In 2014, anti-Maidan protests in eastern Ukraine turned violent. In what was called, with the helping hand of the Kremlin, the “Russian Spring,” the founders of the new anti-Kiev self-appointed authorities in Donbas expropriated businesses and abused and murdered businessmen. Yet now there is a chance to help businessmen get back on their feet in this heavily industrial region, and they could become an integral part of the peace-building process.

The Rebellion of the “Common Man”

In 2014 in eastern Ukraine, the mobilization of angry working-class crowds allowed previously marginal individuals to declare themselves “people’s governors.” While it may not have been part of the Kremlin’s plan for Donbas, genuine anti-establishment sentiment came to underpin the rebellion and added a sheen of genuineness to the staged rallies manned by Russian citizens from across the border.

Ironically, oligarchs who had thrived under former president Viktor Yanukovych became a focal point of anger for both Maidan and anti-Maidan protesters. They also proved a much more useful catalyst for protest than the imported and persistently promoted Russian nationalist agenda, which would have been difficult to sustain in an industrial, multiethnic region where both Ukrainian and Russian were spoken interchangeably. 

The class aspect became central to the Donbas rebellion. Without the layer of Russian and Soviet symbols associated with the protests, they resembled the proletarian, anti-capitalist, and leftist uprisings in Latin America much more than the ethnic secessionist movements in Abkhazia or Nagorny Karabakh.

Local residents had reasons to be angry. Once-thriving single-industry cities were steadily turning into ghost towns. Small, illegal coal mines controlled by local crime bosses offered no social protection for their workers, but were the only alternative to the poorly paid state coal mines. Low wages, high-risk labor conditions, and the grim realities for many workers in Donbas were a stark contrast to the flamboyant, luxurious lifestyles of their bosses. Industrial owners and managers, urban hipster tech entrepreneurs, and various other businesses that formed the core of the region’s middle class became targets. 

Private companies in Donbas were presented with a tough choice. They could either abandon their businesses, property, clients, equipment, and other assets and start a new life elsewhere, or they could stay, struggle to preserve their business assets, and continue on as well as possible under the new circumstances. They carefully weighed these options—often until men with guns came to help them make up their minds.

Evidence suggests that physical insecurity was the most common reason for leaving Donbas. However, the scale of challenges to doing business also persuaded many to leave the conflict regions. These included the disruption of critical supply chains, lack of banking capacity, increasing limitations on movement, and the depletion of local markets.

There was also a category of Donbas entrepreneurs for whom a political and civic imperative overrode business considerations. Many joined the Maidan movement in Donetsk, some even committing to join or finance the Ukrainian armed forces. Others volunteered to support the nascent “people’s republics.” Some packed up and moved to Russia, feeling incompatible with the Maidan leadership yet aware of the increasingly challenging environment for legal business in the self-styled republics.

Challenges to Doing Business

The armed conflict has done great damage to the economy of Donbas and well beyond Donbas. Apart from the physical destruction of buildings and equipment, the dangers posed by the anti-terrorist operation (ATO) zone and constant cease-fire violations have scared away investors and made business deals with businesses in the area seem risky. Restrictions on foreign investment and banking, as well as the overall legal void, make business development in the separatist republics extremely difficult.

Region Sales volume in mln UAH,
small and medium businesses, 2013
Sales volume in mln UAH,
small and medium businesses, 2014
Sales volume in mln UAH,
small and medium businesses, 2015
Sales volume in mln UAH,
small and medium businesses, 2016
Donetsk 792,072.6 139,359.7 108,840 112,834.7
Luhansk 49,248.5 19,177 19,706.6 25,783.4
Source: http://www.ukrstat.gov.ua/
Included are enterprises registered in the government-controlled areas (GCAs) of the Donetsk and Luhansk regions. Some enterprises operate in the non-government-controlled territories but pay taxes/report to fiscal authorities in the GCAs.

Doing business in Donbas war zones gives rise to many moral, ethical, and business dilemmas. In the self-proclaimed republics, businesses must operate with severely restricted mobility and in a cash economy. Then they come under enormous pressure to choose whether to register with the local authorities and pay taxes to the governments of the self-styled entities in order to be able to continue doing business. If they pay taxes to the new anti-Ukrainian regimes, they automatically risk prosecution under the law forbidding financing of terrorism in Ukraine. But if they do not register with the local authorities in the Donbas territories outside of Kiev’s control, they put themselves at risk of persecution and intimidation. These types of decisions made the lives of entrepreneurs who stayed very difficult.

Those who voluntarily pledged loyalty to the new authorities and believed in the future of the republics struggled to keep afloat due to severely disrupted supply chains overwhelmingly linked with partners from the rest of Ukraine and shrunken and impoverished local markets. It was impossible to legally export goods to any destination, which was a severe blow to industries in these net exporter regions.

Those who kept up a Ukrainian business registration because of their belief in their region’s future in Ukraine, but could not physically leave, are either registered in two places and pay double taxes or are living with the risk of repression from the separatist governments. On top of this, the Ukrainian law on the financing of terrorism, which may be applied selectively, is a constant threat to any business working in the self-proclaimed republics.

Despite declarations about the need to revive private business in the breakaway republics, current conditions undermine incentives for investment, hamper exports and imports, and lack the stability for proper development. The overwhelming majority of small businesses in the two republics cater exclusively to the local market, which is severely limited and poor, forcing these businesses to buy expensive and low-quality supplies from Russia. 

