Editor's Note: This a Spektr project, with the support of the Russian Language News Exchange. This project has been adapted by Hromadske International.
In the so-called Luhansk and Donetsk "people's republics", there is no free transfer of capital, and transferring big funds out of the area is extremely difficult. There is no legal banking system, and there is practically no protection of private property. But people still run their businesses.
The Laws of 1961
“Donetsk-style car-sharing is when renting a car is free, and the client shows up with a rifle,” said a colleague of mine from Moscow recently. You won’t hear these kinds of jokes about Donetsk in Kyiv, while locals wouldn't laugh at them in Donetsk: firstly, because there isn't a lot of humor there, and secondly, these jokes often have a hard time keeping up with reality.
“Car-sharing” is forcibly taking cars from people, companies, or even dealerships, which was widely practiced in the more violent times of 2014. This isn’t done anymore, but back then, the conditions at war were primarily dictated by a man with a gun.
Ihor, a construction material factory owner in Donetsk, asking not to be identified by his full name, remembers how in the summer of 2014, his business, and others, were seized by armed men fighting on the side of the so-called "Donetsk people's republic" (or "DPR"). At that time, the only person at the factory was the manager, remaining as the head of a small team that sold whatever products were left. This was normal, in those times – business owners and top managers fled the city en masse, while remaining enterprises (often with management’s permission) were managed by those who were brave enough to stay, or just didn’t have the cash to flee.
But soon, people with guns took this manager into a building formerly used by the Security Service of Ukraine (SBU), beat him up, threatened his family, and then demanded that he send his daily production directly to them. At the time, that SBU building was controlled by the “Russkaya Pravoslavnaya Armiya” ('Russian Orthodox Army'), an armed group affiliated with the "DPR". Almost every armed division of the so-called republic had its own businesses, which were obligated to “aid the war effort” with money and supplies.
Fiscal policy is straightforward in the occupied Donbas. Illustration by Ilya Kutoboy, Russian Language News Exchange
“The first day they came to the office, they stole some small sum of cash we had there, and all the alcohol. And then they started coming to the factory every day, to take all the revenue, everything that we’d managed to sell,” recalls Ihor.
But by the end of 2014, armed men were driven out of business by a new armed forces structure in the "DPR", and they started working in two jurisdictions – the Ukrainian legal entity remained open, and the majority of people counted as being legally employed in Ukraine. All the big businesses paid in hryvnia, on the government-controlled territory. Meanwhile, two or three people were registered in the "DPR", and taxes were paid from their salary. Business in the local jurisdiction of the "DPR" was done purely via cash.
In 2015, a very typical Donetsk story occurred: during the paperwork stage of a sale – done using Ukrainian documents – a group of “taxmen” from the "DPR" broke in with rifles, and demanded additional tax payments, which they based off laws set in the Ukrainian Soviet Socialist Republic of 1961. In fact, the "DPR"’s entire legal system is based on those laws, seeing as they’re the last full legal foundation in the territory prior to Ukrainian independence.
The “taxmen” took the names of all workers present at the factory at the time, though that amount clearly didn’t correspond with the official statement for tax authorities. “And so these taxmen with guns forced us to transfer the majority of workers onto 'DPR' jurisdiction, officially,” explained Ihor.
This jurisdictional transformation for business wasn’t limited to Ihor’s factory. The process carried a lot more meaning for big business – mostly, those tied to the mining-metallurgical complex, that is, businesses that were inextricably tied with steelmaking. This chain involved the use of coal and coke, derived from ore processed in cokeworks, which were then transported to ports in Mariupol. But this critical regional lifecycle was broken due to war, meaning factory bosses were pressed to find compromises.
Until the spring of 2017, all large enterprises on occupied territories of the Donetsk and Luhansk regions continued to work under Ukrainian jurisdiction – this meant their profits were sent to the Ukrainian banking system, their taxes paid in Ukraine (including military taxes), and their workers received wages on their Ukrainian banking accounts.
These businesses officially didn’t pay any taxes in the so-called "DPR" and "LPR" ("Luhansk people's republic"), and officially had no contact with people the Kyiv authorities had deemed to be terrorists (those kinds of contacts could result in prison time, and/or international sanction). At the same time, coal and metal products were sent through the contact lines for export through Mariupol ports practically unhindered. The entire economic infrastructure of the Donbas continued to function, obviously tied to some shadowy deals at the highest levels, while waiting for the situation to be resolved politically.
Big businesses were seized by the "L/DPR" only in 2017. Illustration by Ilya Kutoboy, Russian Language News Exchange
And only after three years following the start of the “Russian spring” and the introduction of an economic blockade of the territories by Ukraine, on March 1 2017, did armed forces associated with the so-called "republics" enter these businesses and install “temporary external management.” The so-called "L/DPR" authorities say that this isn’t nationalization (which would require payment of compensation), and that the de jure owners of these companies haven’t changed. But in reality, these owners no longer have any influence over “their” businesses.
