(Bloomberg) -- From her office across from the wind-lashed docks and idle cranes of Berdyansk Commercial Sea Port in southeastern Ukraine, new director Olga Saminina is frank about its prospects: Zero, without state support and new clients.
Volumes have fallen tenfold, to 450,000 tons of cargo per year from an average 4.5 million tons before 2014, according to Saminina, a direct result of the conflict with Russian-backed separatists 100 kilometers (62 miles) to the east, which for almost eight years has disrupted transport links and squeezed access to the sea. The port mostly handled metals, coal, petroleum and grain.
Mariupol — another Sea of Azov port that’s closer to the separatist fighting but has major steel and grain producers at its doorstep — has also suffered heavily. Throughput roughly halved from 13 million tons in 2013 to a low of 5.8 million in 2019.
“I have a five-year contract, but I could be dismissed at any moment,” said Saminina, 46. Still, she added dryly, “I don’t think there were a lot of volunteers for the job.”
After just six weeks she’s putting together a strategy to strengthen the port also for potential privatization, and said she is optimistic about that track. In Mariupol, the port’s businesses are starting to invest, too.
Yet the damage since Russia annexed Crimea and supported separatists in Ukraine’s eastern Donbas region points to the array of options Russia’s President Vladimir Putin has at hand as he applies pressure on both Kyiv and the West, short of a high risk, full invasion aimed at seizing swathes of territory.
A limited assault seeking to damage infrastructure and communications, or even intensification of the hybrid warfare underway in Donbas, would weaken an already struggling economy, jeopardize emerging efforts to adapt, and deepen frustration with President Volodymyr Zelenskiy’s administration.
Last week the U.K. said — without offering evidence — that Russia was plotting to promote instability and install a pro-Moscow leadership in Kyiv, an allegation the Kremlin dismissed as fabricated. Putin has also repeatedly denied he plans to invade Ukraine.
Were the post 2014 collapse of traffic seen at Berdyansk and Mariupol to hit Ukraine’s main ports around Odessa, on the Black Sea, the result would be catastrophic. As much as 70% of Ukraine’s exports and imports go by sea and the Odessa region’s ports handle three quarters of that. Ukraine mostly ships by sea to and from Asia, the Middle East, Africa and the Americas.
“I would not like even to consider the same impact on Odessa,” said Yuriy Vaskov, Ukraine’s deputy minister for infrastructure and a former general director of the city’s port. He does not believe an invasion on the scale needed would be possible. He also served as chief executive of the company that oversees all 18 of the country’s ports — six of them now under Russian control in Crimea.
Speaking at his office in Kyiv, Vaskov was about to head for Berdyansk to help with the turnaround effort. The principle, he said, is for the state to overcome private sector hesitation about investing by leading from the front. He just started a project to dredge the harbor, so bigger ships would be able to use the port, making it more commercially attractive. Read more: Putin’s Troops Wouldn’t Get Cheers in This Once Pro-Russia City
The mechanics of Ukraine’s economy has its origins in the Soviet-built network of rail and sea links that connected the nation’s heavy and agricultural industries to raw materials and markets. Though under different ownership, that system remains. Some of its major hubs and junctions — in Donetsk, Lugansk, Kharkiv, Mariupol and Odessa — were targets of attempted pro-Russia takeovers in 2014.
Much of what was shipped from Ukraine’s side of the Sea of Azov before the war came from the country’s largest steel producer, Metinvest BV, controlled by Ukraine’s richest so-called oligarch, Rinat Akhmetov. When the company lost control of the coal mines and factories it had around the cities of Donetsk and Lugansk, now under separatist control, Mariupol’s port lost that business.
Metinvest’s two Mariupol iron and steel plants — Azovstal and Ilyich — still ship from the city’s port. But the rail connection from the north ran through Donetsk and was cut. As a result, said Chief Executive Officer Yuriy Ryzhenkov, getting cargo to the docks from factories still in Ukrainian controlled territory often required so large a diversion that it was cheaper to send them direct to the Black Sea, bypassing both Mariupol and Berdyansk.
It took until 2018 to expand a secondary rail route from the north so it could deliver the coal and ore the two plants need, says Ryzhenkov. Today, their output is back to about 9 million tons per year, but transport costs are higher.
The Kerch Bridge that Putin built to join the Russian mainland to Crimea contributes to the squeeze. At 35 meters, it’s too low for the 50,000-ton ships Metinvest used to load with pig iron to send to the U.S. Now the company uses 15,000- to 20,000-ton vessels, leased on long contracts because they first have their tops cut off to fit. That, too, boosted costs and made shipping via Berdyansk uneconomic, said Ryzhenkov.
“The problem with the steel industry is that at the end of the day every dollar counts,” he said. “If you are not in the market to have the lowest cost, you are out of the market.”
None of this has stopped him investing in his Mariupol plants, both within Grad rocket range from the separatist areas should fighting escalate. Since 2014, the company spent $170 million on air filters to cut pollution, according to Ryzhenkov, although poor air quality caused by the aging plants remains a chronic concern in the city.
More filters are to come, he said. A new $1 billion cold rolling facility is under construction and should start production in 2024. A project to replace blast furnaces with modern electric arc technology would follow.
Even a minor Russian incursion could destroy these investments, but having decided not to close the plants in 2015, the only strategy is to keep going, according to Ryzhenkov. “I cannot assess the severity of the political risk we have,” he said. “But if we don’t invest now, we lose the option to develop once this political risk is gone, if it is there.”
Read more: Ukraine’s Frontline Civilians Still Think War With Russia Won’t Come
Other companies have begun to adapt, too. Pavel Plotnikov and a group of friends had been working at Mariupol’s massive Azovmash factory, producing railway freight cars whose primary market was Russia. In 2015, output plummeted and thousands of employees were made redundant. Once among the world’s largest producers of rail cars, the site is now a wasteland.
Already looking for sidelines before the war, the group had gone into the grain shipping business. The war hit hard. Part of their clientele had again been Russian — a majority in the case of ship repair. Multinationals who’ve since left represented 80% of the business of the group’s grain division, he said.
Here, again, the Kerch bridge is a challenge. The combination of high winds and Russian security checks mean even smaller ships used for grain can lose days waiting to enter the Sea of Azov, raising costs and insurance rates, according to Anton Shapran, who runs Maritime Logistics LLC, the group’s shipping arm.
They were rescued by the global boom in commodities and transport markets after the worst of the Covid-19 pandemic, developing new routes and services to Europe.
“Of course, if there were peace (with Russia) it would be a colossal help,” but they’re adapting to lower costs, said Shapran. The bags he had packed almost eight years ago, when just a few lightly armed volunteers stood between Russian tanks and the city, today remain empty. “The fear we had in 2015 is gone.”
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