Business Capital (Ukraine): Implosion and depressive silence. The death of flagships of national industry.

Economic giants, the flagships of the Ukrainian industry, one by one are falling apart. The result can be truly disastrous for the Ukrainian economy this year, the consequences of which will haunt us for a long time.

Industrial statistics shows the start of the disaster. New data of the state statistics for November indicate a decline in industrial output of 6.9%. Logical consequences in the short term are increasing unemployment and a new wave of emigration. Against the background of strengthening of the hryvnia and a complete misunderstanding of the situation by the government on what to do with it, we suppose: after another six months we can expect a serious crisis, which will hit a number of industrial cities (primarily Zaporozhye, Dnepr, Kharkiv) and, of course, will affect the situation in the country as a whole.

We decided to look, as is the case in several industrial centers of Ukraine, at enterprises, whose names are on everyone's lips.

Here, according to experts, under the threat of loss of income and job loss are about 35 thousand people — employees of local businesses. Together with families — about 100 thousand people losing the means of survival.

Motor Sich company is one of the world's leaders in the production of aviation gas turbine engines for aircraft and helicopters, as well as industrial gas turbine installations. On the one hand, Motor Sich has become hostage of the economic war between China and USA, on another — a victim of neglect by the state and private short-sighted management.

This year was to plant a complete disaster. The net loss for January-September amounted to 532,7 million hryvnia, while the same period in 2018, the company ended with a net profit of 543,2 million.

Since August, the factory introduced a regime of strict economy. For engineers working on new projects for several years it is clear that further research is impossible. Employees are moved to a 4-day working week, while Motor Sich managers are now quite seriously talking about the "three-day week". Under threat the social welfare of workers — health, recreation, transportation to work, etc., in which Motor Sich, really, really invested. For many members of the team of thirty thousand, it becomes a serious challenge, although workers say that in the 1990s they have seen worse.

Zaporozhtransformator

In the beginning of the year the Parliament adopted amendments to the transitional provisions of the tax code which led to the fact that foreign manufacturers of transformers got price preferences for two years. Which in turn leads to the loss for the only strategic enterprise of Ukraine in the electricity industry — PJSC Zaporozhtransformator.

The company is a part of the Energy standard group of Konstantin Grigorishin — Europe's largest manufacturers of power transformers and his team — 2500 employees. In October 2019 because of debts of more than $ 10 billion (with own assets of 4 billion hryvnia) the management began the procedure of bankruptcy of the enterprise.

The company, by the way, points at the strange behavior of the authorities: the Russian market for their products is closed due to th government export embargo, but the Russian producers-competitors — freely operate in Ukraine, taking part in the government tenders and taking advantage of state preferences, offering more favorable terms than domestic competitors.

Zaporizhstal

Steel mill Zaporizhstal, part of Metinvest of Rinat Akhmetov has replaced CEO in November now, the company operates under Alexander Mironenko. But he got hard time. Because of the crisis in metallurgy Metinvest stops the investment projects, except environmental. There will also be staff reductions in all enterprises of Metinvest including Zaporozhstal and Zaporozhkoks, Zaporozhogneupor.

Commenting on the situation, CEO of Metinvest group Yuriy Ryzhenkov said: "We are in the hardest crisis in the last 10 years. In particular, Metinvest was forced to cut investment program for 2019, the Company will suspend the implementation of certain projects except the most important and projects with significant environmental impact".

AvtoZAZ

PJSC Zaporizhia automobile building plant (ZAZ) for more than a year is in bankruptcy. The problems lie in the financial issue, the factory needs rehabilitation. Car production on it ceased. The company is a part of the Corporation UkrAVTO of businessman Tariel Vasadze now almost dead. (Remember: the record 2007 AvtoZAZ produced 280 thousand cars) In may 2019 the ZAZ assets are offered for sale but there are no buyers.

Zaporizhzhya Nuclear Power Plant

Here, for various reasons, reactor units are periodically shut down. The reasons given are technical maintenance or mechanic failures. Reactor blocks are worn out long time ago and require replacement, but there is no money. It is clear that the plant is unable to pay its workers or maintain infrastructure for now.

Dnepr

KB Yuzhnoye and Yuzhmash enterprise

Design Buro South, as the main source of new technological developments, does not perform this function anymore. During the years of Ukrainian independence, it has only created a few modifications of old Soviet space rockets. Due to that it was barely able to stay afloat in international space launch market.

