Stuck between a rock and a hard place: Ukraine faces tough choice

By Luke Harding  /  The Guardian, DONETSK, Ukraine

Tue, Apr 01, 2014 - Page 9

Standing outside Donetsk’s coal mine, Igor Yefremov mused over the future of Ukraine’s heavy industry.

“If we join the European Union, our mines and factories will shut down,” he said. “Already the orders from Russia are drying up. Russia doesn’t want us because of the chaos in Kiev.”

Yefremov was waiting to meet his brother-in-law, who was working on the early shift at the city center mine. Above ground, the scene was tranquil: Off-duty workers sat on benches in a small, sunny rose garden, dwarfed by two giant pit frames.

It has been a tumultuous month for Ukraine. There has been a revolution in Kiev, the abrupt exit of the pro-Russian former Ukrainian president Viktor Yanukovych and military occupation. Russia has seized Crimea, denounced the new interim Ukrainian government as “fascist” and launched an all-out information war to justify the peninsular annexation.

The uprising against Yanukovych started in November last year when he dropped plans to sign an association agreement with the EU and instead announced a US$15 billion bailout from Moscow. On March 21 acting Ukrainian Prime Minister Arseniy Yatsenyuk signed the original agreement in Brussels. In theory — at least, this puts Ukraine on a path toward European integration.

However, in the heavily industrialized Donbass area of eastern Ukraine, many are wondering what this geopolitical tug-of-war might mean for them. The Donets Basin — the political home of Yanukovych and his Party of Regions — hosts numerous Soviet-era factories: machine-building works, steel and chemical plants, mines and medium-sized businesses that make fridges.

At the pithead, Yefromov was gloomy about the mine’s prospects. Instead of the EU, Ukraine would be better off joining Russian President Vladimir Putin’s rival Eurasian Union, he said.

“It’s our only chance,” he added.

Lydia Popova, a mine employee for more than four decades and editor of its internal newspaper, disagreed.

“Joining Russia’s customs union is like going back to the USSR. Ukraine wants to be independent from Putin,” she said in Russian. “I’m a Ukrainian. The people who work hardest underground here are the Ukrainians.”

Popova conceded that many mines in the area had closed, including five in a nearby town named after Alexey Stakhanov, the Soviet coal miner made famous by the Russian Communist Party for his quota-busting records.

“We are still profitable,” she added.

Popova may be right. There is still a demand for coal in Ukraine, even though much of the industry has crumbled. Big factories use coal, as do villagers not connected to the electricity grid. Numerous illegal surface mines known as kopanki also exist amid the small, depressed towns of Donbass’ outer regions. New Donetsk Oblast (province) Governor Serhiy Taruta — a local oligarch — has pledged to shut the kopanki down.

Donetsk was founded in the 1860s by enterprising Welshman John Hughes, who constructed its first steel mill. In recent febrile weeks, some pro-Russian campaigners have been calling for Donetsk city to follow Crimea and join Russia. However, more than 7,000 Ukrainians voted in a spoof online referendum for the city of 1 million to become part of another state — the UK.

With bankruptcy looming and its currency enfeebled, Ukraine has received offers of help from the IMF, the US and the EU. The interim government says the country is on the brink of default and accuses Yanukovych and his entourage of stealing US$70 billion.

Economists say Kiev’s move toward the EU will have positive and negative consequences. The 27-member bloc recently abolished import tariffs for Ukrainian goods that previously stood at 14 percent. Economists suggest that this will help Ukraine’s agricultural sector, principally businesses that export milk, cheese and sunflower oil, while the EU says the deal will help trade between Moscow and Kiev.

Yet the news is less good for eastern Ukraine’s traditional heavy industries and a potential disaster for its machine-building and metallurgy businesses. Many of these type of exports traditionally go to Russia and other post-Soviet countries, such as Kazakhstan. Moreover, steel-making factories are heavily dependent on Russian gas supplies. Moscow has signaled that it plans to raise the price Kiev pays from US$268.50 per 1,000m3 — the figure Yanukovych agreed with Putin late last year — to about US$400.

Alexander Seliverstov, the director of Donetsk’s steel plant, said he worried what would happen if Russia shut its border to Ukrainian goods.

“This would be deeply unwelcome,” Seliverstov told Ukraiian news agency UNIAN. “Traditionally, 20 to 25 percent of our production goes to Russia. Finding an alternative market at a time of continuing economic crisis would be difficult.”

Donetsk Steel is undergoing modernization and at the moment only produces pig iron.

Since February, pro-Russian protesters have regularly gathered in the city’s Lenin Square. Their key demand is federalization — greater autonomy for the east — and another is that the new government abandon its plan for European integration.

“The EU doesn’t want Ukraine and we don’t want the EU. We regard the signing of the association agreement as capitulation,” computer programmer Roman Protsenko said.

Only friendly relations with “brotherly” Russia could bring prosperity, he said, adding that Russia, Belarus and Ukraine shared history and the Orthodox religion.

Others said that two decades after Ukraine became independent following the collapse of the Soviet Union, living standards have scarcely improved, with many surviving on pathetically low wages.

Sergey — a 51-year-old anti-Maidan protester — said he was unemployed and that he and his wife, Irina, survived on her salary of US$200 a month.

The anti-Maidan movement refers to pro-government counterprotests against the revolution in Kiev, the hub of which was the Maidan Nezalezhnosti, or Independence Square.

“We’ve put up with these conditions for 23 years,” Sergey said, adding: “Russia is like a magnet. It draws weaker states towards it.”

International relations professor Igor Todorov said the anti-EU mood among those struggling to get by was understandable.

“The main factor here is emotion, but it’s certainly true a part of Ukraine’s economy is closely connected with Russia,” Todorov said.

He added that the Kremlin had numerous economic levers it could pull to sabotage the economy and undermine Kiev, for example by banning Ukrainian goods by arguing that they do not meet Russian standards.

Todorov said Ukraine’s oligarchs were primarily concerned with hanging on to their assets in uncertain times. The country’s richest man, billionaire Rinat Akhmetov, is from Donetsk, but is currently keeping a low profile.

Down the road from Donetsk is the port of Mariupol, home to two of Ukraine’s biggest steel factories. Mariupol, on the Azov Sea, has previously shipped its exports to Bulgaria, Italy and Turkey, but Russia now controls Crimea’s Kerch Strait, a narrow sea lane connecting the Azov and Black seas. It has also captured practically all of Ukraine’s navy. Will Mariupol still be able to function as a port?

“The honest answer is that nobody knows,” said Vladislav Mazur, a lecturer at Mariupol’s Pryazovskyi State Technical University.

Mazur said the problems with Ukraine’s economy were profound, predate the latest crisis and were possibly insoluble.

Some factories have moved with the times and improved their ecological standards, but most still rely on Soviet-era equipment and production processes.

“Not much has been modernized. Nobody cares about the quality of products,” Mazur said.

Foreign investment might be able to transform crumbling industries, but this would take time, he added.

Ultimately, could Ukraine’s industrial base — caught between East and West — survive and prosper in the modern world?

“Ukraine isn’t the modern world,” Mazur said gloomily.