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Peace in Donbas: Benefits for Ukrainian after return of uncontrolled territories

Author : Mykyta Sinitsyn

The armed conflict that erupted in the Donetsk and Luhansk regions as a result of the “Russian spring” led to serious structural changes in the national economy. It also had an adverse effect on quantitative indicators, causing a drop in gross domestic product, devaluation of the national currency and inflation
21:47, 10 October 2019

112 Agency

Now, when the signing of the "Steinmeier formula" is presented by the parties as yet another step closer to the reintegration of the region into Ukraine, one may wonder how this will affect the national economy. In this article, we consider only the pros. About the cons we will talk separately.

Coal for the country, cheap electricity for the population

Coal industry is the first thing, with represents Donbas economically. The loss of 55 mines located in an uncontrolled part of the region of the 150 that were available hit the country and ordinary consumers painfully: already in the fall of 2014, Ukraine was covered by a wave of blackouts, which many have already forgotten about in the previous years.

It was not surprising, because the mines, which turned out to be controlled by the self-proclaimed "people's republics," extracted just coal-anthracite used for the production for heat and electricity. The way out was found in the import of coal from abroad - then coal from South Africa became a pioneer, which purchase almost became the subject of a resonant criminal case.

After 5 years, the situation in the domestic coal industry seemed to improve - from 83.5 million tons of coal mined in 2013, coal production in Ukraine in 2018 fell to 33.286 million tons. The shortage of coal is compensated by import, which amounted to 21.387 million tons in 2018, of which anthracite for the production of heat and electricity is about 3.9 million tons.

The flip side of imports was the increase in electricity tariffs. Together with a reduction in preferential consumption from the previous 150 kW / h per month to the current 100 kW / h, the tariff growth amounted to about 414%.

In a word, the return of coal mining enterprises in the region provides an alternative to imports, which is hypothetically could lead to lower electricity tariffs for the population. However, the interviewed experts were very careful about this.

Thus, economic expert and analyst Borys Kushniruk noted that Ukraine’s return to control of mines will undoubtedly lead to an increase in coal production, which could have a positive effect on the energy sector and even cause a slight reduction in electricity tariffs.

"In my opinion, the possible reduction will be small, and the tariff will still remain within the framework of the" Rotterdam + "formula. Moreover, in the global sense, the return of uncontrolled territories of the region will have a positive effect in the long term," the expert said.

However, Dmytro Marunich sees the main obstacle to the reintegration of the uncontrolled coal industry in the complete absence of a mechanism for returning enterprises to their Ukrainian owners.

“The mines are formally nationalized, but they really work for very specific people in the so-called “DNR” and the Russian Federation. Whether they agree to return them free of charge is a question. And if some compensation is provided, will the Ukrainian owners want to pay it?,” the source said.

The most pessimistic on the idea of ​​the Donbas coal industry influence on the Ukrainian economy is the director of the Ukrainian Analytical Center, Olexander Okhrimenko. In his opinion, given the high cost of Donbas coal, the use of various “schemes” — subsidies in Ukraine, the absence of VAT and cheap pay for miners in the so-called LNR and DNR. If the business is not allowed to use schemes on the return of mines in uncontrolled territory, it is unlikely to show interest in resuming their work, which means that it will not bring any effect for the Ukrainian economy.

Related: New law on Donbas special status to appear after Normandy Summit, - parliamentary speaker


The experts’ fears are increased by the fact that many Donbas mines have actually stopped coal mining, for example. Since 2015 all 10 mines of Horlivka and Yenakiyevo have suspended their work.

So, according to Dmytro Marunich, the return of the metallurgical enterprises of the uncontrolled part of Donbas, their work in full, will return several million tons of metal products that are in demand on foreign markets - steel, rolled products, pipes, etc. The most profitable in this sense will be the return of the largest metallurgical enterprises - Alchevsk Metallurgical Plant and Yenakievo Metallurgical Plant. Also, it is worth adding a powerful chemical production on Stirol concern, which ceased operations with the outbreak of hostilities, but its launch can be carried out relatively painlessly.

All this requires a developed mechanism for returning assets to their Ukrainian owners.

An obvious GDP growth as a result of the restoration of Donbas enterprises is also predicted by the economic expert of the Institute of the Future Danylo Monin.

"Of course, this will require significant costs, but, I think, in the case of real benefits for themselves, domestic and foreign capital will take part in this," the expert said.

According to the economic expert Oleksiy Kushch, the launch of industrial enterprises of the uncontrolled part of Donbas can become an impetus to the growth of national GDP, adding up to 10% to Ukraine's gross domestic product over 2 years after the start of real economic reintegration.

