13 August 2014
Freight throughput handled by Ukraine’s monopoly railway transporter Ukrzaliznytsia (UZ, RAILUA) in the war-torn Donetsk and Luhansk regions (collectively known as Donbas) fell to 153 kt/day in the first 11 days of August vs. 315 kt/day in June, according to an Aug. 12 entity press release. UZ blames armed fighting in Donbas that damaged its infrastructure, as well as a significant decrease of economic activity in the war-afflicted regions. Among the key problems is that freight traffic has stopped in the entire Luhansk region and the core route in Donbas, from the city of Donetsk westward, is also not working. More than 50 railway stations in Donetsk and Luhansk regions are not working, according to Ukrzaliznytsia.
Alexander Paraschiy: The problems with the railway connection between Donbas and other regions of Ukraine will have negative consequences not only for the Donetsk and Luhansk regions (which cumulatively accounted for 27% of revenue from goods exports out of Ukraine last year), but also neighboring regions. Most affected could be Ukraine’s power generating sector (which depends on coal supplies from Donbas), as well as the steel and iron ore sectors (Donbas is responsible for 53% of all of Ukraine’s rolled steel output) and some machinery companies, like engine maker Motor Sich (MSICH UK). Most affected by the current troubles are the assets of the holdings belonging to Rinat Akhmetov, namely steel giant Metinvest (METINV) and energy giant DTEK (DTEKUA).
In the last few days, the Ukrainian government’s anti-terrorist operation in Donbas has gained more success with a lot of towns having been freed from the terrorists. However, core cities such as Donetsk, Horlivka, Luhansk, and Stakhanov – as well as the coal-producing districts of the southern Luhansk region – have no access to the outside world, which is being reflected in the weakened local currency.
In our base case, we see the government retaking control of the key cities of the Donetsk region in the next week or two, and the retaking of the core cities of the Luhansk region on a two-month horizon. Of course, this scenario assumes no drastic change in current military tactics by the Russian government, which hasn’t been ruled out by NATO.