In the Luhansk and Donetsk territories under the rebels’ control, the industrial companies are still working, especially metallurgy and coal. How does the management provide the plants with electricity and raw materials? Where is the production sold? Do the workers receive wages? Do the plants have to give the rebels money?
In this article, we will look at the facts and the gathered information to clear up the mystery of one of the main metallurgical plant of the region : the Public joint-stock company (PJSC) Alchevsk Iron & Steel Works (AISW).

War in Donbass as the gravedigger to the Ukrainian metallurgy

The industrial potential of the Donbass, and especially of the Luhansk region, today is almost annihilated.
Before the war, the region hosted lots of ferrous metallurgy plants, parts of international holdings and corporations. One of them is the PJSC Alchevsk Iron & Steel Works of the corporation «Industrial Union of Donbass» (IUD).
Attempts to solve the multiplying problems have been on the manager’s agenda of the company for a year and a half.
The strategy of survival with the new working conditions has not been found yet, as confirmed the last declarations of the Head Manager of the coorportion IUD about the possibility to re-register the company on the territory of Ukraine.

The situation is even more tense that, along with the Russian Development Bank Vnesheconombank, whose Head of the Board of Directors is the Russian Prime Minister Dmitriy Medvedev, the actual co-owners of the corporation “IUD” remain the Ukrainian businessmen Serhiy Taruta and Oleg Mkrtchyan.
The Ukrainian stakeholders of the corporation IUD have not lost hope yet to revive the old strenght of their holding, even if the control of the corporation is now in the hands of Moscow. But, step by step about everything…

Russians (co)owners

What is notable with Alchevsk Iron & Steel Works is not that it is run by a man with the epic name and surname of Taras Shevchenko, and not even that this company is the « heart » of Alchesk, the second biggest city in the occupied territories of the the Luhansk region. The most remarkable fact is that today the plant, like all the metallurgical corporations of the « Industrial Union of Donbass » is controlled by the national banking structure of the agressor – Vnesheconombank.

Alchevsk Iron & Steel Works belongs to this corportation since 2002.

In 2010, 50 % + 2 shares of the company were sold to a group of investors directed by the Swiss company Carbofer, controlled by the Russian businessman Sergei Katunin. Vnesheconombank financed the deal. At the meantime, Vitaly Haiduk, ex-secretary of the National Security and Defense Council of Ukraine, exited the stakeholders’ group of IUD. 49,9 % of the shares of IUD remained in Sergei Taruta and Oleg Mkrtchan’s hands.

Taruta himself explains in his interviews that, when the holding was sold, Yanukovich won the presidential election. The management IUD supported Tymochenko, and that could cause serious problems. To protect the company from the new president and its team, support of Russian partners was obtained.

According to another version, popular in Ukrainian’s mass media, the sell of the control of a package of shares of the holding resulted from a 2010 agreement between Putin and Tymoshenko, and a part of the money gained was spent on Tymoshenko’s pre-election campaign.

According to Forbes’ datas, today, 24,99% of IUD belong to two companies involving Sergei Taruta and Oleg Mkrtchan. The remaining shares belong to Russian companies.

General Director of “AISW” Taras Shevchenko

It is not useless to remind that, in respect of “Vnesheconombank”, in the summer of 2014 economical international sanctions were introduced, due to which this banking structure is going through hard times.

For the first time in the Russian Ministry of Finance’s history, the bankruptcy of the Vnesheconombank in November was considered. The cause of the problem is that the Bank has accumulated a huge amount of toxic assets, i.e., illiquid assets due to the disappearance of their secondary market.

The bank generously issued loans during the Olympic Games of Sotchi, and even lended some money to Ukrainian companies from Donetsk and Luhansk regions. We can therefore link the investments to the Ukrainian metallurgy.

According to Forbes’ magazine, nowadays IUD is financially completely controlled by the Vnesheconombank, that actually owns it.

On December, 16th, the Head of the legal department of the IUD corporation, Sergey Tkachenko, said that the company’s management was considering the possibility to transfer AISW’s legal adress to the territories under Ukrainian-State control.

