Trade in the Donbas Region

Trade in the Donbas region is a complicated matter. The reasons are multiple, but the first that comes into mind is the liability of its situation as a separatist, occupied region. Finding unbiased and truthful data and reports can be challenging. It is also a region in the middle of the war, a reality that comes with all its difficulties. A brief recap of what happened at the beginning of 2017 is necessary to understand the trade relations that develop in the Donbas region, and the involvement of third actors. For the first three years of the war, trade between Ukraine and the Donbas was carried out regularly on both sides, moreover the NGCAs continued to pay Ukrainian taxes. The Donbas Blockade was firstly announced in December 2016 and then put into action a month later in January 2017 by ATO Veterans. The reason behind such action was the attempt to stop the ‘bloody trade’ of coal and other goods between the GCA and the NGCA. At first the Ukrainian President Petro Poroshenko refused to support the blockade, predicting that the outcome would result in ‘destroying Ukraine in the Donbas’. After a few months President Poroshenko had to give in, afraid of the political backlash his opposition to the ATO veterans could have caused. In March 2017 the Blockade was suddenly legalized stopping all legal trade relationships between Ukraine and the Donbas. The answer of the separatists was the nationalization of coal mines and factories that used to trade with Ukraine.

Implications

The blockade poses threats to both sides of the Donbas as their production cycles are closely connected. As the Prime Minister Volodymyr Groysman stated, the blockade is a costly move for Ukraine. To be fair, the outcome for Ukraine was far better than the one for the NGCA of the Donbas region. The country lost 1% of its GDP, the trade balance worsened by $1.8 billion, but it was compensated by record grain harvests and strong metal prices abroad. The blow the metallurgy sector took was great, Ukraine lost around 17% of its cast iron, 15% of metal cable and 22% of coke production, but the industry reacted better than expected. The government, taking as an example the actions carried out by the oligarch Rinat Akhmetov with its own mines, shifted many state-owned power plants to gas-grade coal; this helped Ukraine to do a damage control. On the other side, the Donbas regions are not doing so well, the loss of export markets and inputs from suppliers in the government-controlled areas affected the regions heavily, reports show continuous shuts down of mines and firms, cutting in working hours and unpaid leaves. On top of that, after the seizure of the enterprises many skilled workers migrated elsewhere. To sum up, the blockade has been an economic disaster, Ukraine lost a great part of its taxes and revenues and access to many factories. The Donbas is spiraling because of its inability to enter the global market and the poor politics of the separatists in dealing with the industries enterprises.

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Illegal Trade Between DCA and NGCA

The issue of the movement of goods to the NGCA is regulated by the “Procedure for movement of goods to the area or from the area of conducting anti-terrorist operation”, adopted by the CMU Resolution of 1 March 2017 № 99. Despite the Blockade this procedure is still valid and regulates the movement of humanitarian goods and personal belongings. To allow such movement there are six transit corridors on the roads and seven on the rails. On the corridors are established both checkpoints and roadblock for inspection and verification. Despite these possibilities, both legal and illegal trades are conducted through the contact line. The products traded, both legally and illegally, coming from the GCA are food products and household goods, electronics, medicine, textile goods and drugs. On the other direction, from the NGCA to the GCA, alcohol, bread and cigarettes are traded. Goods from the NGCA have also been transferred to Russia, Belarus and EU countries. The Transparency international report found various ways through which illegal trade is carried out: through checkpoints on roads and railways, by bribing officials; by using Humanitarian Logistics Centers (HLC) to sell wholesale products, untaxed, for movement into the NGCA, rather than for the HLC’s intended small scale use; by avoiding specified transit corridors. In this case, smugglers coordinate with members of the security and armed forces to move goods to the NGCA, avoiding official checkpoints. by moving goods through Russia and back to the NGCA. This is done by receiving a permit to transfer goods stating that those goods will go on to a third country, such as Kazakhstan or Georgia; those goods are then re-routed via Russia to the NGCA. This is known as ‘terminated transit’.

Third Actors

The ever-present presence of Russia can be felt also in the realm of trade. Russia works both upfront and behind closed curtains when dealing with the Donbas situation. Russia is proceeding to facilitate exports from the Donbas region to make it more independent and provide it with revenues. In fact, Russia does not use the Ukrainian coal, as it has already much of its own, and of better quality. On the other hand, Russia provides and supports the separatist regions with fuel, food and building materials. Western and Ukrainian sources also claim that Russia provides military and logistic aid as well. Russia denies. For obvious reasons, trade with third countries is illegal, the only exporter of the anthracite coal is Russia which acts through the separatists and businessmen no longer welcome in Ukraine. The main interlocutor of such business is Ukrainian oligarch Sergey Kurchenko, who, by the way, is on the international wanted list. Kurchenko, though its company ‘Company Gaz Alliance LTD’ smuggles Ukrainian coal to South Ossetia, where it is mislabeled as Russian and traded with third countries. Kurchenko’s company is entrusted with the task to supply materials, raw products and equipment to branches of CJSC ‘Vneshtorgservis’, a company based in South Ossetia. Kurshenko’s company is known to have trading relationships of anthracite coal with Poland, and through the Azov Sea with Romania, Turkey, Italy, Greece, Bulgaria and Spain. The Washington Post also found out that the other important role for South Ossetia is that of payment center. When anyone in the Donbas regions wants something from Russia, they send the money to the International Settlements Bank, which transfers it to Russia and Russia ships the requested goods to the separatist territories, though their shared border. Since 2015 the South Ossetian connection has provided a more formalized financial link to the roughly 3 million people living in the separatist-occupied territories, allowing them to trade with the outside world. Russian companies wishing to trade with the two self-proclaimed People’s Republics face the risk of sanction from Ukraine and the West, so South Ossetia plays a significant role as in intermediate. On the other side, Georgia has its hands tied, here is a quote on the matter from the Georgian Minister of Reconciliation and Civil Equality Ketevan Tsikhelashvili “Unfortunately, we know about the financial flows from South Ossetia to eastern Ukraine but not much can be done at the moment”. Thanks to a Report from InformNapalm, it turns out that Russia is smuggling Ukrainian coal also through the other unrecognized region of Georgia, Abkhazia. The representative of Abkhazia in the LPR, Sergei Ladariya, in a TV interview stated that a Turkish company was concluding an agreement on the trade of LPR coal, passing through Abkhazia. Georgia is well aware of this illegal trade, but Turkey is one of its main trade partners and in order to not jeopardize their relationship is forced to keep silent. Once again, sending the Ukrainian coal to Abkhazia is a way to have it mislabeled it as Russian in order to trade it while avoiding sanction. The mislabeled coal has been sent to various international markets, including Poland and Spain.

Conclusion

After the 2017 Blockade trade between the Donbas and Ukraine has been interrupted. This has had dire consequences for both regions, even though Ukraine has been able to respond way better than expected. The Donbas economy is spiraling, and it is mostly unable to trade and therefore sustain itself. Its only forms of revenues are though illegal trade across the contact line with Ukraine or with the help of third actors such as Russia that works though the other unrecognized regions of South Ossetia and Abkhazia. As Mr. Milakovsky stated the economy of the NGCA is doomed and the only possible solution is reunification. Reunification is possible only though a political compromise between the two parts, but as it seems for now the political deadlock will continue, with the consequence of worsening the situation.