Ukraine’s industrial sector continues decline amid the military conflict in the Donbas

Photo: Alexei Solodunov

The stagnation of industrial production has somewhat slowed down. Industrial output in Ukraine fell by 2.1% in May 2014 compared to May 2013, while in April the rate of decline reached 6% and in March – by 6.8%. Compared to April a slight recession was also observed in May – 1.6%, the State Statistics Service (SSS) reported. In January-May 2014 industrial output fell by 4.6% compared to the corresponding period last year, according to the SSS.

Total decline

Preliminary information from enterprises and professional associations proved that the decline in industrial production will continue in May. Even prior to the publication of official statistics the UkrAvtoprom association reported that production levels of cars in 2014 are in decline for the second month in a row. Preliminary data showed that the automotive industry in Ukraine produced 3,755 vehicles in May 2014, almost 20% less than the previous month.

Unpromising data came from representatives of the metallurgy industry. In particular, Interpipe reported that in January-May 2014 its Interpipe Steel melting plant reduced steel production by 24% compared with the same period in 2013. According to the MetallurhProm association, these enterprises were forced not only to cut the production of steel, but also rolled metal products and cast iron in January-May 2014.

General Director of Ukrtruboprom Leonid Ksaverchuk said that over the aforementioned period the industry produced 15% less tubular products than in the same period in 2013. He added that the enterprises used only 35-45% of their available capacities. Associations say the main problems that aggravated the decline in the metallurgy industry are the decrease in demand for their products on global markets and the political conflicts in Ukraine. In this context, the decline in economic activity in 2014 may prove to be worse than it was expected, as was stated in the recent report of the Institute of Economic Research and Policy Consulting. “In particular, industrial production may be lower due to the interruption in operation of certain enterprises and logistical complications,” say analysts at the institute.

Eastern reasons

So far it is difficult to assess the damage that the situation in the Donetsk and Luhansk oblasts has done to Ukraine’s steel industry. Still, Secretary of the Verkhovna Rada National Security and Defense Committee Serhiy Kaplin (member of the UDAR party) says approximately 60% of enterprises operating in the eastern region of the country was forced to suspend production due to the conflict. CEO of the Ilyich Iron and Steelworks Yuriy Zinchenko said the other day the continued hostilities and political crisis in general may lead to a situation where industrial enterprises in the Donetsk oblast will run out of raw materials and will be forced to shut down their operation.

Chances for revival of the industry in the coming months are extremely low. The worsening of economic relations with Russia on the background of political conflicts between Kyiv and Moscow will only aggravate the economic situation. MP Anatoliy Kinakh (Economic Development group) says earlier 32% of Ukrainian exports and more than 60% of supplies from Ukraine’s engineering industry went to Russia. Now it turns out that, on the one hand, the Russian market is narrowed for Ukrainian producer and, on the other hand, Europe still does not compensate for losses from trade with Russia.

In Q1 2014 the circulation of commodities with Russia fell by 25%, while exports to the EU grew by only 13%, according to the Ukrainian Union of Industrialists and Entrepreneurs. More recent data from the Metallurgprom association confirms that in January – April 2014 steel export to CIS countries decreased by 38% and to Russia – by 32%. Kinakh says on condition of implementing measures aimed at harmonizing Ukraine’s economy with EU standards, it will be possible to increase trade in the direction of Europe. “Government programs for the support of domestic production should play their role,” says Kinakh. He believes intensification of transport engineering for the needs of railway may reduce the tension in Ukraine’s industrial regions.
It is most likely that enterprises of the Ukroboronprom state-run concern will also have to think about diversification of products. The other day President Petro Poroshenko banned cooperation with Russia in the military industrial sector.

According to estimates of the Center for Army Conversion and Disarmament Studies, if the Ukrainian authorities keep their promise and terminate all contracts with Russia in the military industrial sector the annual loss for the country will be close to US $300 mn. The center’s director Valentyn Badrak says Russia accounts for 15% of Ukrainian arms exports.