Richest Ukrainian Walks $13 Billion Tightrope

Each day at noon, hundreds of thousands of factory workers in Ukraine’s rebel hotbed pause as sirens blare for three minutes, a behavioral tool Rinat Akhmetov is using to help guard the country’s largest fortune.

The daily signal of defiance against pro-Russian militias and pay raises throughout his companies are just some of the measures the billionaire is taking to rally support for the national government in the Donbas industrial basin, where the majority of his 300,000 workers live. Most of them backed the revolt when the fighting began three months ago. Not anymore, according to company officials.

“Now 99 percent of the workforce correctly understands the events that are happening and supports the principle that Donbas is part of Ukraine,” Enver Tskitishvili, who runs the Azovstal mill, a unit of Akhmetov’s Metinvest steel producer, said in his office in the port city of Mariupol. Donbas, the heart of the Soviet coal industry, covers the Donetsk and Luhansk regions along Ukraine’s border with Russia.

Akhmetov, worth $13.2 billion according to the Bloomberg Billionaire Index, is walking a fine line between officials in Kiev who deposed his former ally, Kremlin-backed President Viktor Yanukovych, and secessionists in their native Donetsk who now call him “enemy.” For weeks, Akhmetov, 47, kept out as separatists seized buildings and claimed autonomy. Then in May he declared his opposition to the uprising and vowed to help end it. His efforts may prove critical to the attempts by Ukraine’s new president, Petro Poroshenko, 48, to re-establish control.

Cease-Fire Ends

Ukrainian government forces resumed their campaign against rebels in the easternmost regions today after Poroshenko ended a cease-fire first announced on June 20, citing more than 100 violations by militias. Fighting in Donetsk and and Luhansk has already claimed hundreds of lives.

“Akhmetov is taking a range of measures against us,” Andrei Purgin, deputy premier of the self-declared Donetsk People’s Republic, said in an interview in the regional capital building in Donetsk that his forces have occupied since March. “His TV stations and newspapers are working against us,” Purgin said after talks with militia chiefs on how best to distribute a cache of Kalashnikov assault rifles.

Another separatist leader, Denis Pushilin, has threatened to “nationalize” Akhmetov’s assets in Donbas, which include steel mills, coal mines, chemical plants and power stations. Akhmetov temporarily relocated to Kiev after an armed mob surrounded his residence in May. The billionaire didn’t respond immediately to requests for comment sent by e-mail to his holding company, Donetsk-based System Capital Management.

Soccer Bomb

Still, the new government remains suspicious of the tycoon because he was closely tied to Yanukovych, who fled to Russia amid bloody protests in Kiev in February, and waited too long to declare his loyalty, said Yuriy Yakymenko, head of political studies at the Razumkov Center research group in Kiev.

“If this resistance in the Donbas had started sooner, we could have avoided huge human losses and financial expenditures,” Yakymenko said. “For that, we would have needed those who have influence in the Donbas to use it.”

Akhmetov, whose father and older brother were coal miners, got his start in business after the collapse of the Soviet Union trading coal with Akhat Bragin, who was accused by a local police chief in Donetsk of having connections to organized crime. Bragin denied the claim before he was killed in an explosion at the stadium of his soccer club, Shakhtar Donetsk, during a match in 1995. Akhmetov, who was Bragin’s deputy at the club, became president after the attack and now owns the team, which won the UEFA Cup in 2009.

Privatization Bonanza

After then-premier Yanukovych lost the presidential election of 2004 in what became known as the Orange Revolution, the new government annulled state asset sales that were held in the months before the vote, including Akhmetov’s purchase, with partners, of Kryvorizhstal, Ukraine’s largest steel mill by output, for $800 million. A year later, billionaire Lakshmi Mittal’s steelmaker agreed to pay $4.8 billion for the mill.

After Yanukovych became president in 2010, in a campaign Akhmetov helped fund, the billionaire’s DTEK Holdings BV won five government auctions for some of the country’s biggest power generators and distributors for about $600 million, two as the sole bidder. That gave the billionaire control of 70 percent of Ukraine’s thermal output and boosted his wealth in the six months through April 2012 by $3 billion, according to Bloomberg calculations. At the time, he was a member of parliament in Yanukovych’s Party of Regions.

Money Talks

“Rinat Akhmetov could have become a hero for Donbas, but instead he became its enemy,” Pushilin, the separatist leader in Donetsk, told reporters in Moscow on June 20. “He supports the Kiev regime.”

President Poroshenko’s spokesman, Sviatoslav Tsegolko, declined to comment immediately on Akhmetov’s role in the government’s campaign to halt the revolt in eastern Ukraine.

