You're reading: Ukraine, Russian-occupied Donbas going separate ways

After failing to coerce Ukraine into taking back the separatist-controlled parts of Donetsk and Luhansk oblasts on Russian terms, the Kremlin appears to be radically changing its plans for the occupied territories in the Donbas.

It seems Moscow is now trying to make the breakaway regions viable and economically independent from Ukraine.

To do this, Russia ordered the separatists to seize large Ukrainian-owned businesses located on their territory, and is now trying to set up the supply of raw materials from Russia to separatist-controlled enterprises.

Earlier, Russia had decided to accept documents, including passports, issued by the pseudo authorities in Donetsk and Luhansk.

Russian Deputy Prime Minister Dmitry Kozak met early this month with Russian steel magnates Alisher Usmanov and Aleksey Mordashov. They discussed the future supply of the iron ore to the steel mills in the separatist-held area, RBC news agency reported on March 15.

Usmanov, who owns Russia’s biggest iron ore producer Metalloinvest, and Mordashov, the main shareholder and chairman of Severstal, a Russian metals, energy and mining group, agreed to start supplies soon, the report said.

On March 13, Donetsk separatist leader Oleksandr Zakharchenko also declared the separation line with the rest of Ukraine as a state border of the separatist pseudo-republic centered in Donetsk.

Critics say Russia’s actions, along with uneven responses by Ukraine’s government, will finally cut the breakaway regions from the rest of the country – bad news for supporters of the Donbas’s re-integration.

Blockade on blockade

Ukraine’s government ordered a halt to trade with the separatist-held territories on March 15 until the separatists return Ukrainian companies they seized on March 1.

But two weeks before that, Zakharchenko announced his own blockade, “cutting off all connections with Ukraine.”

In late February, the Donetsk separatists drew up a list of 43 Ukrainian companies for so-called “nationalization,” which included businesses owned by SCM, the holding company of Ukraine’s richest man, oligarch Rinat Akhmetov. Also on the list were companies belonging to the Industrial Union of Donbas and some other private and state-owned companies.

Meanwhile, separatists in Luhansk announced plans to nationalize Akhmetov’s coal mines in Krasnodon, Rovenky, and Sverdlovsk.

The separatists linked this decision to the ongoing railway blockade by veterans of Ukrainian volunteer battalions and political activists, who have for weeks blocked the shipment of coal and other goods from the separatist-controlled zone to government-held areas.

But the real situation might be that the separatists and their Russian patrons are now taking control over the choicest enterprises in the territory ahead of a final breakaway from Kyiv.

And according to phone calls intercepted by Ukraine’s SBU security service, the separatists – junior partners in the deal – are not happy. In the phone intercepts, released by the SBU in early March, Zakharchenko can be heard speaking with his aide Dmitry Trapeznikov, and with a Russian citizen nicknamed “Seriy” (short for Sergey).

The phone conversations indicate that Russia has ordered the separatists to hand control over the most lucrative companies to runaway Ukrainian oligarch Sergiy Kurchenko, a close ally of ousted President Viktor Yanukovych, who is now hiding in Russia.

“Kurchenko will take everything, all the best (stuff),” Zakharchenko complains to Seriy.“ We will have 30, 30-something enterprises, which we don’t f***ing need. All these stadiums, all these luxes (luxury properties), hotels – they’re unprofitable.”

Akhmetov’s losses

On March 13 management of the Donetsk-based Park Inn and Donbas Palace hotels, both belonging to Akhmetov, claimed the properties had been seized by armed men.

The separatists also took over Akhmetov’s Donbas Arena stadium. According to Kyiv Post sources, they also captured his residence near Donetsk botanical gardens, locally known as Lux.

Akhmetov’s DTEK energy company and the Metinvest group of steel and mining companies announced on March 15 they had lost control over enterprises in the separatist-held parts of Donetsk and Luhansk Oblasts.