Vnesheconombank, that Russian management decided to keep and support, expects an interesting optimization very soon. Will the bank keep the control on the “Industrial Union of Donbass”? That remains unknown. Our source, close to IUD management, is sure that, this way, Ukrainian co-owners would have a definite advantage in the struggle for the corporation.

Modernization

For lots of years, the IUD metallurgical holding’s strategy was to modernize the Soviet companies through cheap loans. In his interviews, Sergei Taruta tells, not without pride, that thanks to his reputation, for lots of year, he was able to attract cheap credit resources.

Modernization didn’t bypassed Alchevsk Iron & Steel Works. During a few years, before the war, the open-hearth furnaces were replaced by convectors, and in 2013 a gas generating power station was built on AISW.

The gas turbine power plant of combined cycles, of a capacity of more than 300 MW, was expected to fully meet the needs of the company in electricity, refining the secondary gases of the metallurgical production (selling the surplus was even planned). On June, 20th of 2013, the President Yanukovich himself attended the launching of the turbin. According to the «guarantor», the total investment in this project amounted to 675 millions of US dollars.

However, the modernisation did not solve all IUD’s serious problems. The weak point of the corporation has always been the absence of its own raw materials, which implied buying it to parteners, mainly Ukrainians or Russians. In the 2000’s, these circumstances forced the owners of the corporation to look for new economical ties in the Kuzbas and to consider purchasing iron ore in Brazil. The time will speak for itself : the war that exploded in the Donbass, not without Russia’s help, left this problem unsolved.

Times of war

In the summer of 2014, in the territories of Eastern Ukraine occupied by fighters and Russian soldiers, the metallurgical plant, like the city of Alchevsk, found themselves in the lands controlled by the so-called “LPR”. Local dwellers tell that, thanks to the plant, there are no fightings and shellings in the city : no one wants to be in bad terms with its powerful Russians owners.

In August, 2014, the work of the company was completely stopped because of the fightings. However, the company kept paying its workers, who went to work and were mainly cleaning the place. In his interviews of this period, Sergei Taruta said that AISW paid the workers on account of other companies, located outside of the ATO zone.

The fighters of “LPR”, and in particular Alexei Mozgavoi, that controls the city of Alchevsk, did not intervene in the activity of the plant. The leader of the fighters repeatedly told the media that it was important to guarantee normal work conditions at the plant, that provides jobs to 15 000 inhabitants and it’s not the most important question, who is the owner of the enterprise.

The convectors were idle running, and the staff was cleaning the facility all day long, taking out the thrashes that had accumulated for years on the plant. Of course, all waited for the plant to get back to work. “When you get paid, you can wait”, told us one of the workers of AISW, travelling to the territories under Ukrainian-State control for personal reasons. At the beginning, we had five working days a week, then we switched to a four working days a week, then 3 days a week and at the end, at the beginning of 2015, we started to work 2 days a week.

According to our interlocutor, in the middle of the summer of 2015, resumption of the production was being prepared. The direction of the firm succeded in organizing the delivery of raw materials from the city of Kryvyï Rih in Ukraine. It is worth noting that most of the employees do not know the supplier, the direction keeps the strict confidentiality of this information. (We did not find out which working mining plants of Kryvyï Rih could provide AISW with raw materials).

It is possible to understand the owners of AISW because, until now, the company works out of the framework of Ukrainian law and has not re-registered in the Ukrainian-State controlled territories. The legal adress of AISW is located in Alchevsk.

Before, the products were mainly shipped through the transport hub of Debaltseve. Today, to export the products out of the plant, the management has to negociate with the fighters and Ukrainian authorities. However, this is not always efficient. The Ukrainian authorities even seized freight trains transporting raw materials and products for and from the plant.

The difficulties with the deliveries of raw materials worsened because the convectors’ furnaces, in addition to iron ore, require a certain amount of high-quality steel. It is not enough for the plant, that is why the company literally little by little gathers all unclaimed remains of metal scrap and also they dumped from the vicinity of Alchevsk. One of the technical-engineer of the company told us how the plant works today.

