Nikolaus von Twickel


The “people’s republics” in eastern Ukraine have yet to announce a grand strategy for economic recovery, but an unlikely candidate – South Ossetia – might play a key role in keeping them afloat after most industrial production came to a halt following the economic blockade from Ukraine and the plant seizures on their territory. And while the exact circumstances of deadly explosion underneath an OSCE car in April remain unclear, the separatists say they know exactly who did it.


  1. Why a key to the “people’s republics’” economic survival lies in the Caucasus

In the third month after the severance of the remaining economic links between the “people’s republics” and Ukraine proper, some details were revealed about how the separatists plan to run the industrial assets they forcefully put under their control on March 1. A key role will seemingly be played by South Ossetia, the breakaway republic inside Georgia.

The “Donetsk People’s Republic (DNR)”, which controls the lion’s share of the factories put under “external administration”, on April 4 assigned an obscure company called Vneshtorgservis to manage the nine largest affected enterprises, mainly steel and metallurgy plants.

That company has no website nor is much about its background known. However, the Donetsk-based former separatist commander Alexander Khodakovsky has claimed in his blog that Vneshtorgservis is registered in South Ossetia. In early May, an investigation in Russia’s Kommersant-Vlast weekly revealed that the company is headed by Vladimir Pashkov, a former deputy governor of the Irkutsk region in Siberia.

In that report, Alexei Granovsky, the “DNR minister” for industry and trade, confirmed that Pashkov is a Russian citizen and that he had previously served as an economic adviser to Donetsk separatist leader Alexander Zakharchenko. “We won’t reveal who stands behind (Pashkov), in order to protect our partners,” Granovsky told Vlast, only to add that “our only partner is the Russian Federation”.

Ukraine’s Security Service SBU said in February that Pashkov was instrumental in the secret transfer of money from the Russian state to the “Luhansk People’s Republic”. In order to hide the link with Russia, Pashkov used an obscure charity called Foundation for the Support of International Humanitarian Projects and a bank called Mezhdunarodny Rashchyotny Bank (MRBank).

A bank with that name is registered in South Ossetia’s capital Tskhinvali and serves the official correspondent bank for both the Luhansk and the Donetsk “people’s republics”, according to statements by the respective “state banks”.

The “people’s republics” are believed to be heavily dependent on transfer payments from Russia (see our annual report, p. 9). According to the SBU statement quoted above, the “LNR” could just provide two out of eleven billion roubles for its 1st quarter budget this year – this amounts to just 18 per cent.

The fact that South Ossetia has become the key hub for financial transactions between Russia and its protectorates in eastern Ukraine was confirmed by Denis Pushilin, the Donetsk “people’s republic” parliamentary speaker and chief international envoy.

In a video interview published in April, Pushilin explained that “all processes” regarding payments, raw materials and their documentation for the affected plants “go through the country that has recognized us – that is South Ossetia”. He added that it is important for the international community that international law is not violated.

A total of 43 Ukrainian-owned enterprises have been put under “external administration” in the Donetsk “people’s republic” alone, following an activist-led trade blockade from the Ukrainian side. The 34 factories not assigned to Vneshtorgservis are all managed by different separatist “ministries”. This will also make it even harder for Ukraine to deal with them because of Kiev’s policy not to speak to the separatists directly.

Ukraine has labeled the move an illegal seizure, while the separatists claim that legal ownership is not affected. However, much of the industrial production and wage payments in the affected factories were halted.

The separatists have promised to pay wages themselves and to find new markets for the plants in Russia, but have admitted themselves that turning the plants’ orientation away from Ukraine after more than 25 years of economic integration won’t be easy (see Newsletter 21).

However, Moscow, which is under Western sanctions because of its role in the conflict, does not recognize the “republics” – even though it began recognizing separatist-issued passports in February. Thus, Russian companies trading directly with the “people’s republics” do not only risk western sanctions, they also are likely to break Russian law (the Kremlin decree on recognition only covers personal documents and vehicle plates, not company or trade certificates).

This gives a pivotal role to South Ossetia: The tiny region with less than 50,000 inhabitants on the Caucasus southern flank is currently the world’s only territory to have officially recognized both “people’s republics”. And South Ossetia has been recognized as an independent state by Russia after its troops crushed an attempt by Georgia to recapture the region in 2008.

