Donbas rebel leaders demand Ukraine government cease trade blockade

The leaders of the self-declared Donetsk and Luhansk People’s Republics have issued an ultimatum to the Ukrainian government demanding that it end its blockade of railway connections between the occupied regions and the Ukrainian mainland, the Interfax news agency reported on Feb. 27. The separatists threatened to impose “external administration” on all the enterprises located on the occupied territories, and registered in Ukraine, if the blockade isn’t removed by March 1. Besides that, the separatists threatened to “halt coal supplies to Kyiv” and redirect “all production to the market of Russia and other countries.”

Recall, the blockade of some railway connections between the occupied districts and Ukraine was initiated by some Ukrainian MPs and paramilitary activists in January. The blockade gained momentum after Feb. 10-11, halting most of goods shipments across the war line. The blockade has already resulted in the stoppage of many steel sector enterprises located on the occupied territory, including Metinvest’s Yenakiyeve Steel and coking coal producer Krasnodon Coal. Thus far, the government has not been active in lifting the blockade and is only trying to get activists to unblock the rail lines, with no apparent success.

Alexander Paraschiy: The nationalization of assets in occupied Donbas looks possible after Russian President Putin ruled on Feb. 18 to recognize all documents issued in those territories. This potentially allows the occupiers to start trading with Russia, as an alternative to trading with Ukraine. The threat of “external administration,” or in essence nationalization, would be very painful for Rinat Akhmetov, the owner of many of the largest assets on the occupied territories.

His holding, Metinvest (METINV), stands to lose the above-mentioned steel mill and coal mine, as well as a dozen of smaller enterprises. As we wrote in our Feb. 22 note, the loss of these assets would result in about a 10% drop in Metinvest’s revenue and EBITDA, which is not very painful, as it turns out. The bigger hit will be from the loss of its established sources of coking coal supply, forcing imports of more coking coal, which may cause short-term troubles to the group.

Even bigger losses will be for Akhmetov’s coal and utility holding DTEK (DTEKUA) as the loss of its three large coal mines (accounting for 28% of coal mining in 2016) will leave three of DTEK’s nine thermal power plants (25% of power generated in 2016) without anthracite and will force DTEK to bear heavy costs to import it.

On top of that, DTEK would also lose a power plant (about 8% of its generation) located on the occupied territory. Total losses for DTEK from the “nationalization” may exceed one-third of its potential EBITDA.