ukraine's population.



However, the main source of Donbass's economic output, analysts point out, these days is generated by its privately owned metallurgical enterprises, managed for the most part by large financial-industrial groups (FIGs).



Although few people in Donbass may be aware of it, analysts say, these large FIGs, such as System Capital Management (SCM) and Industrial Union of Donbass (IUD), are increasingly adopting Western-style management and are successful exactly because they have been able to restructure, modernise and respond to global market challenges.



Igor Koritko, a young general manager at one of the oldest metallurgical factories in Ukraine, the Yenakievsky Metallurgical Plant, owned by SCM, confirmed that the success of his enterprise rests on future investments, restructuring and a clearly executed strategy.



"Our region has three competitive advantages," Koritko told OBG last week. "Good geographical position, low cost of labour and less stringent environmental standards than elsewhere in Europe. We are aware that the last two will disappear and we must therefore be able to adapt to compete globally."



Koritko added that the reason why SCM is strong in its own metallurgy segment is because it has become a vertically integrated company, which has access to its own raw material, such as iron ore, coal and coke plants.



So, while metallurgy is expected to do well, run by young and forward-looking managers like Koritko, the main question for the Donbass region is to decide what to do with its loss-making and heavily subsidised coal mining industry.



During the height of the Orange Revolution last year, there was a widespread fear among Donbass coal miners that the election of Viktor Yushchenko, the arch-adversary of Donbass' own candidate, Viktor Yanukovich, would lead to a closure of state-subsidised loss-making coal pits.



Although this fear proved to be unfounded, because President Yushchenko could not afford stoking social unrest in Donbass ahead of the parliamentary elections, analysts say, there is huge overcapacity in the Donbass coal mining industry.



"Ukrainian mines are deep and therefore costly to operate. Moreover, the coal here contains a lot of sulphur and is not suitable for export, whereas our country does not need that much coal," one industry insider told OBG.



Another new source of frustration for Donbass industries these days is the talk of a sharp gas price hike, which would raise the price of electricity and the overall cost level of all Ukrainian industrial enterprises.



Many in Donbass believe that if their candidate had won last year's presidential election, Russian President Vladimir Putin would not have decided to raise the price of gas.



Many other Ukrainian commentators also argue that Putin is using gas politics as a lever in seeking to punish the Orange elite for wishing to escape Russia's orbit of influence.



But Georgy Skudar, president of a successfully revamped machine-building plant in Kramatorsk, thinks that the Orange elite has simply proven to be incompetent and made many rash and ill-thought-out decisions.



Manager of the plant for many years and number three on Yanukovich's Party of Region's list, Skudar is going to stand in the March elections somewhat reluctantly. He told OBG last week, that he feels compelled to take part in Ukrainian politics.



"As long as our political class consists of self-interested and unprofessional people, I feel I have to fight my battles in Kiev. But believe me, I would much rather build machines here in Donbass," he said.



Meanwhile, analysts say the battle in March is likely to be as bitter as during the presidential elections last year. Unimpressed by the Orange administration, Donbass is expected to come out in force for Yanukovich.



Unfortunately, little has changed in Donbass since last year's Orange Revolution. The fundamental socio-economic issues of transition in this region have remained off the main political agenda.



As fear of change and regional alienation continues to hold the region hostage to stalled reforms, Donbass marches on, proudly clad in its traditional blue colours.

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