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14:46 PM Wednesday, June 20, 2018
Tech
Ukraine Can Cut Daily Anthracite Use
How dangerous is the coal bloackade in Donbass to Ukraine and its government?
image/svg+xml Kyiv Lutsk Rivne Zhytomyr Lviv Ternopil Khmelnytskyi Uzhgorod Chernivtsi Vinnytsia Chernigiv Sumy Kharkiv Poltava Cherkasy Kirovohrad Lugansk Dnipropetrovsk Donetsk Zaporizhzhia Mykolaiv Odesa Kherson Simferopol Sevastopol Ivano- Frankivsk

Things getting very tricky on the ground around this coal blockade in the East.

It is pretty complicated all around. The opposition Samopomnich party and various veterans groups continue to blockade rail routes from DPR/LPR as they argue that Ukraine should not be facilitating trade with these rebel areas, and in effect supporting these zones, while Ukrainian soldiers continue to die across the front line.

They are also demanding an exchange of prisoners between the two sides. Samopomnich claim that the government have not done enough to diversify coal supplies from DPR/LPR and go further to argue that this just reflects a broader failure to undertake reform of the power sector - with friendly oligarchic groups continuing to benefit from a favourable energy pricing formulae.

The Ends Justify the Means?

The government and the SCM group (owned by Rinat Akhmetov) would no doubt argue that in facilitating trade with DPR/LPR they are making the best of a bad situation in the greater good of Ukraine. Tens of thousands of jobs in DPR/LPR and the rest of Ukraine rely on trade of raw materials across the border. And pulling this trade will only damage the nascent recovery in the rest of Ukraine (actually going quite well so far this year).

They would perhaps also argue that in maintaining trading relations with DPR/LPR that Ukraine continues to prevent their drift towards integration into Russia - with Moscow's actions over the weekend, accepting Ids from DPR/LPR in Russia appearing as a step in that direction. Western governments appear to support this official Ukrainian government line, with the US Ambassador this week calling for the blockade to end - and also for broader energy sector reform as a sop perhaps to those demonstrating.

National politics also plays a part herein, as Samopomnich would argue that their demonstration exposes weak reform momentum in Kyiv - timed to coincide with the three year anniversary of Euromaydan and the death of 100 or so demonstrators.

Ukrainian nationalists and Samopomich activists voice their support for the coal blockade.

Obviously this creates a difficult dilemma for President Poroshenko. Coal supplies are running low - and there is potential for major disruption to the Ukrainian economy. Reports suggest that Ukraine still has 30-40 days of coal supplies, and I guess conservation efforts/a warm spell, plus some use of alternative supplies/energy could extend this. But already production at the Yenakiive steel plant in DPR has stopped, and there is some nervousness over how long the two key steel plants close to Mariupol will still be able to function.

Stalled production would impact on economic activity, exports, and also back into fiscal and BOP space. Poroshenko would likely want to clear demonstrators, but this has obvious risks, and scuffles/arrests over the weekend at a demonstration in support of the blockade was a warning of what might lie ahead - remember Euromaydan and the Orange Revolution were more about injustice/mistreatment of demonstrators, than economic hardship.

Poroshenko needs to play this carefully and especially with the one year anniversary of the Hroisman government looming, after which it could face a motion of no confidence.

Peril for Poroshenko?

Meanwhile, the other angle to this is that this likely represents an attack on Rinat Akhmetov as the blockade seems to mainly impact on his SCM assets in Donbas. Demonstrators and

Samopomnich likely would argue that this all exposes the cozy relations between oligarchs and the Poroshenko administration - nothing much changing from the Yanukovych era. That said, the fact that Akhmetov' companies continue to function in the East, facilitating cross border trade likely acts as a factor keeping a lid on social and political tensions in the rest of Donbas.

The blockade heaps the pressure on Poroshenko to do more to reform the power sector, but not sure that political stability in Kyiv or Donbas would be better assured by picking a fight at this particular time with Akhmetov. Albeit demonstrators would argue that there is no good time, and the sector is still in urgent need of reform.

And all this ties back into the ongoing furore over the Trump administrations's links to Putin, and NYT reports of some peace plan for Russia/Ukraine given to former NSC head Flynn by a Ukrainian mini oligarch - the authenticity of which has been denied by all sides. The latter plan does not seem to have much credibility - and would never have been saleable in Ukraine, given it argued for Crimea to be leased back to Russia. But its mere appearance has further stirred the political mix/tensions in Kyiv, and alongside the recent military escalation in Donbas, has affirmed the complexity of the situation on the ground, and also in terms of Russia - US relations, in the context of a WH which is still in a state of some considerable flux.


Timothy Ash is a senior sovereign strategist at BlueBay Asset Management, London

Posted Feb. 21, 2017

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