Written by 5:00 pm Europe Economy

Ukraine: the $10bn steel plant at the heart of Russia’s economic warfare

The Russians came for the city of Kryviy Rih in the first days of the war, their columns of armoured cars advancing within kilometres of its sprawling Soviet-era steel plant, once coveted by Nazis and oligarchs and, now, Vladimir Putin.

Beaten back, they now menace the central Ukrainian city from some 50km away, occasionally lobbing rockets from afar. The prize, Ukraine’s largest steel mill that ArcelorMittal spent $5bn modernising, is within reach of their rockets, a mere half-hour’s drive from the city.

Russia’s invasion of Ukraine is usually measured by lines on the map — territory lost, cities vanquished, borders erased. But Putin’s war on his neighbour has included a deliberate assault on Ukraine’s industrial heartland, designed to choke its economy and cripple its ability to finance its army and defend itself.

A soldier stands in a shattered plaza with a bombed-out building behind
A Russian serviceman guards an area near the Azovstal steel plant in Mariupol in June © Yuri Kadobnov/AFP/Getty Images

In the east, the Russian army advance destroyed, then occupied, Ukraine’s second-largest steel plant, the Metinvest-owned Azovstal, and its smaller cousin, Ilyich. Its soldiers are still fighting over a Metinvest coking coal plant in the mineral-rich Donetsk region. Russian rockets destroyed the oil refinery at Kremenchuk, taking out almost half of Ukraine’s refining capacity, forcing it to import petrol and diesel from Poland.

Just north of Crimea, the peninsula annexed by Russia in 2014, the invading army has seized Europe’s largest nuclear plant, with six reactors, and they have occupied the city of Kherson, a major shipbuilding centre at the mouth of the Dnipro River.

Casting a shadow over it all is the Russian naval blockade of the three Black Sea ports in Odesa, strangling the conduit through which Ukraine’s most valuable exports — steel, grain and fertiliser — once reached global markets.

“This is a carefully devised plan,” says Alexander Rodnyansky, an economic adviser to Ukraine’s President Volodymyr Zelenskyy. “Ever since its blitzkrieg failed, Russia has moved to the strategy of the slow, painful death by economic means.”

It appears to be working. Ukraine’s gross domestic product will fall by as much as half this year. Its budget deficit is $5bn a month and, by the end of 2022, foreign donors will have spent at least $27bn paying the salaries of Ukrainian public sector workers and soldiers, keeping them warm this winter. The central bank has devalued the currency, the hryvnia, by 25 per cent and is printing more to buy government debt, tipping inflation to over 20 per cent.

“People don’t understand how acute this is, and that we are on the brink of a currency crisis,” says Rodnyansky. If this leads to hyperinflation, “that would be a calamity of unimaginable proportions and we won’t be able to continue the war effort”.

Economic chokehold

Putin is betting that western generosity is not infinite — especially as high gas prices damage domestic economies in the west — and that squeezing Ukraine’s economy will further stretch the limits of how long the west will buoy up Kyiv.

ArcelorMittal’s steel plant in Kryviy Rih is emblematic of the futile attempts by Ukraine to slip out of Russia’s chokehold on the economy, which has accompanied its invasion. After paying $4.8bn to buy it in 2005, ArcelorMittal has invested another $5bn upgrading the sprawling, 7,000ha plant, built on one of the richest iron ore deposits in the world. It had planned to spend another $2.5bn, says the plant’s chief executive Mauro Longobardo. “We were seeing Ukraine moving towards Europe and needed to prepare the facility to be a European facility,” he says.

Line chart of Daily steel output (Kiloton) showing Ukrainian steel production has dropped significantly since Russia’s invasion

Fed by coal trucked in from Kazakhstan via Russia, its four blast furnaces — including one of Europe’s largest — churned out 4.7mn tons of steel a year. Miners dug out 11mn tons of iron ore from a rich seam that runs under the city. It had its own port facilities in Mykolayiv, near the Black Sea, and with 26,000 employees, has become the second-largest industrial employer in Ukraine, sending $6bn in taxes to the state coffers since being acquired in 2005.

Today, the once bustling factory wears a near-deserted look. A single blast furnace was operating last week, producing barely a few thousand tons of steel. In June, the company was forced to cut wages by a third.

Mauro sits in an office chair with a map and Ukrainian flag on the wall behind him
ArcelorMittal’s Kryviy Rih plant CEO Mauro Longobardo says he has done all he can to keep the plant running © Ueslei Marcelino/Reuters

Russia’s forcing of a completely intact steel plant to the verge of a complete shutdown is a case study in economic warfare. Sitting in his office in Kyiv, Longobardo, the Italian CEO recruited to Ukraine by the Indian-British steel magnate Lakshmi Mittal, details the six-month transformation from a bustling and profitable enterprise to a moribund firm waiting for decisions outside its control to return to life.

The defence of Kryviy Rih, which means “crooked horn”, is already the stuff of legend in Ukraine. Despite being Zelenskyy’s hometown, it found itself without any military protection in the early days of the war and was run by Mayor Oleksandr Vilkul, a former vice-prime minister once considered one of Ukraine’s most pro-Russian politicians.

