White elephant: occupied Donbass has been sucking dry Russia's last resources

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Russian budget pays

From the very beginning of its aggression against Ukraine in 2014, the Kremlin was forced to support the «people's republics» economically. Contrary to the popular myth that the prewar Donbass had fed all of Ukraine, the region's economy was already in crisis and was being subsidized. Only some of the industrial assets owned by the oligarchs Rinat Akhmetov (the Mariupol metallurgical plants and the most profitable coal holdings) and Dmitry Firtash (the chemical plants in Severodonetsk and Horlivka) were generating income. The hostilities of 2014-2015 exacerbated the situation. The «gray zone» enterprises lost their Ukrainian markets, and the Russian authorities began devising schemes to keep them alive.

In 2017, the SBU published an investigation into the Russian Foundation for the Support of International Humanitarian Projects. The Ukrainian security services claimed that only 2 out of 11 billion rubles in taxes was collected for the «LNR» budget locally. The rest was transferred from the Russian budget through the intermediary fund, headed by Vladimir Pashkov, a former vice-governor of the Irkutsk region, and founded by the South Ossetian International Settlements Bank situated on Stalin Street in Tskhinvali. Pashkov later showed up in Donbass as «deputy prime minister of the DNR.»

The Russian budget supported the infrastructure and social payments in those territories. However, the payments remained much lower than in any other Russian region: the average pension in the «LDNR» is 7,000 rubles, the average salary is 12,000. Yet, according to calculations by Bild, by 2016 Russia was spending up to a billion euros a year to support the «LDNR.»

How the Donbass economy is managed

Sergey Nazarov, Russia's deputy minister for economic development, became the informal supervisor of the Donbass economy in 2014. Before joining the Ministry of Economy, he was first deputy governor of the Rostov Region, which borders on Donbass, and was considered a specialist in that area. In December 2014, Nazarov was appointed head of the interdepartmental commission on humanitarian aid to Donbass, which at that time was tasked with organizing the region's reconstruction. Formally, Nazarov was responsible for organizing the delivery of humanitarian supplies; in fact, the commission was responsible for all aspects of organization of Russia's protectorates in Donbass. This included «humanitarian» supplies of energy resources, i.e. gas and electricity, after Ukraine stopped supplying the occupied territories.

Some claim it was Sergei Nazarov's idea to bring to Donbass the fugitive Ukrainian oligarch Sergei Kurchenko, who in the past got fabulously rich through his proximity to President Yanukovich's family and controlled an offshore empire. In 2017, under Russia's patronage, Kurchenko took control of the most profitable part of Donbass industry expropriated from Akhmetov and organized a system of gray exports of coal and metallurgical products through Vneshtorgservis (VTS), a firm registered in South Ossetia. For example, Donbass coal was shipped all over the world (including Ukraine, where it went through Belarus) through shell companies and ports in southern Russia.

Kurchenko took control of the Yenakiyevo and Makeyevka metallurgical plants, the Yenakiyevo Coke Chemical Plant, the Khartsyzsk Pipe Plant, the Rovenkianthracite, Sverdlovanthracite, Krasnodonugol coal mines, and the Alchevsk Metallurgical Plant (owned by the Industrial Union of Donbass) which had been part of Akhmetov's business empire.

VTS managers joined the governments of the «republics» and became colonial officials of sorts (the policy of Vneshtorgservice was compared to the predatory methods of the East India Company).

However, Kurchenko was let down by his excessive thirst for enrichment. Workers went on strikes at Donbass enterprises over wage arrears, as all profits were taken offshore. For a long time, the Kremlin was content with the situation - the Ukrainian media periodically published articles about Russian officials and FSB generals who had a stake in Donbass schemes. But in 2021, when the situation began to threaten the stability in the region and the scale of the strike movement could not be concealed, the Kremlin decided to replace the adventurist Kurchenko with a Russian businessman with a «clean» background, Yevgeny Yurchenko, a former top manager of Svyazinvest and the United Aircraft Corporation. He was supposed to cover up the infusion of Russian money into the Donbass economy.

The change of overseers took place amid another political stalemate with the Minsk agreements. A new Russian «investor» was supposed to represent the creation of a «showcase of the Russian world» in Donbass, attractive in the eyes of the region's population that remained under Kiev's control. At the same time, Putin issued a decree removing customs barriers to goods from the «LDNR.»

Some experts speculated that Russian private metallurgical companies are forced to pay «patriotic tribute» to Donbass enterprises. «They are assigned certain areas of activity, in other words, they are told that along with their companies they have to develop some other enterprise in the uncontrolled territory of Donetsk and Luhansk regions,» says the Ukrainian economist Oleksiy Kushch.

Putin's new aggression, which began in February 2022, ended the coexistence of the two Donbass regions: the Kremlin set its sights on the occupation of the entire region. Under the new setup, there was no need to imitate the statehood of the «LDNR» or use other complicated schemes: Russia's presence in Donbass came out into the open. For example, instead of suspicious banks from South Ossetia, Russia's Promsvyazbank with ties to the military-industrial complex, which is under Western sanctions and has already opened branches in the annexed Crimea, officially began operating in the «DNR.»

