We estimate that the potential losses to Ukraine’s balance of payments, as a result of Ukrainian enterprises taken over by separatists in the occupied territories, could amount to US$2.1-2.5bn in 2017. However, several mitigating factors could reduce these losses to US$1.2-1.4bn.

One of the primary mitigating effects could come from Ukraine’s lower imports of coking coal consumed by steel mills and coke plants located in the temporarily uncontrolled territories. This will be further enhanced by higher prices for coking coal, which we expect to grow 40-50% to an average of $165-170/t in 2017. This could result in US$300-400m savings for the national trade balance.

Furthermore, we expect Ukrainian TPPs to reduce their consumption of anthracite by 40-50% to 4.5-5.5m ton, one of the key causes being the transfer of power blocks of PJSC "Centrenergo" from using anthracite to using gas coal. This could lead to US$400-500m savings. Over the longer term, one or two years, Ukrainian TPPs could abandon burning anthracite, and we estimate such a conversion as highly likely. According to known technological parameters, anthracite-burning power blocks in Ukraine are specifically designed to use Donbass anthracites, while using coal from other regions is possible as a mix component only. Only the reconstruction of power blocks could critically alter the requirements for consumed coal fuel.

Finally, losses in steel exports should be partially offset by additional exports of iron ore which were previously supplied to steel mills in the uncontrolled territories. Even factoring in volume losses, sea port bottlenecks and additional price discounts in external spot markets, as much as US$150-200m could be offset.