The Battle for Donbass Industry: Oligarchs vs. People’s Republics

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February 14, 2017 – Fort Russ – 

Alexander Tsyganov, Tsargrad – translated by J. Arnoldski – 

On February 13th, the Alchevsk Metallurgical Plant in the Lugansk People’s Republic ceased work. 

The reason behind the plant’s shutdown was the blockade of the enterprise by Kiev, as a consequence of which it was deprived of raw materials and a market for sales. According to a source, the factory will be maintained in working order within one week. Even if nothing changes at this plant at which 90% of the population of Alchevsk works, then it will be preserved. 

This news was accompanied by another report: the People’s Council of the LPR adopted, upon first reading, amendments to the law “On the Tax System.” According to this law, foreign entities and entrepreneurs are obliged to legitimize their activities on the territory of the republic by March 31, 2017. This means in particular that they need to conclude agreements with the LPR’s tax authorities on paying taxes into the republic’s budget. In the case of disobedience, the bill provides for companies operating on the LPR but not registered with the republic to be submitted to state administration with an appointed, temporary management. 

In other words, nationalization. 

Indeed, this ultimatum to the oligarchs has been quite loudly sounded from political podiums in Lugansk. For example, the head of the LPR himself, Igor Plotnitsky, has stated that he supports the initiative of the People’s Council.

“We have very long and patiently put up with the presence on our territory of non-residents (legal entities, individual entrepreneurs) who, not recognizing the republic, have engaged in economic activity on our land and used its resources, manpower, and enriched themselves and Ukraine,” Plotnitsky stated. 

The LPR leader continued: “We have repeatedly stated that we will not accept this situation, because first and foremost we need to respect the people living on this land and observe the legislation which has been adopted and is valid on the territory of the republic.”

LPR head Igor Plotnitsky

The head of the republic further warned that Lugansk does not recognize “deals made after May 18th, 2014 outside of the Lugansk People’s Republic on the alienation, transfer of management, and use of corporate rights and commercial properties belonging to legal and physical entities on the territory of the former Lugansk region.”

Afterwards, Plotnitsky separately addressed that “the norms of the current draft law apply only to those non-resident legal entities and non-resident individual entrepreneurs who carry out economic and entrepreneurial activities on the territory of the republic.” 

He specifically explained: “This concerns the open joint stock company of the Alchevsk Metallurgic Plant, including Alchevskkoks, DTEK Sverdlovantratsit, DTEK Rovenkiantratsit, open joint stoock company Krasnodonugol, the private stock companies Akvaservis and Ekoenergiya, and the Krasnodonsky and Lutuginsky wind parks.” 

Are these two pieces of news connected, seeing as how the same Alchevsk Metallurgical Plant is concerned? According to observers who are informed on the depths of political and economic happenings in the Donbass republics, of course!

“Plotnitsky’s statement is fully in line with the construction of a state, any state. Naturally all economic entities on a state’s territory should be subject to its economic legislation and pay taxes to it. But this is not happening in the LPR or DPR. And the taxes are paid into the budget of Ukraine, just as salaries are coming from the same place. Residents of the republic even had to pay military taxes which then go towards killing them,” the famous political expert on Novorossiyan affairs, Mikhail Onufrienko, said, recognizing the logic of the Lugansk leadership’s action. Onufrienko is nevertheless sure that nothing positive should be expected from this chain of events. In the best case, nothing will change, while in the worst – everything will get worse.

The problem is that the Alchevsk plant belongs to the Industrial Union of Donbass, 50.1% of whose stock before the Maidan belonged to a group of investors under the management of the Swiss company Carobefer – in turn controlled by the Russian entrepreneur Sergey Katunin. The second half of ownership was divided between Ukrainian oligarchs Sergeey Taruta and Oleg Mkrtchyan. Russia’s Vnesheconombank imposed its heavy hand on Taruta’s share since, according to the press, the former stands behind Russian investors and is the actual majority owner.

