Reading Time: 15 minutes

Since March 2014, the rebels of the Donetsk People’s Republic (DPR) and Luhansk People’s Republic (LPR) have stolen over 50 state-owned mines, raided military-owned companies and looted foreign and Ukrainian-owned businesses.

They have claimed that all businesses on the occupied territory belong to them. At first rebels wanted to nationalize industry and power generation, bringing them into the lap of the Republic, severing all links with Ukraine and creating a self-sufficient state.

But this did not happen.

Today, small and medium businesses are destroyed, stolen or forced to register in the new Republic. But the giant factories owned by oligarchs remain, for the most part, unmolested. Kyiv buys coal and electricity from the separatist region, and supplies the territory with gas and water. Companies on rebel land who pay taxes in Ukraine can trade between the borders, but to operate in the separatist zone, firms must pay taxes to the rebels. While business contributes to financing both Kyiv and Donetsk, many retirees now receive two pensions.

Yet gunfire is still heard every day – and casualties on both sides continue to rise.
With Russia reducing its financial assistance for the zone since mid-2015, a dual-state has emerged of mutually-dependent adversaries, locked in an abusive marriage, with little sign of divorce or reconciliation.

Oligarchs: too big to hijack

Donbass is Ukraine’s center of heavy industry and coal mining, which includes Soviet-era metal, transport and fertilizer factories and power stations. It is home to massive Ukrainian companies. Metal manufacturer Metinvest and mining and energy group DTEK are both owned by Ukraine’s richest man, 49 year-old Rinat Akhmetov. Another giant operation is the iron and steelworks in the town of Alchevsk run by the Industrial Union of Donbass (IUD), bought in 2010 by Russian investors, such as metal trading magnate Alexander Katunin.

Metallurgy in Ukraine generates over 40 per cent of all foreign currency inflows and employs more than 200,000 people in crushing, smelting and shaping. Centred on the Donbass, this makes region a major blacksmith of Europe.

But Donbass was reliant on state subsidies, taking more out of the Ukrainian state than contributing, according to Ukrainian officials. Many of its factories are decrepit and inefficient – and its economy was dependent on this state injection of cash and cheap gas from Russia.

“By and large this is a useless rust belt,”

The Donbass was run by oligarchs who made dubious deals with the state and Russia to maintain regional power and keep large numbers of people in jobs, especially in mining

Last year, DPR and LPR leaders proclaimed their desire to nationalize heavy industry, much of which is owned by Russians and Ukrainians with close ties to Moscow. These industries are labor-intensive and low-profit and the rebels have no expertise to manage such risky enterprises. But today these industrial giants remain registered in Kyiv and pay taxes to the Ukrainian state.

The Kremlin has also allegedly forbidden their takeover. One business analyst tells us leading figures from enterprises in occupied territories visit Moscow each month to negotiate deals directly with an official in the presidential administration, circumventing local rebel leaders. However Jock Mendoza-Wilson, Director of International and Investor Relations at Akhmetov’s SCM Holding states: “To the best of my knowledge, this is not happening with SCM.”
The rebels grant this ownership status their “silent approval”, according to ex-governor of Donetsk Sergiy Taruta.

Now there is a hybrid economy of state-sanctioned private ownership. One Donetsk business analyst calls Akhmetov’s giant Yenakiieve Steel mill a “dual property” between the oligarch’s company Metinvest and the DPR. “De jure, it is a Ukrainian company,” says the analyst, “but once in a while DPR President Alexander Zaharchenko visits and gives out some orders.”

The message from Moscow to the rebels seems to be “take what you can and behave like organized criminals” argues Aslund. “They are allowed to take over smaller enterprises and state companies, but must leave the big companies alone.”

Most industrial giants are operating at a reduced level or sporadically, when they have the necessary raw materials and can transport their goods through the region’s wrecked infrastructure.

But they are haemorrhaging money. Rinat Akhmetov’s SCM posted a net loss of 1.84 billion USD in 2014. “Akhmetov and the other oligarchs have bled enormously,” says Aslund.

Ukraine has a shortage of thermal coal, which it needs as fuel for the country’s power stations this winter. The Ministry of Coal and Mining has been importing from South Africa, Russia and the separatist zone. This means cooperating with the rebels and risking financing what Kyiv calls “terrorism”.

Although the coal passes from occupied Ukraine, Kyiv argues its power generators are buying coal from five businesses registered in its territory. These include DTEK Trading, a vertically integrated energy company owned by Akhmetov, and Energoinvest Trading, a company close to the ousted President Victor Yanukovich.

