Economic separation of Donbas “republics” from Ukraine likely to create more economic woes

The severing of economic links between the areas controlled by separatists and the government in Ukraine’s Donetsk and Luhansk regions continued unabatedly. On April 25, Ukrainian state power distributor Ukrenergo said that it had halted power supplies to the separatist areas of Luhansk region because of unpaid bills that amount to 2.6 bn hryvnias (90 mn euros). Russia announced hours later that it would step in and provide the affected areas with electricity. However, there was no immediate confirmation that Russia has sent any supplies. The “People’s Republic’s” de-facto Energy Ministry and Emergency Situations Ministry said earlier on the same day that power had been restored by redirecting domestic supplies. Emergency “Minister” Sergei Ivanushkin said that Luhansk will no longer buy electricity from Ukraine and seek “other suppliers”, without naming any. Luhansk separatist leader Igor Plotnitsky said that by “cutting the last navel-string”, Ukraine was showing that it did not view the people of eastern Ukraine as its own. The Luhansk separatist-held areas already suffer from water shortages because much of its drinking water depends on government-controlled infrastructure. A row with Kiev overpayments was solved at the Minsk Contact Group talks in January (see Newsletter Nr. 15), but supplies remain erratic, partly because of ongoing repair works. Ukrenergo CEO Vsevolod Kovalchuk also warned on April 25 that electricity supplies to separatist-held areas in Donetsk might be suspended. Much of the industrial production in both Donetsk and Luhansk ground to a halt after March 1, when the “people’s republics” took control of all major factories that had continued to function under Ukrainian ownership. The separatists claimed that the so-called outside administration was a response to the ongoing blockade in the region’s government-controlled areas, carried out by Ukrainian activists, in order to thwart trade with “terrorists”. Kiev initially criticized that blockade as harmful but failed to stop it. In mid-March President Petro Poroshenko announced that the government was imposing its own blockade, meaning that the remaining links were cut from both sides.

Read more: Donbas coal blockade: 5 things you need to know

The economic effects are believed to be serious because of high levels of interdependence – Divorcing both areas economically is likely to be expensive. Ukrainian energy giant DTEK said on April 13 that it will buy up to one million tons of anthracite coal from South Africa. Many Ukrainian power plants depend on this type of coal, which is found mainly in the separatist-controlled areas of Luhansk region and Ukraine bought more than 7 million tons anthracite coal here last year (see our annual report, p 9-10). Importing coal from as far as South Africa will likely cost significantly more. And while Ukraine continues to receive financial aid from international donors (on April 4 the IMF paid another 1 bn dollar credit tranche), the “people’s republics” depend entirely on Russia, which is itself in a prolonged recession. On April 14, the head of the Russian federal agency overseeing the country’s substantial reserve funds, Dmitry Gogin, said that money from the reserves would be used to help plants in (separatist-controlled) eastern Ukraine, presumably by supplying raw materials. Four days later, Kremlin-linked economist Andrei Margolin argued in an interview with US news agency Bloomberg that integrating east Ukraine’s economy with Russia will reduce Moscow’s cost for subsidizing the region. In Russia, there is little, if any, debate about the cost of further subsidizing Donbas. In an interview published on April 24, the pro-Kremlin newspaper Izvestia asked Donetsk separatist leader Alexander Zakharchenko how the affected plants will be run but did not mention the cost issue. Zakharchenko hinted that the process is difficult when he said that now was a “transitional period” and that the supply of raw materials and re-starting production would be decided for each factory individually. However, other leading separatists openly admit that there are serious obstacles to establishing proper trade ties with Russia, which is necessary for kickstarting the economy. In a TV show aired on April 2, Luhansk “agriculture minister” Ruslan Sorokovenko said that as long as the “people’s republic” is not recognized, it cannot export goods anywhere, including to Russia, because it lacks official certification. Sorokovenko also said that local production is “not competitive, neither in price nor in quantity” and that the business climate was negative, not just because of the ongoing war but because potential investors are scared of sanctions and the absence of proper local laws. Commenting on Sorokovenko’s remarks about the business climate, Ukrainian journalist Serhiy Garmash added that the effective seizure of plants by imposing “external administration” makes any outside investment even less likely, because it puts ownership rights under doubt. In another sign that the separatists are bracing themselves for tough economic times, the Donetsk “People’s Republic” on March 30 issued a decree regulating salary payments in natural goods.