On November 1 the leadership of the southern design office fired the Director of the Pivdenmash plant Sergei Vought. Later, on 4 November, the Cabinet of Ministers at an extraordinary meeting dismissed Pavel Degtyarenko from the post of head of the national space Agency and announced a competition for the position.

For the period from 2015 to 2017 KB South practically ceased to give orders to Pivdenmash facility. Thus the revenues of the plant reduced 34-fold in monetary terms and more than 25 times in terms of production volume.

DneprAzot

JSC Dniproazot is a part of Privat group. The factory is located in Kam'yans'ke (Dnipropetrovsk region) and specialized in the production of fertilizers. Net revenues of the enterprise in 2017 was 7.3 billion hryvnia. But since last year the company regularly stops production requiring bailouts and has lost a large share of the Ukrainian market of nitric fertilizers, etc. DneprAzot employs 4 thousand workers whose incomes have dropped significantly. And the future of the company is under big question.

Krivoy Rog

Arcelor Mittal

The company this summer has been in a series of scandalously loud checks and searches by law enforcement agencies, as well as a target of personal criticism of President Vladimir Zelensky. Then the question arose would the biggest foreign investor operating the country's largest steel mill be able to continue to work in Ukraine at all. If the conflict with the government is not settled and will inflame with a new force, about 30 thousand workers in Krivoy Rog would be left without work. The largest foreign investor (invested $9 bln in Ukrainian steel making) is likely to leave the country for good.

Kharkov

Malyshev plant

The owners of this enterprise came under harsh criticism in November. Zelensky said that he was shocked upon learning that the Kharkov Plant named after Malyshev only produced one main battle tank for the armed forces of Ukraine since 2009. "I'm in shock about statistics. In Soviet times you built 900 tanks on a bad year", — he said at a meeting on problematic issues of the Ukroboronprom group. Zelenski stated that the factories of the military-industrial complex has wage arrears of up to four years and the wages are very low, and due to the electricity saving in winter people work at plants at subzero temperature. On top of that the company had electricity shut off completely by utility company over debt. The debt of the plant before power companies amounted to 4 million 124 thousand UAH.

Turboatom

The company employs nearly 3.5 thousand people. They have been manufacturing nuclear turbines in a closed cycle: from design and research work to manufacturing, assembly, testing and shipment of the turbines. 75% of Turboatom belongs to the state, and 25% privatized.

And now the General Director of JSC Turboatom Victor Subbotin believes that the requirement of the government to pay from 50% to 90% of the income as dividends on a share of the state shareholding may lead to a bankruptcy of the enterprise.

"The Cabinet has decided to increase this proportion to 90%, and it is still 230 million, which the factory must pay within a week. There is no such money here. If we assume that this amount will be deducted from us by the state compulsorily, it will inevitably lead to stop of production, and hence the failure of the contracts and joint projects of Electrotyazhmash and Turboatom", — said the General Director.

A social explosion or the silence?

As you can see, the situation in the major industrial centers of Ukraine, its leading enterprises, getting worse and worse. It doesn't necessary means that tomorrow tens of thousands of people will be thrown into the street, but it is quite possible that their wages will be reduced to a level where going to work becomes pointless.

The crisis in the industry in 2020 may be overlapped by problems in agriculture. Dry autumn, snowless winter means no early harvest. It is very likely that the incomes of exporters of agricultural products will fall next year . And the industry will not be able to support the economy...

Many observers believe that the present — the failed industrial policy of the current government could lead to a social explosion in the industrial areas (Zaporozhye, Dnepr, Kharkiv). Under this scenario, tens of thousands of people will lose the ability to feed their families... Not that the civil unrest over all of the above would be the worst option — it would change something, to someone in Kiev fixing the minds of authorities in the correct direction. But in another scenario — it will be an oppressive silence. Because the demand for manpower in Poland is not falling and it is growing in Germany. So we get a new wave of labor emigration of skilled workers which can be fatal for the Ukrainian industry this time.

What is the way out? First of all, the return to power of professionals. Second, the top leadership of the state should put the government bureaucrats on leash. For now we only see a desire to destroy everything (especially talking about SBU, RRT and NABU). Third: to normalize monetary policy. Strong currency just kills the exporters, with government bonds noose tightened "the neck of the economy."

Finally, and most important: it is necessary to discard prejudices about the fact that protectionism is an absolute harm. One thing — theory, written in the neo-liberal (not all!) economics textbooks, the other — the real government in a crisis. For certain industries a healthy dose of protectionism could be a boon.

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