Prospects grim for busi­ness in Don­bas war zone

Many re­lo­cate to other parts of Ukraine or shut down

Kyiv Post Legal Quarterly - - Contents - By Nataliya Trach trach@kyivpost.com

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.

A man stands with crutches as he buys veg­eta­bles in the eastern Ukrainian city of Donetsk on Nov. 20. (AFP)

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