Nikolaus von Twickel



The situation in eastern Ukraine worsened considerably over the past weeks. While the military standoff continues unabated, Russia and the separatists took a number of steps that promise to deepen the chasm between the two “people’s republics” and the rest of Ukraine, thus further reducing hopes for the implementation of the Minsk agreement.


  1. Separatist administration over Ukrainian-owned industry

The main news to come out of eastern Ukraine’s “people’s republics” was their decision to end the relatively free operations of Ukraine-owned enterprises by imposing “temporary state administration” upon them.

While the move does not change legal ownership, it stipulates that management decisions are made by people appointed by the separatist authorities, thus amounting to a de-facto nationalization. It also leaves much of the local industry at the behest of people, who have a dubious track record of managing the economy.

Despite the violence and upheavals in the past three years, most large enterprises in the area controlled by the “people’s republics” remained officially registered as Ukrainian and paid taxes to the Ukrainian budget. Their owners, most prominently Rinat Akhmetov and Serhiy Taruta, had moved to Kiev, together with senior management, while workers and middle management remained behind.

On 10 February, the “parliaments” in both Donetsk and Luhansk voted for laws that would force the enterprises who continue to pay taxes in Ukraine to accept “outside administration” by 31 March. As an explanation, both cited the fact that the “people’s republics” needed the money to make social payments.

However, two weeks later, on 27 February, the leaders of both “republics”, Alexander Zakharchenko and Igor Plotnitsky, suddenly announced that the deadline would be brought forward to 1 March – leaving just two days to comply for the affected businesses.

This time, they cited the blockade organized by Ukrainian activists to thwart Kiev’s trade with the “people’s republics”. Zakharchenko argued that major factories like the Yenakiieve Iron and Steel Works, which employs thousands of people, were forced to halt production because of the blockade.

The volunteers, mostly veteran fighters and nationalists, started in January by blocking railway lines, and went on to include road links in mid-February.

The government in Kiev opposes the blockade, saying that it destabilizes the Ukrainian economy. On 15 March, however, it announced a ban on cargo traffic with the separatists, indicating that it is trying to replace the blockade with an official trade ban.

The Donetsk “People’s Republic” said on the same day that 43 enterprises have been put under its control – practically all major businesses on its territory. There were no reports that any businesses complied: Akhmetov’s energy giant DTEK said in a statement also on 15 March that it has lost control over all of its 11 plants in the separatist-controlled areas after they were officially notified that they must re-register and have their assets audited.

DTEK CEO Maksym Tymchenko argued that re-registering was unacceptable and that the plants would have to halt production because they cannot function outside the intra-Ukrainian production chain. “As a result, there will be a dramatic drop in revenues and rise of unemployment,” he warned.

The separatists played down such fears by arguing that there is demand for local industry products in Russia and other countries.

Zakharchenko said on 3 March that Donbass no longer needs Ukraine and that the remaining ties would be cut: “Let (Ukraine) learn to live without electricity, heat and soon without food, wages and pensions,” he was quoted as saying.

The separatist leader promised that the businesses would be administered by ministries of the Donetsk “People’s Republic” and that economic reorientation to Russia could be completed within two months. He also claimed that, as a start, 95 train wagons with coal were on their way to Russia.

However, there are serious doubts if such a scenario is realistic. If past experience is any guidance, redirecting dozens of factories towards Russia in just two months is very little time: The Donetsk Metallurgy Plant was taken under separatist control in June 2016, but nine months later it still has not restarted production – according to the latest announcement, it is supposed to happen this summer.

Experts point out that incorporating Donbass economically does not suit Russia well at a time, when demand is hit by a widespread economic slump. Russian steel and metal producers on 15 March denied a media report that the Kremlin had asked them to supply raw materials to eastern Ukraine. And a report in Russia’s Kommersant newspaper earlier this month said that many factories are facing closure as a result of the severance of ties with Ukraine proper.

Some of the difficulties have been spelt out by Ukrainian journalist Serhiy Garmash. In a video blog this week, he argued that the “people’s republics” might have a hard time to find capable managers as previous incumbents are likely to leave: “Not everyone wants to have the “DNR” stamp in his employment record book.”

In an earlier blog, Garmash suggested that since the seizures are unlikely to bring any financial gains quickly, the real reason behind them might be to force Ukraine to negotiate directly with the “people’s republics”: “Because the factories are now run by ‘state administrations’, negotiations with them amount to Kiev recognizing the puppet republics,” he said.

Garmash also listed phone conversations between Zakharchenko and one of his aides, intercepted by Ukraine, which suggest that the separatists were acting upon orders from Moscow. Indeed, the fact that Luhansk and Donetsk issued both ultimatums and parliamentary votes in tandem strongly indicates that a third party played a role – a situation similar to the “primaries” held in both “people’s republics” in October.

Direct negotiations between Ukraine and the separatist has been a long-standing Russian demand. The trade blockade on the government-controlled side, whose initiators remain murky, was a near perfect pretext for enforcing such a situation.

