Russia steps in as job losses, closures ravage east Ukraine

Yulia Silina
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A broken ATM machine in the eastern Ukrainian city of Donetsk, on March 31, 2015

A broken ATM machine in the eastern Ukrainian city of Donetsk, on March 31, 2015 (AFP Photo/Dimitar Dilkoff)

Donetsk (Ukraine) (AFP) - The year-long conflict in east Ukraine has closed businesses across this industrial heartland, ramping up unemployment, crippling finances and leaving it ever more reliant on Moscow.

Fierce fighting between government forces and pro-Russian rebels has ravaged a region that once provided 25 percent of the nation's exports and has shorn Kiev of a vital source of foreign currency, seeing the Ukrainian economy contract sharply.

For people in rebel-held territory, the destruction of infrastructure and a cut-off of government support along with the legal limbo created by the separatist takeover have left once-flourishing cities in dire straits.

In total, medium and large businesses employed close to 350,000 people in Donetsk in the first half of 2014, according to the city's mayor Oleksandr Lukyanchenko, who fled to Kiev after rebels took the city almost a year ago.

"Half of them have now lost their jobs, and main source of income," he told AFP.

Brutal fighting around the rebel stronghold of Donetsk turned the once-gleaming international airport into a post-apocalyptic ruin, undermining the booming companies that helped make it one of Ukraine’s richest cities.

The resulting plunge in income-tax revenue has drained the public coffers of the rebels' self-proclaimed statelet. A new tax department has done little to get business back on its feet.

"Many large companies have been separated from their production capacity across the border of the Donetsk People's Republic (DNR)," explained Yuri Makogon, professor of economics at the University of Donetsk.

"So they are forced to accept double taxation, in Ukraine and the DNR".

In the face of falling business income, DNR leader Alexander Zakharchenko has stressed that coal, the traditional mainstay of the region's economy, must form the backbone of public finances. But the conflict has left Russia as the only viable trading partner.

"Exports from the Donbass region have always been divided into three: one third went to the east (80 percent of that to Russia), a third went towards the European Union and a third went to Southeast Asia and North America," said Makogon.

"Today, the DNR only has Russia because none of the countries of the EU, Asia or America recognise it, therefore cannot accept its goods."

In addition, Russia has alternative sources of cheap coal in the Far East and in Western Siberia.

- Moscow holds purse-strings -

Before the conflict, which has claimed more than 6,000 lives, "Donetsk spent between 640 and 670 million hryvnias ($27.1-28.4 million, 25-26.2 million euros) annually on health," said former mayor Lukyanchenko.

It spent 540 and 560 million hryvnias on education, and between 45 and 48 million hryvnias on civil-servant salaries.

"Now, there is nowhere to find the money," added Lukyanchenko, arguing that Moscow must be plugging the gap.

A rebel official confirmed that flow of Kremlin cash to eastern Ukraine.

"This money comes directly from Moscow, and all the transfers are controlled by the Russian president's office," he said, on condition of anonymity.

The separatists' budget minister Alexander Timofeyev maintains "DNR income is classified information".

Kiev's decision in November to cease the dispersal of central funds to separatist areas, combined with the closure of banks and retailers, has further darkened the region's economic outlook.

And in a tacit admission that Moscow now wants to shift the economic burden for the war-torn territories back on to Kiev, President Vladimir Putin made Ukraine resuming payments to the east a key plank of a peace deal hammered out in February.

For now the new authorities have only managed to pay pensions on one occasion, and then only at a maximum equivalent to around $40.

Several doctors and teachers told AFP that in 2014 they had received one monthly payment worth around $120, and then another of some $40.

Surgeons nursing wounded fighters added they were receiving no more than $215.

"People in these regions cannot survive on the fruits of their own production," concluded Kiev-based political expert Taras Beressovets.

"The Donbass is already below the poverty line and the situation will only get worse."