Abrupt signs of recession are being felt in the eastern industrial heartland of Ukraine. Donetsk, the largest steel and coal-mining town in this export-oriented region is suffering from falling orders.
Smoke stacks are no longer polluting the atmosphere but the city’s 1m residents are not breathing more easily. “The air in recent weeks has been cleaner,” says Victor, who works for a leading steel company in Donetsk. “But the dirty air has been replaced with a sense of anxiety. Industrial growth is slowing. It is being replaced by growing fears of lay-offs.”
Many Ukrainians do not understand the economics behind a $16.4bn (£10bn, €13bn) standby loan that the International Monetary Fund gave their country to stabilise its currency and banking system. But they know something is wrong when smoke stops churning out of the factories that pay their $400-$1,300 monthly pay cheques. Ukraine has ranked as one of the world’s top 10 steel exporters. Annual production is down 6 per cent year on year to 33.5m tonnes and the decline is accelerating: domestic steel output plummeted 49 per cent in October compared with last year to 1.9m tonnes because of low demand.
Factories across Ukraine have slashed production. The country’s three ferroalloy plants warned that they would halt production altogether. Sergiy Gayda, a steel industry analyst at Dragon Capital, a Kiev-based investment bank, says two-thirds of Ukrainian steelmaking facilities were idle.
“Out of 42 open-hearth furnaces owned by Ukrainian producers, only 10 operated by seven companies were working in late October,” he says, adding that the Makiyivka and Ilyich metallurgical plants completely halted production last month.
As production falls, workers complain that they have been sent on unpaid holidays. Others say they have received salaries late. Some factories warn that they could be forced to make workers redundant.
Hundreds of thousands of steel industry employees fear that they could lose their jobs. Coalminers, who supply a key raw material to the industry, say they could be next. “It’s scary. We don’t know if we will be paid in coming weeks or if we will have a job at all,” says Mykhailo Masyuk, a coalminer in the region.
Anxiety in Ukraine’s industrial regions is spreading throughout the country. Steel is an important source of foreign currency for Ukraine and has accounted for 40 per cent of the country’s exports. With exports falling, Kiev’s current account deficit has widened. The currency has declined. Ukraine is braced for a recession.
Nervous about the future, there are signs that citizens are stocking up on flour, oats and other basic foods. Some worry that they could default on bank loans used to buy cars and apartments.
Production from Soviet-built steel factories has contributed substantially to the eight years of growth that have pulled Ukraine out of economic turmoil following the collapse of the Soviet Union. But now credit markets are frozen and Ukraine’s overheated economy is cooling off.
Rinat Akhmetov, Ukraine’s richest businessman, is worried. His Metinvest Holding owns several steel mills and coal mines. Donetsk residents hope billionaires such as Mr Akhmetov will help cushion them from a serious blow.
Asked how his business has been affected, Mr Akhmetov was tight-lipped. He could not clearly say whether production at a handful of his factories would be halted but pledged to avoid redundancies.
“We see thousands of people being laid off in Europe,” Mr Akhmetov says. “It is hard to say what will happen. This is my hometown. My company is socially responsible and will do everything possible.”
The IMF said last week that Ukraine’s 6 per cent growth this year could fall to 3 per cent in 2009. Anton Khmelnitski, head of the Eastern Europe investment team at UK-based Polar Capital, says Ukraine is in for a “hard landing”.
Victor Yushchenko, Ukraine’s president, says the first tranche of the IMF loan approved last week helped stabilise his country’s financial system. But he warns: “The biggest problem now is to prevent a deep fall and stagnation.”
A top aide announced on Monday that plans to hold a snap parliamentary election this year had been put off until the economic situation calmed down.