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Donetsk and Luhansk economies start healing war scars

April 02, 2015, 21:24 UTC+3 Alexandrova Lyudmila
© Valery Sharifulin/TASS

MOSCOW, April 2. /TASS/. The economies of the self-proclaimed Donetsk and Luhansk People’s Republics are showing the first signs of recovery, although Kiev is continuing the economic blockade and impairing every effort to shape the restive territories’ political future. The war-ravaged region does have a development potential, experts say, but at the same time they warn that without reintegration with Ukraine many issues will be hard to address.

Kiev’s stance remains harsh. Ukraine’s central authorities keep pressing for preposterously unrealistic demands, which leaves the Donetsk and Luhansk leaders no option other than to consider alternative scenarios of future development, including those causing these territories and Ukraine drift ever farther apart. First and foremost the Donetsk and Luhansk republics have started creating their own economic systems and mending ruined or damaged infrastructures. A monetary system is in the making and financial and commodity flows are being put under control.

Last January the leader of the Donetsk Republic, Aleksandr Zakharchenko, declared the banking system was up and running. The authorities of the Luhansk Republic have been workingalong the same lines.

Donetsk has declared that as of April 1 it was shifting to a multi-currency system. It is presumed that the Ukrainian hryvnia will be the basic currency, but many financial transactions, including tax collection and the payment of benefits will be made in roubles, dollars and euros — until Ukraine has lifted the economic blockade. The Luhansk Republic introduced a multi-currency system on March 15.

As Russian media report, the food supply situation in the region is more or less normal. The Donetsk Republic runs what just recently was Ukraine’s largest manufacturers of salamis and sausages, mayonnaise, dairy products, semi-cooked foods and beer. Street bazaars are open. But the prices are high, while most potential buyers lack cash.

In this region Ukraine’s economic problems had been piling for quite a long time, the deputy dean of the world economy and world politics department at the Higher School of Economics, Andrey Suzdaltsev, told TASS.

"The economy of Donbas has remained under oligarchic rule for years. And oligarchs are not very investment-and development-minded people.

Ukraine’s heavy industries, mostly coalmining and heavy machine-building are located here, Suzdaltsev recalled. But the technological base is the one inherited back from the Soviet era. It is largely outdated. These energy-ineffective facilities remained afloat as long as they had access to low-priced Soviet and then Russian energy resources. Now most economic facilities are at a stand-still. Only some industries and coalmines are in operation. The region’s export potential remains untapped and there is no access to sea ports.

"Although problems are many, the potential of economic development does exist, and it would be very wrong to say that the region is doomed," Suzdaltsev says. "There still is skilled personnel, although some human resources have been wasted. True, development will require heavy investment, and amid the current political uncertainty it is unrealistic to expect money will suddenly start pouring in.

The financial system is in the most precarious position. A four-currency monetary system is to be introduced — the authorities have left the financial market at the mercy of uncontrolled processes, but there is no other way out.

There are two alternative concepts of the Donetsk and Luhansk republic’s future development, the deputy director of the CIS Countries Institute, Vladimir Zharikhin, has told TASS. "One is that of a compromise between Russia and the European Union, letting both republics integrate with Ukraine, which as a matter of fact would turn into a federal state with a weaker central government. And there is Kiev’s concept, which better suits the interests of the United States,reluctant to see federalization for political reasons. In fact, a federative Ukraine would be a neutral country looking both ways, towards the West and the East. The United States has obviously opted for phasing out the Donetsk and Lugansk republics from Ukraine’s political and economic affairs and turning them into equivalents of Trans-Dniestria or Northern Cyprus."

In a situation like that, Zharikhin said, developing the economies in both republics will be no easy, although such a potential does exist. First of all, there is coal, and Ukraine needs it very much. "Latent supplies of Donetsk coal to Ukraine are already underway. It is not accidental that both the Donetsk and Luhansk republics have retained the hryvnia as part of their multi-currency systems." Also, they certainly count on support from Russia, but Kiev and the West will certainly be posing obstructions to this," he said.

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