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Rebuilding the Donbas: costs and considerations

Rebuilding the Donbas: costs and considerations

by Liubomyr Shavaliuk

In Ukraine almost any issue of national importance is now viewed through the prism of money. Although this is fundamentally a flawed approach, especially with issues that have primarily a human component, this has always been the case. The motive is clear: the bigger the state project, the more money will end up in the pockets of specific individuals. Similar thinking continues in the new government as well. Even if it is not going to exploit the restoration of the Donbas, it still addresses the issues according to old methods. How much money will be needed to restore the Donetsk and Luhansk oblasts, what burden will the required sum place on the budget, and who will finance this project in addition to the government? The Cabinet never tires of posing these questions, while ignoring the non-financial aspects of the problem , which are much more important.

In early July, the prime minister said that damages to the infrastructure in both oblasts caused by the fighting stood at UAH 8.1bn, adding that the amount would increase for as long as ATO (anti-terrorist operation) continues. The initial plan was to include these expenditures in the budget while sacrificing increases in social payments. However, deputies refused to support appropriate changes to the budget, given the likelihood of early parliamentary elections, so the government had to compromise. As a result, the proposal presented for voting on July 31, contained a different amount — UAH 3.3bn designated for the restoration of the Donbas.

It is not yet clear what elements of infrastructure will provide the savings.  And is this even necessary to do? Already on July 2, Iryna Herashchenko, the presidential appointee responsible for resolving the situation in eastern Ukraine, stated that there is an agreement with Western partners to have them allocate EUR 1.5bn for infrastructure projects, job creation and restoration of housing in the eastern regions of Ukraine. This amount (almost UAH 25bn) appears to be pretty solid and will help implement many effective projects in the Donbas. However, the government is not going to limit itself to these funds. Yatseniuk has called on the oligarchs to participate in the restoration of the Donetsk and Luhansk oblasts and, additionally, has announced that a donor conference for EU investors will take place in September, with the goal of attracting funds for restoring the region and for creating jobs there.

However, a few questions still remain unanswered. First, who will rebuild the region. If this is left to the government, then even UAH 3.3bn is too much money. Based on past experience, there will always be someone in the government ready to cash in on someone else’s grief and appropriate a portion of the amount. Let’s look at Ukrautodor, for example. According to the head of the State Agency for Highways in Ukraine, the estimated cost of restoring bridges, overpasses and highways for general use in the Donbas is almost UAH 1.9bn. Knowing the scale of corruption at Ukrautodor and its inefficiency, which we all experience on a daily basis, who in their right mind would trust this organization with such large sums at such a difficult time for the country? And anyway, is the current Cabinet able to ensure transparency in the use of the funds earmarked for the reconstruction of the Donetsk and Luhansk oblasts?

Theoretically, the reconstruction of the region could be entrusted to the oligarchs, at least if they contribute to its funding. It is possible they would add efficiency to the process (if they so desire). However, some of them are directly involved in the war and will they want to repair the damage they caused? Furthermore, won’t these benefactors demand in exchange for their financial and organizational participation certain privileges or the return to old spheres of influence, particularly in the budget allocations? As the answer to these questions is not clear, we must conclude that Ukrainian society can ill afford to leave the rebuilding of the Donbas to the oligarchs, especially since there is no guarantee they will not try to derive political or economic dividends from the effort.

It seems that our Western partners have found the most effective way to rebuild the Donetsk and Luhansk oblasts. Taught by bitter experience based on many years of embezzlement of project money by Ukrainian officials, they allocate it in small amounts for specific purposes. For example, Germany has promised to provide EUR 2.5mn for rebuilding the infrastructure of Sloviansk and Kramatorsk. The sums, or course, are small — sufficient perhaps for one of the communication networks in one of the cities. However, it is possible that another tranche of aid will follow the successful completion of a given project. Following the German example, Americans, in the person of Vice President Joe Biden, have promised Ukraine US $7mn to restore the Donbas. Let us hope this is not the final aid from the developed countries for the restoration of the Donetsk and the Luhansk oblasts.

Second, should we even restore the damaged and destroyed structures and to what extent? Or, would it be easier to build a number of infrastructure components from scratch? For example, the restoration of the Sloviansk power plant of the energy generating company Donbasenergo was estimated at UAH 400mn. This represents 23% of the current market value of the company (market capitalization plus net debt) at a time when the capacity of power generation at this station represents 31% of all the stations in Donbasenergo. This means that the restoration of the Sloviansk station would be cost effective (its worth, $38/kVT, is ten times less than the construction of a new power plant). However, the power generated by this station has been reduced to 80-90% of capacity. It has lagged international standards in terms of environmental policy, etc., and the country has a surplus of electrical energy assets. Under these circumstances, should the government spend money to restore such a station? An owner would, perhaps. At least he would be free to make that decision at his own discretion. However, using budget funds for such a purpose is debatable. And these dilemmas are not unique.

Third, who will help the small and medium businesses to rebuild? Given the size of capital of Donetsk origin, the small and medium businesses found it difficult to operate in the Donbas even earlier. Now, because of the war, many business people complain that they have had to close their businesses in the region and move to other areas in Ukraine. Some have suffered significant losses. Who will replace their lost capital and, most importantly, the markets in which they operated and earned income? After all, they need people and their incomes for renewed activity, and both have been significantly reduced in the Donbas by the war.

But regardless of the shortage of funds and the organizational difficulties in rebuilding the region, the most important aspect of the problem  is the human dimension. When Ukrainians invented the slogan “Thanks Donbas residents…,” (offensive chant about Yanukovych invented by soccer fans in 2011 — Ed.) several years ago, perhaps no one thought that a president like Yanukovych, with all his characteristics, could be generated only by this region, where such people may be the norm. The industrialization of this region — so uncharacteristic for the country — which turned people into slaves tied to the workplace and to their “masters of life,”  coupled with myths that it is this region that “feeds all of Ukraine,” have transformed many locals into a specific type of “Donbas resident” — angry, arrogant, who respects only strength and who places all faith in the “tsar.” This is the ground that prepared the ruin of the Donetsk and Luhansk oblasts,  existing long before the outbreak of war. And the current fighting can only exacerbate the situation.

Without changes in the current social-economic paradigm of the Donbas, the region will continue to manifest its distinctiveness, and Ukraine will be saddled with more than one Yanukovych, generated by the Donbas. Therefore, the government should make every effort to rehabilitate the inhabitants of the region, to integrate them into the human sphere of development undertaken by the state.  To do this, it will be necessary first to recognize the problem and them to begin to restore the Donbas not based on available money, but following a farsighted strategic plan that includes the human component. But is the government capable of formulating the problem in this fashion? And are the current problems in the Donbas the last ones in the history of independent Ukraine? These are rhetorical questions.

Translated by Anna Mostovych


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