How to Develop Economy of Donetsk and Luhansk Regions

Destroyed supply chains in the Donetsk and Luhansk regions are not being restored. Due to the armed aggression of the Russian Federation, the Donetsk region has lost 40% of the industry, The Luhansk region, 70%. Along with the emergence of the demarcation line and the loss of infrastructure, this has led to the destruction of many value chains that are hardly restored. The direct Gross Regional Product (GRP) losses of the two regions alone are estimated at more than $50 billion for five years, from 2013 to 2018.

The region loses billions every year due to high security risks. In 2019, the ratio of capital investments to GRP in the Donetsk region was 14% (ranking ninth among the regions of Ukraine), in the Luhansk region, 8%, being the lowest result among all regions. At the same time, in real terms, it is still less than in 2013. In 2019, the region accounted for only 5.4% of all capital investments in Ukraine, while in 2013 it was 15.7%.

It is almost impossible to get a commercial loan for Donetsk and Luhansk businesses. Banks do not risk lending to businesses in the region due to high military risks and unwillingness to take in pledge assets located there. The region accounts for less than 1% of total loans issued to businesses by banks. Enterprises finance investments at their own expense – 81% in the Donetsk region and 57% in the Luhansk region in 2019.

How to restore investors’ confidence

To reduce military-political risks of doing business and investing. Launching insurance against the risks of physical damage due to hostilities will help not only to obtain financing for local businesses but also to boost the attraction of new capital investments. Insurance should cover export and logistics contracts, agricultural crops, pledges taken by banks from companies, and private investment projects.

To lower the threshold for using the “investment nanny” programme. It is proposed to reduce the threshold for participation in the programme in the region to EUR 5 million of investment and 20 new jobs, which is four times less than that proposed for projects in other regions of Ukraine. Combined with military and political risk insurance and the restoration of the region’s infrastructure, this could lead to a significant increase in domestic and foreign private investment.

Among the initiatives, it is also proposed to invest in the infrastructure of industrial parks, set up business support centres, and customise national business development programmes in accordance with the regional specifics.

How to help local business

To build a rail line in the Luhansk region and electrify the railway to Mariupol. Connecting the Luhansk railway to the national network will allow the delivery of coal to Luhansk TPP from the territory controlled by Ukraine and, therefore, reduce energy dependence on Russia. In addition, it will be an impetus for the development of the region, as it will reduce travel time and make the logistics of goods cheaper. Electrification of the railway to Mariupol will open the prospect of launching high-speed transport links with Zaporizhzhia and reduce the cost of freight.

To ensure uninterrupted electricity supplies to consumers. Restoration of network infrastructure and construction of new substations will allow unblocking three TPPs in the region, reduce electricity losses, and improve the reliability of energy supply not only to consumers in the Donetsk and Luhansk regions but also to consumers in neighbouring regions.

To demine fields, provide compensations for land seized for fortifications, and implement long-term public-private land reclamation projects. Ukraine ranks as the third country most contaminated by landmines in the world. State aid for mine action will free up space for agriculture. It is also important to provide compensation to owners whose land was used to build fortifications, for example, by providing similar fertility plots or monetary compensation. Public-private partnership in investment in irrigation systems will allow producers to increase the yield of major crops and give impetus to the production of agricultural products with higher added value.

How to make the region comfortable to live and work in

To perceive the region as a “high security area,” integrate service members into communities, and develop territorial defence battalions. Improving military discipline and implementing NATO standards will build confidence in engagement with the local population and reduce the risk of escalation of hostilities. Thanks to the construction of military towns, communities will be able to see the military not only as those who came to “fight,” but as those who take children to school, pay taxes, live with their families. Contracting people for territorial defence and relevant support from local businesses and authorities, as well as the effective operation of the alert system, will enhance the level of security in the region.

To provide preferential loans for overhaul of houses and increase the share of compensation for energy modernisation. Providing preferential loans for major repairs of buildings under municipal programmes will reduce the deficit of high-quality housing, which arose due to lack of new housing construction. Raising the share of energy modernisation costs reimbursed by the city or the state to 70-90% will also help to make high-quality housing more affordable in the region.

To improve the sustainability and quality of healthcare, educational, and administrative services at various levels of provision of care to population. The creation of a system of administrative multicenters in the communities where the entry-exit checkpoints are located and the optimisation of capable networks of educational and healthcare services will improve the quality of life of people in the most vulnerable communities, as well as facilitate further reintegration of the occupied territories.

To build regional hospitals. The resumed operation of Luhansk and Donetsk regional clinical hospitals will help provide modern, highly specialised medical care (3d level) to residents of towns and districts in the government-controlled territory, to halve the budget spending for hospital stock maintenance.

Initiatives also include diversification of sources and reconstruction of drinking water supply systems in communities, introduction of a dual education system in vocational schools, introduction of environmental monitoring, development of suburban railways for human mobility, etc.

It is proposed to establish a Consortium Fund to finance these and other initiatives. The creation of the fund will help attract foreign donors and ensure transparency in the distribution of funds for these projects. The fund can be set up on the example of the E5P fund, or the EBRD-run Chernobyl Shelter Fund, with Ukraine contributing 5% of the fund’s assets which could amount to EUR 2.5-3 billion.

Source: Centre for Economic Strategy