Ukraine's Separatist Regions Face A Bleak Economic Future

With major enterprises closed for the past month, coal production down, and the transportation system in disarray, the economic future of eastern Ukraine's separatist territories looks bleak.

"The consequences of the conflict for the local economy have been disastrous. We're looking at a 30 percent decline in output from last year," said Yuriy Makogon, an economist at the University of Donetsk.

The areas of Donetsk and Lugansk, in the middle of the coal-producing Donbas region, declared independence last month and cut ties with the central government in Kiev.

Since then, the region of six million people, Ukraine's industrial heartland accounting for one fifth of the country's total gross domestic product, has slipped into lawlessness.

The two largest companies, chemical heavyweights Stirol and Severodonetsk Azot, halted their operations in early May, citing the ongoing hostilities between pro-Russian rebels and Ukrainian forces.

One of the nation's largest shale gas projects, with an investment of over $10 billion (7.3 billion euro), has stalled.

The project's operator, Anglo-Dutch corporation Shell, insists that it is still on track, but Ukrainian Prime Minister Arseniy Yatsenyuk has acknowledged it is in trouble.

The reason: A crucial portion of the deposits are located in Slavyansk, a rebel stronghold surrounded by Ukrainian forces and the scene of daily combat.

- Leave without pay -

Several mines have also been forced to close down, causing a year-on-year drop in coal production of 10 percent in recent weeks.

"That's 7,000 to 10,000 tonnes of coal that we miss out on every day," said Ukraine's deputy coal minister Yuriy Zyukov.

"Many companies in Donetsk have closed the gates and sent their staff home on unpaid leave," said Gennadiy Tkachenko, the deputy mayor of Donetsk, a city of one million inhabitants.

Transportation is in trouble too. The Donetsk International Airport has been closed down after rebels tried to take it and were met by a lethal counterattack by Ukrainian authorities in late May.

Train traffic has been disrupted by explosions on the rail network, and on most major roads throughout the region, checkpoints have been set up by rebels and Ukrainian forces, making goods transport a risky business.

AFP journalists saw two trucks, riddled with bullets and abandoned, along a road near Slavyansk.

Pro-Russian insurgent leaders try to instill optimism by rattling off figures about the economic importance of the Donbas area.

It accounts for just four percent of Ukraine's total territory, but has 14.5 percent of the nation's population, accounts for 20 percent of its gross domestic product, and is the source of 25 percent of exports.

"If the 'People's Republics' of Donetsk and Lugansk are not recognised by the international community, we cannot export our products abroad," said Makogon, the economist.

"Currently we only export 30 percent of our production to Russia. Russia won't be able to buy everything we produce."

- Crisis industries -

Despite their riches, the separatist regions have been net loss makers for the government in Kiev.

Official Ukrainian statistics show that Donetsk receives three times as much money as it pays back to Ukraine. Lugansk receives twice as much.

Rinat Akhmetov, a billionaire whose sprawling empire covers everything from mining to banking and employs 100,000 people in the east of Ukraine, is opposed to the separatists.

In return, the head of the pro-Russian "parliament", Denis Pushilin, has threatened to seize his enterprises and nationalise them.

But the prime minister of the "People's Republic of Donetsk", Aleksandr Borodai, has rejected the threats.

"There is no way the enterprises will be nationalised," he said, while expressing he hope that Akhmetov, the region's top employer, might change his anti-Russian stance.

"The regions in the east can't survive on their own, without help from Kiev," an economic expert said in Donetsk, asking to remain anonymous.

The said very few of the mines are profitable and the metallurgic industry has been losing money since 2009 because of the global economic crisis.

"The state is holding up that sector because of its social importance."