Yet the separatists claim they are leading negotiations for the purchase and distribution of coal, and will not allow transport until their demands are met. The DPR asked Kyiv to lift the blockade on providing petroleum products to the Republic in exchange for coal, while DPR President Alexander Zaharchenko was not satisfied with the price of 50 USD per tonne – significantly cheaper than coal imported from abroad

At the beginning of October, the separatist transport minister Semen Kuzmenko began permitting the exchange of coal, claiming that Ukrainian authorities had “partially” met their demands

However Akhmetov’s DTEK states the company mines, processes and then sells on the coal independent from the authorities of the DPR and LPR, while other companies operate with mines registered in the Ukraine.

“Perhaps the self-proclaimed authorities receive some money,” says Donetsk Governor Pavlo Zhebrivsky. “I do not know about that, but if some people did, they would bear criminal responsibility, because it would be called ‘financing terrorism’.”
If Kyiv’s money ends up in the pockets of rebels, it creates a legal complication. Pragmatically, however, it means Ukraine, currently in deep recession, can obtain affordable energy.

“I know people are saying we finance terrorists, but Ukraine would need a lot more money to rebuild the entire energy system,”
says Vitaliy Kropachov, ex-owner of a coal mine in Torez, Donetsk.

“We should have bought coal from other markets, but in the end the miners are the same. The [separatists] didn’t bring Russians or Chinese workers [to the Donbass coal mines]. It’s still our people. We still feel that the product is ours.”

Rebels: declaring war on shops

Running an energy infrastructure and generating income is tough without materials, supplies or expertise. This might explain why the rebels are cashing in on a less complex sector: the high street.

During the civil war, staff in the rebel-controlled region at Ukraine’s leading local supermarket chain ATB-Market suffered threats, interrogation and physical abuse. When the banks pulled out of the region in mid-2014, many of its stores continued to operate, using only cash. Soon armed men entered the stores and threatened staff, before stealing money and valuables from the vaults.

When the war entered its most violent stage with the bombing of Donetsk airport, the company removed local employees’ kids to a children’s home on Ukraine territory in Dnipropetrovsk.

In smaller towns in the occupied region, armed men entered the ATB supermarkets and arrested and interrogated store managers. “Sometimes we had to pay a ransom to save people,” says Tatiana Ermakova, ATB representative.

One employee in Luhansk was kept in basement for ten days and beaten by rebels. “When such cases became more frequent, we began to close the shops,” adds Ermakova.

At least 152 of its stores fell under the control of the DPR and LPR. Its distribution centre in Donetsk was wrecked and the company suffered losses of more than 273 million Euro.

But then the stores reopened – under a different name.

In April 2015, Stavros Bagateliya, a former Abkhazian martial arts expert and mercenary, became the director of 48 “rebel” stores operating on former ATB premises. The separatist regime rebranded these “The First Republican Supermarket”, with the logo of a two-headed eagle, similar to the Russian coat of arms. Meanwhile, the leaders of the LPR transformed 20 former ATB stores into shops called ‘People’s’.

Rebels have also “nationalized” Ukrainian DIY superstore, Epicenter, renaming it Galaxy, while Ukrainian Smart-Holding’s 18 hypermarkets, Amstor, have been taken over by a Russian company registered in the DPR as Multitorg. Products are now more expensive in the shops, which are flooded with around 80 per cent of Russian and Belorussian goods.

But in the central high street of Donetsk, one store is still selling strong under new management – lingerie brand Victoria’s Secret.

Online, the firm advertises “everybody’s favourite Black Friday” with two burning flame icons – possibly indicating that prices are ‘hot’, due to discounts of up to 75 per cent are available.

Via social media site VKontakte, the manager Ekaterina Sviridova told The Black Sea the store has “new stuff every week” and confirmed that this is “official Victoria’s Secret merchandise”.

But although it looks and talks like a Victoria’s Secret store, and sells Victoria’s Secret bras, slips and hosiery, the American brand owners are not happy. “This is not an authorized Victoria’s Secret location,” according to Robin Hoffman, spokesman for US parent company, L Brands. “We are currently working with authorities on the matter.”

Foreign business: wrecked, abandoned or seized

Nearly all foreign companies have fled from the occupied zone. Most of their assets have since been destroyed, looted or occupied. Our research shows that the only companies operating in the zone are Ukrainian and Russian.

Although Russia is a sponsor of the breakaway republics, its investors have not been immune to intervention. All the Russian banks operating in the zone complied with Kyiv’s request to close operations in August 2014. Meanwhile, mobile communications company, Kyivstar, jointly owned by a Norwegian-Russian concern, was raided earlier this year. The rebels used the equipment to create their own communications network, branded ‘Fenix’.