Following in the USSR's footsteps: patronage, international duty, and construction brigades

Even before the invasion of Ukraine, Senator Ryabukhin, first deputy chairman of the budget committee of the Federation Council, said that the restoration of infrastructure in Donbass would require about 1.5 trillion rubles. Now, given the total destruction of Mariupol, the cost for the Russian budget could grow to several trillions. Kirienko (or the protagonist of the piece attributed to Kirienko) also confirmed this. Senator Ryabukhin also argued that Russia has money for Donbass coming both from the state budget and via public-private partnership. The main thing, he said, was to protect Donbass from the threat of an attack by Ukraine.

After three months of war, Russian governors and mayors began to offer their patronage over Donbas cities. For example, Moscow Mayor Sergei Sobyanin offered to take Luhansk under his wing, and St. Petersburg government head Alexander Beglov Mariupol. Mikhail Degtyarev, governor of Khabarovsk Krai, announced his «patronage» over Debaltsevo in the Donetsk region; Natalia Komarova, governor of the Khanty-Mansi Autonomous District, signed a cooperation agreement between Yugra and Makeyevka; and Chuvashia plans to help restore Donetsk factories.

At the St. Petersburg Economic Forum, a cooperation agreement was signed between the «DNR» and the Tula region, according to Denis Pushilin, a guest of honor at the event. In total, the Donbass tribute was imposed on 20 regions. The process is being overseen by first deputy head of the Presidential Administration Sergei Kirienko, who is known behind the scenes as the «viceroy of Donbass.»

Infrastructure projects will be coordinated by a team of government officials headed by Deputy Prime Minister Marat Khusnullin, a major lobbyist for the construction industry. A corresponding agreement was signed by the Russian Ministry of Construction and the «governments» of the «LDNR». Kommersant's sources point out that the Unified State Customer for state construction, created in 2021 and subordinated to the Ministry of Construction, may become the general contractor for doing construction work in Donbass. This entity has been engaged in constructing facilities in the Russian regions financed via the Federal Targeted Investment Program (and is ready to spend 938.7 billion rubles in 2021-2023).

The fact that the diversion of funds from regional budgets will lead to problems on the ground is already evidenced by the cuts in spending in the Russian regions, for example, on road construction. In May 2022 the tender for the reconstruction of the R-504 Kolyma highway (5.3 billion rubles) was canceled and the Baikal highway repair project (6.6 billion rubles) was halted in June. There is also a lack of funds for extinguishing forest fires in Siberia. One can easily assume that as regional budgets are squeezed, the generous aid to Donbass will turn into an analog of the «international duty» of the late-period Soviet Union, when the authorities maintained friendly socialist regimes amid the country's deteriorating economic situation.

A separate area is human resources and labor. Since 2014, the demographic situation in Donbass has been rapidly deteriorating. The population fell by half, from 6.5 million to 3.6 million: the economically active and young people were leaving the conflict zone. Some people moved to Ukrainian territory, while others moved to Russia. As a result of these processes, Luhansk and Donetsk turned into retirement cities: people of retirement age accounted for about half of the republics' population. After the start of the current phase of the war, the population decreased even further due to refugees and military losses (general mobilization was announced in the LNR, and a significant number of men ended up at the front, where «allied units» suffer heavy losses). The same can be said of the territories of Donbass seized by Russia during the «special operation.»

The replenishment of human resources will be taking place, particularly, at the expense of shift workers and migrants from Russia. Russian authorities have already been actively recruiting regional officials, doctors, and teachers, enticing them with double pay and benefits (such as interest-free mortgages). The propaganda telegraph channel Nezygar suggests using «Israeli experience» to encourage resettlement of several million Russians to the occupied territories.

Another option is to redirect labor migrants from Central Asia to Donbass. Vyacheslav Postavnin, head of the Center for Analytical and Practical Studies of Migration Processes, pointed out in an interview with Rossiyskaya Gazeta that such a plan is quite promising - at a time when residents of the Russian provinces «are beginning to lose their labor skills,» while «the prospects are wide open» to industrious migrants in Donbass.

Some Russian enthusiasts of the «denazification» of Ukraine propose using forced labor of Ukrainian prisoners of war in Donbass, following the example of the postwar restoration of the USSR. Similar initiatives have been put forward by the «DNR» Ministry of Justice. Nor does the United Russia party forget about another Soviet practice - student construction brigades, which they plan to use in the reconstruction of the Donbass infrastructure. «Such work should count as educational, introductory and industrial practice,» says the official website of United Russia.

Such plans indicate that the Kremlin already views Donbass as a part of Russia, the next target for annexation. And the Russian bureaucracy perceives the region as a place where it will be easy to make a «patriotic» career - and, given its corrupt traditions, to quickly enrich itself through generous programs and subsidies allocated from the state budget «to Donbass.»