To gain the confidence of his workers and boost morale, Akhmetov has raised all salaries by about 20 percent and started a bonus program for employees in conflict zones who agree to help patrol the streets with local police, according to the company.

The average wage at Metinvest, which produced 12.5 million tons of steel last year, or about a third of the country’s output, is 5,264 hryvnia ($450) a month, about 53 percent more than the national average, according to the company. Workers can earn another $25 a day through the patrol program.

‘Criminal Behavior’

Those incentives have already paid off in Mariupol, a city of half a million people on the Sea of Azov that was recaptured by government forces on June 13, a month after Akhmetov announced his opposition to the rebels.

Lawlessness spread after a government offensive failed to dislodge militants on May 9, prompting Metinvest, Mariupol’s largest employer, to call on its workers and the population as a whole to help secure the streets. More than 33,000 people signed up to join unarmed patrols alongside police officers in one week alone, according to company officials.

“In the beginning, I was keen for us to split off and join Russia,” Yevgeny Slavgorodskiy, a 37-year metal worker, said as he fastened a red patrol badge around his arm outside a police station in the city center. He said he changed his mind after he tried to talk to a group of separatists and was shooed away at the barrel of a gun. “That’s how I understood that these people are capable of criminal behavior.”

‘Don’t Read’

Metinvest’s economic importance to Mariupol is unrivaled. Its two iron and steel factories in the city, Azovstal and Ilyich, employ more than 45,000 people, almost 10 percent of the population. Ilyich, the largest mill in Ukraine by workforce, was named after Vladimir Ilyich Lenin, the founder of the Soviet Union, and stretches for 10 kilometers.

Through factory-floor meetings, e-mails and in-house publications, managers make sure every employee is educated on the dangers of separatism, said Dmitry Cherkez, a deputy department head at Ilyich.

“We say to people: don’t read the Internet too often, don’t pay much attention to what people say on the bus,” Cherkez said in his workshop, which is filled with vats of liquid metal and adorned with paintings of storks and boats.

The factories in Mariupol provide a semblance of normalcy in an area of Ukraine where battle lines are blurred. Still, Metinvest’s enterprises remain vulnerable to sabotage, according to Yuriy Zinchenko, Ilyich’s director.

Fear, Threats

Insurgents have twice blocked a rail line supplying four Metinvest factories, including Ilyich, Zinchenko said. If the furnaces are starved of ore for more than a few days, the whole plant would have to be closed, threatening thousands of jobs.

“We managed to convince these armed people through negotiations that their actions threaten to shut down the output of the entire region,” Zinchenko said.

The conflict is impacting business in the region in a myriad of ways, including basic fear, Metinvest Chief Executive Officer Yuriy Ryzhenkov said in an interview.

Banks are afraid to lend, so pre-export financing is harder to get, and foreigners are reluctant to travel to the region, which can paralyze investment projects that require imported technology, Ryzhenkov said in his new office in Mariupol, where he and his management team have been working to escape the violence in Donetsk, 100 kilometers to the north.

Shipments Redirected

The company is also struggling with the loss of its main port, in Sevastopol, which is part of the Crimea region that Russia annexed in March. Metinvest, which reported revenue of $12.8 billion last year, exports as much as 80 percent of its production and had to redirect most of its seaborne shipments through the port at Mariupol, which isn’t deep enough to accomodate many types of ships, Ryzhenkov said.

While Akhmetov is in open confrontation with the rebels, his managers on the ground are having to negotiate with militias to avoid total shutdown.

At Yenakievo, Yanukovych’s hometown, a giant sign with the name of Akhmetov’s plant has separatist slogans scrawled on it in red. A minute’s drive from the factory, in the local administration building, rebel official Sergei Sverchkov is coordinating aid supplies to the besieged town of Slovyansk.

Akhmetov’s factory managers in Yenakievo agreed when Sverchkov, as a rebel representative, asked them to provide a corporate resort for refugees from the fighting, Sverchkov said. Company officials denied any cooperation with the insurgents.

‘They Come’

Still, the management has to stay in contact with the secessionists to prevent them from entering factories to forcibly enlist workers to their cause, according to Ryzhenkov, the Metinvest CEO.

“They come and say, ‘Give us your people to fight,’” Ryzhenkov said. “We convince them not to, explaining that if that happens, production will stop, something that didn’t even happen during the Great Patriotic War,” he said, referring to World War Two.

It’s a life and death struggle, literally and financially, and critics of Akhmetov shouldn’t doubt his resolve to end this uprising peaceably, he said.

“We really are fighting them,” Ryzhenkov said. “We hope this will come to an end tomorrow, but we are trying to make sure that even if it continues for several years, we can keep the company’s operations together.”

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