Economic Connectivity Across the Line of Contact in Donbas, Ukraine Economic Connectivity Across the Line of Contact in Donbas

Economic connectivity across the line of contact in Donbas, Ukraine

September 2017 An under-utilised resource for conflict resolution

Natalia Mirimanova

www.hd centre.org Credits

HD expresses its appreciation to Global Affairs Canada for its generous support for the conduct of this study.

About the author Natalia Mirimanova is a conflict resolution scholar and practitioner and has over twenty years of experience in Russia, South Caucasus, Central Asia, Moldova, Ukraine, Western Balkans and Eastern Europe advising various leading multilateral institutions and international NGOs. She received her Ph.D. from the Institute for Conflict Analysis and Resolution, George Mason University, USA and has been published widely in English and Russian.

Centre for Humanitarian Dialogue 114, Rue de Lausanne 1202 Geneva | Switzerland t : +41 22 908 11 30 f : +41 22 908 11 40 [email protected] www.hdcentre.org

The Centre for Humanitarian Dialogue (HD) is a private diplomacy organisation founded on the principles of humanity, impartiality and independence. Its mission is to help prevent, mitigate, and resolve armed conflict through dialogue and mediation.

List of figures ...... 2

Executive summary ...... 4 Business dynamics 4 Economic connectivity 4 Political connectivity 5 Future outlook 5

Introduction ...... 6 Assessing connections across the divide 6 Scope and research methods 7

1. Business size and operational basis ...... 9 1.1 Business size and sector 9 1.2 Business dynamic since the beginning of the conflict 11

2. Economic connectivity ...... 15 2.1 Changes in markets 15 2.2 Changes in supply chains 15 2.3 Need for supplies across the line of contact 16 2.4 Freedom of movement 18 2.5 Difficulties in maintaining economic relations 19 2.6 Conclusions 20

3. Political connectivity ...... 22 3.1 Business nature and registration 22 3.2 IDP entrepreneurs in Ukraine (before February 2017) 24 3.3 Preferred political–territorial status of NGCAs in Donbas 25 3.4 Conclusions 26

4. Economic and political connectivity: future outlook ...... 28 4.1 Conditions for improvement of the business environment 28 4.2 Investment patterns before and after the conflict 28 4.3 Reasons to stay in business 29 4.4 Prospects for the next six and twelve months 30 4.5 Conclusions 32

Endnotes ...... 33 2 Economic connectivity across the line of contact in Donbas, Ukraine

List of figures

1. Business profile: Donetsk SME sample 2: Business sector: IDP SMEs from Donetsk sample 3. Business profile: Luhansk SME sample 4. Business sector: IDP SMEs from Luhansk sample 5. Business profile: IDP SME sample, combined 6. Dynamics of manufacturing and industry, Donetsk SME sample, before the military conflict 7. Dynamics of manufacturing and industry, Donetsk SME sample, since the military conflict 8. Dynamics of retail trade, Donetsk SME sample, before the military conflict 9. Dynamics of retail trade, Donetsk SME sample, since the military conflict 10. Dynamics of services, Donetsk SME sample, before the military conflict 11. Dynamics of services, Donetsk SME sample, since the military conflict 12. Dynamics of manufacturing and industry, Luhansk SME sample, before the military conflict 13. Dynamics of manufacturing and industry, Luhansk SME sample, since the military conflict 14. Dynamics of retail trade, Luhansk SME sample, before the military conflict 15. Dynamics of retail trade, Luhansk SME sample, since the military conflict 16. Dynamics of services, Luhansk SME sample, before the military conflict 17. Dynamics of services, Luhansk SME sample, since the military conflict 18. Dynamics of manufacturing and industry, IDP SME sample, since the military conflict 19. Dynamics of retail trade, IDP SME sample, since the military conflict 20. Dynamics of services, IDP SME sample, since the military conflict 21. Reasons for the decline in business, SME samples 22. Markets for businesses (%) before the conflict and at present, Donetsk SME sample 23. Markets for businesses (%) before the conflict and at present, Luhansk SME sample 24. Markets for businesses (%) before the conflict and at present, IDP SME sample 25. Supply chains (%) before the conflict and at present, Donetsk SME sample 26. Supply chains (%) before the conflict and at present, Luhansk SME sample 27. Supply chains (%) before the conflict and at present, IDP SME sample 28. Need for supplies across the line of contact: Donetsk, Luhansk and IDP SME samples (%), 2016 29. Need for supplies across the line of contact: Donetsk, Luhansk and IDP SME samples (%), 2016 30. Need for specific supplies across the line of contact: Donetsk, Luhansk and IDP entrepreneurs, Ukraine samples (%), 2015 31. Need for supplies across the line of contact: Donetsk, Luhansk and IDP SME samples combined (%), 2015 and 2016 32. Engagement in economic relations with NGCAs: IDP entrepreneurs, Ukraine sample (%) 33. Difficulties in maintaining economic relations with NGCAs: IDP entrepreneurs, Ukraine sample 34. Place of registration and company type: Donetsk SME sample Economic connectivity across the line of contact in Donbas, Ukraine 3

