By Lina Kushch, Elizabeth Piper and Natalia Zinets.A man walks past a coal mine in the eastern Ukrainian city of Donetsk, July 8, 2014. CREDIT: REUTERS/MAXIM ZMEYEV.
(Reuters) – After pro-Russian rebels took 720 kg of explosives, 360 detonators and almost 1 km of wiring, the Skochinskiy coal mine, an ageing stalwart of the economy in Ukraine’s Donbass region, was put out of action.
Fierce fighting and rebel requisitioning have stopped work at many of the coal mines in and around the strongholds of Donetsk and Luhansk. Without the fuel, nearby steel factories and electricity plants across Ukraine are struggling to work.
Many in Ukraine’s western and central regions see the industrial east as a burden, home to an outdated Soviet economy of monolithic factories that offer little to the rest of a country where other sectors and smaller firms are more common.
But officials say with a budget unable to finance the Ukrainian army after losing revenues from Crimea, annexed by Moscow in March, Kiev not only needs the contributions from its east but also its heavy industry, albeit in a modernised form.
“There’s a war in Donetsk and Luhansk and practically all revenue from these regions to the state budget has fallen. Plus they annexed Crimea,” said Mikhailo Noniak, deputy minister for revenue and duties at Ukraine’s tax agency.
“The reality of the financial situation is pretty bad at the moment because of Russia’s aggression. A lot of money goes to defence.”
Ukraine is virtually bankrupt, running wide external deficits and struggling to cover state wages, never mind feed and equip an army whose numbers have risen as fighting against rebels who want independence for the Donbass intensifies.
Western lender, the International Monetary Fund, has thrown a financial lifeline, stumping up $17.1 billion as part of a two-year bailout package. Kiev has received $3.2 billion so far and hopes to get an additional $1.4 billion in late August.
Oligarchs, who became wealthy in the chaos following the fall of the Soviet Union and own much of the country’s private economy, have also stepped in, with one, Ihor Kolomoisky, financing and arming several battalions fighting the rebels.
But while financing from businessmen is unsustainable, Western funding demands that a reluctant Ukrainian parliament make some tough changes to its economy, where the state has long subsidised energy bills and has a bloated state sector.
Much of that budget spending goes to its east, especially Luhansk and Donetsk, impoverished regions where a flat panorama of pot-holed roads and grassy fields is punctuated by slag piles or mining machinery.
Donetsk contributed 11.7 percent, or 170.8 billion hryvnias UAH=, to Ukrainian gross domestic product last year and Luhansk contributed just over 4 percent, at 38.9 billion hryvnias. Continue reading