Who will make money on rebuilding Donbass

Ukraine during the war (CC-By-UN-Ukraine)

Ukrainian authorities are considering how to rebuild Donbass, destroyed by Russian mercenaries. Unless the West takes part in the procedure, decisions are likely to depend on under which variant the most money can be transferred to the pockets of oligarchs associated with the governing team rather than on economic effectiveness.

The Ukrainian government has prepared initial calculations of losses caused by the war in Donbass, the most industrialised region of the country. The estimate amounts range from hundreds of millions to as much as USD 8 billion.

Long list of losses

Whole branches of industry have disappeared; production in the chemical sector came to a halt, 80-90 per cent of SMEs suspended activities, hard coal extraction declined by half, as well as production in the metallurgical and machine sectors. Overall, every second inhabitant of the region is unemployed, according to the report. It may take even a year and a half to resume production in some sectors.

According to the government, the initial phase of rebuilding the destroyed regions of Lugansk and Donetsk would cost USD 1 billion. The total number of infrastructure objects destroyed or damaged in the region amounts to 11 thousand, that of apartments – 4.5 thousand, education facilities – 217, health service facilities – 45, culture and sports facilities – 51, administration buildings – 81, retail trade facilities – 14, industrial plants – 132. It is necessary to make 5 thousand repairs to the energy, waterworks and heat distribution networks and 1.5 thousand repairs to the transport and communication infrastructure. Officials estimate that almost 1 thousand houses, 3 thousand energy, water and heat distribution facilities, 55 education facilities and 9 health service facilities as well as the whole destroyed transport infrastructure and administration buildings should be the first to be rebuilt. The total cost of the above would amount to USD 190 million. After completing this phase, it would be time to rebuild industry.

According to the calculations of Andriy Novak, head of the Committee of Economists of Ukraine, before the Russian aggression, Donbass accounted for 15 percent of GDP and 25 percent of Ukraine’s exports. As a result of the war, the decline in production in different sectors amounts currently to 40-65 percent.

However, the numbers do not reflect the specific situation in the region. The loss in profits from the industry situated in the region are rather unlikely to affect the state budget. State-owned companies had continually required subsidies and those owned by oligarchs immediately transferred profits to tax havens.

– From the financial point of view, however paradoxical it may sound, Donbass always needed subsidies. Production was going on, there were jobs, but only individuals, i.e. plant owners, benefitted financially from the work. Moreover, for the last 15 years, those individuals were in power, one way or another, and subsidised their plants from the state budget – says Nowak.

Mines to be closed down

It may turn out that the war damage resulting from the Russian aggression will help Ukraine solve the problem of unprofitable hard coal mining. Ninety five percent of working mines are in the occupied territories and a lot of mines have been closed down and flooded as a result. This provides an opportunity “to pull miners up to the surface” and close down loss-generating shafts, experts say.

Miners would be able to find jobs in the construction sector. Rebuilding also gives the economy a chance to modernise – the majority of destroyed infrastructure represents the decapitalised leftovers from the Soviet Union which needed to be replaced long ago.

In search of money

In September, Ukraine’s parliament, urged by president Petro Poroszenko, approved two bills which, according to the official announcement, are aimed at bringing the conflict to an end. The first bill automatically exempts “participants of the events” from criminal responsibility, including those accused of financing militants and the separatist movement organisation, Aleksandr Yefremov (who controls the economy of the Lugansk oblast), the head of the Party of Regions parliamentary faction from the time of Janukovych, and Rinat Akhmetov, an oligarch from the Donetsk region with a past dating back to the “bandit years of the 1990s”, who took over various economic spheres of Ukraine one after another. As is pointed out in Kiev, such a solution provides the governing team with room for negotiating new spheres of influence in Ukraine’s economy.

The second bill, the one on the reconstruction of Donbass, imposes on the state the obligation to cover all expenses of rebuilding the region taken over by militants (de facto by the Russians) by turning on the money tap, which will make it possible to siphon money from the budget under the pretext of rebuilding without any control whatsoever.

When submitting the draft bills to parliament, Poroshenko presented his vision of raising funds. The rebuilding of Donbass would be financed with USD 1 billion from the state budget and a special fund “the replenishment of which will be the subject of discussions with the EU”.

