Invest-Gazeta, Kiev, in Russian 13 Jan 04; p 35
BBC Monitoring Service, UK, in English, Jan 20, 2004

The key business players in Ukraine's industrial Donetsk Region are Rinat Akhmetov, Serhiy Taruta (head of the Industrial Union of Donbas) and former Soviet-time directors of local enterprises, a Ukrainian business weekly has said. These three groups have redistributed their assets among themselves and now monopolize mining and metal production in the region. The article detailed this process and argued that the groups are now in a position to extend their acquisitions throughout Ukraine and beyond.

The following is the text of the article by Vitaliy Kisel, published by the Ukrainian newspaper Invest Gazeta on 13 January under the title "A house that is becoming crowded"; subheadings have been inserted editorially:

Last year was, in many ways, a landmark for the Donetsk business elite. Several centres of influence finally crystallized from the concept, so current among people in the capital, of a "unified Donetsk financial-industrial group", and they carried out among themselves a substantial redistribution of the industrial assets belonging to them.

This applies primarily to the resale of shares in companies belonging to the Industrial Union of Donbas corporation [ISD] to System Capital Management [SCM], a company that is controlled by Rinat Akhmetov. The final division of business between the two huge Donetsk financial-industrial groups inside the region has led to yet another irreversible process - the expansion of spheres of influence beyond Donbas [area around Donetsk] and even outside Ukraine.

Industrial Union of Donbas sells out to System Capital Management

The big redistribution of assets between ISD and SCM started back in April last year with the sale to Rinat Akhmetov's businesses of ISD's shareholding in Azovstal [Azov Steel], one of the region's largest steelworks. Although several of the media have already dubbed this process a major split in the "Donetsk clan", the resale of the steelworks was a totally natural process.

This is how Serhiy Taruta, the chairman of the ISD board of directors, commented on the deal in an interview with the weekly Biznes: "Some of the shares in Azovstal were bought by us, and some by SCM. At that time, our partners did not have their own management company, while we had quite a lot of experience of managing industrial assets. So the ISD corporation was granted the right to manage the consolidated shareholding in the company."

It is obvious that disagreements may have arisen at some time between the managements of the two groups over the operations of the steelworks they controlled. To avoid them, ISD decided to relinquish its interest to its partners in SCM.

The sale of Azovstal invariably led to ISD's withdrawal from a number of other companies that were connected with the steelworks, in one way or another, by the unified cycle of production and sales. System Capital Management gained control of the main coke producer for the steelworks (the Markokhim open joint-stock company), one of the ore suppliers (the Central ore-dressing plant in Dnipropetrovsk Region) and two of the largest consumers of Azovstal's output (the Azovmash [Azov Machinery] open joint-stock company and the Khartsyzk tube and pipe works).

But the redistribution of assets between the Donetsk financial-industrial groups did not end there. This is extremely easy to explain. During the turbulent years of massive privatization, the Donetsk companies, either through share purchases or through bankruptcies, concentrated in their hands significant industrial assets in various sectors of the regional economy - from engineering to coke and metal production.

Evidently, there came a moment at which it proved necessary to structure these assets and set up specialized management companies that could efficiently coordinate the production and sales policies of the companies controlled by the Donetsk financial-industrial groups. Apart from SCM, which has undertaken to manage the iron and steel assets, two other entities stand out in Rinat Akhmetov's business interests - the ARS closed joint-stock company and the Ukrvuhillyamash [Ukrainian Coal Machinery] trade and industry company.

One of the numerous coal traders of the early 1990s, ARS developed into a company that coordinated the mining and sales of coking coal, as well as the production of coke. ARS now controls all the coal and coke chemical assets among Rinat Akhmetov's business interests (except Markokhim).

The company also had occasion to deal with investment in the Donbas coal industry. Several years ago, a further area - the production of mining equipment - was hived off from ARS in the form of the Ukrvuhillyamash trade and industry company. This company now coordinates the activities of the seven producers of mining equipment in Ukraine and Russia that have, at various times, been taken over by the Donetsk financial-industrial groups.

