Anton Skyba

Amid staggering destruction, eastern Ukraine looks to rebuild

Analysts say repairs to damaged infrastructure will cost billions and require a reboot of the economy

SLOVYANSK, Ukraine — Oleksandr Bohoslavskiy stared at the gaping hole in the roof of the Zeus Ceramic tile factory and shook his head in dismay. Rocket-propelled grenades hit the structure in June, ripping through the ceiling and leaving twisted and torn metal in their wake.

It will cost at least $3 million to fix the damage to the facility’s ceiling, shrapnel-pocked walls and shattered windows, said Bohoslavskiy, the 43-year-old general director of Zeus Ceramics. Another $1 million was lost when pro-Russian separatists, who had stationed themselves about 100 yards from the factory’s entrance, broke in and destroyed thousands of ready-to-ship, industrial-size floor tiles that were stacked in the stockyard behind the building.

“My heart broke the first time I saw this,” he said, pointing to the piles of shattered bits of tiles.

Zeus Ceramics, like so many other businesses and factories in the east, is looking at a millions of dollars in repair costs after months of heavy fighting between Ukrainian government forces and the rebels. Bohoslavskiy said his estimates don’t even begin to cover how much the company lost in production and sales as a result of a four-month shutdown.

Across eastern Ukraine the destruction of much of the region's core industries and infrastructure is staggering. There aren’t official numbers on the cost at this point, but eastern city managers and economists estimate the destruction of private and public buildings, public works and transportation infrastructure will run well into the billions of dollars.

In cities and town across the east, multistory apartment buildings still have gaping craters left by shelling, and entire streets of private homes were turned into rubble. Schools and hospitals have been destroyed, and many city administration buildings were damaged or demolished.

In the neighboring Luhansk region, the hardest hit by the war, there has been no electricity or water for months after shelling wiped out power stations and water pipes and knocked down electricity wires.

The regions of Donetsk and Luhansk were once Ukraine’s largest industrial centers, producing nearly 23 percent of the country’s industrial and and mining output and 20 percent of its exports. In the words of regional businessmen and officials, they have basically shut down.

The Donbass, the resource-rich industrial belt, “today is not working,” said Sergei Taruta, governor of Donetsk Oblast, in a press conference at the beginning of September. 

A worker at Zeus Ceramics looks at roof repairs after the building was damaged by shelling.
Anton Skyba

Nearly all the large facilities in Donetsk have been inoperable since the fighting in the east intensified several months ago, particularly in districts controlled by the rebels, Taruta said. Many of the region’s coal mines have flooded because power to them has been cut, shutting down their water extraction systems. Only the metallurgy plants of the southern port city of Mariupol continue to operate, he said.

In addition, the war has destroyed much of the region’s power stations and wires and key transportation infrastructure — including bridges, roads and railways — for transferring the Donbass’ exports of coal, steel and other industrial goods, Taruta said.

Before the Ukrainian conflict began in November, the east contributed 20 percent of the country’s gross domestic product. But massive anti-government protests and the February ousting of Kremlin-favored President Viktor Yanukovych sparked a regional conflict that turned violent in April, when the new, Western-leaning government in Kiev initiated an operation to rout the armed insurgency in the east demanding independence.

Then came a war, which Prime Minister Arseniy Yatsenyuk said on Sept. 17 was costing the government $6.15 million a day. After Russia cut off natural gas shipments to Ukraine in June, Ukrainians faced the prospect of a long, cold winter. On Friday, Moscow and Kiev struck a preliminary deal, and Russia’s natural gas should flow for the next six months, but supplies may be only as steady as the shaky cease-fire that has been in place since Sept. 7. 

The east’s industries remain at a standstill, and Ukraine’s economy is taking its worst beating since the country of 45 million broke away from the Soviet Union in 1991. Last week the European Bank for Reconstruction and Development predicted Ukraine’s GDP would contract by 9 percent in 2014 as a result of “disruption to production and trade, agricultural losses and a partial military mobilization.”

Ukraine’s economy was flailing even before demonstrations began in Kiev in November, triggered when Yanukovych — under pressure from Moscow — backtracked on signing a political association and trade agreement with the European Union. In 2013, Ukraine’s economy was stagnating, with zero growth in GDP.

This week Ukrainian President Petro Poroshenko signed the EU deal that led to Yanukovych’s ouster, and with it agreed to implement reforms to the country’s political, judicial and economic sectors. He also took steps to reconcile with the rebels in the east by adopting legislation to give more self-rule to the separatist-held districts and to invest government funds in the east's redevelopment. Western countries, including the United States, have pledged billions of dollars to support Ukraine’s recovery.

Ukraine is now facing the difficult task of trying to reunite the divided nation, rebuild the east’s destroyed industries and revive and modernize its post-Soviet economy.

It won’t be easy. Representatives of the self-declared Donetsk People’s Republic say that they haven’t given up their fight for independence and that the two sides have different interpretations of Poroshenko's offer of greater regional autonomy — developments that indicate the region could remain in a state of frozen conflict.

Nostalgic for the former Soviet Union, when industrial workers were hailed as heroes, many of the supporters of the eastern separatist movement complain that post-independence Ukrainian governments have neglected the region’s blue collar workers. The eastern regions, whose metals, coal, power generation and other industries are closely linked to the Russian market, see Kiev’s EU aspirations as another step toward destroying their way of life.

Throughout the conflict, the separatists have insisted that the east could survive economically without the rest of Ukraine.

But “that is not very feasible,” said Alex Ryabchyn, a professor of economics at the Donetsk National University, who left the region in May and is now a running for a seat in the Oct. 26 parliamentary elections.

The east is a major powerhouse of Ukraine’s gross domestic product, but its exports are deeply dependent on an extensive network of Soviet-era infrastructure to get its coal, steel and power generation to market. At the same time, Ukraine needs these raw materials for its manufacturing industries elsewhere in the country, not to mention the income the east generates for the state budget.

If the region were to secede, it would be like “cutting off the legs of a person … The person could try to survive, but the leg would have a very hard time on its own,” Ryabchyn said.

Still, it will be hard to change what Zeus’ Bohoslavskiy said is a very stubborn mentality, still wistful for the days of the Soviet Union.

“It’s not possible to make a revolution in 10 years. To change this mentality, we really need 50 years,” he said. “Maybe the young generation under 30 will see a real independent Ukraine.”

Ukraine needs a market relationship with Russia, but it needs to find a way to work with Moscow while reforming domestically, Bohoslavskiy added. According to Ryabchyn, Russia accounts for at least a third of the Donbass’ market.

Zeus Ceramics is an example of such modernization — the company was an anomaly in the east when in 2003 an Italian firm invested in Slovyansk's 100-year old ceramics industry, producing floor tiles for markets from North America to China. The Italian investment tapped into an old, established industry using new innovation.

But even before the military conflict started in April, there were major challenges to the role of the east’s industries and mining. Despite its complaints about previous Ukrainian governments, the Donbass region was a major recipient of state budget subsidies, which helped energy-inefficient, Soviet-era structures continue to operate and employ millions of workers.

Now, with Ukraine signed on to adopt what will be expensive reforms to prepare for joining the European Union, the country will need to look at ways to modernize its industries to tap into European markets. That most likely will mean a cutback in those subsidies.

“The Donbass regions needs to be developed, but the question is, who will pay for all of this?” Ryabchyn asked. “It won’t be possible without Western aid. But the question then becomes, who to give the money to if it’s a just a frozen conflict?” 

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