The “people’s republics”, who suffer from bloated bureaucratic apparatuses, an ageing population and a weak entrepreneurial base, have been eying the money from these plants for some time. Russia, which is believed to be spending millions of euros each month to bankroll the separatists, is undergoing a recession and is thus also keen to reduce this financial burden.

Last year, Russian media reports said that the Donetsk “People’s Republic” would start nationalizing those plants who pay taxes in Ukraine. However, except for one Donetsk Metallurgy Plant, which had a Russian owner (Mechel), this was not carried out. Instead, Kiev admitted by the end of the year that it is buying anthracite coal from the separatists, which a vital raw material for Ukraine’s energy sector (see our Annual Report, p. 9-10).

The risks for Russia and the separatists remain high. If Kiev refuses to back down and ultimately manages to switch to alternative coal imports, the socio-economic situation in the “people’s republics” could get out of hand. And Russia will face a significantly higher bill for keeping these areas financially sound.


  1. Russia declares separatist passports valid

The severance of factories’ ties to Ukraine is not the only recent indication for the deepening rift between Ukraine on the one side and the “people’s republics” and Russia on the other. On 18 February, Russian President Vladimir Putin signed a decree that obliges Russian officials to recognize personal documents like passports and birth certificates issued by the separatist authorities.

Ukraine lambasted the move as another breach of the Minsk Agreement that may result in wrecking it altogether. President Petro Poroshenko said at the time that it was “another evidence of Russian occupation and violation of international law”.

While Putin’s decree is illogical in the sense that it recognizes documents issued by a state that it does not recognize, the text actually tries to stick to the letter of the Minsk Agreement: It does not mention any “people’s republics” but talks of “documents and vehicle registration plates issued to Ukrainian citizens … permanently residing in certain districts of Ukraine’s Donetsk and Lugansk regions” – similar to the Agreement’s language.

The German Foreign Office consequently criticized Moscow’s recognition as “a clear breach of the Minsk Agreement’s spirit and aims”.

Russian Foreign Minister Sergei Lavrov justified the move as a humanitarian gesture, arguing that the population in the “people’s republics” faced growing difficulties in Russia, e.g. when their Ukrainian passports expired (see a discussion of this in Newsletter Nr. 10-2016).

While this is mostly true, the fact remains that more and more people won’t be able to travel abroad, given that no other country is likely to follow suit. This in turn, is fueling demands in Moscow to issue Russian passports to people in eastern Ukraine. Earlier this month, prominent Russian MP and Ukraine expert Konstantin Zatulin submitted a bill in the State Duma that would make it easy for Russian-speaking people who can trace their ancestors to the Soviet Union or even the Russian Empire.


  1. Donetsk separatist leader declares the contact line a state border

More bad news for adherents to the Minsk Agreement came on 11 March, when the Donetsk “State Security Ministry” published a decree by Donetsk “People’s Republic” leader Alexander Zakharchenko that defines the “line of contact” between separatist-controlled and government areas as a “state boundary”.

While the decree itself is unlikely to change much, because both sides have long established rigid customs, passport and security checks along that line, it obviously contradicts the Minsk Agreement, which speaks of “certain districts of the Donetsk and Luhansk regions,” which should be reincorporated into Ukraine.

It also contradicts earlier declarations by Zakharchenko, where he said that the separatists should “liberate” the whole of the Donetsk region.

However, at a press conference on 14 March, Zakharchenko said that the decree is merely a tool to remove legal barriers for arresting people crossing into the “people’s republic”. “Now we can legally arrest those that we don’t want to see here”, he said, adding that hitherto the law had allowed only short detentions. Zakharchenko went on to claim that the contact line remains a front line that might well move again. “The state border will be established then, when we will decide ourselves that this is our land and this is our state border,” he said.


  1. Captured Ukrainian servicemen paraded on video, confessing assassination in Luhansk

In Luhansk, meanwhile, the separatists claimed to have captured the assassins of their top military commander. In a video published on 10 March by the “State Security Ministry”, or MGB, a Ukrainian officer called Serhiy Ivanchuk claimed that he led a team of special forces that blew up the car of Oleg Anashchenko on 4 February. Another Ukrainians soldier, Ivan Deyev, was also presented in a video confession.

Ukraine rejected the confessions, saying that the two soldiers went missing on 11 February, one week after Anashchenko’s death. The Ukrainian intelligence service SBU said after the videos’ publication that the soldiers showed signs of torture and that their confessions were clearly made under duress. It also pointed out that it took the separatists a whole month to capture the confessions on camera.

The Luhansk separatists blamed Ukrainian agents for killing Anashchenko, as they have done after the killing of several prominent field commanders in 2015 (see also Newsletter Nr. 18-2016). Since the first video interview on 10 March, the Luhansk MGB has released a whole series of videos, in which the captured Ukrainian servicemen make more claims, like that they were trained by NATO officers and that the SBU is planning to assassinate more separatist leaders.