On May 11, the third anniversary of the controversial referenda on which both “DNR” and “LNR” justify their independence, Anatoly Bibilov, who was elected de-facto President of South Ossetia one month earlier, signed a wide-ranging friendship agreement with the “Donetsk People’s Republic” that is supposed to deepen cooperation in all spheres.


  1. Fledgling attempts at economic integration with Russia

South Ossetia’s Bibilov also took part in a session of the “Russia-Donbass Integration Committee” in Donetsk on May 12, where he argued that the economic future was bright because Donbass had been an economic powerhouse during the Soviet Union.

Speaking at the same event, Donetsk “people’s republic” leader Alexander Zacharchenko once again seemingly refuted the Minsk agreement (which stipulates the separatist areas’ return to Ukraine) by declaring that all efforts at economic integration will be directed to Russia, claiming that this process was already in its third year, having begun in 2014. “Sadly, we did not manage to do it like Crimea”, he added with reference to the Ukrainian peninsula, which was annexed by Russia in 2014.

However, the “Integration Committee’s” yielded no discernible momentum to restart industrial production. Among its few concrete outcomes was a pledge by a Crimean state economic cooperation agency, that household cleaning products and sweets from the Russian-occupied Black Sea peninsula would be shipped to the “people’s republics” soon.

Meanwhile, ministries and members of parliament have been at least making suggestions on how to achieve that.

Earlier in May, the Donetsk “people’s republic” Economics “Ministry” launched a website for outside investors, which boasts 69 specific investment suggestions, ranging from noise reduction for steel mills to constructing a brick factory. The site is in Russian only – and at the launch officials did not mention any specific countries from where they would like to attract investors. And in Moscow, State Duma deputies presented plans to turn the coal and steel region into a tourist zone.


  1. No new clues about deadly OSCE incident, but separatists heap accusations at Ukraine

The fatal explosion underneath a vehicle of the OSCE Special Monitoring Mission on April 23, which killed a paramedic working with the mission, remains officially unsolved. However, the most likely explanation is that the armoured Toyota Land Cruiser with three people on board accidentally hit an anti-tank mine (see Newsletter 21). This notwithstanding, the Luhansk “People’s Republic” (LNR), who controls the road where the explosion happened, published a series of what it claimed to be evidence that the Ukrainian military had committed an “act of terror”.

The separatists’ military spokesman, Andrei Marochko, on  May 12 gave the names of four Ukrainian commanders whom he said had ordered to send special forces “sabotage groups” into LNR-controlled territory. According to Marochko, these groups did not only blow up the OSCE vehicle, but also managed to shell a village (Frunze) and open fire with (large caliber) weapons banned by the Minsk agreement in eight other villages.

One day later, Marochko claimed to have intercepted a text message exchange between Ukrainian officers after the explosion. The Ukrainian special forces command was happy with the outcome of the provocation, the spokesman said.

And on May 14, Alexander Sleptsov, an LNR military intelligence commander claimed in a video interview from the scene of the explosion that a Ukrainian military UAV had been filming that particular area. The video includes aerial footage from a drone, which Sleptsov said was shot down by the separatists, although he did not say when.

However, that information is hardly surprising, given that the explosion occurred on a road less than a mile from the line of contact (front line), which is identical with the Seversky Donets river in this area. Mine density is highest along this line and both sides are well known to spy on each other with the help of drones.

The commander also said that the road was used by both the OSCE and vehicles from the LNR military and that he himself had used it one day before the explosion to follow up on sightings of an unidentified military jeep, believed to be carrying Ukrainian special forces.

Both “people’s republics” regularly blame Ukrainian commandos (known by their Russian acronym DRG) for all sorts of incidents in the areas they control. The LNR state security “ministry” has recently paraded confessions of captured Ukrainian servicemen on video (see Newsletter Nr 19).

On May 19, the ministry published interviews with three men who said that they had formed such a commando under orders from a Ukrainian commander identified as Major Pavel Balov. In one video, the commando’s leader, identified as Vasily Sapronov, is shown how he readily replays the killing of an LNR” police officer.

Ukrainian officials have accused the separatists and Russia of orchestrating the explosion. The country’s law enforcement authorities have launched a criminal investigation into what they call an act of terrorism.