Thursday

20th Feb 2020

Investigation

The great looting of Donbass

  • Donbass is Ukraine’s center of heavy industry and coal mining, which includes Soviet-era metal and fertiliser factories and power stations (Photo: Irina Gorbasyova)

Over 50 percent of large-scale enterprises in the rebel-controlled areas of eastern Ukraine have been closed, destroyed, or seized by the Russian-backed separatists, reveals an analysis of almost 80 representative companies in the region.

Donbass is Ukraine’s center of heavy industry and coal mining, which includes Soviet-era metal and fertiliser factories and power stations.

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Since March 2014, the rebels and supporters of the self-proclaimed Donetsk People’s Republic (DPR) and Luhansk People’s Republic (LPR) have stolen state-owned mines, raided military-owned companies, and seized or looted foreign and Ukrainian-owned businesses, such as retailers Auchan and Metro, staking a claim to all businesses on the occupied territory.

Around 23 percent (18 of these companies) have been taken by the rebels and their supporters, 28 percent (22 companies) have closed down. A further four (five percent) are damaged and destroyed, while seven (nine percent) have moved their operations to west Ukraine.

This leaves 35 percent (27 major companies) functioning, under rebel patronage and, in most cases, paying taxes to Ukraine.

Last year the rebels in the DPR and LPR aimed to nationalise all industry and power generation, and bring it into the lap of the Republic, sever all links with Ukraine and create a self-sufficient state.

But while small businesses are destroyed, stolen or forced to register in the new republics, the rebels have left the giant oligarch-owned factories in the region alone.

These include some of Ukraine’s largest companies, such as metal manufacturer Metinvest and mining and energy group DTEK, both owned by Ukraine’s richest man Rinat Akhmetov, and the Donetsk Steelworks (DMZ) and the Industrial Union of Donbass (IUD), both owned by Russian investors.

The rebels face a challenge to build a functional economy, as the war has created an artificial border that splits roads, railways, power infrastructure, water pipes, and business networks.

“It creates a wall where there should be no wall,” says Dmitry Churin, research associate at Kyiv-based Eavex Capital. “They are still our people, it’s still our economy. When we look at the bigger picture, the idea just to ‘cut here’ doesn’t work.”

The rebels have left alone the two thermal power stations on the occupied territory, one of which is owned by Akhmetov, and a second by Donbassenergo, a company close to ousted president Victor Yanukovich and 25 percent owned by the Ukrainian state.

Kievv also continues to allow the passage of gas and water to the region.

Rebel seizure: mines and shops

Most significant among the companies taken over by the rebels is the Ukrainian State Mining Company’s network of 55 coal mines in the occupied zone.

The state lost control of these mines in July 2014 - some are destroyed, others are flooded or closed, but some are functioning.

While it is tough for the rebels to run factories without materials, supplies or expertise, they have instead moved into one sector to try and cash in - the high street.

The rebels have taken over 152 branches of Ukraine’s leading supermarket retailer ATB, renaming it The First Republican Supermarket in Donetsk and People’s store in Luhansk, causing losses of €273 million to the parent company.

French retailer Auchan has also been taken over by a rebel-registered company, as has Ukrainian DIY superstore Epicenter.

Meanwhile, American lingerie brand Victoria’s Secret continues to operate under owners which are “unauthorised,” according to the US firm.

Nearly all foreign companies have fled from the occupied zone - and most of their assets have been destroyed, looted or occupied.

All the banks - Russian, French, Austrian, Italian and Ukrainian - closed in August 2014. The rebels have raided many of the banking premises and blown up ATMs, looking for cash.

The only bank open is the rebel-run Republican Central Bank, which has opened mainly in the former premises of Ukrainian banks PrivatBank and Oschadbank. They now have their own-branded ATMs and recently launched a bank card.

Russians not immune

Although Russia is a sponsor of the breakaway republics, its investors have not been immune to intervention.

While its banks are closed, mobile communications company Kyivstar, jointly owned by a Norwegian-Russian concern, was raided earlier this year. The rebels used the equipment to create their own communications network, branded Fenix.

German cash-and-carry giant Metro has closed three stores, while its fourth, near Donetsk airport, was destroyed in the war. Its products emerge in other stores around the region, due to looting.

In July 2014, American agricultural giant Cargill’s $40 million sunflower seed crushing plant in Donetsk was abandoned, then occupied by a group of armed men.

A month later, at the height of the conflict, shells blasted holes in the factory. Since then, a Cargill spokesperson said: “We have had no way of knowing the state of the plant for more than a year.”

To operate in the DPR and LPR, small and medium-sized businesses need to pay taxes. The republics are creating the semblance of a legal system of governance.

Taxes

“Taxes are more important than nationalisation,” adds one Donetsk business analyst. “It is much simpler and easier for authorities [not to seize a company], but to approach the director or owner and make him pay 20 percent of his profits to the DPR state.”

Only companies from Ukraine and Russia are operational on the territory, according to our sample.

The information is taken from company data, interviews with companies and employees, and media reports.

This article is part of the project “The Donbass Paradox” financed by Journalism Funds for EUobserver. An extended report can be found here

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