Vilkul, wearing army greens, demonstrates an old detonator with Ukraine flags behind
Oleksandr Vilkul said he grabbed explosives to blow up bridges and a tunnel to slow the Russian advance © Roman Olearchyk/FT

Vilkul, who had worked in the mines as an explosives expert, says he knew the Russians would come for the strategically important city, centrally located with its steel plant and iron ore deposits. So he grabbed explosives from a nearby mine and blew up the bridges and a tunnel on the road to the city. He then blocked a highway with the massive trucks used to carry ore, cutting off a 150-vehicle Russian convoy.

“We defended ourselves with what we could,” he says, showing off a hand-cranked detonator from the 1970s that he had pressed into service. “The lines on the map were moving fast, and someone had to take responsibility.”

At the plant, Longobardo ordered the blast furnaces to be cooled down (a process that takes days) and sent all non-essential staff home. “The enemy was very close — a single . . . bomb could have been catastrophic,” says Valeriy Sorukhan, a foreman.

But the fate of the plant had already been decided far away from Kryviy Rih. In the north, the Ukrainian military had blown up the railway lines from Russia, which normally brought in the coal that heats the furnaces to more than 1,500C. In the south, Russian gunships formed an offshore blockade after the Ukrainians laid down sea mines at the port of Odesa to ward off amphibious assaults.

Smoke billows in the background, with a man on a motorbike in the foreground
Air strikes hit the key Ukrainian port of Odesa in April © Bulent Kilic/AFP/Getty Images

Months later, Longobardo is still unable to revive the plant profitably. He was able to keep the iron ore mines open but, with his own blast furnaces turned off, he had to try to sell the ore. “Same problem — even if you solve the logistics, it’s $100 a ton more expensive,” he says, growing frantic as he recounts the different ways he tried to make the business work by shipping steel and ore via rail to a port in Poland, instead of through the Black Sea. “With all these extra costs I can’t even sell a single ton of steel without losses.”

At one point he was breaking even and then steel prices started falling as the global economy cooled. His product was even less competitive — as much as $120 more than the market price to produce and $130 a ton extra to get to his customer.

It took months, he says, to accept the inevitable. Without the port of Odesa, it made no difference that Kryviy Rih was safe, well-fortified and his steel plant was still standing with his workforce intact. “Without the port, there is no metal industry in Ukraine,” he says. “We have done everything that we could.”

The Kryviy Rih plant still has 26,000 employees on the payroll © Julia Kravchenko/Bloomberg

It turned out that Russia didn’t need to take Kryviy Rih to nearly finish off one of Ukraine’s largest employers and its last remaining major steel plant. With the Mariupol steelworks under Russian control, “we are now one of the biggest taxpayers”, he says. “If we do not produce, there is no money coming to the government.”

Now, Longobardo keeps the single blast furnace running, mostly for local Ukrainian customers, and is waiting either for global prices to recover or the Black Sea blockade to lift. If neither happens, he will have to shut that down too. As for the 26,000 employees still on the payroll, he says the company’s support “can’t be eternal”.

A diplomatic crowbar

The blockade has given Russia not just economic leverage over Ukraine but also a diplomatic crowbar with which to pry loose some of the strict restrictions on its own exports. In August, it started letting ships carrying Ukrainian grain run its naval gauntlet to supply volatile global food markets.

But it is extremely unlikely Russia will allow ships carrying steel or coal to follow — Russian steel is itself blocked from European markets and letting Ukrainian steel out would defeat the purpose of the blockade. Already, Moscow has complained that the west has not eased the pressure on Russian exports (a quid pro quo it expected for letting Ukrainian grain out) and suggested it may not renew the food deal in November.

“We need a lifting of sanctions,” says Gennady Gatilov, Russia’s permanent representative to the UN in Geneva. “We need for the ships to come to the Russian ports and the Russian ships to come to European ports.”

The cost to Ukraine’s economy of the physical destruction from Russia’s missiles and artillery is about $130bn, the Kyiv School of Economics estimated in June, with $26bn in damaged business infrastructure.

“The key is not just the amount of damage, it is that a lot of this destroyed infrastructure was crucial for our export-oriented businesses,” says Taras Kachka, Ukraine’s junior economy minister. “We are trying to maintain our transportation systems, our road and railway functions and, unless we do, our key industries cannot export their goods or receive the inputs they need.”

As the Russian army inches west, the industrialised eastern flank of Ukraine faces a grim choice: either stay put and risk destruction or flee. A vertically integrated steel plant sitting on a seam of iron ore cannot be shifted — for now, the ArcelorMittal facility is stuck. But other factories can be transported elsewhere. Indeed, many in Ukraine are doing just that.

Crossed iron bars by the side of the road
Tank traps outside the Kryviy Rih plant. The front line is only about 50km from the facility © Julia Kochetova/Bloomberg

In May, the 80-year-old Kramatorsk Heavy Machine Tool Plant, which makes wheels for trains, machine lathes and turbines for windmills, decided it was time to move. Russian rockets had landed nearby throughout April and the front line was only about 30km away.

Bit by bit, its 650 employees are now taking apart machines that weigh as much as 30 tons, putting the parts on the back of trucks and reassembling them in an abandoned industrial building 1,500km to the west on the border with Poland. “In the end, we will be stronger, more efficient,” says a manager. “But we will still be angry.”

Additional reporting by Henry Foy in Geneva

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