"Donbas is part of an important technological coal-coke-metal and coal-electricity-metal chains. 2014 broke the first link of these chains - coal, which affected the work of the whole chain. Of course, this led to damage of other links. The return of the first element of the network can serve as an impetus to the GDP growth of the whole country, "the expert says about the importance of Donbas for the national economy.

According to Oleksiy Kushch, the return and launch of the Alchevsk "industrial island", which includes one of the largest and most modern iron and steel plants in Ukraine – Alchevsky plant, which can bring up to 1.3 billion dollars in revenue, and the coke and chemical plant of the same name, can also be especially valuable.

Finally, the expert advises not to forget about the consumer market represented in the region, and this is another 3-4 million people who can act as buyers of the products of the national economy and stimulate its development and GDP growth. With the onset of the conflict, this market was mainly occupied by Russian products.

Olexander Okhrimenko, however, doubts the positive role that the reintegration of Donbas economy into Ukraine can play, focusing on the fact that the work of industrial enterprises in uncontrolled territory is largely undermined.

Tens of billions taxes to the budget and social contributions

The logical result of the resumption of work of enterprises and their return to the Ukrainian legal field will be the payment of the taxes and contributions to the Pension and other social funds.

At the same time, due to the funded pension system, pensioners living in the uncontrolled part of Donbas continue to receive pensions from the Pension Fund of Ukraine, which is formed from contributions made by Ukrainian enterprises and businesses. In January 2019, the then representative of Ukraine in the Trilateral Contact Group, Yevgen Marchuk, estimated these payments from 2014 at UAH 80 billion. With the return to the Ukrainian legal field, part of these payments can be compensated.

A rather unexpected material benefit for Ukraine from the return of Donbas may be the cessation of the growth in the number of combatants, the number of which exceeded 370 000 people, and the savings on the payment of their benefits. Judging by a recent statement by the Chairman of the Verkhovna Rada of Ukraine Committee on Social Policy and Protection of Veterans' Rights, MP Galyna Tretyakova, the authorities clearly believe that it would be good to save government expenses on this item.

Legalizing Smuggling

Another somewhat unexpected positive feature for the domestic economy may be the legalization of the "shadow" business, which flourishes in Donbas uncontrolled territories.

In general, it is no secret that a shadow business with a full range of corruption services has developed around the front line for a long time, from the transportation service through the demarcation line without a queue to a bribe to assistance in preparing the necessary documents. Not to mention smuggling.

In fact, the uncontrolled region has long earned the dubious fame of a "black hole" for various kinds of smuggling, in which Ukrainian troops are also involved. A vivid example of this is the detention of the battalion commander of the 10th assault brigade of the Armed Forces, Lieutenant Colonel Lysyuk, previously awarded the Order of Bogdan Khmelnitsky, for smuggling cigarettes from the self-proclaimed "LNR". In August, the officer pleaded guilty and heard his verdict - a fine of 119 000 hryvnia. Actually, it is the transportation of cigarettes through the crossing line that is today the most popular form of smuggling into Ukraine from the territory of the uncontrolled part of Donbas.

Of course, there are much more such cases at the front line than they say about it, but they are unlikely to exceed the supply of “Russian” coal to Ukraine, which usually hides Donbas coal, legalized in the Russian Federation. However, a part of it has recently been clearly moving through Belarus; on October 1, the MP from the Batkivshchyna party, chairman of the Independent Miners' Union of Ukraine, Mykhailo Volynets announced the closure of this route. The return of uncontrolled mines to Ukraine will clearly violate this scheme.

However, smuggling in the JFO area is going both ways, and many Ukrainian enterprises “successfully” drive smuggling into self-proclaimed republics through “interrupted transit”. Cargo officially being sent through the Russian Federation usually to Azerbaijan. In fact, it is delivered to Donetsk and Luhansk through the open state border. In this case, in addition to selling its products, a formal exporter company may also claim for VAT compensation from the state budget.

The cessation of such schemes, on which, according to expert Olexander Okhrimenko, a large share of today's economy of the self-proclaimed "people's republics" is based, will also clearly have a positive effect on the economy and the state budget, the expert believes.

* * *
Are the benefits of returning uncontrolled territories outweigh the downsides? There is no answer to this question, since it can only be found in the case of global studies, in the framework of which a lot of factors will need to be studied. For example, the real state of enterprises in ORDLO, the real population. We are not trying to predict what is best for the economy, we are trying to appreciate the pros and cons of reuniting territories.

Related: If Steinmeier formula fails, Ukraine to seek other options to solve Donbas conflict, - Zelensky

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