"Red directors" hang on

Against the background of the regrouping of forces between the business environment connected with Rinat Akhmetov and ISD, which has now lost something of its "regional colouring", other groups in the region have not lost their influence. The reference here is to members of the "red directorate", who have managed to retain their influence on individual major companies in the region. Among them, one can recall [former Donetsk mayor and acting prime minister, now MP] Yukhym Zvyahilskyy's "brothers-in-arms", who attempted to conquer the heights of power in the capital in the early 1990s.

The former acting prime minister himself has preserved his influence on one of the largest and quite profitable companies in the Ukrainian coal industry - the Zasyadko mine. The mine is currently held by the workforce on a long-term lease, but they have already announced their wish to privatize it soon. MPs Volodymyr Rybak (formerly mayor of Donetsk) and Valentyn Landyk, who controls the Nord group, both of whom are close to Zvyahilskyy [and are members of the progovernment Regions of Ukraine faction], have also maintained their political and economic weight in the region.

Among the members of the "red directorate" who have managed to protect their companies against being swallowed up by the "new Donetsk businessmen", particular note should be taken of MPs Heorhiy Skudar and Volodymyr Boyko [also of the Regions of Ukraine faction]. Back in 1994, the former managed, through exceptional lobbying efforts, to prevent the sale of a Ukrainian industrial giant - the Novokramatorsk engineering works - and to transform it into a closed joint-stock company owned by the workforce. The Mariupol-based Illich integrated metal plant was privatized in a similar way.

Admittedly, unlike Mr Skudar, its head, Volodymyr Boyko, also contrived to set up a local financial-industrial group. In 2002, the Illich metal plant was appointed to manage the state's shares in the Komsomolsk ore directorate (specializing in the production of flux dolomite, which is used in metallurgy). Currently, the Illich metal plant is actively developing its social infrastructure and is also buying up shares in companies not connected with its core business. The metal plant's latest acquisitions include the Mariupol TV company, the municipal airport, the Ay-Danil sanatorium, one of Crimea's largest, and the Mariupol fish cannery, as well as a whole series of other enterprises.

Although relations between the "red directorate" and the major regional financial-industrial groups are often based on equality and fairness, it would be hard to describe them as ideal. This is mainly because companies like the Novokramatorsk engineering works and Mariupol's Illich metal plant are still the "icing on the cake" for big business in Donetsk, and members of the largest regional business groups have already tried, at various times, to obtain control of these giants. So it is not surprising that conflicts periodically arise in the region, such as the "raw material war" between the Illich metal plant and the coke chemical plants, all of which are controlled by the same company, ARS.

"Donetsk clan" expands inside and outside Ukraine

The definitive redistribution of spheres of economic influence in the region is irreversibly leading the "Donetsk clan" to the need to expand its business and buy up assets both in the neighbouring industrial areas and outside Ukraine. In the first case, this is frequently done through ample representation in the power hierarchy in the capital; in the second, it is done because, thanks to their financial resources, major Donetsk corporations like ISD can already compete on equal terms with the world's leading companies.

It is not surprising that the above-mentioned ISD was among the pioneers in the field. After last year's redistribution of property in Donetsk, the corporation's industrial assets "thinned out" noticeably. Admittedly, though, ISD gained a substantial sum, paid by its SCM partners for the shares belonging to IDS. The expansion started in the neighbouring Dnipropetrovsk Region, where, in a protracted struggle with the Pryvat group, the Donetsk corporation managed to win the contests for the sale of shares in the Dniprovskyy integrated iron and steel works named after Dzerzhinskiy and the Dniprovskyy iron and steel works named after Petrovskyy.

Apart from that, ISD chalked up its first solid international success right at the end of last year, when it bought the Dunaferr integrated metallurgical plant in Hungary. The corporation's assets may well be increased soon by another company from the "near abroad" - the Polish integrated iron and steel works Huta Stal, Czestochowa.

Bearing in mind the support of those "powers that be" in Kiev who hail from Donetsk, other Donetsk financial-industrial groups will soon begin to move out of the region. Their gaze is likely to be bent towards neighbouring Dnipropetrovsk Region, if only because the main iron ore-producing areas are concentrated there, and iron ore is the only commodity that the Donetsk business groups lack for full control over the technological sequence "ore - coal - coke - metal". At present, the "Donetsk clan's" assets are represented only by a shareholding in the Central ore-dressing plant, where, admittedly, Akhmetov's SCM is still locked in a protracted battle for ownership.

