Ukraine's Industrial East
November 12, 2014
This article has been produced by the efforts of the following members:
Adheeb Rifdi – Primary article contributor examining Ukrainian Political Risk
Martin Eidenberg – Team Leader and article Editor examining Ukrainian Political Risk
As the conflict in Eastern Ukraine rages on, aided by the recent deterioration of a two-month long cease-fire agreement, the destruction to the region’s core industries and infrastructure has been staggering. The eastern regions of Donetsk and Luhansk were once Ukraine’s largest industrial centers, producing nearly 23 percent of the country’s industrial and mining output and 20 percent of its exports. Now, much of this has come to a standstill. The war has seen the destruction of much of the region’s power stations and transportation infrastructure, cutting off access to energy and raw materials critical to the manufacturing process. Current World Bank projections estimate that the ongoing conflict with separatists in the east will lead to an eight percent contraction in the Ukrainian economy through 2014, followed by subsequent further contractions in the foreseeable future.
Steel-making accounts for up about 15 percent of Ukraine’s economy. Much of this industry is centered in the conflict-torn regions of Luhansk and Donetsk, where many factories, mills, and mines have been forced to stop work. Being the world’s fourth largest exporter of steel (by volume) in 2013, Ukraine sold three-quarters of its production to foreign nations, of which Russia made up almost 15 percent. Declining Russian imports of steel, down 38 percent through January-April 2014, due to the destruction of the critical transportation infrastructure and declining prospects of stability in the region have created a further blow to an industry that is failing to attract new clients. Total output has declined by seven percent in the first half of 2014, sparking fears of further drops in output in the near future.
Coal mining is also centered in the industrial regions of Luhansk and Donetsk, making them a critical resource to Europe’s second largest coal exporter. Of the 115 coalmines in Ukraine, around half have halted production in the wake of the conflict, leading to a government declared state of emergency for the electricity market. The difficulties faced in transporting coal through damaged supply routes to thermal power plants have forced a once net-exporter of coal to raise imports. Since thermal energy accounts for almost 40 percent of electricity in Ukraine this is a significant blow to the economy. Furthermore, access roads to the power plants themselves have been destroyed in the fighting, creating further logistical issues.
Despite the saturation of industry in the eastern regions of Ukraine, many in Ukraine’s western and central regions see the industrial east as a burden, home to an outdated Soviet economy of monolithic factories that offer little to the rest of a country where other sectors and smaller firms are more common. The lack of investment in new equipment and maintenance has left many of the Soviet-era industries in the east uncompetitive on a global scale. This is because they have benefited from massive energy subsidies that have since been abolished with the acceptance of IMF loans.
The economic significance of the Donbas region also cannot be understated within the scope of this conflict and the future of Ukraine. This region, around the city of Donetsk, makes up only 5 percent of Ukraine's territory and about 10 percent of the country’s population. However, it produces 20 percent of gross domestic product and about a quarter of Ukraine's export volume. The on-going conflict, partially fueled by the conflicting economic aspirations of a geographically segregated population, has forced many in the east to adopt a pro-Russian stance due to the bleak future they see ahead under new trade agreements arranged by their government. The economic ties of the east with Russia make the conflict a particularly difficult issue for the Ukrainian government who risk destroying vital parts of their nation’s infrastructure in order to retain sovereignty.
