Ukraine’s Rust Belt Faces Ruin as Putin Threatens Imports

President Vladimir Putin is threatening to halt Ukrainian imports as he tries to cool his neighbor’s plans to integrate trade with Europe after the ouster of its Russian-backed leader in February. Ukraine’s east, whose metals and machinery plants rely on demand over the border, has been rocked by pro-Russian separatists who’ve seized official buildings and taken hostages.

While the eastern regions of Luhansk, Donetsk, Kharkiv and Dnipropetrovsk are home to 28 percent of Ukraine’s 45 million people, they accounted for almost half of industrial output in January-February, statistics service data show. Luhansk sends 70 percent of its exports to Russia, according to the service.

Eastern Reliance

The Donetsk region is home to Metinvest, Ukraine’s largest steelmaker, owned by Rinat Akhmetov, the country’s richest man with an $11.8 billion fortune. The nation’s western provinces grow crops -- such as wheat and corn -- and also rely on service industries including tourism and information technology.

Ukraine’s economy, which has endured two slumps since 2008, is already facing a recession the government says will erase 3 percent of gross domestic product this year. Ukraine is awaiting approval for an International Monetary Fund loan to unlock $27 billion in financing in the next two years, with the hryvnia stuck at a record low.

Enduring Recession

Ukraine sends about a quarter of its total exports to Russia and the same amount to the EU. Putin told his government outside of Moscow to draw up a plan to replace Ukrainian imports and said Russia can’t subsidize its neighbor forever with gas supplies and financial aid.

Russia has imposed bans or delayed shipments of Ukrainian goods several times during the last year as Ukraine’s government pushed ahead with plans to sign a European Union trade accord. Ukraine later changed its mind, sealing a $15 billion bailout from Russia that Putin cut off after the ouster of his ally, President Viktor Yanukovych.

Chocolate, Cheese

Russia has seized a confectionery factory in Lipetsk, 370 kilometers (230 miles) south of Moscow, belonging to billionaire Petro Poroshenko, a pro-European candidate in May 25 presidential elections, and banned imports from his Ukrainian plants. It also halted most cheese imports this week, according to Ukraine’s Agriculture Ministry. Putin ordered the government yesterday to draw up a plan to replace Ukrainian imports.

Russian imports from Ukraine fell 12 percent last year to $15.8 billion, or 5 percent of the country’s total, according to the Federal Customs Service in Moscow.

The Luhansk’s region’s factories employ 40 percent of workers, who earn about a third more than average, according to the local administration.

Yachts, Palaces

Ukraine must overhaul its Soviet-era industrial base because it can’t rely forever on selling uncompetitive goods to Russia, according to Oleksandr Kendyukhov, head of the economic management department at Donetsk National Technical University.

“For 20 years, Ukrainian industry bought yachts and palaces rather than modernizing,” Kendyukhov said. “Dependence on the Russian market is futile because it’s based on politics rather than economics. The risk of a closed border isn’t conducive to investment.”

In rejecting the EU trade pact last November, the previous government cited the long period of adjustment Ukraine would need to retool its factories for European competition. That prospect alone scares some.