Oleg Tsarev: Risks and Prospects of Nationalization in the Donbass Republics

Translated by Ollie Richardson & Angelina Siard



The former Deputy of the Verkhovna Rada of Ukraine, one of the leaders of the Russian Spring in the South-East, Oleg Tsarev evaluates the risks and prospects of nationalization in the Republics of Donbass.

News Front: So what happened at 00:00 on March 1st, 2017? And what is behind all of this? What should we expect now both in Donbass and Ukraine?

“In fact, the situation up to now could not last forever — shelling is ongoing, the status of the Republics is not solved. And nevertheless, against this background, since there is no movement in the direction of Ukraine, the question of economic independence arises. Until now, there was a whole group of enterprises of businessmen, oligarchs, who paid taxes in Ukraine. And the taxes were decent enough: around 2% of GDP, half the military budget of Ukraine – the money received from the ATO in the Donetsk and Lugansk Republics. And why wasn’t the decision made earlier? The fact is that tens of thousands of people work in these enterprises — more than 100,000 people. These people regularly received, like clockwork, a salary. To employ so many people is quite difficult. For this reason, in general, the decision was not taken. But when Ukraine started to block deliveries of raw materials to Donbass, it became clear that enterprises will stop. And if they stop, the issue with these people will anyway need to be addressed. And the Republics adopted such a decision.

They adopted a decision that isn’t very simple. They assumed a very serious, big job by doing this. I think that a special enterprise that will be engaged in nationalizing businesses will be created. And the managerial staff need to be formed in the shortest possible time. The fact is that I have talked to Rinat Akhmetov for a rather long time — we were Deputies in the Parliament. I know him quite well and know the managers of his company, they are highly qualified: they studied abroad, everything is built, automated, the most modern software, the latest developments in marketing. This is a modern and quite effective company. So now there is a need to find specialists who in a matter of hours have to pick up all these enterprises, because all these enterprises mustn’t stop for even an hour. The shutting down of many nationalized enterprises for technical reasons will simply turn them into scrap metal. Therefore, everything should be done quickly.

What other problems arise. The fact is that Donbass is a rather unique place. It’s not in vain that it was called the “steel backbone” of the Soviet Union. A unique place on a world scale, where coal and iron ore raw materials are situated nearby. Krivoy Rog is literally a one and a half hour drive from Donbass. And the supply of raw materials for these enterprises, we can predict, will be closed. Raw materials can be taken from Russia. Where in Russia it is possible to get the raw materials? Murmansk, Karelia, the Urals, Kursk Magnetic Anomaly, these are probably the closest places. Between Kursk and Belgorod are plants that extract the iron ore raw material, but the transport branch is a lot bigger. Special tariffs existed for enterprises for the transportation of iron ore in Ukraine. Because the raw material is very inexpensive – $30 per tonne, and the transport rate is a significant part of the cost. So, I think that Russia will have to have special railway tariffs for shipments to Donbass. It is not burdensome, because the railways are already here, if nine or ten trains pass, amortization is not significantly increased. In principle, it is not the biggest problem.

The biggest problem is the employees, and what to do with the products. The fact is that one of the reasons why the oligarchs did not register themselves for tax in the Republics is that they are exporting to global markets, and for them it is possible to take a certificate of origin, paying taxes in Ukraine. They were taking the certificate of Ukrainian origin and selling the goods in Europe and around the world. Now there will be a need to make a certificate of origin. How to solve this problem? It may be some joint ventures with Russian enterprises. Perhaps raw materials to some degree will undergo some additional processing, and a Russian certificate of origin will be produced. It must be said that to sell metal, coal, and coke on the territory of the Russian Federation will hardly be possible. The fact is that the Russian market is now saturated: by the first, second, and third. That’s why it is necessary to enter international markets – to sell to the same place where Rinat Akhmetov was selling. These are all difficult challenges that the Republic’s leadership now face.

I understand that many in Donetsk and Lugansk have great optimism and enthusiasm about the fact that these enterprises will be nationalized. But again – it’s a very difficult task. And I would, of course, like to think that the leadership of the Republics can cope with it. Unfortunately, at the moment not all of the nationalized enterprises work as is desired. Some of them show worse results than under private owners. For example, “Electrical networks” in Donetsk – before they were loss-free. Rinat Akhmetov maintained it, and now there is a need to subsidize it from the budget. It means that the management doesn’t cope. There are enterprises that have stopped. But these enterprises mustn’t be allowed to stop. This is actually the death of Donbass. That’s why the challenge is very serious — a large volume of work.”

News Front: Now we turn to the other side and look at the Ukrainian situation. It would seem that it is beneficial for Ukraine to in some way cooperate. The status quo and all the conditions were also beneficial. And suddenly appears Semenchenko, Parasyuk and their cohort, which blocks the railroad tracks. And politicians who are pointing fingers at each other: you decide, no you decide, you will answer, and I’m not involved. Why is this happening?

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“This situation is like children’s games: ‘who will take the mountain’. Here, as of yesterday, the biggest oligarch with the biggest political influence was Rinat Akhmetov. He was a heavy weight, who had his media, his Deputies in the Verkhovna Rada, has his own faction, his own party, his influence. He came to an agreement with every President. He has a distinctive feature – he always keeps his word, it’s like a signature of “Donetsk” oligarchs. And, in general, everything was good for him. But as a person who is on the mountain, there is such a situation when all who climb from all sides want to remove him. It is the oligarchs who are around Poroshenko. This is Kolomoisky, who, according to various estimates, has from 4 to 8 billion dollars, which he took out of PrivatBank. Today he is the only oligarch who has real money in Ukraine. And he plans to be the number one. And for this he has enough large prerequisites: when the country almost went bankrupt, all the oligarchs except Poroshenko, became bankrupt. While Kolomoisky has a great resource. I think all of this played a role in the fact that Akhmetov found himself in such a situation. What does he risk? Now Akhmetov has 5 billion of loans in Geneva banks. I think he will try to refer to a force majeure (what is happening now is a classic force majeure) and not to give back credits, trying to avoid bankruptcy. Whether he will succeed to avoid bankruptcy or not, time will tell. But the blow that was landed on his empire is, of course, significant… But we must not exaggerate his losses… His profit from the export of iron ore is very large. I think he now will redirect flows to Mariupol.

The big disadvantage is that the militia did not take Mariupol beforehand. Now the damage from the fact that the enterprises of Akhmetov and other oligarchs went to the Republics is 2% of GDP. And if it was, along with Mariupol, it would be 12%. Not to mention the fact that exporting this iron ore would be impossible. It would be a very serious, big, really big, blow on foreign currency earnings in Ukraine, and on the Hryvnia too. I predict that the military-industrial complex will receive money like it already has, but this fall of the Ukrainian budget, of course, will affect ordinary people.”


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