The decline of the city in Luhansk Oblast shows how hopeless the current oligarch-controlled economy is as it rules out free entrepreneurship and competition
Lysychansk is a monotown of 100,000 in Luhansk Oblast. Its major plants have been closing one by one, leaving virtually all the locals jobless. The climax came when LYNIK, the local oil refinery and the monotown’s core plant, came to a complete halt this spring. The locals requested authorities to change the situation on numerous occasions, but no specific actions have been taken. Eventually, on June 4, a group of activists occupied the small session room of the city council, demanding an extraordinary session and the resignation of Lysychansk’s top officials. They only left the premises after the authorities promised them that a session would be held on June 18. Protesters stormed this one as well, demanding either the return of jobs at the plants or the resignation of the local authorities. Eventually, the latter accepted a number of applications to the central government, requesting support for the revival of industry in the town.
In Soviet times, Lysychansk was among the biggest industrial centres in Luhansk Oblast. This status remained long after Ukraine gained independence in 1991. The local economy was based on several industrial giants, including an industrial rubber plant; the Proletar glassworks; the LYNIK oil refinery; a caustic soda factory; and a thermal power plant. They all survived the turbulent 1990s and the “Orange chaos” but, for some reason, are grinding to a halt in the era of “stability”. Today, local industry is under threat of complete destruction. For the locals, this is a matter of survival, since the big industry-oriented monotown has no SMEs as an alternative, hence the hopeless situation – something that is typical for most Donbas towns (see The Ghosts of the Industrial Past at ukrainianweek.com). The situation in Lysychansk has once more proved the inefficiency of the oligarch-controlled economy in this industrial region, inevitably leading to stagnation, the deterioration of the infrastructure and depopulation.
Today, only mines operate in what used to be a relatively big chemical industrial centre, although their coal mostly ends up in warehouses. The local industrial giants plunged into losses then stopped, one by one, announcing massive lay-offs and a halt of production. The first one to go was the Lysychansk Rubber Products Plant. However, this was a murder rather than death from natural causes. The locals believe that, just like a dozen other plants in the oblast, the process involved Oleksandr Yefremov, one-time Head of Luhansk Oblast State Administration and now head of the Party of Regions faction in parliament. Sources claim that he forced the plants’ administration to buy overpriced gas from his Fond CJSC, thus pushing them into debt. To cover them, their most liquid assets were confiscated while the rest went bankrupt and used for scrap. This is a typical Donbas business scheme that has been imposed on the entire country since 2010, whereby an intermediary pops up between a state-owned enterprise, say a thermal power station, and a supplier, say a coal mine, and accumulates most profits in this chain.
The Lysychansk Rubber Products Plant faced its death sentence in 2000 when Fond CJSC, linked to Oleksandr Kyseliov, ex-MP representing SDPU(o) who ran Gas of Ukraine state-owned enterprise under the presidency of Leonid Kuchma, and Oleksandr Yefremov, took its most liquid assets to cover its debts. These included workshops 2 and 6 that produced mine conveyor belts, and workshop 1 that produced rubber compounds. Lysychansk Industrial Rubber Plant LLC was established on the basis of these three units, but this was obviously not enough for the gas traders. In 2002, Fond CJSC initiated bankruptcy proceedings against the plant for its UAH 1.4mn debt. The case dragged on for a few years until rehabilitation was launched in 2005 and a tender to find an investor was announced, although ultimately, no investors were found. In 2011, Luhansk Oblast Commercial Court declared the plant’s bankruptcy and launched its liquidation.
Another giant, LysSoda (Lysychansk caustic soda factory) was the next to fall victim to this business model. Until recently the second largest caustic soda producer in Ukraine, the plant has the biggest industrial cableway and chemical sumps in Ukraine. Its difficulties began in 2008 when it was bought by BINBANK owned by Chechen billionaire Mikail Shyshkhanov. A year later, the plant stopped production altogether and went bankrupt. In 2010, the administration began to slowly dismantle it for scrap. Its employees tried to protest, but with little success. Today, all that’s left of LysSoda is its giant carcass. The main premises were blown up this spring. Bulldozers will demolish the last buildings on the territory by the end of this summer. All scrap, including the unique 16.5km long cableway, was removed last year. When the workshop buildings were blown up and their metal parts loaded on trains and taken away, the then Lysychansk Mayor, Party of Regions’ Serhiy Dunayev, was running as a first-past-the-post candidate in the parliamentary election. He clearly realized that it was high time to leave the drained town. He got his MP mandate and left for Kyiv. His plan, perhaps, was to implement the Lysychansk experience throughout Ukraine.
The destruction of LysSoda shocked the locals. Normal practice in selling big enterprises that feed the towns built around them is to discuss the investor’s commitments before the deal. If the investor fails to meet them, the government has the right to return the facility to state ownership and find another manager for it. For some reason, however, Ukrainian officials have sold the plant for scrap, and nobody is being held responsible.
Experts expect a similar fate for the Russian-owned LYNIK oil refinery. Last year, the plant was sold to RosNeft. The owner was expected to supply it with crude oil but reality proved the opposite. This March, RosNeft closed down LYNIK altogether, ostensibly because of the losses it generated. Vice Premier Yuriy Boyko pledged to persuade the owner to upgrade the plant’s equipment and re-launch it in the fall of 2013. However, according to Luhansk Audit Chamber experts, the refinery will re-start operations in summer 2014 at the earliest,. Never is the other plausible option. Russian investors act very predictably in the strategic industries of Luhansk Oblast: LuhanskTeploVoz (the Luhansk locomotive plant) virtually stopped operation; LysSoda was laid to waste, and operations at the Lysychansk oil refinery were halted.
Until recently, Proletar glassworks, the only producer of float glass in Ukraine, was one of the last survivors. In winter, however, it ground to a halt as well. Molten glass froze in one of the furnaces. This means that it will not work again without costly repairs. 850 employees have already been laid off, and another 1,500 are to follow. The administration declared that the factory stopped because gas is too expensive and is demanding help from the government.
“I’m turning 50 this year,” says Tetiana, an ex-employee at Proletar. “I won’t get a job here. All the enterprises have been shut down. The town is dying out. Our children have no future. We’ve written letters and appealed to Dunayev (the ex-mayor, known to be the plant owner – Ed.), so what? He promised us mountains of gold, but there is no result.” Hardly any of the all locals we talked to have jobs, or money for that matter.
Meanwhile, the government is pretending that Lunask Oblast has no problems at all. So claims Volodymyr Prystiuk, current Head of Luhansk Oblast State Administration and Head of the Party of Regions’ oblast branch. “Luhansk Oblast rose from 14th in 2012 to 5th in Q1’2013 in the socio-economic development rating of Ukraine’s regions compiled by the Cabinet of Ministers,” the local Party of Regions’ website states proudly. What drove the rise is unclear, but protests may erupt very soon unless at least some of the plants resume operations in Lysychansk. The government is obviously not about to take off its rose-tinted glasses. Meanwhile, Donbas residents are struggling to survive its widely-advertised “stability”.
The Ukrainian Week asks American think-tankers and diplomats three questions: 1. Is Ukraine seen as part of Russia’s sphere of influence in the US? 2. Why a part of the American establishment believes that Ukraine should be attributed to Russia’s orbit? 3. What can Ukraine do to counter this approach?