The "Donetsk clan's" main hopes for acquiring ore assets are pinned on the sale of the state-owned joint-stock company Ukrrudprom [Ukrainian Ore Industry], the privatization of which may start this year. More "icing on the cake" in the neighbouring Dnipropetrovsk Region is still provided by one of the country's largest integrated iron and steel works, Kryvorizhstal [Kryvyy Rih Steel]. It is no mere coincidence that Leman Commodities, a company that is close to Rinat Akhmetov's business environment, has been authorized to sell the plant's output.

Coal mining and the production of mining equipment are further promising areas for the purchase of assets. Here the "Donetsk clan's" gaze is turned towards neighbouring Luhansk Region, despite the rather difficult relations between the two regions' power and business elite. Apart from the Alchevsk integrated metallurgical and coke chemical plant, owned by ISD, the "Donetsk clan" is working quite solidly in Luhansk Region's coal industry. For example, ARS is a strategic partner of several state-owned coal-mining companies, while Ukrvuhillyamash is fighting hard for control of the two major factories producing mining equipment - the Krasnyy Luch and Sverdlovsk engineering works.

Industrial assets of leading Donetsk groups[The article concludes with a chart showing the assets of Rinat Akhmetov, ISD and the "red directorate" as follows:]

1. Business environment of Rinat Akhmetov
System Capital Management:
\· \·Kerch integrated iron and steel works
\· \·Yenakiyeve iron and steel works
\· Azovstal integrated iron and steel works
\· Druzhkivka ore directorate
\· Silur open joint-stock company
\· Central ore-dressing plant
\· Khartsyzk tube and pipe works
\· Markokhim open joint-stock company
\· Azovmash open joint-stock company
ARS closed joint-stock company:
\·Coke chemistry:
\· \·Avdiyivka coke chemical plant
\· \·Zaporizhkoks [Zaporizhzhya Coke] open joint-stock company
\· Donetskkoks [Donetsk Coke] open joint-stock company
\· Koksan closed joint-stock company
\· Horlivka coke chemical plant
\· Kharkiv coke chemical plant
Coal mining and enrichment:
\· \·Krasnodonvuhillya [Krasnodon Coal]
\· \·Dobropillyavuhillya [Dobropillya Coal]
\· Krasnoarmiyskvuhillya [Krasnoarmiysk Coal]
\· Makiyivvuhillya [Makiyivka Coal]
\· Komsomolets Donbasa
\· Dobropilska central enrichment plant
\· Oktyabrska central enrichment plant
Ukrvuhillyamash trade and industry company:
\· \·Druzhkivka engineering works
\· \·Horlivka engineering works
\· Novhorodskyy engineering works
\· \·Donetskhormash
\· \·Donetsk power works
\· Kamensk engineering works (Russia)
\· Shakhty engineering works (Russia)
\· Krasnyy Luch engineering works (Luhansk Region)
\· Sverdlovsk engineering works (Luhansk Region)
2. ISD corporation - Serhiy Taruta
Metallurgy:
\· \·Kuybyshev integrated iron and steel works, Kramatorsk
\· \·Alchevsk integrated iron and steel works
\· Alchevsk coke chemical plant
\· Dniprovskyy tube and pipe works
\· Enerhomashspetsstal [Power machinery special steel]
\· \·Dniprovskyy iron and steel works named after Dzerzhinskiy (Dnipropetrovsk Region)
\· \·Dniprovskyy iron and steel works named after Petrovskyy (Dnipropetrovsk Region)
\· Dunaferr integrated metallurgical plant (Hungary)
Coal industry:
\· \·Krasnolimanska coal company
\· \·Donetsk Industrial Union (strategic partnership with a number of coal-mining companies)
Engineering:
\· \·Slovyansk heavy engineering works
\· \·Snezhnyanskkhimmash [Snezhnyansk chemical engineering]
\· Starokramatorsk heavy engineering works
3. "Red directorate"
Yukhym Zvyahilskyy: Zasyadko mine
Valentyn Landyk: Nord group
Volodymyr Boyko:
Illich integrated metal plant, Mariupol
Donetsk chemical-metallurgical plant
Komsomolsk ore directorate
Heorhiy Skudar: Novokramatorsk engineering works
Mykola Yankovskyy: Stirol concern