“For the efficient walk of the plant, 300 MW/h of electricity are compulsory. Only a third of it is available. The launch of the gas turbin, which could provide electricity to the plant, does not offer this possibility – to work, again, it needs a full capacity, otherwise it lacks wastes of production. To launch the gas turbin, all the convectors have to work and starting them does not work so far because of the lack of raw materials and too little orders”.

“Now there is 10 to 15 thousand tons of product enter monthly in our rolling mill. These volumes are negligible compared to the prewar ones – at this time, it took 1 or 2 rounds to issue this quantity, says our source. As for the other sections, and especially the sheets, they either work even less than rolling mill, or do not function at all”.

At the beginning of November, the representative of the company informed the agency « Interfax-Ukraine » that after 10 months, the plant had reduced its production of 87 %. “In October, 94 thousand tons of iron, 103 thousand tons of steel, 103 thousand tons of rolled steel were produced. In September, 80 thousand tons of iron, 91 thousand tons of steel, 74 thousand tons of rolled steel. The company continues to operate with one furnace”.

On September, 25th, the head of the website Sprotyv (“Information Resistance”), the Ukrainian deputy Dmitry Tymchuk wrote on his facebook page that the management of AISW was negociating with the proper “Ministers and agencies” of the terrorist organisation “LPR” and representatives of the Russian Federation about the implementation of the production beyond the limits of the “republic”, and especially in Europe. Plus, the failure to return of the railway carriages on the occupied territories by the Ukrainian side is one of the other problems.

In its turn Russian curators offer the companies working on the territory of the terrorist organisation “LPR”  and starting a “Vnesheconombank activity” with Russia, to pass to non-cash transactions : for the Ukrainian registration documents, it is necessary to open an account in NKO (a non-bank financial institution), and for the registration documents in “LPR”, an account in the so-called “LPR State-Bank”, so that the money from the NKO account could be transferred to the “LPR State-Bank”.

According to our source’s mind, the management of “IUD” wants first to export the production of the plant to Europe, to increase the volumes of production of the plant, since the actual volumes are unprofitable.
At the beginning of November, the portal “Delo.ua”, refering to “Ukrainian News”, shared the information that, to supply the markets of AISW, the management of IUD had even stopped a blast furnace of the Hungarian plant of the corporation, the mill Dunaferr.

A modest amount of the production which is producted today on the plant and, especially, the rolling mill, is sent to Russia.

A rumor has it among the employees of the plant that some products are delivered to Crimea to build the “Kerch bridge” and to build transmission lines. However, we could not confirm this information.

Social tension

We wanted to ask another questions to the employees of the plant : how many workers had been put on leave or dismissed because of the situation?

One of the oldest technical-engineer of the plant, currently living in Dneprodzerzhinsk, told us that this question had been addressed quite simply and radically.

“Those who left at the time of the intense fightings did not have the possibility to come back to work. Then, those people were just retroactively dismissed, against all the principles of Labour Law. At the plant, not everything was all right before the war. Even now, the State is not able to control these violations, it does not care about the people”.

Paying the workers of the plant represents today about a quarter of the prewar 1-1,5 thousands hryvnia. This does not keep people from going to work and hoping for the situation to get better. There is nothing more to hope, living in Alchevsk.

Perspectives of evolution

Today, the work of AISW is not profitable. The problems with supply of raw materials, sale on markets and exports from the territory of “LPR” are worsened by the fact that Ukraine allegedly does not give back stock for the freight.
Moreover, the quarrels between the Russian and Ukrainian co-owners of the corporation keep going, since Sergei Taruta is sure that, after the end of the war, the corporation will be again one of the best asset of the post-Soviet area.

The possible collapse of the Vnesheconombank weighs in favor of the Ukrainian co-owners of IUD.

The perspectives of the metallurgical holding IUD and, in particular, of AISW, are still obscure, as well as the future of the whole region.

Written with the financial support of the Czech non-governmental organization “People in need” as part of the program Transitions of the Ministry of Foreign Affairs of the Czech Republic.

Mark Korablev