35. Place of registration and company type: Luhansk SME sample 36. Place of registration and company type: IDP SME sample 37. Attitude to economic blockade: IDP SME sample (%) 38. Conditions for improvement of the business environment, 2016 39. Conditions for improvement of the business environment, 2015 40. Borrowing history, Donetsk, Luhansk and IDP SME samples (%) 41. Source of loans, Donetsk, Luhansk and IDP SME samples (%) 42. Taking out a loan: an ideal bank: Donetsk, Luhansk and IDP entrepreneurs, Ukraine samples 43. Taking out a loan: a realistic bank: Donetsk, Luhansk and IDP SME samples 44. Reasons to stay in business, Donetsk, Luhansk and IDP SME samples 45. Prospects for the next six months, Donetsk, Luhansk and IDP entrepreneurs, Ukraine samples 46. Prospects for the next twelve months, IDP SMEs sample 47. Plans for the next 12 months, Donetsk and Luhansk SME samples 48. Plans to return, IDP SMEs sample (%) 4 Economic connectivity across the line of contact in Donbas, Ukraine

Executive summary

Escalating political and military manoeuvres on both sides of transactions, have hampered exports to all destination, the conflict in Eastern Ukraine led, in early 2017, to a full com- including Russia. mercial cargo blockade across the line of contact. As a result, • Those small and medium-sized enterprises (SMEs) that several industrial, energy production and transport cycles that reported sharp declines in operations cited the following as spanned the conflict divide were disrupted, and hundreds major reasons: physical departure and reduced purchas- of thousands of jobs have been jeopardised on both sides. ing power of customers, destruction of physical assets, Support for the incorporation of Donbas’ industry into Russia and disrupted supply chains. from some public figures in Russia has deepened uncertainty and fears of further military escalation and a potentially • Medium-sized enterprises which are easier to operate, creeping annexation. such as pharmacies, supermarkets, and petrol stations have changed ownership and been expropriated, largely Nevertheless, political imperatives often override economic by force, by individuals in NGCAs, but continue their concerns. The war economy is both a consequence and a operations. driver of the conflict in Ukraine, which should be understood • Some businesses have relocated and re-registered in as part of the larger conflict analysis. To understand the man- Government Controlled Areas (GCAs) and many continue ner in which economic drivers of conflict function in Donbas to serve customers in NGCAs through complex arrange- one first needs to look at the (restricted) economic connec- ments and intermediaries, while others have remained tivity in the region as mirrored by weakened political connec- in NGCAs to operate at significantly lower profits. Other tivity of economic actors and political centres across the entities have ceased operating in the NGCAs, or in both conflict divide. NGCAs and GCAs. This study builds on previous research from 20151 on eco- • Initial lack of access to markets in other parts of Ukraine nomic connectivity between small and medium businesses dramatically decreased profits for business entities in from Non-Government Controlled Areas (NGCAs) and their NGCAs as well as for ‘internally displaced businesses’, suppliers, customers, and partners across the line of con- however beginning in January 2016 SMEs began replac- tact. The present report is expanded to include larger busi- ing inaccessible supplies with new ones, and restructured nesses and additional variables of economic activity, such their operations to cater to a shrunken local market. as bank loans and longer-term business plans. The data was collected between July 2016 and January 2017, employing surveys, focus groups, and semi-structured in-depth inter- Economic connectivity views and presents a baseline analysis of economic and • Donetsk and IDP SMEs have been more averse to sev- political positions of private businesses beginning with the ering business relations for political reasons. However, introduction of the full blockade between Kiev and NGCAs. Luhansk SMEs have become more willing to actively boycott Ukrainian supplies and markets and to substitute them with Russian alternatives. Business dynamics • Nearly half of all IDP SMEs retain business links with both • Interviewees unanimously assessed the conflict as harm- NGCAs and GCAs. ful to their ventures. • Several large industrial enterprises from NGCAs have • Large industrial exporters in NGCAs were hit most severely re-registered in the GCAs and are on a list of companies by the conflict, with many ceasing operations and others exempt from the ban on commercial activities with the on the verge of non-profitability. The railway restrictions NGCAs, allowing them to transport their products across with the rest of Ukraine have led to dramatic declines in the line of contact, to the GCAs and export destinations productivity of large enterprises, which can no longer (including Russia). They pay taxes in Ukraine. export their products via Ukraine. The uncertain legal • As a business destination, Russia is not seen as an ideal status of enterprises that cannot leave NGCAs, and diffi- substitute for Ukraine by private enterprises in Donbas, culties in keeping or obtaining legal status for international as newly established links with Russia have led to a virtual Economic connectivity across the line of contact in Donbas, Ukraine 5

