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 Fierce fighting and rebel requisitioning have stopped work at many
of the coal mines in and around the strongholds of Donetsk and
Luhansk. Without the fuel, nearby steel factories and electricity
plants across Ukraine are struggling to work.
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east as a burden, home to an outdated Soviet economy of monolithic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.
But officials say with a budget unable to finance the Ukrainian army
after losing revenues from Crimea, annexed by Moscow in March, Kiev
not only needs the contributions from its east but also its heavy
industry, albeit in a modernised form.
"There's a war in Donetsk and Luhansk and practically all revenue
from these regions to the state budget has fallen. Plus they annexed
Crimea," said Mikhailo Noniak, deputy minister for revenue and
duties at Ukraine's tax agency.
"The reality of the financial situation is pretty bad at the moment
because of Russia's aggression. A lot of money goes to defense."
Ukraine is virtually bankrupt, running wide external deficits and
struggling to cover state wages, never mind feed and equip an army
whose numbers have risen as fighting against rebels who want
independence for the Donbass intensifies.
Western lender, the International Monetary Fund, has thrown a
financial lifeline, stumping up $17.1 billion as part of a two-year
bailout package. Kiev has received $3.2 billion so far and hopes to
get an additional $1.4 billion in late August.
Oligarchs, who became wealthy in the chaos following the fall of the
Soviet Union and own much of the country's private economy, have
also stepped in, with one, Ihor Kolomoisky, financing and arming
several battalions fighting the rebels.
But while financing from businessmen is unsustainable, Western
funding demands that a reluctant Ukrainian parliament make some
tough changes to its economy, where the state has long subsidised
energy bills and has a bloated state sector.
Much of that budget spending goes to its east, especially Luhansk
and Donetsk, impoverished regions where a flat panorama of pot-holed
roads and grassy fields is punctuated by slag piles or mining
machinery.
EASTERN DRAIN
Donetsk contributed 11.7 percent, or 170.8 billion hryvnias, to
Ukrainian gross domestic product last year and Luhansk contributed
just over 4 percent, at 38.9 billion hryvnias.
But they swallowed more than 10 billion hryvnias from the budget in
2013, largely because of the high number of state workers in the
mining and steel industries.
Now, those workers who have yet to flee the area are still paid
despite largely not being able to mine.
"The majority of mines in the Donetsk region have stopped work
because of a lack of explosives," said Mykola Volynets of the
independent trade union for Ukrainian miners.
"The separatists came to the mines and just took the explosives and
we do not have spare," he told Reuters.
Oleksander Vapnyk of the state's Donetsk coal energy company said
his mines had been reduced to just two shifts because of a lack of
explosives. "What will happen next, we just don't know. The mines
are working, getting coal, but in smaller volumes."
Many workers have fled, but those who remain are trying to keep the
mines safe, preventing flooding and doing maintenance. But with
electricity often cut off by stray missiles or a lack of coal, such
work is often impossible.
Some officials fear the lack of employment could fuel
disillusionment in a region which has lagged much of rest of the
country and spur more to join the rebel movement.
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For the time being wages are being paid, said Dmytro Sakharuk of
DTEK, the company of tycoon Rinat Akhmetov, Ukraine's richest man
who during the rule of pro-Russian President Viktor Yanukovich
increased his holdings in coal.
His company now accounts for 48 percent of coal output and generates
almost 30 percent of Ukraine's electricity, mostly from coal.
Akhmetov, whose fortune is put at more than $11 billion by Forbes
magazine, has about 300,000 employees on his payroll.
"Yesterday when the (electricity) lines were down ... we brought out
the miners, about 3,000 people, from our mines in the Luhansk
region," he told Ukraine's 112 television, adding that they restored
power in the evening and miners were preparing the shaft for the
second shift.
"To restore the power supply we need peace."
RUSSIAN PAIN
Without power to guide maintenance work, the mines may become
flooded and machinery could seize, meaning it could take months or
years to make them operational again.
Some officials argue that the demise of the mines and other
coal-dependent heavy industry would not be such a bad thing as
exports, such as steel, are dependent on Russian markets, which are
becoming increasingly closed to Ukrainian products.
Russian President Vladimir Putin has made clear that if Ukraine
pursues close trade and economic ties with the European Union,
Moscow will respond with more restrictions and bans.
Exports to Russia accounted for nearly a quarter of Ukrainian
external trade and contributed around 8 percent of GDP before the
war. Thirteen percent of Ukraine's iron and steel exports used to go
to the neighboring country.
Reorienting to the West would be a challenge for the east's economy,
which is unable to compete on price or quality with Chinese steel
after officials have been reluctant to plough any profit into
upgrading or modernising its plants.
"There are virtually no small and medium-sized businesses as a
sector and that was done deliberately. It was more like a feudal
system," said Daniel Bilack, an adviser to the governor of Donetsk,
Serhiy Taruta.
He said Russia would hardly want the Donbass region with its
inefficient, loss making mines and rather it was time to "bite the
bullet and start building very efficient coal plants that will
provide electricity and energy that Ukraine needs".
For that, Ukraine will need U.S., European and Japanese investors to
come into the east and help rebuild roads, rail, building, bridges,
airports and other infrastructure projects.
But that will mean a long road ahead.
"There will have to be a significant lifeline for a period of time,"
he said. "But then how did Germany get started again after World War
Two?"
(additional reporting by Thomas Grove in Donetsk, editing by Anna
Willard)
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