This “external management” has some interesting forms – for example, the Private Limited Company (PLC) “Vneshtorgservis”, (roughly, a word meaning external trade service -ed.) is registered in the self-recognized territory of South Ossetia, meaning that international sanctions have little influence.
“Vneshtorgservis” PLC is a special management organ for the following companies: the Donetsk Metallurgical Plant, the Yenakiyeve Metallurgical Plant, the Makiyivka Metallurgical Plant, the Yenakiyeve Cokeworks, the Khartsyz'k Pipe Plant, the Yasyniv Coking Plant, MakiyivkCoke, the Komsomol Oreworks, the public joint-stock company (PJSC) “Air Liquide”, joint venture (JV) “Krasnodon Coal”, the Alchevs'k Metallurgical Combine, “Sverdlovanthracite”, “Roven’kyanthracite”, and the state-owned enterprise “Dokuchayevsk Flux and Dolomite Plant.”
There were efforts to fully reorient these mining-metallurgical factories to Russia, and now ore is transported 1,500 km from the Kola Peninsula in Russia, while Russian Railways provide a 25% discount on ore transport to the Donbas. Then the finished products are sent back to Russia, to Russian metal plants, and from there, it seems, are exported as “Russian” products.
Tenants and Owners
While smaller companies were not put under “external management”, their owners still had to balance on two chairs: one, to continue doing business in the non-government controlled territory, but two, not to run afoul of “terrorism financing” laws. They managed to find help by using a simple method – renting.
So the business is rented out. An example are two candy companies located in Donetsk – “Konti” and AVK. “Strila” candies, formerly manufactured by AVK, are now said to be manufactured at the “Lakond” factory in Donetsk, which means any criminal cases for “terrorism financing” would be aimed at the tenants, who are located beyond the reach of Ukrainian law in the non-controlled territories.
Sometimes, the use of middlemen as tenants can lead to unpleasant surprises. For example, the owner of one of the bigger Ukrainian trading brands for alcohol, “Olimp”, Pavlo Klymets, who once was found among lists of Ukraine’s richest people, was arrested in Moscow last April on charges of “large-sum bribery of responsible agents.” Klymets, according to Russian business daily Kommersant, was trying to set up a deal to regain control of his own businesses in the "L/DPR" territories, once his tenants began to treat the business as their own.
He didn’t manage to find authority over those middlemen, and remains imprisoned to this day.
At the market in Yasynuvata, Donetsk region. Photo: Spektr. Press
But in some cases, things in Donetsk worked squarely, without clever schemes – a single order nationalized all commercial markets in the "DPR", and they were all combined into a single state-owned enterprise, “Donbas Markets,” directed from Donetsk.
There were business owners who decided not to test fate, and resolved their problems in a radical way: “We dumped our shares in Donbas and Crimea as quickly as we could,” said one source, connected to agricultural oligarch Yuriy Kosiuk. “Once war engulfed the area, and armed men arrived at our poultry factories near the village of Hrabove, next to Shakhtarsk, we managed to get an order out to the director there to free the birds onto the fields – it would have been a catastrophe if they’d died in an enclosed space. Now we have no relation at all to that factory!”
That poultry factory is now one the of ”city-building”, “governmental” products in the "DPR". Its chickens are the cheapest meat for the population. Control of the factory was first attributed to former "DPR" head Alexander Zakharchenko’s circle of influence – after his death, the business was transferred to his successor, Denis Pushilin.
A single order nationalized all commercial markets in the "DPR", and they were combined into a single state-owned enterprise called “Donbas Markets,” directed from Donetsk.” Illustration by Ilya Kutoboy, Russian Language News Exchange
Taxes and Certification
The so-called "ministry of economy" in the "DPR" requires that official salaries start at a minimum of no less than 10,000 Russian rubles, or $155. Taxes are paid from this sum. This bothers business owners: doctors and teachers, for example, earn 6,000 roubles, or $93, and small businesses are unable to pay salaries of $155.
“People obviously earn more in cash,” says construction material factory owner Ihor. “Right now, in 2019, everyone’s fighting with cash. A lot of our end customers work with cash, nearly 90%, especially now when everything has shrunk. And the tax office tell us that it should be the other way around – 90% of transactions should be cashless in the 'DPR', using 'Respublikansky Bank'. They seriously expect our accountants to ask for documents in nearly every retail transaction, so that she would register the payments as a cashless transaction, while the clients provide their passport details. This way they increase the tax load.”
According to Ihor, the tax system in the "DPR" works this way: there’s no VAT, but there’s a 2% tax on transactions and 15% tax on profits. But when Russian businesses deliver to the "DPR", these deals are registered as exports to Ukraine, and VAT is refunded.
