KP: Shutting Down. Industrial east fears layoffs, recession.
DONETSK – As Donetsk’s industrial plants have slowed production, locals say they have noticed an improvement in the city’s air quality. But this small blessing has hardly left the inhabitants of the capital of Ukraine’s eastern industrial heartland breathing more easily, as concern over wage cuts and layoffs grows.
Huge global demand for the steel that is the Donetsk region’s main export has brought several years of impressive economic growth. Wealth has trickled down from the super-rich oligarchs to blue-collar workers. But while local business and political leaders were advertising Donetsk’s great potential for future investment at the International Investment Summit last week, workers spoke of fears in the present. The global financial crisis and economic slowdown have seen prices and demand for steel plummet. And now their effects are starting to be felt throughout the local economy.
“There are no jobs. The steel factories are working four-day weeks and many people have been sent on holiday with no pay,” said Alik, a coal miner who had just emerged from his shift at a mine on the outskirts of the city. “We’re worried that the mines are next. People are worried about not getting paid.”
Factories across Ukraine’s industrial East have been slashing production and sending workers on leave as Ukraine’s export-oriented economy was hit by a slide in global demand. On Nov. 1, all three Ukrainian ferroalloy plants started phased shutdowns. Serhiy Taruta, chairman of the leading steel producer Industrial Union of Donbas, told the Kommersant newspaper last month that his company plans to lay off around 20,000 people.
“It’s not our fault,” he said. “We just can’t provide these people with a wage.”
The steel factories may have been the worst hit so far, with daily steel output dropping 50 percent since July, but there is fear that the turmoil is spreading quickly to the mines, as demand for coking coal used in the steelmaking process drops.
“We haven’t sold a single kilogram of coking coal since Aug. 25,” said Vera Lyashchenko, press officer for Makiyivvuhillya, which runs nine coal mines in the mining heartland of Makiyivka, 25 kilometers outside Donetsk.
Vladimir Boiko, director of steelmaker Illich, announced last week that it was shutting a mine in Luhansk, citing lack of demand.
“Most of the coking coal mines are still working at the moment and storing the coal,” said Anatoliy Akimochkin, deputy head of the Confederation of Independent Trade Unions (CITU). “But if the demand does not pick up, some could be forced to close.”
Many coal mines have not yet been affected by the crisis, as the demand for thermal coal, used in power stations, remains high. Mykola Lysenko, director of Makiyivvuhillya’s Butivska mine, even reported that he has been taking on new workers in the past few months on the back of a successful two years.
But the decreased demand for coking coal, which accounts for 60 percent of Makiyivvuhillya’s production, is starting to affect other mines.
“Young people felt stability and took out loans for cars,” Lysenko said. “Now they are coming from other enterprises looking for jobs. They ask me for help, but what can I do if no one is ordering coal?”
According to Akimochkin, there are more delays in wage payments to miners than usual, although 90 percent have already been paid for September.
It is not just Donetsk’s metallurgy and mining sectors that are starting to suffer. Easy credit and the stable hryvnia-dollar exchange rate drove a consumer boom in recent years as the growth spread throughout the local economy. Nationwide, consumer loans totaled Hr 213 billion in September, up from Hr 33.5 billion in 2005, according to national bank figures. But as the hryvnia has slid from a relatively stable 5 to the dollar to a high of around 7 last week, the pinch is being felt in all walks of life.
“I took a car loan in dollars,” said Mykola, a local taxi driver. “But now I’m struggling to pay it back with the exchange rate so high. I’m not getting as many customers and I’m counting the kopecks.”
And there is a widespread feeling that the worst is yet to come, with experts estimating an exchange rate ranging 7.5-10 hryvnias per dollar next year and unemployment predicted to hit 7.7 percent by the end of 2008.
“The average Ukrainian doesn’t realize what’s coming,” said Jorge Zukoski, president of the American Chamber of Commerce in Ukraine (ACC). “But they will when a family member or a neighbor loses their job and if the hryvnia continues to slip.”
People are clear about who they blame. “How can politicians sort the country’s problems out when they can’t even agree to work properly themselves?” said Mykola, the taxi driver. “We need a strong hand.”
Russian Prime Minister Vladimir Putin and Belarusian President Alexander Lukashenko are popular figures here for their perceived ability to get things done and help the people.
Although Victor Yanukovych, leader of the Donetsk-based Party of Regions still enjoys popularity among some workers, others are angry.
“Yanukovych can’t be the strong hand,” Mykola continued. “He makes many promises, but he doesn’t fulfill any of them. I’ll vote for him, but only because he’s from Donetsk.”
If politicians are taking most of the blame, oligarchs, many of whom have become rich after picking up industrial plants at cheap prices in quick-fire privatizations, are still widely respected as successful entrepreneurs who invest money in improving Donetsk.
Stories abound on the streets and in the media of Rinat Akhmetov’s generosity and help in reconstructing the city. Akhmetov is majority shareholder in System Capital Management and Ukraine’s richest man.
One local told how his granddaughter came back from her first day at school with a brand new diary, provided to all first-year pupils by Akhmetov. “This might be small change for him,” said Alik, the miner. “But at least he is doing something.”
And there is a great feeling of reliance on the business leader as a man who can help the region through the crisis. “Akhmetov knows what he is doing,” Alik continued. “He’s a clever man. I don’t expect he’ll let the steel factories close.”
At the International Investors Summit, business leaders were not keen to talk about immediate plans. The Financial Times reported that Akhmetov refused to comment in detail on the impact of the recession on jobs and wages, but pledged to avoid lay-offs at all costs.
Akhmetov made clear in his speech at the opening that the long-term strategy should focus on the development of the internal market. “I am convinced that not the metallurgists should be assisted, but the consumers of steel,” Akhmetov said. “We need a building boom. It is very important for the state to increase investments in large infrastructural projects: construction of airports, highways and bridges.”
Mykhailo Volynets, head of CITU, agreed, telling RBC news agency that one job in the construction industry created up to four jobs in connected industries.
This boom in infrastructure investment could come as early as next year as Ukraine prepares to co-host the European Football Championship in 2012. Preparations ahead of the tournament, including the reconstruction of roads, airports, railways and investment in new hotels, is estimated to cost more than $30 billion. Although analysts predict that Ukraine will fall into recession in the first half of 2009, they see the outlook for the second half of the year as more positive as exports benefit from the hryvnia’s expected fall and an anticipated rise in demand for steel.
There was much talk at the summit of getting through the turmoil and preparing for recovery. “There will be a need to scale back investment programs if the crisis continues,” said Jock Mendoza-Wilson, director of international and investor relations at Akhmetov’s SCM. He confirmed, however, that SCM intends to carry through on its 10-year, $5 billion investment into steel mill Azovstal because of the “competitive advantages” Ukraine offers.
But the immediate future looks far from easy for Donetsk’s blue-collar workers. As the turmoil continues and the business leaders try to come up with answers, there is little more that the workers can do than remain resolute. “All we can do is work hard and believe that things will get better,” said Lysenko, the mine director.
In 1872 an ironworks was founded there by a Welshman, John Hughes (from whom the town’s pre-Revolutionary name Yuzovka was derived), to produce iron rails for the growing Russian rail network. Later steel rails were made. The plant used coal from the immediate vicinity, and both coal mining and steel making developed rapidly. By 1914 there were 4 metallurgical plants, 10 coalpits, and a population of about 50,000.