monopoly of Russian supplies in NGCAs, have incurred Future outlook reputational costs, and may trigger future legal conse- • For the time being, the majority of SMEs are focusing on quences under Ukrainian law. operating in their respective local markets, however around • Personal links between business partners have often 15% of Luhansk SMEs are considering expansion into counter-balanced political rifts, enabling continued eco- Russian markets. Of Donetsk SMEs, 15% have expressed nomic connections which could help restore economic a willingness to expand into the Ukrainian market, whereas connectivity. only 5% expressed a desire for the Russian market. • A lack of freedom of movement and of a framework for • Donetsk-based SMEs are less optimistic about near-term legal business transactions are seen as central barriers economic prospects than IDP and Luhansk-based SMEs, to retaining or restoring business links. however they are generally more optimistic about long- term perspectives. They generally take a more economically pragmatic approach, hoping for minimal legal Political connectivity and security improvements to be able to re-engage with • Decisions regarding the place of registration for SMEs markets and suppliers, irrespective of the final political were largely based on an admixture of political, economic, solution of the conflict. and security-related considerations: nearly one third of • Luhansk-based SMEs are equally uncertain about the Donetsk-based SMEs retain their sole registration in long-term political solution, but have nevertheless limited Ukraine (while some combine it with registration in the their business operations to local markets and suppliers, NGCAs). No Luhansk-based SMEs have retained their given their inability to enter the Russian market or com- registration in Ukraine. Meanwhile, the vast majority of pete with Russian supplies. IDP SMEs have re-registered in Ukraine, apart from around 15% who operate without any legal registration. • Very few IDP entrepreneurs who left the NGCAs and settled in government-controlled territories plan to return • Registration in the self-proclaimed republics is incom- to the NGCAs – in marked contrast to the results of the patible with export operations, unless an exemption is author’s 2015 research. granted by Kiev. Many large industrial exporters considered the procedure of securing an exemption from the • Luhansk-based SMEs exclude the prospect of moving commercial ban to be non-transparent and corrupt. out of NGCAs, while a minority of Donetsk-based SMEs Companies not exempt from the export ban, but needing are considering a variety of destinations for their opera- legal ways to continue exporting, have either re-registered tions, including the GCAs. in Russia or operate through ‘grey intermediaries’. • Businesspeople in NGCAs expect that economic rela- • Luhansk-based SMEs expressed overwhelming support tions will resume sooner and faster than personal relations for the emergence of a Luhansk People’s Republic that between residents of NGCAs and the rest of Ukraine. would be independent from Ukraine or integrated with • Big businesses and SMEs alike consider Donbas indus- Russia. This is reflected in their attitude to abandon eco- try to be an asset to Ukraine, and integral to certain nomic ties with Ukraine. global markets, such as coal and metals. Developing • Donetsk-based SMEs expressed a range of preferences diversified destinations for industrial outputs is regarded for the political status of their self-declared republic, as the most viable policy – including for sustaining peace which is partially mirrored in their economic pragmatism and security. (support for freedom of movement across the line of contact, legal and administrative transparency) as well as their willingness to (re-)enter into economic relations with Ukraine. 6 Economic connectivity across the line of contact in Donbas, Ukraine