German cash-and-carry giant Metro has closed three stores. Its fourth, near Donetsk airport, was destroyed in the heavy fighting that centred on the flashpoint of the airport. French hypermarket Auchan’s one store is now managed by SigmaLend, a company registered in the new republic.

In July 2014, American agricultural giant Cargill’s 40 million USD sunflower seed crushing plant in Donetsk was abandoned and a group of armed men took control. A month later, at the height of the conflict, artillery shells blasted holes in the factory. A Cargill spokesperson told us: “We have had no way of knowing the state of the plant for more than a year.”

All the banks – Russian, French, Austrian, Italian and Ukrainian – closed in mid-2014. The rebels have raided many of the outlets and blown up ATMs, looking for cash.

The only bank open is the rebel-run Republican Central Bank, which has around 100 branches. These have emerged mainly in the seized premises of Ukrainian banks PrivatBank and Oschadbank. They have ATMs and recently launched a bank card.

HOW THE REGIME MAKES MONEY

The rebels face a challenge to build a functioning economy. The war has created an artificial border that splits roads, railways, power infrastructure, water pipes and business networks.

“It creates a wall where there should be no wall,” says Dmitry Churin, research associate at Kyiv-based Eavex Capital. “They are still our people. It’s still our economy. When we look at the bigger picture, the idea just to ‘cut here’ doesn’t work.”

While trade between Ukraine and the separatist republics is a source of cash for some residents, the regime mostly makes its money in three ways.

The leader of the DPR’s security council, Alexander Khodakovsky, has said 70 per cent of the budget comes from Russia, which is used to pay pensions, public sector salaries and welfare payments.

“These are puppet states, managed and financed by Russia,” adds Donetsk Governor Pavlo Zhebrivsky.

But Russia seems to be retreating from its earlier enthusiasm for flooding the zone with charity. Moscow stopped providing free gas as “humanitarian aid” in June, and ended the purchase of coal from the Republic’s mines at the same time. The Russian-backed militants are no longer bombing infrastructure and, since July, industrial production has increased.

“The Russians don’t want to pay much money to this region,” says Anders Aslund.

Flats, cars and houses are taken by the rebels and resold, but metal is the region’s biggest resource. Companies in Donetsk and Luhansk are plundered for scrap.

“Where the enterprises had some valuable assets, all the equipment was exported to Russia,” says Donetsk Governor Pavlo Zhebrivsky. “Where the owners left everything, the companies were robbed and the equipment taken for scrap.”

Mines have also been hit. “In the war much of the equipment keeping the mines alive was destroyed,” says mining union leader Anatoli Akimochkin. “With their help, the miners went down the pit, pumped the water out and ventilated the mine. Without them, the mine is dead.”

The mines are being pilfered with the approval of DPR president Zaharchenko, according to Nikolai Volanco, Independent Union of the Miners of Donbass: “In one mine, Zaharchenko called all the people for a meeting and told them: ‘I will throw out anyone who sells at least a kilogram of metal without my knowledge.’” Business leaders we spoke to argued that scrap metal is now being taken both to Russia and Ukraine.

THREE: TAXATION

To operate in the DPR and LPR, small and medium-sized businesses must pay taxes to the regime. The Republics have set up the semblance of a structured economy of governance. “Taxes are more important than nationalization,” adds one Donetsk business analyst, “as it is much easier for authorities to approach the director or owner and make him pay 20 per cent of his profits to the DPR state [than a takeover].”

But this throws up dilemma for any business-owner in the region: to whom should they pay taxes?

Taxation: hit by both sides

Anna, 55, owns and rents 30 offices and a large basement for a children’s centre in Donetsk, where she and the tenants hid from shelling when the war reached the city in summer 2014. Now she rents to a beauty salon, shops, studios, notaries, and door manufacturers.

“No one has come with guns to us, no one demands anything,” she says. “Last year, from May to October, we saw a big lull in business and rentals because many people left Donetsk to escape the shelling. Since November 2014, many people have returned and now the picture is the same as before the outbreak of hostilities.”

Like other landlords in the area, she says her rents have dropped by more than half and many of her tenants have problems meeting payments. Any money she does receive is under the threat of double taxation.

Companies wanting to trade with Ukraine or use Ukrainian banks must register and pay taxes to Kyiv. However, many of these businesses in the separatist republics must also pay taxes to the leaders of Donetsk or Luhansk. Anna, like many others, is unlucky enough to fall into this category.