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Here it is interesting that Russia’s Vnesheconombank itself is under Western sanctions. This has left its assets, mildly speaking, insecure. The bank’s assets are now called “toxic.” One such asset is the Alchevsk plant. First of all, the press names unimaginable debts and losses and says that just in 2015 they were $1 billion while the total debts of the Industrial Union of Donbass could exceed $5-7 billion. Around $2.5 billion of the union’s debt was supposedly to Western banks, but the investments turned out to be at $10 billion.

There’s also trouble with deliveries and logistics. The Industrial Union of Donbass faces an extreme lack of raw materials for production. Before the Maidan and the ensuing civil war, these problems were resolved via ore imported from Russia and the far abroad. The war broke these ties and its deliveries from the Krivoy Rog basin of Ukraine are complicated by the operations of Nazi bands blockading the republic.

Meanwhile, analysts constantly refer to Sergey Taruta as the real manager of the Alchevsk plant.

Overall, what is really happening in the dark depths of power and management with the Industrial Union of Donbass’ assets in wartime is difficult for the external observer to understand. But if the LPR leadership’s initiative is logical and correct in theory, then in practice it is essentially taking over a Lugansk enterprise whose main owner is a Russian back. It would be nice to be wrong in this conclusion.

The rest of the enterprises on “Plotnitsky’s list” are the property of Ukrainian oligarch Rinat Akhmetov. But he does not have so many assets in the LPR. The majority of them are outside of Donbass, in Ukraine. The question is: can he allow himself to not pay taxes into the Ukrainian treasury?

Rinat Akhmetov, the richest man in Ukraine…and Donbass?

Mikhail Onufrienko is doubtful: “Akhmetov’s enterprises on different sides of the line are gathered into a single indivisible holding. Let’s say that the Mariupol plant is tied to Donbass coal. Then Akhmetov can’t simply meet with Plotnitsky and pay taxes in Lugansk, because then Ukraine would cut him off by, for example, closing down the Mariupol plant at gunpoint.”

So will Akhmetov prefer to transfer his assets to Lugansk?

A number of observers who point to the very tightly woven production chains in Akhmetov’s empire say that it is not guaranteed that he will opt for this. For example, the recent events in Avdeevka nearly brought the local coke plant to a halt. Without it, Akhmetov would lose a few other industries – and not only him.

Therefore, Akhmetov will fight. Moreover, he owns a number of key enterprises on the territory of the LPR among which are also such “biggies” like the Khartsyzk pipe plant, the Makeevka branch of the Enakievo metallurgical plant, the Gorlovka machine-building plant, Mospinsk, a thermal power station in Zugres, the Donbass Komsomolets mine, high voltage networks, Egergougol, Donetskblenergo, etc. As already mentioned, he also has a number of enterprises in Ukraine.

What’s more, when there was the recent escalation in Avdeevka, more than a few commentators drew attention to the fact that the Avdeevka coke and chemical plant belonging to Akhmetov was never subjected to a single shelling – and not for nothing, but for the important reason that stopping it would inevitably freeze up the Mariupol Ilyich steelworks which are perhaps the heart of Akhmetov’s holdings. Many suggested that the provocation at Avdeevka was organized by Ukrainian President Petro Poroshenko not so much against the DPR as against Akhmetov. The goal, roughly speaking, was to squeeze at least a portion of his assets.

Now it turns out that the leadership of the Donbass republics has set its sights on the same goal. 

“There is a fight for money,” Onufrienko summarized, “And this fight has practically no peaceful solution. This is the second phase of the war – the war for money which both Kiev and the republics are sorely lacking.”

But a military solution also does not exist, the expert is convinced – at least until the fall of the Kiev regime or the return of the republics to Ukraine.

“Imagine that the oligarchs abandon this huge money, well, too bad,” Onufrienko concludes, “because no one can force them to do this – neither Kiev, Donetsk, nor Lugansk. What does this mean? Either the recovery and continuation of the status-quo in which the oligarchs will not pay taxes to the republics, or some kind of compromise in which one or two enterprises will start paying the republics, but not stop feeding Ukraine in addition.”

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In a word, this is a splash. This is the next phase of an unstoppable war. There is no solution to this situation in the framework of the present paradigm. 

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