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10 June, 2014

Money of the Donbas

The unrest in Donetsk and Luhansk Oblasts has deep underlying causes. Unless removed, they make a prospering Donbas as part of Ukraine a mission impossible

Firearms, camouflaged and masked men, military equipment, shots and explosions, looting and robberies of civilians, checkpoints and burnt cars… Half a year ago, this picture was familiar only to those Ukrainians who had been to hot spots across the globe. Now, almost everyone knows about it, while the Donbas residents (Luhansk and Donetsk Oblasts – Ed.) witness it every day. However, only a few see how these atrocities result from deep underlying economic problems that have been around for a long time and exploded as soon as the sociopolitical climate changed.

The current situation in Donetsk and Luhansk Oblasts is a heartfelt cry of the Donbas money. The problem here is not so much with the personality of Rinat Akhmetov, Ukraine’s richest tycoon who controls the region, and other oligarchs, as it is with their businesses. After a new government came to power in Ukraine, the “business elites” of the region risk not only losing most of their assets acquired through corporate raids under the ousted ex-president Viktor Yanukovych. They can lose an opportunity to grow using their old ways. The era of extensive capital acquisition is coming to an end in Ukraine – there is no more room for expansion. Therefore, the drivers of this process – the oligarchs and thousands of goons that serve them – will become useless. They will have to either adapt to the new business climate or lose everything. These prospects perturb the enterprising and militant Donetsk and Luhansk businessmen, causing a well-known reaction to the revolutionary events in Kyiv. If the Donbas oligarchs saw the smallest opportunity for further growth under the new government, there would be no gunmen, separatism or Putin’s hand in the region, just like there had been no Chechen or other fighters there in the stormy 1990s. In fact, it was the capital of the Donbas that forced Akhmetov to keep silent when the events in Donetsk and Luhansk Oblasts were only getting off the ground and made him speak when they reached Mariupol, where his company, SCM, has steelworks and the railway which transports their products.

Finance Minister Oleksandr Shlapak has said recently that Donetsk Oblast collected UAH 1.6bn in consolidated budget revenues last year, compared to the total expenditures at UAH 41bn. The oblast can cover a mere 40% of its needs, i.e. less than Luhansk Oblast (44%) or its own performance in the past, such as 54% in 2011. Hence the conclusion suggested by the minister: contrary to what many believe, the Donbas does not feed Ukraine. It is in fact the other way around. This conclusion may fit many in Ukraine who do not mind the splitoff of the region. However, it is superficial.

READ ALSO: Feigned Triumph or Concealed Capitulation

Flooded with cash

When the initial division of assets came to an end in the Donbas in the early 2000s and the local elites seized their squabbles, it turned out that the majority of assets in the region had been divided. Favourable situation on the international markets stimulated the national economy, driving significant cash flows to the region. The money had to be used in some way or another. Under normal circumstances, this cash would have been invested to increase labour productivity, relieving some of the labour resources who could then be employed in new sectors created with this investment. However, this scenario required the presence of strong government institutions, as well as intellectual and managerial talents among business owners. Clearly, Ukraine did not have either of these two preconditions, because the bloody 1990s put a premium on other qualities. Moreover, the uncertainty of private property rights which could be challenged by a killer or a corporate raider rendered intensive business growth pointless and opened the way for extensive growth. This was the turning point which led to the economic model in the Donbas and across Ukraine that the 2013-14 revolution fought against.

Capital started spilling over from the Donbas to other regions. This led to massive “investments” in buying power in Kyiv that opened access to cheap privatization and embezzlement of budget funds. Add to this the acquisition of assets across Ukraine, including land and real estate in Kyiv, and transferring of unused cash to offshore areas. Finally, the Donbas capital grew so much that it was able to buy and monopolize nearly all power in Ukraine, creating the preconditions for Yanukovych’s presidency. As opportunities for extensive capital acquisition across Ukraine began to shrink, the Donbas barons proceeded to abuse power to take away businesses even from owners who did not want to sell it.

All these evolutionary stages have something in common – capital must grow, because this is its essence, as observed by Karl Marx a long time ago. Personalities are not important here, because it is not Rinat Akhmetov or others who control their businesses – on the contrary, business needs control them and determine their actions. The important thing is that capital seeks paths of least resistance and fastest growth. The result is the series of shameful developments Ukraine is facing today. Donetsk and Luhansk Oblasts send a mere 7.1% of consolidated budget revenues, while the region’s gross product is twice as big at 15.7% (see The diverse Donbas). The Donbas is not sending taxes to Kyiv. Otherwise, it would not see its assets grow at the recent pace. Moreover, there are thousands of the rich there who are used to extensive capital growth – they cannot operate otherwise and do not want to sit idly. They oust other businesses from their region to avoid unnecessary competition (as well indicated by the disproportionately low share of direct foreign investments in the region), while they themselves do not know where to invest and, as a result, do not invest enough for the region to develop dynamically.

Their penchant for easy money and shadow business is evident in agriculture, which requires hard labour. The Donbas is not an agricultural region, but the proportion of agricultural products there is too low as compared to acreage under crops, even though it would have to be otherwise, given the presence of excessive capital. Ordinary residents of the region are adversely affected by these processes: even though an average salary in the Donbas is higher than across Ukraine (by 15% in Donetsk Oblast), a large number of people have nowhere to use their energy in the region and seek employment elsewhere, particularly in Russia, or simply become criminals. At the same time, the local rulers use their capital not only to earn money and achieve self-fulfilment but also to control the lives of ordinary people, keep large paramilitary “security” units, etc.

The new government should channel the energy of the Donbas residents in a constructive direction. For example, if Donetsk natives learned to code, the city would very soon become one of Ukraine’s IT centres, outpacing Kyiv and Lviv. The effort should not be limited to universities alone, even though IT-related enrolment should be increased. The authorities can launch numerous free-of-charge courses in programming.

The same goes for the capital of the Donbas. The government should amnesty assets as soon as possible and guarantee property rights, thus laying the foundation for intensive capital growth and more technological and productive labour. Yanukovych’s money should be neutralized and returned to the state coffers as soon as possible. A revision of the outcomes of corporate raids made under his presidency could take years – this scenario must be avoided, and swift action needs to be taken instead.

Moreover, the government should build a new system of institutions in such a way that the money and energy of Donetsk and Luhansk Oblast residents would not be able to break it by taking over budget money flows. Finally, Ukraine needs to open the Donbas to non-local capital. Foreign investors who, as the West promises, will start coming to Ukraine, should be directed precisely to this region, which will create competition on the labour market (salaries and employment will grow) and will also teach the local businesses to grow using intellect and ideas rather than bribes, violence and firearms.

Big money originating in the Donbas calls for special attention. Ukraine needs to offer Akhmetov and his businesses enough opportunities for growth that would serve as real alternatives to the embezzlement of taxpayers’ money, underpriced privatization and monopolization of economic sectors. A list of offers has to be worked out so that this capital could stay in the country rather than flow abroad. Without consideration for the business interests of the Donbas and adequate solution for them, the region will not be successful either as part of Ukraine or as a separate entity. If the government realizes that, the current manifestations of separatism, terrorism and banditry will be the last such occurrence in the history of the region. Otherwise the wound the Donbas has sustained from its own capital will continue to bleed for a long time to come.

 


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