Prospects grim for business in Donbas war zone
Many relocate to other parts of Ukraine or shut down
Businesspeople in areas of the eastern Donbas controlled by Kremlin-backed separatists are on their own. It’s a lawless zone where no state institutions, including law enforcement, work anymore. Rules, such as they exist, are enforced by the military or militia that controls the area.
Some businesses in occupied parts of Luhansk and Donetsk oblasts continue to operate at lower capacities, but many small-tomedium sized business have gone bankrupt and lost assets.
For bigger businesses, there are many risks. Since April, ukraine’s largest metal holding, Metinvest, has been forced to suspend operations at some of its 10 steel mills and cut output at others. Not all of them are located in the separatist territory, though.
“Yenakiyevo Steel Mill is operating at 30 percent of capacity, while the capacity utilization rate of Azovstal steel plant and Mariupol Illich steel plant are at around 70 percent,” the head of Metinvest press service Vitaliyyermak told the Legal Quarterly.
The shipment of supplies and ready-made goods is a problem because many railway routes are damaged. Employees who commute through separatist-controlled territory find it hard to get to work because public transport does not operate regularly, and traveling is risky because of shelling.
“Production at all the metallurgical plants of the Metinvest Group, including Zaporizhstal, decreased by 20 percent in the second half of the year compared with the same period last year,” Yermak says. Metinvest’s income fell by 14 percent in the first nine months.
Yet big business continues to pay taxes to the Ukrainian government. However, in eleven months of this year, Ukraine received just Hr 4.3 billion in taxes from Donetsk and Luhansk Oblasts, 73 percent down from the last year, Ukrainian National News reported.
Small businesses no longer do it because they have either closed, or are forced to pay to the self-proclaimed republics.
Volodymyr Lukyanenko, chairman of the Donbas Small and Medium Business Union, says local owners are desperate because leaders of the self-proclaimed Donetsk People’s Republic decided all local businesses should re-register before Dec. 25 and pay taxes to them. Otherwise, they are threatening to confiscate business, money and assets if a company refuses to comply, according to Lukyanenko.
Volga Sheyko, lawyer at the Kyiv-based Asters law firm, says business will be forced to
choose to whom to pay taxes to avoid double payments. “This peculiar double taxation will become an unbearable burden to the Donbas small and medium business,” Sheyko says.
Lukyanenko of the Business Union regularly receives requests from local small businesspeople asking for help because of the separatists. “Pro-russian terrorists do not let equipment and technical devices pass through their checkpoints. Besides, rebels want to appropriate corporate offices,” he says.
Unfortunately, there is no way to resist racketeering. yegor Shtokalov, attorney of criminal practice at the Alekseev, Boyarchukov & Partners law firm, says that although local entrepreneurs are faced with illegal demands, they have no recourse. "Law enforcement agencies and courts cannot effectively perform their functions in the occupied territory, so business remains defenseless,” Shtokalov says.
Besides the lack of legal protection, there is no way of obtaining even partial compensation from the loss of business. “The person who is responsible for the damage caused should be established. However, it’s impossible to identify those people with 100 percent accuracy,” Shtokalov says. Insurance is hard to come by now.
Since the beginning of the hostilities in the east, some 1,078 business entities and 240 individual entrepreneurs relocated from Donbas to other regions, according to Ukraine’s public database of taxpayers.
Those Donbas entrepreneurs who managed to relocate received no support from the government until recently. On Oct. 15, a law came into effect that spells out the procedures for re-registration in exile. It also bans change of ownership and top management in separatist-occupied territories for the duration of what the government still refers to as the “anti-terrorist operation.”
Lukyanenko of the Donbas Business Union says many owners have trouble re-registering because they lack original documents required for the procedure. Recovering lost documents is also impossible because none of the Ukrainian institutions in the war-torn Donbas work.
This is also the reason why many entrepreneurs with bank loans struggle to postpone their payments due to emergency circumstances. Besides, a service fee for issuing a force majeure certificate is nearly Hr 1,500 ($100), which is too costly for many who have not been receiving income for months.
For those who want to start business in exile, things are not easy. One of the top problems is getting any cash to start with.
“Granting unsecured loans is forbidden by law. All the property which an entrepreneur could give to a bank as collateral in most cases is in occupied territory and may be destroyed by the terrorists’ shells any time. It’s unprofitable for banks to covenant such agreements,” Shtokalov of alekseev, Boyarchukov& Partners law firm explains.
At the same time, lawyers are against adapting rules especially for runaway businesses. “all persons are equal in the face of law. That’s why there is no sense to change the legislation aimed to provide prerogatives to entrepreneurs from the east,” Shtokalov believes. “Providing victims of terrorist attacks with certain subsidies may cause a new wave of corruption.”
Lawyers are also skeptical about the efficiency of the Ukrainian government’s legal aid for businesses located in the war zone until hostilities have ended. “Talking about business support makes sense only within a legal field. War is in the east of Ukraine, and legal assistance for local business is powerless there,” says Sheyko of Asters.