According to Prime Minister Arseniy  Yatsenyuk, the money earmarked for the reconstruction should come from big business, international donors, the state budget and tax receipts from the regions covered by the programme.

Moreover, the introduction of tax holidays is being considered for companies operating in Ukraine. In theory, the funds saved by companies in this way would be reinvested in their modernization. In practice, it will probably enable the oligarchs to use what is left in an unlimited manner without developing elaborate schemes due to which billions of dollars annually were transferred to tax havens from Donbass before the war.

The West is fed up with corruption

While Ukrainian authorities appeal for international help, the West, irritated with the scale of Ukrainian corruption, has this time decided to keep an eye on the governing team.

At the beginning of October, the results of a special UN and EU mission were published. The mission, which worked in the region, assessed the needs of Donbass reconstruction from war damage. According to the experts, financial aid should be granted gradually, which means constant control over the use of funds. This should make it difficult to steal the money.

In the first stage, the reconstruction would cover the sector of basic social services and infrastructure to create conditions for the population evacuated from the war zone to return . Only after completing this phase would the Ukrainian government assess the needs of the region based on a nationwide development strategy combined with systemic reforms.

Coordination of activities and financial flows would be carried out by a special board composed of government representatives, a permanent UN coordinator, the director of the Ukrainian branch of the World Bank and the head of the EU representative office in Kiev. A technical commission would be working in parallel to deal with specific tasks. It would be composed of representatives of the Agency for the restoration of the Donbass, the UN, the EU and the World Bank.

Bearing in mind the practice of subsequent government teams in Ukraine, one may doubt whether even such Western assistance, surrounded by controlling institutions, will not end up in the pockets of members of the government. On the other hand, such a structure of the aid system would at least make it difficult to steal the money.

There are also fears arising from the fact that Ukraine’s authorities reach out for “proven experts” who know well how to lay their hands on the budgetary money. At the beginning of October, Prime Minister Arseniy  Yatsenyuk appointed Oleksandr Sukhomlyn as vice minister of economic development and trade. The Kiev portal  Naszi Hroszi, specialising in tracking corruption, reported that Sukhomlyn, who formed part of the team of Viktor Yanukovych from March 2010 to April 2011 in the capacity of vice-minister of the economy, was supposed to take part in rigging tenders for food purchases for the Ukrainian army. The state budget lost USD 30 million on the tenders. The vice-minister was in the end dismissed from the post, but maintained a function in the government structure that organised purchases of energy carriers for state-owned enterprises. While performing this function he was supposed to have enabled the monopolisation of the market for liquefied natural gas by Siergiy Kurchenko, an oligarch associated with the son of Viktor Yanukovych, Aleksandr. The ministry that will be entrusted with the major responsibility for carrying out the rebuilding of Donbass and the related financial flows will be the ministry where Sukhomlyn has found a haven.

The queue of oligarchs reaching for “Donbass-earmarked money” is already forming. According to estimates presented by the management of HarvEast agricultural holding company (controlled by Rinat Akhmetov), the losses in the agricultural sector of Donbass could amount to as much as UAH 5 billion, i.e. USD 400 million.

– Before the conflict, the value of agricultural production in the Donetsk oblast amounted to UAH 15 billion annually. This is 1/8 of the whole of Ukraine’s agricultural production – HarvEast CEO Simon Cherniavsky said recently.

According to him, to be able to begin sowing, agricultural companies from Donbass will need financial assistance from the state, i.e. low interest rate loans and tax holidays.

The management of the state Agency for the restoration of Donbass was entrusted to Andrey Nikolayenko, until recently a politician from the Yanukovych camp. An analogical structure, which carried out investments for the Euro 2012 Championship in Ukraine, is to be a role model for the Agency. If we take into account the fact that according to estimates, the oligarchs from the government camp stole at least 40% of budgetary funds earmarked for this purpose, it does not seem the best recommendation. The more so as, like in the case of the championship, the estimates are practically pulled out of thin air.

– Western diplomats were provided with information on the needs in the range of at least USD 1 billion. I am sure, however, that the number will be much higher –  Nikolayenko announced recently in an interview for the newspaper “Siegodnia”, published by Akhmetov.

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