Global Economics

Ukraine's East Is Poor, Fed Up, and Desperate for Change


Along the road that stretches east from the regional capital of Donetsk toward Ukraine’s border with Russia, crumbling Soviet apartment complexes quickly give way to shabby villages of squat houses with aluminum-sheet roofs and shuttered windows. Settlements clustered around the remnants of coal mines that fed the former Soviet Union and minted the eastern province now stand mostly in disrepair.

In Snizhne, 50 miles east of Donetsk and roughly a dozen miles from the Russian border, privatization and restructuring have closed all but two of the 17 government-run coal mines that fed the town in the 1990s. “The people have nowhere to work—it’s like Detroit in America,” says Sergey Vasilivich, who used to own a business transporting and sorting coal from small local mines to private buyers. “There’s a real depression in this city.” Today, small, semilegal mine shafts operate on the fringes of the economy with a blatant lack of regard for safety and workers’ rights. Many miners have lost their jobs, and young people have left for greener pastures. Many in Snizhne see themselves as ethnic Russians and would have no problem joining with Russia, especially because they think it would help the stunted local economy.
A small illegal mine, near Snizhne, in eastern UkrainePhotograph by Sergei Supinsky/AFP via Getty ImagesA small illegal mine, near Snizhne, in eastern Ukraine
As pro-Russian tensions continue to simmer in the east, the interim government in Kiev is trying to keep a lid on separatist rhetoric in the industrial heartland, where small but vocal protests in Donetsk against the new government continue to rage. In an effort to pacify the local population, the central authorities on March 2 appointed Sergei Taruta, an oligarch with roots in the east, governor of the Donetsk region. With about 5 million people, it’s Ukraine’s most densely populated province.

Taruta faces not only the loud chants of pro-Russian protesters in front of government headquarters, but also a depressed economy, a legacy of corruption, lack of popularity, and the institutional stasis of a local government authority composed of members from ousted President Viktor Yanukovych’s Party of Regions, which could thwart Taruta’s attempts at reform at any turn.

“His decision [to accept the position] is a risky one,” says Oleksandr Kliuzhev, a political analyst and program coordinator of the Committee of Voters of Ukraine, a nongovernmental organization in Donetsk. “There are real pro-Russian tendencies here—they don’t hide them. These emotions were held in check before by the Party of Regions. … Our politicians played the Russia card, but the new risk is that there are politicians promising union with Russia and we haven’t had this risk before.”

Indeed, last week pro-Russian supporters stormed the regional government headquarters here and hoisted the Russian flag. During the course of the week the building changed hands twice until the self-declared leader of the pro-Russian separatist movement, Pavel Gubarev, was arrested Thursday night.

Reached by telephone in Kiev after a brief visit to Donetsk, Taruta say he was convinced he can keep the situation under control. “I think I’ll deal with this. I have a big mandate. I was asked to power at this crisis moment, to control things as a manager. My mandate is very big. I’m from Donbass, I worked a lot in Donetsk, the people there know me,” he said, suggesting dialogue with all factions would be the solution to the issues of political separatism, while the kinds of “hooligans” who stormed the government headquarters would be dealt with harshly by security services.

“I’m absolutely convinced that within two months we’ll have calm,” Taruta said. The east is vital to Ukraine’s already embattled economy. The Donbass region houses much of the country’s heavy industry, including metallurgical plants, coal mines, chemical processing operations, and salt mines that produce heavily for the domestic market, as well as agriculture. According to the Ukrainian government’s investment portal, the Donetsk region contains 12 percent of all the country’s natural resources.

Since Ukraine’s independence in 1991, 10 percent to 15 percent of the country’s gross domestic product has come from industrial production in the east, according to Alexander Kendyuhov, head of the economics department of Donetsk National Technical University. For the last three years, Kendyuhov estimates, Donetsk contributed from 10 to 13 percent of GDP—which grew zero percent last year on the whole—yet the backbone of Ukraine’s economy is stagnating, factories and mines are closing, and villages like Snizhne are suffering.

“Unfortunately, these industries haven’t modernized, nor have their technology or instruments been updated since the fall of the Soviet Union,” says Kendyuhov. “This situation is the inheritance of an irrational, ineffective economic model, which since the first years of Ukraine’s independence was built on the principle of Neanderthal capitalism: Whoever is strongest is the one who gets the profits.” Big business in the region, where Ukraine’s richest man, Rinat Akhmetov, hails from, has grown at the expense of small and midsize companies. Taruta is the country’s 16th-richest man, according to Forbes Ukraine.

When asked how he would deal with stagnating industries and the legacy of corruption, Taruta said he has a plan. “We have new programs to help the people. I’m on my fourth day as governor. Right now I can’t answer deeply on all [policy] questions,” he said, adding that he’s assembling a team of experts to handle the economy and that his experience as a successful businessman would come in handy for reform and development.

Whether or not Taruta comes up with a program to pull the region out of depression and into the fold of a government widely viewed here as representing only western Ukraine, carrying out his ideas is another question altogether. The new governor also faces the political cadre of ousted president Yanukovych’s party, the Party of Regions. While in seeming disarray and without a leader, members of the party continue to hold key local government posts here.

Many post-revolutionary governments have installed new faces at the top of a bureaucratic hierarchy, only to see their reforms thwarted by an old guard with lasting loyalties who are unwilling to change the way they’ve been working for decades and are eager to see a new regime fail.

“It will be hard for him, starting simply from who will even acknowledge him as a governor with legitimate authority,” says Tatyana Marmazova, a city council deputy from the Party of Regions and political science professor at Donetsk National University. Marmazova considers the new interim government in Kiev illegitimate and advocates for budgetary federalism, in which the Donetsk region would keep most of its money at home instead of sending it to the central government in Kiev.

“This is all just starting,” Marmazova cautions about an uprising in the east of Ukraine. “Now we’ll start thinking about what we want, but the destabilization is here.”

Many see the eruption of Russian nationalism here as stoked and partially funded by the Kremlin. President Vladimir Putin has repeatedly reserved the right to use Russian troops to protect Russian-speaking populations outside the country’s borders, and while the status of Crimea remains contested some have cautioned that Donetsk might be the next flashpoint in the new cold war.

On Sunday more pro-Russian protesters poured into downtown Donestk, but the crowds were smaller than in the past. Many here seem to be waiting to see what the new government will do for them, but after decades of frustrated expectations they aren’t entirely convinced anything will change. Driving through the mud roads around abandoned mine shafts in Snizhne, people are few and far between while ramshackle houses with sagging roofs are plentiful.

When asked his opinion of the new governor, one miner who refused to give his name shrugged wearily. “What’s happening in the country, the Maidan, not the Maidan, Russia, Ukraine, I don’t give a s–––,” he said. “All I care about is making my paycheck.”

Others seemed to think economic development would come from their neighbor. “People here look at Russia like a big brother, smarter, richer, and stronger,” Vasilivich, the ex-coal business owner, said. “Maybe people here are trying to believe the new government in Kiev, but if this turns out to be a lie, if the Ukrainian authorities in Kiev misstep, this will become Russian territory.”

Topol is a Bloomberg Businessweek contributor. Follow her on Twitter @satopol.

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