The Russian Federation spends between one and two billion dollars a year to support its proxies in the "Donetsk and Luhansk People’s Republics" ("DNR" and "LNR") running the occupied territories of Donbas. But Ukraine’s direct and indirect support for the “budgets” of these self-proclaimed republics is also estimated to be around US $1 billion a year. Russia is paying for the opportunity to exercise “effective control” over the territories, whereas Ukraine seems to be paying for useless expectations that they might soon return to Ukraine’s control. Given that this might be possible only under two circumstances—either Ukraine capitulates and accepts Russia’s conditions for a disastrous reintegration of ORDiLO, as the occupied counties of Donetsk and Luhansk Oblasts are called, or Russia itself goes through a major shake-up or falls apart altogether—, shaping policies in the hope that this will happen any time soon drives Ukraine off-track and wears the country down. And this is exactly what Moscow is counting on. Worse yet would be to simply take back ORDiLO and support and rebuild it entirely in return for a formal recognition of Ukraine’s sovereignty while the Kremlin continues to run it for all intents and purposes.
The Ukrainian Week analyzes what could be the potential cost of stopping all economic ties with the occupied territories.
Making out like bandits
According to the Main Statistics Bureau in Luhansk Oblast, of the UAH 34.58bn in goods and services sold by enterprises registered on Ukraine-controlled territory, UAH 11.6bn-worth was sold in the occupied territories in 2015. Statistics for 2016 are not available yet. What’s more, over UAH 1bn in salaries were paid to 21,800 of their employees in the occupied territories. According to the Main Statistics Bureau in Donetsk Oblast, companies registered in Ukraine but actually located in the occupied part of the oblast sold goods and services worth UAH 115.54bn there, and UAH 210.1bn in the rest of Ukraine. Officially alone, they paid UAH 7.69bn in wages to 107,600 employees.
To a large extent, industrial production on the occupied territories, especially the steel industry, is running at a loss and is covered by counterpart enterprises in the rest of Ukraine. Countless manufacturers that depend on supplies of raw materials and retail chains that sell consumer goods including food from other parts of Ukraine—which are all considerably cheaper than similar supplies from Russia—also play a major role in supporting the economies of the occupied territories.
This kind of cooperation with the occupied territories cannot be accurately measured today, but it is clearly profitable for Ukraine as well. After all, we’re talking about volumes that once covered a single Ukrainian market over more than two decades. However, it is also clear that stopping this trade will not be critical for any domestic producers, either.
Dead pensioners spending money
According to data from late 2014 collected under the Yatseniuk Government, expenditures on the budgets and social funds of the occupied counties of Donetsk and Luhansk Oblasts exceeded revenues by UAH 19.6bn and UAH 14.6bn. At that point, a decision was made to stop issuing payments to the occupied territories. Still, all this did was change the mechanism. Residents of ORDiLO who registered temporarily displaced persons on non-occupied Ukrainian territory continue to receive government benefits under law and additional support as IDPs. Not long ago, IDPs, like other citizens of Ukraine, were allowed to register or transfer their pensions to any office of the Pension Fund that was convenient to them.
Of course, the state has to take care of Ukrainians who have been fleeing the war in Donbas. However, most of these people are actually fake refugees. Data for the beginning of 2017 is not available yet, but if we compare indicators, we can see that the number of pensioners registered in Ukraine-controlled Donetsk and Luhansk Oblasts was 2.12mn at the beginning of 2014 and shrank to 1.15mn by the beginning of 2015. However, it then grew to 1.4mn by the beginning of 2016.
In some of the counties next to the occupied territories the number of pensioners registered during 2015 grew at an astonishing rate. For instance, the numbers nearly doubled in Bakhmut—formerly Artemivsk—and county, going from 59,850 on January 1, 2015 to 113,400 by January 1, 2016. In Sloviansk, the number of registered pensioners went from 61,800 to 84,800, in Kostiantynivka it went from 46,700 to 67,200, in Kramatorsk from 79,800 to 92,500, in Lyman—formerly Krasniy Lyman—from 22,100 to 29,800, in Mrynohrad from 26,300 to 32,200, and in Seldynov from 32,700 to 38,700.
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The number of pensioners registered in these towns amounted to more than half, and in some cases even two thirds, of the population of those territories. These relative proportions suggest that the majority of migrant pensioners have fictively registered either themselves or through intermediaries only to get their pension benefits, but most of them, in fact, continue to live in the occupied territories.
In 2016, the SBU established nearly 4,000 cases where someone continued to take money through the pension cards of individuals who had actually died in ORDiLO, an amount that added up to nearly UAH 8mn a month. Moreover, SBU staff found instances when the money transferred to a dead pensioner’s account was actually being taken out by "LNR" officials. All told, the SBU calculated that it stopped payments of benefits to 450,000 questionable pensioners and only 80,000 filed requests with their local pension office to reinstate their pensions over the course of three months.