However, somewhat surprisingly, since 2014, both businesses that stayed and those that moved have reported growth. This speaks to the resilience and adaptability of Donbas entrepreneurs.

Large industrial businesses have retained a relatively privileged status; however, they are far from having been left untouched. Attempts at nationalizing them by the de facto authorities began as soon as the revolution was over. Regional authorities looking for ways to support the population and therefore preserve their loyalty through economic means had limited options apart from a financial “lifeline” from Russia. Statistics on the number of industrial enterprises operating before the act on nationalization announced by the self-styled authorities on March 1, 2017, and since the subsequent blockade of all commercial activities across the line of contact put in place by Kiev vary.

Some businessmen reregistered with the regional authorities and started paying taxes into the Donetsk and Luhansk budgets; others, most notably businesses belonging to Rinat Akhmetov, resisted and paid Ukrainian taxes only. They were therefore seen by local authorities as the first candidates for nationalization. However, as they have ensured regional stability by providing jobs to nearly 200,000 people and paying them regular salaries, the local authorities backed off (the salaries were paid to their accounts in Ukrainian banks not operating in the breakaways republics; the money could be withdrawn from any ATM in Ukraine proper or in Russia). 

Most commercial activity across the line of contact was banned. The Ukrainian government created exceptions for certain large-scale private industrial enterprises in the territories to transport industrial products, most notably coal and metal, in both directions across the front line to keep crucial industrial cycles operational. A special registry of “strategic” businesses was created. In other words, wagons loaded with coal could cross, while crates of milk bottles could not. This discriminatory policy was resented by SMEs on both sides of the line of contact. 

The self-appointed regional authorities eventually followed up with their own bans. The line of contact with government-controlled territory was officially closed to all businesses in late 2014-eary 2015. That caused corruption at checkpoints and forced businessmen to reconsider engagement with their existing partners across the line and turn toward the Russian market.

Restrictions on movement and trade have changed the attitudes of the Luhansk and Donetsk business communities. In 2015, most businessmen wanted to reestablish business and human connections with their previous Ukrainian partners, suppliers, and customers. By the end of 2016, this attitude was still prevalent in Donetsk, but the views of businessmen in Luhansk have dramatically shifted, and many now reject the prospect of reengaging in business with Ukrainians. One possible reason for this is that all crossing points along the Luhansk line of contact except one were closed, while five crossing points remain operational in Donetsk.

A Role for Businessmen in Peace-Building

The story of the Donbas businessmen provides a number of lessons that can be incorporated into the broader discussions about reaching peace in Ukraine. A well-established private sector makes this conflict different from the separatist conflicts of the early 1990s in the wake of the collapse of the Soviet Union. This new class of businessmen, who thrived off the inviolability of private property, unrestricted mobility, and access to clients, services, and finances globally, and who demonstrated individual initiative and responsibility, was inherently idiosyncratic to the Soviet pathos of nationalization of the self-proclaimed Donbas republics.

Private business is a strong pro-peace force because lawlessness, a fragile security environment, and a shrinking population and its impoverishment can be crippling to business operations. Business is vitally interested in stability, free movement, uninhibited access to technology, financing, know-how and, above all, customers.

There are no standard models for engaging the private sector in conflict prevention and peace-building. However, there are numerous models, which have helped achieve breakthroughs in the past. The Consolidated Goldfields company financed and convened a dialogue between the leaders of the African National Congress (ANC) and South Africa’s apartheid government, which helped both sides move toward formal negotiations that brought that regime to an end. The Group of Seven, comprising several important business associations, actively engaged with parties involved in the conflict in Northern Ireland and promoted peace by raising public and political awareness of the peace dividend. In Colombia, businesses sponsored and convened a groundbreaking scenario-building exercise in which national leaders and guerillas took part.

In Donbas, there are numerous examples of social corporate responsibility, or even “business saving lives.” Bakeries that stayed open and offered free food to the elderly and poor who were left for months with no pensions or salaries during most heavy fighting. Other businessmen joined forces to assist the disabled and children.

But in the polarized conflict environment, some of these initiatives were regarded as controversial; for example, the “Nova Poshta” (New Post), a major Ukrainian postal company, has been shipping packages collected by volunteers for Ukrainian soldiers free of charge since the beginning of the war, while Rinat Akhmetov, the most powerful oligarch of the Yanukovych cohort, has been supplying the civilian population sieged in Donetsk with humanitarian aid.

However, neither businesses in Donbas nor those in the rest of Ukraine have demonstrated an active pro-peace position. Political obstacles to the reintegration of the breakaway entities into the Ukrainian state seem to be insurmountable at present. The logic of parallel tracks of peace processes, particularly at multiple “entry points,” such as through business and entrepreneurs, may invigorate dialogue. Business is a natural connector rather than a divider, as it is founded on trustful and constructive relations between partners, customers, and suppliers.

Including the private sector as one of the key actors in the recovery and consolidation of peace is a growing trend among international organizations. Business is also being accepted as being as legitimate a beneficiary of international assistance as government institutions and civil society organizations. The UN Development Program in Ukraine has demonstrated how quickly internally displaced businessmen from Donbas restart their businesses in a new place after they have lost their assets, clients, and markets with the help of small financial assistance. The revival of small and medium-sized businesses in the government-controlled areas of Donbas is clear proof of the region’s entrepreneurial resilience.

This material is a part of “Minimizing the Risk of an East-West Collision: Practical Ideas on European Security” project, supported by the UK Foreign and Commonwealth Office.

By:
  • Natalia Mirimanova