“Previously, [the DPR authorities] unnerved us with constant phone calls when required to re-register in the DPR. We deliberated for a long time, trying to understand the new legislation, then we registered as a DPR company,” she says. “Before the hostilities there were some years when our profit was so large, that we even received some dividends. But not now.”

Most businesses that operate in the DPR pay taxes both in Ukraine and in the DPR “because otherwise they would not be able to function” argues Donetsk Governor Pavlo Zhebrivsky.

Although firms are twice penalized, those needing social assistance can double their benefits.

Pensions: rewarded by both sides

Irina is a 63 year-old Donetsk resident, who has re-registered her pension in Mariupol in non-occupied Ukraine. She is one of 70 per cent of the separatist region’s pensioners who receive their payments from the Ukrainian state.

Her daughter withdraws the 72 Euro per month from an ATM in the non-occupied territory, and brings the money over the border.

“That’s not enough – and after paying bills for public utilities I have no money for living,” she says. “That is why I decided to also register my pension in the Donetsk People’s Republic.”

Governor Zhebrivsky has no figures on how many duplicated pensioners there are, nor is he sanctioning them for receiving cash from ‘terrorists’. “We consider those people who live there as Ukrainians, who have become hostages of Putin’s aggressive policy in Ukraine,” he adds.

Now Irina receives a pension in Russian currency from the separatists – of around 52 Euro per month.

“I cannot call this a ‘pension’.” she says. “I call these roubles ‘social assistance’. I’m not ashamed to take money from the DPR. This is a small compensation for shells falling down and exploding near my house.”

Russia: creating a “poisoned chalice” with return of Donbass to Ukraine

After 8,050 have died in the Donbass conflict, Russian-backed rebels are slowly withdrawing heavy weapons from the border regions, but casualty numbers remain constant. Following the seizure of Crimea and the coup in half of the Donetsk and Luhansk Oblasts, Russia’s annexation of further parts of Ukraine is not happening.

Putin’s concept in 2014 of Russia creating “Novorossiya”, a term used during Catherine the Great’s epoch, seems finished for now. Recently this has come to signify a stretch of land from Donbass through Dnipropetrovsk to Odessa to connect Russia to Crimea and Transnistria in Moldova, uniting Russian speakers and undermining the national sovereignty of Ukraine.

“The Russians tried to do in Donbass what they did in Crimea,” says Sergiy Taruta, businessman and ex-Governor of Donetsk Oblast. “But it didn’t work out. Ukraine has concentrated its human, military and international resources.”

The Donbass may be too large, expensive and controversial for Russia to hold. “They will never be independent because [the separatists] do not have an economic base. Even before the war, the Donetsk and Lugansk regions were subsidized,” says Governor Zhebrivsky

There is also the risk of too many Russian soldiers dying if hostilities reignite. Until now, Russia has been coy about how many of its own citizens are “enlisted” in the Donbass region, and how many are volunteers. Even the DPR’s perspective is that Novorossiya can only continue if other Russian-speaking regions in south Ukraine vote in favour of joining the bloc.

Some leaders we spoke to argue that Putin took bad advice on the public reaction to Novorossiya and the Donbass, believing that annexation would be smoother than it has proven to be. “Russia planned a blitzkrieg,” says Vitaliy Sisov, a journalist at Novosti Donbassa. “Either creating Novorossiya or putting pressure on the Ukrainian Government to accept its conditions.”

“It hasn’t happened and now Russia has another problem: what to do with the 2.3 million people living there?” He adds, “They have to be fed.”

A frozen Donbass “imprisoned” between states

There are two alternatives for the future of the region, according to Anders Aslund, senior fellow at the Atlantic Council.

One is a frozen conflict, similar to Russian-backed unrecognised states in Moldova (Transnistria) and Georgia (Abkhazia). But this would make western sanctions against Russia “persist forever”, argues Aslund.

Since the sanctions began last year, Ukrainian trade with Russia has collapsed. In 2013, this trade accounted for between 20 and 30 per cent of all imports and exports through Ukraine. This fell by 30 per cent in 2014 and by almost half in 2015.

“In the modern world, you cannot adjust territories without integration at the borders,” says Dmitry Churin at Eavex Capital. “You cannot force people not to talk to each other or trade with each other’s businesses, because it will be like a prison. Russia and Ukraine have a big border and it is stupid when all trading crashes because of political reasons.”

