Russia set to cut funding of proxy “republics” in Donbas in favor of Crimea – media

Russian humanitarian convoy. Photo: mchs.gov.ru 

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Article by: Alya Shandra

The Russian government intends to stop the “humanitarian assistance to certain territories” in favor of financing projects in Crimea and Kaliningrad, with “certain territories” meaning the “Donetsk and Luhansk People’s Republics” in Ukraine’s Donbas, the Russian outlet RBK reported on 15 September citing its sources close to the Kremlin.

RBK wrote that according to a verified protocol of a meeting held with Russia’s Deputy Prime minister Dmitri Kozak on 1 September, Russia’s Finance Ministry was instructed to exclude “to exclude humanitarian assistance to certain territories in 2019–2020 from the draft federal budget for 2018,” “certain territories” being a codename for the “Luhansk and Donetsk People’s Republics,” (“LNR” and “DNR”) two proxy statelets set up with Russian assistance in eastern Ukraine in 2014.

According to the protocol, at the beginning of August on a trip to occupied Crimea, Russian Prime Minister Dmitry Medvedev instructed to provide funding for the “unconditional implementation” of measures for the social-economic development and ensuring transport and information security of  Crimea and Kaliningrad, a Russian city exclave sandwiched between Lithuania and Poland. Particularly, an additional RUB 85 bn ($1.5 mn) is needed for Crimea during 2018-2020 (of which $1 mn should be provided over 2019-2020) to build healthcare and educational facilities, road and waterline repairs etc.

In all, the Russian government needs to find RUB 165 bn ($2.87 mn) for financing its projects in Crimea and Kaliningrad over three years.

Crimea “is ours” and Donbas is not

According to political analyst Aleksei Makarkin, funds are to be distributed in the favor of those regions that Russia does not intend to give away, and Russia is not sure of the future status of the Donbas “republics,” RBK wrote. Director of the Progressive Policy Foundation Oleg Bondarenko told RBK that Crimea needs colossal assistance from Russia and the development of Crimea is a matter of reputation for the Kremlin; like Kaliningrad, the Russian authorities intend to make it a “showcase” for the West. “There are territories of Russia that need active development, and self-proclaimed republics are not the territory of Russia,” argued Bondarenko. However, he was not aware of the reduction in spending on the “LNR” and “DNR.”

The supposed exclusion of “humanitarian assistance” for Donbas from the budget is only one possible source of securing funding for Crimea and Kaliningrad; others include a possible increase in excise taxes on gasoline, reducing railway subsidies and other measures. Therefore, it’s not possible to estimate how much the Kremlin spends now on Donbas from this document. Apart from that, RBK’s sources in the Russian Parliament and Government stress that even if the authorities decide to stop the “humanitarian assistance” to Donbas, that doesn’t mean Russia will stop providing funds to the proxy states. Funding for the “LNR” and “DNR” is totally classified and is described by secret orders and budget lines and “humanitarian assistance” is likely to be one of many channels of funding the “republics.”

Another source of RBK familiar with the document said that at the start of the conflict in eastern Ukraine, the Russian government approved targeted subsidies to restore the damaged infrastructure of Donbas (energy, roads, and railways) and construct buildings in a secret government decree, calling them “humanitarian assistance to certain territories of Ukraine.” According to the source, these “humanitarian subsidies” passed through a reserve fund of the government formed annually to finance activities on the decision of the government. The source assumes, but cannot be sure, that it is these subsidies that will be canceled.

Responding to RBK’s article, Russian President Vladimir Putin’s press secretary Dmitry Peskov responded that there will be a “certain redistrubution” of funds, but the Kremlin still intended to “take care” of the inhabitants of Donbas.

Corroborating evidence for Russia defunding Donbas

In an interview with the Ukrainian outlet Apostrophe.ua on 7 September, Yuriy Hrymchak, Ukrainian deputy Minister of Temporarily Occupied Territories, said that he is receiving information about Russia defunding the proxy republics “from different sources”:

“I can’t completely verify this information, but it comes in, and from different sources. The last thing we had – and this was confirmed on many occassions – that the Russian Federation will stop funding these ‘LDNRs’ next year. They are not putting in expenditures on the ‘people’s republics’ in the 2018 budet. […] Of course, ‘LDNR’ is funded from hidden funds, but it has been repeatedly confirmed that they will not fund the occupied territories from the next year.”

As well, Hrymchak mentioned that the leaders of the self-proclaimed “republics” are seeking to buy property in Russia and that the Russian military started taking especially valuable military equipment out of Donbas back into Russia.

Russia’s “humanitarian assistance” to Donbas

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The figures of Russia’s possible Russian aid to the unrecognized republics of Donbas remain largely unclear. In September 2015,  Bloomberg reported, referring to its sources in the self-proclaimed republics, that Russia transferred RUB 2.5 bn ($37 mn) to pay for pensions of the “Donetsk People’s Republic” (the Russian Ministry of Finance later denied that there are expenses for such payments in the Russian budget).