In a statement released on March 15, SCM said it would apply to the law enforcement agencies of Ukraine about the seizure of its production and non-production assets.

“We will do everything we can to restore the rule of law and resume operations of our businesses in the non-government-controlled areas within the legal framework, including appeals to Ukrainian and international courts,” the holding said.

Nevertheless, in less than a month Akhmetov’s wealth has shrunk by more than $1 billion, from $4.52 billion on Feb. 16 to $3.37 billion on March 6, according to Bloomberg.

Rinat Akhmetov attends the opening ceremony of the Donbas Arena stadium on Aug. 29, 2009. Akhmetov’s humanitarian aid was distributed from the stadium until Kremlin separatists seized it in March. (UNIAN) (source)

Oleksandr Parashchiy, the head of research of Kyiv-based investment bank Concorde Capital, said that with the expropriation of its business in the separatist-held parts of the Donbas, Akhmetov’s Metinvest company will lose about 10 percent of its revenues, while DTEK will lose up to 25 percent.

“But the expropriation of these enterprises is definitely more profitable for Akhmetov than the blockade,” the expert said. “With the blockade, he will keep on having losses, he will have to pay salaries to his workers regardless of whether their plants work or not. If he loses these plants, he loses this headache.”

Ways to trade

Even if the separatists manage to make the stolen companies work, they face problems selling their products abroad due to their illegal status.

But last March the Donbas separatist entities were recognized by South Ossetia, a part of Georgia that Russia carved from the rest of the country following the Russian-Georgian war in 2008.

Unrecognized by the world community, South Ossetia, with a population of just some 50,000 people, was recognized by Russia as an independent state in 2009. That means it can trade with Russia and other members of Russian-led Eurasian Customs Union, including Belarus, Armenia, and Kazakhstan.

So it seems the Kremlin, without even having to recognize the two puppet republics it created in the Donbas, is setting up a trade conduit for them, via South Ossetia, to the economic block it controls, thus making the two statelets more economically viable.

One of the Donetsk separatist leaders, Denys Pushylin, and Vladislad Deinego – one of the Luhansk separatists – confirmed to RBC that the republics plan to set up trade relation with South Ossetia.

Meanwhile, the Kremlin’s apparent change of tack regarding the Donbas “republics” hasn’t gone unnoticed in Kyiv.

Earlier this month President Petro Poroshenko called on the West to apply more sanctions against the individuals who gain control over the Ukrainian companies seized by the separatists.

Any trade by Russia with the unrecognized entities would be another reason for sanctions.

But Parashchiy said the origin of goods from the occupied territories could be obscured by a blizzard of paperwork, and they could be sold anyway.

“It won’t be Putin who buys (the separatists’ products), it will be someone – let’s say Kurchenko or someone like him – and it will all be covered by some papers, re-registered, legalized, and sold after that,” Parashchiy said.

Millions in limbo

However, these measures will hardly be enough to support the up to three million residents of the separatist-held areas, most of whom still rely on their jobs at the local mines and steel mills.

Every month Akhmetov’s charity has also supplied needy residents of the separatist-held Donetsk Oblast with some 400,000 food packages – a great deal more humanitarian aid than Russia illegally sends into Ukraine in its regular convoys of white aid trucks
But with the hardening of the situation, SCM says Akhmetov’s charity has “had to suspend its operations” in the separatist-controlled areas.

And as re-integration with Ukraine looks less and less likely, many locals might want to leave their homes and move to Ukraine or Russia, which became easier for them after Russia in late February recognized the passports issued by the “republics.”

Russia also seems to be preparing to accept some migrants from the Donbas: on March 9, the governor of Russia’s Leningrad Oblast Aleksandr Drozdenko asked Russian President Vladimir Putin to make it easier for residents of the separatist-controlled Donbas to work in Russia.

Drozdenko said he would like to give jobs in his region to 500 residents from the separatist-held part of Luhansk Oblast, Russian media reported.