The beginning of a “normalisation” between the two sides may help Russia ease its sanctions with the west and Ukraine to boost trade with its bigger neighbour. “We can’t live without the Russian Federation,” says Donetsk-based businessman and ex-politician Vitaliy Kropachov. “We buy gas, we sell coal, we have a connected energy system. We need a consensus. It’s either we declare war on Russia and start fighting or we end this terrorist operation and cut a deal.”

A broken Donbass “gifted” to Ukraine

The other alternative is for Russia to “reinsert” occupied Donbass into Ukraine with huge costs for its redevelopment, especially since the rebel leadership appropriated large amounts of real estate and businesses.

This rebels’ position could be empowered by a win in elections planned for the occupied territories of LPR and DPR on 20 February 2016.

Rebel leader of Luhansk Igor Plotnitsky has said: “No one from us want to return to Ukraine and as I understand it, Ukraine doesn’t want us either.”

But Plotnitsky has indicated there is room for compromise, meaning Kyiv may need to grant an amnesty to rebels accused of war crimes and a ‘special status’ for the LPR and DPR. It would also give Ukraine control over its borders.

Such a move could legitimise their institutions and provide semi-independence from Kyiv, but is a possible solution to secure the borders and a create a lasting peace. “We are in a divorce in a three-room apartment,” said Plotnitsky. “Russia from one side, Ukraine from the other and us in the middle.”

Head of DPR Security Alexander Khodakovsky also supports reintegration, but under terms favourable to the Republics – and has said in September he was “not satisfied” with what Kyiv had to offer.

Ongoing negotiations involve the Minsk Contact Group, including representatives of Ukraine, Russia, the Organization for Security and Cooperation in Europe (OSCE), alongside the DPR and LPR. This works in tandem with the ‘Normandy Format’ of German, Russian, Ukrainian and French leaders, who are encouraging a resolution.

But on the street in Donetsk, most residents are sceptical about the effectiveness of the talks in Minsk.

“I consider all peace negotiations finished when the world leaders appear and say: ‘Gentlemen, the war has ended, no one else will shoot!’,” says Oleg, a student. “Because when they start to talk about something in Minsk, the gunfire begins in Donetsk.”

Despite the promise of an armistice, many still see violence as part of daily life. “It is likely that the withdrawal of arms after the some agreements is happening, but in the Kiev District of Donetsk city, there is still shooting every night,” says a manager, Marina.

There is a demand for more practical solutions. “We are tired and want it to finish soon,” says Marina. “It is necessary to prepare for winter, not to engage in conversation. It is not clear whether we have gas, water or electricity. This is what worries me – not the next negotiations, which one are we talking about now? The fifteenth?”

France and Germany are pushing for a compromise where Ukraine retains the Donbass region. But with a deal in place, Russia gifts Ukraine a collapsed infrastructure, a gangster ruling class, a broken economy and a traumatised population, almost half of which are scattered across the rest of the country, Russia and Belorussia.

“The Russians will give Ukraine a poisoned chalice,” says Anders Aslund. “The idea is to make sure that Ukraine fails. This suits Moscow very well – the worse the better.”

The view that the Donbass is no more than an instrument to undermine Ukraine is echoed by Donetsk Governor Pavlo Zhebrivsky.

“A democratically successful Ukraine would mean the death of imperial Russia and Putin’s political death,” he says. “Putin is not ready to leave Ukraine alone. I have a pessimistic attitude to the negotiations. Without the tightening of sanctions against Russia and without the economic collapse of Russia, to say that that peace will come to Ukraine and Donbass means to deceive oneself.”

Zhebrivsky believes Putin is not ready for a situation where borders between Ukraine and Russia “overlap” in the Donetsk region. “Putin wants to do to us something worse than he did to Transnistria,” he says.

The Governor talks in his office in Kramatorsk, 70 km from the makeshift border.

“The shelling became more frequent last night – 15 attacks, before last night – 18 attacks,” he says. “The rebels are accumulating forces near the town of Novoazovsk, near Mariupol [a port in Ukraine]. Therefore, peace is very far from here.”

Donbass may become the region nobody wants, but Ukraine needs to preserve its territorial integrity, becoming de jure a Ukrainian province, but de facto a Russian-backed micro-state.

“Pragmatically, in three years Ukraine could easily live without that territory,” says businessman Vitaliy Kropachov. “But it is ours and nobody can guarantee that once we let it go, other scenarios like this will not take place in other regions. Federalization cannot even be considered. We are a united country.”

This article was financed with the help of journalismfund.eu

Authors: Michael Bird, Lina Vdovii and Yana Tkachenko

Source: theblacksea.eu