The grand tale of metallurgy: How Ukraine lost its largest economic sector.
After 33 years, Ukrainian enterprises produce seven times less metallurgical products. The primary reason for this drastic decline is the war. However, issues in the Ukrainian metallurgy sector began long before that.
EP narrates the story of the fall of the Ukrainian mining and metallurgical complex (MMC). This story is not just about blast furnaces, coal, and steel; it also involves post-Soviet privatization, the rise of Ukrainian oligarchs, and leading politicians.
The Early Years of Independence
Between 1989 and 1991, the economy of the USSR declined by 15%. The reason was the drop in global energy prices, compounded by overall inefficiency and low labor productivity. As the Soviet Union began to disintegrate into republics, the economic crisis only intensified within each independent state.
The economic system of the USSR was built on interdependence among the republics, so production chains were widely scattered across the territories of the then-state. For instance, if a certain mechanism was assembled in Uzbekistan, the bolt for it was cut in Sumy, and the nut was made in Khabarovsk.
"When the structures collapsed at the political level, it was necessary to reinforce this at the economic level. Thus, the task was set in almost every sector: to create unified closed production chains within Ukraine," recalls former Deputy Minister of Industrial Policy Serhiy Gryshchenko.
In addition to production challenges, there were also issues with product sales. Before gaining independence, Ukrainian MMC enterprises supplied products for construction and military-industrial complex enterprises throughout the USSR, but after 1991, domestic demand in Ukraine was simply insufficient.
In the early years of independence, the crisis affected not only large factories but also small enterprises, which had to close due to competition from Western imports. As a result, budget revenues also decreased. Under such conditions, there was no question of former volumes of state orders for metallurgical products. The only option for MMC enterprises was export.
In the initial years of independence, metallurgical products were exported through three methods: direct sales by enterprises, sales through private intermediaries, and state contracts via a special organization.
"Quotas for export were hardly issued to factories. At that time, a state organization was created to sell the products – a state trader. Enterprises were required to sell their products to it at domestic prices, while it would export them at external prices and settle with the enterprises," explains the chairman of the board of directors of the "Industrial Union of Donbas," Serhiy Taruta, adding that mostly factories and the state trader conducted sales through private structures.
0 Another issue faced by mining and metallurgical enterprises upon entering independence was the terrible condition of their main production assets. The wear and tear at some enterprises reached 70%. The modernization of capacities occurred slowly, creating an urgent need for funds for upgrades.
Additionally, factories were responsible for certain social expenditures and maintaining municipal facilities. "The city trolleybus administration does not plan to repay its debt because the city budget does not allocate funding for the relevant administration. Trolleybuses in Alchevsk still operate only because workers from the Alchevsk Metallurgical Plant use them to get to work," complained then-general director of AMK Enver Tsikitishvili.
The First Capital of the Oligarchs
From 1991 to 1995, the price difference for metallurgical products between domestic and global markets was significant due to low wages, local ore, and cheap Russian gas.
The director of the Mariupol Illich Steelworks, Volodymyr Boyko, stated in an interview that just on ten thousand tons of metal, one could "pocket" $1 million. Thus, it was no surprise that many were eager to take advantage of this. Behind the intermediary companies exporting products were not only now-famous businessmen and those close to the management but also representatives of power.
"I remember my last trip as Deputy Minister to 'Kryvorizhstal.' Before the trip, I received instructions from the president (Leonid Kuchma – EP) who said: 'As flies surround this enterprise, there are 300 intermediary firms, deal with them.' One firm was backed by the district administration, another by the city, and there were firms from the regional sanitary station, district customs, and so on… Not to mention the security forces," recounts Gryshchenko.
1 When in 1995 Russia decided to raise gas prices several times, Ukraine entered an energy crisis. Since the metallurgical plants could not pay for gas with products, they turned to intermediaries – traders. These traders received metallurgical products, sold them, and transferred the funds back to the producers.
The transition to barter schemes was facilitated by the hyperinflation of the 1990s. At that time, products became more expensive during production, and the buyer was not always willing to pay for them. A boom in non-payments occurred, leading to mutual settlements being conducted in goods.
One example from the Dnipro Metallurgical Plant is described by "Business Ukraine." The scheme worked as follows: PrivatBank provided a loan so that the plant could purchase everything necessary for production. The buyer of the plant's products acted as a guarantor that the enterprise would return the funds to the bank.
After producing rolled products and selling them to the buyer, the plant accrued a debt to the bank. The plant did not pay it, so PrivatBank turned to the guarantor – the product buyer, who deposited the funds and signed a settlement act with the enterprise. In the end, the money went to the bank, while the plant had nothing to pay taxes with.
This economic policy of basic industries had a very negative impact on the budget, forcing the authorities to "print" more and more money.
Privatization
Shadow privatization began during the so-called perestroika in the late 1980s, when party nomenclature exchanged power for property. Following independence, legislation on leasing facilitated the transition of enterprises into private hands, allowing labor collectives to take over plants.
Lessees paid mandatory fees to the budget while keeping the net profit for themselves. The vast majority of metallurgical enterprises went through this, strengthening the positions of their leaders. The latter combined the position of general director with that of head of the board of lessees.
In 1995, voucher privatization began in Ukraine. Every citizen could receive a property certificate granting access to a privatization auction where certificates were exchanged for shares. Often, Ukrainians sold their vouchers to financial companies.
"A month before the auction, the state informed which enterprises would be represented and what percentage of shares was offered. We analytically calculated what might be of interest to us," says the founder and head of the financial company "Kinto," Serhiy Oksanych. His firm managed to concentrate about 5% of all Ukrainians' certificates at that time.
People sold vouchers to intermediaries because there were no guarantees of receiving dividends from enterprises, and due to the crisis, many needed money immediately. Vouchers were sold for $10-20 – a decent amount at that time. During voucher privatization, the labor collective of an enterprise had a priority right to receive its shares. Some plants transferred 15-20% of shares to employees.
There were also other methods of denationalization, such as transferring the state share package to a private company for management. This occurred due to debts of the state enterprise to the company or through agreements with the authorities. This was the case with the Dnipro Metallurgical Plant and the Privat Group, Northern Mining and Processing Plant and UkrSibbank. After the transfer