Poroshenko, Metinvest, IUD warn of consequences from railway blockade

President Petro Poroshenko stated on Feb. 16 that Ukraine may lose up to USD 2 bln in metal export proceeds if the blockade of railway connections through the war zone in Donbas goes on. The decrease of export proceeds may affect the Ukrainian currency negatively, president stated. He called the blockade a destabilizing factor for Ukraine and promised to find ways to end the blockade, Interfax-Ukraine reported.

Ukrainian steel holdings Metinvest (METINV) and Industrial Union of Donbas (IUD) believe the blockade will have poor humanitarian consequences, Interfax-Ukraine reported on Feb. 16 citing the companies’ comments. Metinvest warns of a risk of work stoppages at its enterprises in the occupied territories, namely Yenakiyeve Steel (23% of the holding’s steel output in 2016) and Krasnodon Coal (about half of coking coal production). The companies  pay taxes to the Ukrainian government and have a lot of business connections in Kyiv-controlled Ukraine, Metinvest said.

Another risk that has recently emerged for the companies operating in the occupied territories is the intention declared by the people controlling the territories to “nationalize” the enterprises existing there. An IUD representative warned that such a “nationalization” will make it impossible for the enterprises to export their goods outside Ukraine.

Alexander Paraschiy: Despite the calls by industry and top Ukrainian officials, the blockade is continuing. As we wrote before, they key losers of the blockade will be Metinvest, DTEK (DTEKUA), and IUD, whose production chains depend on goods flowing though the front line. We still believe the blockade will not last for a long time, and the government will find a compromise with the activists who are blocking railway connections.

The negative consequences for Ukraine’s export proceeds from the blockade could be much smaller than Poroshenko estimates. If the blockade will indeed result in a decease of steel exports by about USD 2 bln p.a. (we estimate the effect will be smaller – about USD 1.5 bln), Ukraine will be able to compensate about half of those losses through  the increased export of iron ore products, which are produced outside the occupied regions.