This all results in a very illustrative case: For example, a sports newspaper, called Start, is made in Donetsk, though now it’s printed in Rostov-on-Don in Russia – and even with customs and transport costs to Russia, it ends up cheaper. But working the other way is unprofitable. “You don’t understand how many customs documents I have to gather for every separate position for export into Russia, it’s too long for our business!” said Start’s owner.
Some people turn a profit off their unrecognized status. This primarily applies to bus operators to nearly all the cities on the European part of Russia – the biggest of which are Rostov-on-Don and Moscow. Starting from 2015, Ukrainian authorities banned busses and trucks from crossing the demarcation line.
Advertisements for transit in Donetsk, September 2019. Photo: Spektr.Press
People can cross the demarcation line only in automobiles with a seating capacity maximum of seven people – commercial seven-seater cars are the biggest sellers here. One of the biggest routes, “Pension Fund – Oshchadbank”, which is used by pensioners who collect their pensions on the government-controlled territory, costs $40 per person – around a third of their collected pension.
Pensioners need to take this route at least once every 59 days (though President Volodymyr Zelenskyy has offered to increase this duration to at least a year, but this has not yet been ratified). 700,000 people have been estimated to receive Ukrainian pensions in the non-government-controlled territories.
According to data provided by the Pension Fund of Ukraine, authorities on the government-controlled territory have paid out pensions to, in September 2016, 519,500 pensioner-IDPs, in September 2017, 492,500, in September 2018, 502,200, and in September 2019 618,800 pensioner-IDPs.
Cargo is another matter. Busses and trucks have been banned from crossing the demarcation line from 2015, which means that only minibuses like the “Gazelle” can cross. Selling an apartment, for example, which requires removing the stove, washing machines, furniture, clothes, can result in steep costs. Minibuses can carry up to 2 tons, but this costs $242 to deliver to nearby Volnovakha, and approximately twice as much to deliver to Kyiv.
Tourism and Realty
Tourism companies in the unrecognized republics work both for Russian and Ukrainian tourists. People with money, but without connections to the "DPR", prefer to relax for cheap in Egypt, which is closed to Russian charter flights. They fly from Ukraine. And flights from Ukraine to Turkey and Croatia are also cheaper.
But the locals have a very clear understanding that taking even one vacation in Russia could lead to problems in Ukrainian airports. “When we made our Ukrainian passports, we immediately took a euphoric flight through Rostov into Georgia, but only after did we understand, that we received a Russian stamp without receiving an official exit stamp from Ukraine,” said one Donetsk business owner, Andriy. “Now if we fly to Egypt via Kharkiv, tour agencies warn that our vacation could be ruined because of Ukrainian border guards – so we flew again through Rostov for our summer vacation.”
For crossing the uncontrolled border with Russia from the non-government-controlled territory, Ukraine places administrative penalties and fines starting from $69. But for crossing the border, starting in Ukraine, the fines rise to $137. But when checking the documents of Donetsk residents, border guards typically hold them for a few hours, for explanations. Taking a vacation, according to travelers, will result either in canceled plans or in a sudden need to pay bribes.
Real estate agencies can, without exaggeration, be called the most profitable and growing business in the "L/DPR". “House prices depend on the level of despair of the buyer – recently, a house across from the Donetsk Area was sold for $100,000, though it had a modest price before the war, a little over $400,000,” shared one real estate agent who deals in elite realty.
Landlords aren’t rushing to lower prices, but they’re not often present on their property – but leaving a luxury property without oversight can be dangerous. This has resulted in the creation of a new job – Donetsk residents have been setting themselves up as supervisors of posh apartments. They live in them and receive salaries equal to doctors or teachers.
One of the most successful realtors in the "DPR" is Kyrylo Sirius. Unlike others we’ve spoken to, he doesn’t hide his name and offers us his business card, on which his portrait in a tux has been drawn. The flip side carries the slogan “The time has come to buy a house for yourself!”
He explains the pricing for typical housing in Donetsk: divide the pre-war price by four, and if the apartment had unfinished renovations – by five. For example, an apartment that cost $75,000 at the end of 2013, may, in very favorable circumstances, be sold for $15,000.
Kirill Sirius, September 2019. Photo: Spektr.Press
Sirius shows us a three-room apartment in a posh new development for $20,000. This apartment was built by Ukrainian companies, and was sold with Ukrainian documents, but now it needs to be re-registered under "DPR" law, and once the property has been priced, 1% of the property’s price will need to be paid as “tax” to the so-called "republic."
Selling an apartment can be done remotely: the services of a lawyer can be retained for $220, while the buyer will hand money off to a middleman in Donetsk, while in Kyiv, for example, the seller will receive this sum minus a 2% commission.
Sirius entered the real estate business in 2016, and has a very positive attitude. He believes that any kind of crisis also represents a time of opportunity – all that’s needed is finding the right niche.
/With help from the Russian Language News Exchange.
/Translated by Romeo Kokriatski