Ukraine Faces a Double Threat if Russia Takes Pokrovsk

The latest Russian offensive in Donetsk, in eastern Ukraine, threatens to finally topple the city of Pokrovsk—and that carries both military and economic risks for a beleaguered Ukraine already bracing for its most challenging winter of the war.

Pokrovsk, a once-vibrant city of 80,000 people, is the object of a Russian encircling move that began in July and is creeping within miles of the city as every day passes. The city has served as a key logistics and transportation hub for Ukrainian military operations in eastern Ukraine and is the gateway to conquering the rest of Donetsk Oblast—and potentially on to even bigger prizes such as Dnipro, Ukraine’s fourth-largest city before the war.

But Pokrovsk’s fall could have an even more insidious impact on Ukraine’s ability to keep fighting: The city is the source of most of the coal used for the country’s steel and iron industry, once the backbone of the Ukrainian economy and still its second-largest sector, though production has fallen to less than one-third of its pre-war levels. That metallurgical coal is needed to produce pig iron, which is what feeds the majority of Ukraine’s old steel furnaces and a significant chunk of its industrial exports. A healthy steel industry also pays a big share of Ukraine’s tax take, helping fund an economy that operates hand-to-mouth these days.

“Without steel plants, the Ukrainian economy will die. It is a very, very important part of the economy,” said Stanislav Zinchenko, chief executive of GMK Center, a Ukraine-based industrial consultancy.

This week, the Russian army continued nibbling away to the southeast of Pokrovsk, after already having shelled and battered the town from the east. Russian forces are trying to step up attacks now, before muddy weather in the fall and a lack of tree cover makes both mechanized and infantry assaults tougher. Experts say the fight for Pokrovsk could end up taking months, with a siege similar to the monthslong battle for Bakhmut, another key Ukrainian town further east.

While Pokrovsk has already lost some of its value as a Ukrainian transit hub, with roads to the north and east all but unviable, it still serves as a check to further Russian conquests in Donetsk.

The city’s loss “would be operationally significant, but much depends on the price that the Ukrainian military exacts” from Russian forces in the upcoming battle, said Michael Kofman, a senior fellow in the Russia and Eurasia Program at the Carnegie Endowment for International Peace. “The most important consideration is that it opens up a path for Russian forces to push further north and west.”

If the city does fall, and Russian forces retain momentum, it could serve as a springboard for further Russian advances, Kofman said, because it would then be used by Russian forces and it would be harder to establish a new line of defense to protect the remaining Ukrainian industrial base further west.

“Once Pokrovsk is lost, until Pavlohrad, there are fewer suitable areas to anchor a line of defense,” he said.

If Russian forces do get to the west of Pokrovsk, there will be another concern beyond the open road to Dnipro: the risk to Ukraine’s main source of metallurgical coal, which is mined nearby, even during wartime.

For Ukraine’s mostly old-school blast furnaces, coking coal is a key part of making the iron that is used to make steel. Without cheap local supplies of coking coal, Ukraine will have little choice but to turn to even more volumes of pricier imports. That might not mean a halving of Ukraine’s remaining national steel production as some predict, said Zinchenko, but it will mean even more difficulty competing in a global steel market that is already distorted by massive Chinese overcapacity and razor-thin margins.

“It is possible to physically ensure operations, but there is a question with economic feasibility. Ukrainian steelmakers do not have such profit margins that would allow them to pay more, so producers would have to limit exports,” he said. For a sector that accounts for almost 6 percent of Ukraine’s GDP, and more than twice that in terms of exports, the economic threat from Russia’s advance is real.

There are plenty of countries increasing their exports of metallurgical coal, including to Ukraine, such as Australia and the United States. Metallurgical coal exports by the United States were up 13 percent in the first half of the year, including a big jump in the volumes shipped to Ukraine. Sources in the coal industry said that trend continued in August, driven apparently by large volumes of coking coal exports from U.S. mines owned by Metinvest, the Ukrainian firm that operates the Pokrovsk mine and a number of steel mills. (Metinvest declined to comment, though it did share this insightful interview.)

But even with sources of the key raw material available on global markets, there remain a couple of problems for Ukraine. First, imports from afar come by ship, and the Black Sea has gotten more dangerous lately for merchant shipping thanks to a redoubled Russian effort to interdict Ukraine’s economic lifelines, from grain exports to mineral imports.

Second, the European Union, despite years of rhetoric about financially assisting Ukraine, still maintains some distorting trade policies that actually favor Russian iron, even during wartime, over Ukraine’s exports of the same product.

“Even right now, we cannot be competitive on pig iron with Russia’s exports, but with imported coke and coking coal, nobody will buy pig iron from us,” Zinchenko said. “It will be a huge problem for Ukraine.”

And that’s not even considering soon-to-be-introduced EU policies such as a border-adjustment tax, meant to penalize carbon-intensive imports into the economic bloc. Currently, Ukraine’s old-fashioned iron and steel industries are anything but green, and they could face a billion-euro export hit by the end of the decade.

But the war, and the threat to the main source of metallurgical coal, might just galvanize a minirevolution in Ukrainian steelmaking that could solve both the coal problem and the carbon tariffs in one fell swoop, Zinchenko said.

Ukraine can’t take a page from the U.S. steel playbook and run its steel mills on leaner, greener scrap-fed electric arc furnaces: The country has little scrap metal available, and Russia destroyed most of its power grid. But it can make pig iron without using coal by tapping plentiful supplies of natural gas or nuclear power to reduce mountains of local iron ore to feed its old blast-oven furnaces.

That would make Ukraine’s all-important steel sector both cleaner and more resilient. But like most plans in Ukraine these days, Zinchenko said that’s one that has to be left until “after the war.”