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How Donbas Economy may Contribute to Reintegration

How Donbas Economy may Contribute to Reintegration

In 2013, the Donetsk region was the leader among the other regions of Ukraine in goods export volume and took the second place after the Odesa region in the volume of service export. Before the war, the main things that influenced the economy of the Donetsk region were structural changes in the country and in the world. The hostilities started in 2014, and the war became the main problem in all areas of life in the Donbas and in the entire country.

What do Ukrainian business people think about the war?

In 2015 the unstable political situation became the main problem blocking the development of small and medium entrepreneurship in Ukraine according to the survey conducted by the Institute of Economic Research and Policy Consulting: every second respondent spoke about that (51%). The war in the east and its consequences occupied the fifth place in the rating of the factors which negatively influenced the growth of business. That was indicated by 28% of respondents. Legal entities gave the war the fourth place as an obstacle to the development of business (29% of respondents); physical entities gave it the fifth place (26% of respondents).

Sociological research of the Institute demonstrated that the problems faced by industrial enterprises of the Donbas and Ukraine changed during the period from 2014 to 2017.

In 2014 problem #1 was the problem with finding clients. In 2015 mobilization of employees became the main problem, with finding clients being the second one. In 2016-2017 the problem of finding consumers became the leading one again. With every passing year the main problem of Donbas enterprises has aggravated, and more and more respondents pointed to it (from 44 to 52%).

In 2014 the second place was occupied by logistical problems; in 2016 – mobilization of employees; in 2017 – the loss of consumers on the occupied territory. That is likely to be connected with the blockade of a part of the Donbas.

In 2014 the third place was given to problems connected with financial institutions and break of production chains; in 2015 – logistical problems; in 2016 – refusal of partners to cooperate; in 2017 – shortage of raw materials.

The 2017 survey demonstrated that the number of Ukrainian entrepreneurs (79%) who thought that the hostilities in the Donbas negatively influenced the finance and economy of industrial enterprises of the country increased. Only 6% think that the war has not influenced the economic situation to compare with 2014 when 36% of respondents said that the hostilities aggravated the economy of Ukrainian enterprises. Approximately the same number of respondents expressed an opposite point of view (34%).

Is the reintegration real in the conditions of hostilities and the economic blockade?

Professor Ihor Burakovsky, board director of the Institute of Economic Research and Policy Consulting analyze the data and the results of similar economic research and are convinced that, on the whole, Ukrainian business is optimistic with respect to the forthcoming two years. He notices that the enterprises on the part of the Donbas controlled by Ukraine have managed to find their niche and are getting used or have already got used to new conditions. As far as the ties with the uncontrolled territory are concerned, the situation is still complicated.

“They [enterprises – ed.] are looking for opportunities. It is a very important factor as surveys conducted 10-15 years ago presented a different situation. Businesses wanted the state to help. They wanted privileges, etc. Today business speaks a different language and within a different dimension. As far as the ties between the occupied territory and the unoccupied one are concerned, I do not see any opportunities for full cooperation. Different rules are in force there. Some businesses have been registered in Ukraine, but the major part of them is physical entities – small businesses. Medium and big businesses cannot be registered in Ukraine and work there according to Ukrainian laws. That is really a huge problem, and the major part of the Donbas industrial potential is dying. The reasons are objective as before the war the plants and mines there required considerable restructuring”, said I. Burakovsky.

The professor added that on the uncontrolled territory a lot of enterprises started reorientation to the Russian market. Others use intransparent schemes to get to Ukrainian consumers.

“They have established effective ties with Russian partners or special intermediary companied. Today they are not working for Ukrainian market. They are working for Russia. We may speak about very complicated schemes when the goods cannot get to Ukraine directly; first they get to Russia and then to Ukraine. It is clear that such schemes work with interruptions and big problems. When we impose any restrictions on the trade with Russia, such schemes will die. That is why we can speak about some particular contacts. They take place, and we are aware of that. After the liberation we will get to know how that works. It is clear that there is smuggling. It is clear that there corruption chains have been established to deliver goods through the demarcation line. It is absolutely clear to me. Whether there is the blockade or not, it is impossible to crush economy, to make it die”, the expert says.

Answering the question about the Donbas reintegration in the conditions of the economic blockade, Ihor Burakovsky stresses that it is impossible to speak about full economic ties until the full restoration of sovereignty on the uncontrolled territory. At the same time, the expert thinks that long-term prospects of the country in the conditions of war deserve more attention in Ukraine.

“We can speak about the support of those who left and want to launch business here. There are lots of people like that in the continental Ukraine. Some people managed to do that by themselves; some people got help. It is clear that opportunities should be looked for. Another problem is that whether the society likes it or not, people should get social support. I think a lot should be done in order to pay pensions and other payments in a secure way. However, it is difficult to do that as banks and banking institutions are afraid of working on that territory. It is quite clear why. There are a lot of things which are connected with the present situation. I think there is no serious discussion in the society concerning the future reintegration. We should start discussing (maybe, not a public discussion with officials, experts, etc.) what we are going to do if the situation continues for 20 more years. And what we will do if we come to the Donbas tomorrow, restore the border, and everything is the way we want it to be”, says the expert.

He considers that so far the “demonstration effect” has been underestimated in the country.

“It may sound trite, but if we combat corruption efficiently, if we implement pension and medical reforms, if we create opportunities for the development of business here, and so on, that will be the best agitation for reintegration, that would be the best example of the fact that we should be dealt with. When the territory is returned to the sovereignty of Ukraine, we will solve a lot of problem easily. We will have resources, experience, and certain opportunities. Without these things our talks about the reintegration will be the first try, as athletes say. When there is the second try, we will see,” Burakovsky summed up.

Iryna Bekeshkina, director of Democratic Initiatives Fund added, that “the reintegration of the Donbas is, first and foremost, economic in nature.” The expert stresses that this can be clearly seen in the towns which were under the control of “DPR” formations for some time, such towns as Slovyansk and Mariupol. However, humanitarian activities are also important there.

“There the biggest problem is, as we stress when we write various analytical reports, economy, economy, and economy once again. When we hold focus groups, people do not discuss the NATO issue, they do not discuss the issue of the Russian language or some special status of the Donbas. The main problems are jobs, employment, plants, factories, which sometimes do not work. Russia is mentioned only in the context of selling production to Russia, “Who we will sell our production now?” That means that the reintegration is, first and foremost, economic in nature. However, that does not mean that we should not deal with humanitarian issues. I think that first there should be the programme of the reintegration of the areas controlled by Ukraine. That is why when we ask what way of the reintegration is the most efficient, the absolute majority of people say that life is to be good on the territory controlled by Ukraine,” said Iryna Bekeshkina.

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