August 14, 2019 Last updated August 14th, 2019 811 Reads share

Influence of the Donbass Conflict on the Ukrainian Commodity Market

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Since 2014 the world community has observed the armed conflict in Donbass, Ukraine. This war took a huge toll on Ukraine:

  • 3,331 civilians killed;
  • 12,800–13,000 killed and 27,500–30,000 wounded overall;
  • 1,414,798 Ukrainians internally displaced;
  • 925,500 fled abroad.

During the conflict, the infrastructure of Donbass was seriously damaged. Local enterprises were unable to work under normal conditions, struggling daily to survive in a stressful atmosphere of military pressure. Even though armed clashes were formally stopped, random skirmishes continued, endangering the lives of civilians and hampering trade, healthcare, education, and the supply of utilities.

The Verkhovna Rada of Ukraine adopted a resolution recognizing some regions, cities, towns, and villages of Donetsk and Luhansk as temporarily occupied territories, which greatly complicated the provision of commodities to these areas. Local facilities and their partners are forced to work under extreme conditions, making sacrifices and putting their own businesses in jeopardy.

Local companies suffered serious debts and were unable to maintain operations without external support and concessions from the Ukrainian government. To give you an idea of the suffering of Ukrainian energy companies during the war in Donbass, we will consider the relationship between a local utility enterprise, Donbass Water, and its energy provider, Ukrinterenergo, acting as a supplier of last resort (SoLR).

The debts of “Donbass Water”

The Donbass Water company repeatedly reported being unable to make timely payments for electricity supplied by the state enterprise, Ukrinterenergo, and certain other companies. Difficulties were conditioned by lack of funds, partially due to non-payment for drinking water supplied by Donbass Water to the territories of the Donetsk region, which were temporarily outside the control of the Ukrainian government.

As of May 1, 2019, Donbass Water’s outstanding debt for consumed electricity amounted to UAH 1 billion 409.8 million (USD 55.9 million). In addition to its electricity debt, the cost of providing services to consumers located in an uncontrolled territory amounted to UAH 1.434 billion (USD 56,9 million).

On May 27, at the request of Ukrinterenergo, the facilities of Donbass Water were partially disconnected from the electrical power supply.

On July 5, the Cabinet of Ministers forbade disconnection and any restrictions on the supply of electric energy to Donbass Water.

After this, SFTC Ukrinterenergo stated that the Donbass Water company was excluded from its list of debtors at risk of interrupted electricity supply, and the company’s power supply was restored.

Ukrinterenergo faces challenges as a SoLR

Ukrinterenergo’s example shows the challenges faced in performing SoLR responsibilities.

When the government appoints a company to function as an SoLR, it is expected to take on enormous responsibilities and perform countless tasks, with no option to negotiate. The SoLR is expected to continue providing high-quality services to its regular customers while fulfilling its government-appointed role. As a consequence, the SoLR may find it difficult to continue its own operations and stay afloat.

Ukrinterenergo, represented by Vasily Andriienko, Dmitry Kotlyarenko, Vasily Skalatskyi, Roman Matviienko, and Aleksandr Manuilenko, faced serious difficulties due to its SoLR status, and supplying energy to Donbass Water was only one of its many problems.

In this article, David Treyster overviews the case of Ukrenergy Trade SE and Korlea Invest, A.S. v. SFTC Ukrinterenergo.

In a nutshell, “In January 2013, companies Ukrenergy Trade SE and Korlea Invest, A.S. lost their lawsuits against SFTC Ukrinterenergo due to a breach of contract. The companies failed to export and deliver electricity in the volumes stipulated by contracts signed in 2008.”

Ukrinterenergo’s problems would not have arisen if it had not been compelled to perform SoLR responsibilities and forced to supply companies like Donbass Water. Even though the claims were dismissed, Ukrinterenergo suffered negative consequences, as noted by David Treyster:

“Of course, heated controversies can tarnish an enterprise’s reputation due to negative PR, which is often used to attack opponents. Businesses need a vote of confidence to not lose their niche authority.”

“The ten years of litigation has undoubtedly cost SFTC millions in attorney fees. In the future, this will impact how SFTC handles disputes. The costs of litigation, with the possibility of damages, routinely is part of the cost-benefit analysis that companies use when negotiating settlements with the claimants.”

Even the most stable companies in the energy market find it challenging to function as SoLRs, especially when their countries are involved in armed confrontations. Ukrinterenergo found themselves in a difficult position, even though it has a top-notch management team:

  • Vasily Andriienko, the CEO of the company since December 2014, is a Doctor of Economics (Economic Security of Economic Entities) with more than 25 years of executive-level experience in state authorities and as an Honored Employee of Civil Defence of Ukraine.
  • Dmitry Kotlyarenko (Deputy Director for Economy and Finance) is a candidate of Economic Sciences (Economics and Management of National Economy) with more than 15 years of work experience in the power sector in the field of economy and finance.
  • Vasily Skalatskyi (Deputy Director for Investment Planning and Asset Management) is an Honored Economist of Ukraine with 22 years of executive-level experience.
  • Roman Matviienko (Deputy Director for Commercial Affairs) has 14 years of executive-level experience and more than four years’ professional experience in the power sector.
  • Aleksandr Manuilenko (Deputy Director for Supplier of Last Resort Operation) has three university degrees, in electric power systems, jurisprudence, and business management, with more than 15 years of executive-level experience, and more than 20 years’ professional experience in the power sector.

Also, David Treyster notes that Ukrinterenergo partnered with Moscow before the Donbass conflict began:

“In 2014, SFTC Ukrinterenergo partnered with Inter RAO (Moscow) to ensure a reliable and uninterrupted electrical energy supply to Crimea.”

While there are no guilty parties in the case of Ukrinterenergo, the company took a serious hit by functioning as an SoLR. Donbass Water accumulated debts when it supplied water to endangered regions that were unable to pay, and they, in turn, were unable to pay for electrical energy supplied to their facilities. Ukrinterenergo was forced to expend extensive resources to provide service to Donbass and other entities, resulting in the loss of multi-million dollar contracts and accumulating legal expenses protecting itself in court.

Sergey Petrov

Sergey Petrov

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