Bloomberg’s sum is approximately in line with the “DNR’s” estimated needs, according to a financial plan for the republics which surfaced as a result of a 2016 leak from the mailbox of Putin’s “gray cardinal” Vladislav Surkov. According to economic estimates of 2013 which Surkov received on 26 May 2014, the monthly pension needs of the entire Donetsk Oblast were RUB 7.7 bn ($243 mn by the average exchange rate of 2013). Taking into account that the territory of the “DNR” is roughly 1/3 of that of Donetsk Oblast, and that many pensioners fled from the conflict zone, RUB 2.5 bn seems to be an adequate figure to cover the “DNR’s” pension needs, although inflation had drastically reduced the face value of that sum.

In February 2017, the Security Service of Ukraine claimed that the budget of “LNR” for the first quarter of the year envisioned RUB 11 bn of revenues ($191 mn), of which the self-proclaimed government could raise only RUB 2 bn and RUB 9 bn ($156 mn) were to come from the Russian government, which, again, is roughly in line with the figures that surfaced in the Surkov leaks. There, the monthly state expenditures for the entire Luhansk Oblast were estimated at RUB 9 bn ($283 mn by the average exchange rate of 2013), meaning that the expenditures for three months were RUB 27 bn. As the “LNR” occupies roughly 1/3 of the entire Luhansk Oblast, we again get a figure comparable to the estimates Surkov received.

According to the Russian Ministry of Emergency Situations, Russia has sent 68 “humanitarian convoys” to Donbas, which have delivered over 70,000 tonnes of humanitarian cargo. A source of RBK close to the Ministry told the outlet that although the department carries out the transport logistics, the cargo itself was purchased with funds outside the minstry budget.

In April 2017, the Russian State Reserve confirmed providing “humanitarian assistance” to metallurgical companies in the occupied territory of Donbas from its own budget. Afterward, the Russian government gave the State Reserve RUB 10 bn rubles to replenish its stock of raw materials for the steel industry.

In addition, Russia supplies electricity to the “LNR” as “humanitarian assistance.”

The “DNR” budget indicates “humanitarian aid” as a source of revenue, but the size of the “republics” budgets has never been disclosed.

Some information about the economic interaction between Moscow and the Donbas Russian-backed separatists is provided in the film “The Russian secret behind Ukraine’s self-declared ‘Donetsk Republic’” released on 15 October 2016 by France24. In it, journalist Elena Volochine recorded how Russia was restoring DNR buildings damaged by the war and participated in the economic development of the region. She also exposed the forced nationalization underway in the so-called DNR in an attempt to make the region economically viable and lessen the burden on the Russian budget.

Almost one year before that, on 21 October 2015, Surkov held a meeting which revealed the extent of the dependency of the “DNR” and “LNR” on the Kremlin, the Surkov leaks revealed. The meeting involved Russia’s deputy Ministers of economic development, trade, construction, and energy, as well as the deputy head of the Department of the FSB and representatives from Rossiyskiy Natsionalny Kommercheskiy Bank. The meeting covered several topics. These included:

  • “plans of the territories [LNR and DNR] to increase tax collection,”
  • “on the finalization of forming the energy market on the territories,”
  • “on the work of the [Russian] Federal Anti-Monopoly Service on developing the regulatory framework for the calculation of tariffs on the territories,”
  • “on the delivery of coal from the territories to Ukraine and by transit through the RF,”
  • “on the start of the heating season, including in Debaltseve and Uhlehorsk,”
  • “on restoring the private sector (speed of building 214 new houses, materials for the renovation of 4,000),” “on increasing the
    pensions by 15%,”

As the Kremlin’s official communications and the film by France24 suggested, at the time, Moscow tried to keep its economic support for the “LNR” and DNR a secret, but the Surkov leaks leave no doubt that the only reason “territory 1” and “territory 2,” as they were called in the meeting, were economically functioning were the secret financial infusions agreed by the Kremlin. In 2017, as we see by Peskov’s reaction, the Kremlin does not deny funding the “republics,” although it does not disclose the exact sums.

All in all, comparing the RUB 165 bn which RBK reported Russia will redistribute from the budgets of the proxy “republics” in favor of Crimea and Kaliningrad over 2018-2020 (i.e. RUB 55 bn/year) with the figures which surfaced in the Surkov leaks, which appear to be reasonable when compared with other sources, we can assume that this sum covers slightly more than half of the needs of occupied Donbas. The document in the Surkov leaks puts the annual needs of the Donetsk and Luhansk oblasts at RUB 291 bn (183 bn for Donetsk Oblast and 108 bn for Luhansk Oblast). As the “LNR” and “DNR” occupy roughly 1/3 of the total area of the oblasts, the “LDNR” annual needs can be estimated at RUB 97 bn. Therefore, it is reasonable to assume that Russia is not dropping all its financing to the “republics” yet.

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