Energy addiction
However, the power industry has become the biggest Achilles’ heel in economic contacts between Ukraine and ORDiLO. Having got rid of its dependence on Russia for gas, Ukraine remains hostage for the last three years in an artificial dependency on the territories occupied by Moscow when it comes to electricity. The most critical yet the easiest to resolve is the situation in Ukraine-controlled Luhansk Oblast. Its power grid was cut off from the rest of the Ukrainian power grid after Russia occupied the southern corner of the oblast and currently operates as a power island, completely dependent on the Luhansk TES, a co-generation plant located right on the line of contact in the town of Shchastia. This TES can only operate on anthracite, a coal that is in shortage in the rest of Ukraine. But this problem can easily be resolved by building a power transmission line that joins into the power grid of non-occupied Luhansk oblast, the northwestern part of Donetsk Oblast, or southern Kharkiv Oblast.
Dependence on anthracite that is mainly found in the occupied territories but is needed for TESs is a bit harder to resolve, but hardly impossible. Obviously, this can’t be done in a week or two or even in a month, so the blockade by activists could genuinely cause serious problem with power supplies to the rest of the country. However, the real problem lies in the fact that converting the state-owned co-generation plants to work on coal gas, of which there is a surplus, rather than unavailable anthracite is happening only when someone is ready to wield a stick. Last year, Energy Minister Nasalyk announced a deadline for converting the Zmiyiv TES in Kharkiv Oblast from anthracite to coal gas, but those deadlines were ignored and so this has not compensated for the deficit of anthracite so far.
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The situation with the largest private power generation companies operating on coal, operated by Rinat Akhmetov’s DTEK, is still worse. This corporation, which owns a slew of major buyers of anthracite on non-occupied Ukrainian territory—Prydniprovsk, Kryvyi Rih and Luhansk TESs—still hasn’t considered transferring at least some portion of their power blocks to coal gas, which doesn’t need to come from the occupied territories. But this is hardly surprising, as DTEK has three huge coal companies on the occupied territories: RovenkyAntratsyt, SverdlovskAntratsyt and the Komsomolets Donbasu Mine, with a total capacity of over 10mn tonnes a year.
The only way DTEK can be forced to stop shipping coal from them is by requiring all co-generation plants in the rest of Ukraine to switch to coal gas. This, despite some speculation, can be done without major cost and is completely realistic, based on the current Rotterdam+ rates being paid.
No need to go cold turkey
Indeed, even without switching TESs to coal in gas group, which is plentiful on non-occupied Ukrainian territory, the use of anthracite from the occupied territories could be reduced severalfold. Looking at recent months, when the use of electricity is at a seasonal peak, consumption over December 2016-January 2017 28.77bn kWh of power was released on the Wholesale Energy Market (ORE), whereas a year ago during those same months consumption was 27.16bn kWh. Moreover, power output at TESs increased from 7.38bn kWh to 8.77bn kWh during this same period last year, while output from AESs shrank from 15.61bn kWh to 15.35bn kWh. Sometimes the share of power generated by AESs through the ORE fell to 50% and in the last week of January was only 52%, while in previous years it was up to 60% and more.
If Ukraine’s AESs were to provide 60% of all the country’s power through ORE today, purchases from TESs could be cut to 6.8bn kWh, although 8.77bn kWh is actually being used. This would in turn reduce the coal being used by 22-23%, of which 35-40% is anthracite, meaning that demand for black coal could be reduced nearly 67% based on current consumption volumes.
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Altogether for 2016, coal extraction at DTEK mines in ORDiLO grew 77% to 8.03mn t, compared to 4.54mn t in 2015. Over this past December-January, DTEK companies RovenkyAntratsyt and SverdlovskAntratsyt in Luhansk Oblast and Komsomolets Donbasu in Donetsk extracted 1.86mn t of anthracite, which is 310% more than they did in the previous heating season.
Curiously, armed conflict along the contact like has not stopped nor interrupted socio-economic links, let alone completely isolated the occupied territories from the rest of the country. Still, such steps will mean shifting the entire burden of supporting them to Moscow and its local proxies. At the same time, stopping commercial ties might cause losses to those who supply and consume goods from ORDiLO, but it will be felt much more in the occupied territories. This will raise the cost of supporting ORDiLO for Russia and push it to look more actively for ways to resolve the situation.
Meanwhile, this will reduce costs for Ukraine and increase its capacity to a longer stand-off with Russia. On one hand, additional resources will appear to finance defense and strengthen the line of contact. On the other, it will reduce the scale of economizing needed across the country. After all, just the cost of paying out pensions to residents of the occupied territories will save the Pension Fund far more than even a very significant increase in the retirement age of Ukrainians in the rest of the country.
Translated by Lidia Wolanskyj
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