Introduction

Assessing connections across the divide In order to assess economic drivers While the first draft of this report was being prepared, rapid of conflict and peace effectively in developments on both sides of the conflict culminated in the full blockade of commercial cargo across the line of contact the case of the Donbas it is important to between Russia and Ukraine. Since late December 2016 understand whether and how restricted Ukrainian activists have been attempting to block railway transport of coal, metal and other commodities to and from economic connectivity is paralleled by enterprises in the non-government controlled areas (NGCAs) weakened political connectivity of economic formerly exempt from the ban on commercial transactions.2 After the de facto authorities of the self-proclaimed republics actors across the conflict divide. expropriated (or ‘nationalised’) the industrial assets under Ukrainian jurisdiction, the Ukrainian president made the blockade official.3 As a result, industrial and energy cycles that state. The impact on the economy of the NGCAs is more transcended the conflict divide were disrupted and hundreds difficult to forecast. One reason for this is the lack of reliable of thousands of jobs on both sides were jeopardised. data, and another is the uncertainty about Russia’s plans to manage the industrial enterprises there. However, in a pro- Meanwhile, irrespective of Russia’s official position regarding tracted conflict economy, economic regularities apply only the political status of the self-proclaimed republics within the to a degree. Emotional economy is a particular phenomenon Ukrainian state fixed within the Minsk and Normandy formats, observed across various deep-rooted conflicts. Coupled with Russian political and public figures have expressed support political imperatives overriding economic ones, a war economy 7 for the incorporation of Donbas industry into Russia’s eco- is both a consequence and a driver of the conflict and has nomic and administrative space. Media leaks on the discus- to be integrated into conflict analysis and scenario building. sion about specific plans at the level of the Deputy Prime In order to assess economic drivers of conflict and peace Minister4 deepen uncertainty and stir fears of military esca- effectively in the case of the Donbas it is important to under- lation and creeping annexation. stand whether and how restricted economic connectivity is paralleled by weakened political connectivity of economic Diametrically opposed evaluations of the economic value of actors across the conflict divide. Political connectivity is the Donbas are abundant in the media and political fora and ultimate measure of isolation or rapprochement of the con- seem to be inflated or deflated according to political expe- flict parties. diency.5 In these circumstances, rigorous economic forecasts based on reliable data and robust methodology are rare and The present study maps economic and political connectivity very much needed. According to an assessment published across the line of contact before and up to January 2017. 6 in May 2017 by the German Advisory Group, the recent block- Our previous study analysed economic and political con- ade has had a negative impact on Ukrainian GDP and trade nectivity to 2015.8 In combination, the two studies show the balance as the seized coal mines and steel plants were pre- dynamic of the relationships between business communi- dominantly exporters. However in macro-economic terms ties across the line of contact and between entrepreneurs in and for the sectors thought to be most affected (energy and the NGCAs and the Ukrainian state as the context in which metallurgy), the shock can be absorbed relatively quickly. the recent full blockade and complete rupture of economic This is partly due to the steady decline in the importance of ties has been unfolding. commodities from the Non-Government Controlled Areas (NGCAs) for the industry and energy sector in the Government The status quo is not stable by any means – in fact, both Controlled Areas (GCAs), and slow but sure re-arrangement sides make clear that the current ad hoc arrangements are of the sectors immediately concerned. Railways and ports temporary. We need timely and serious assessment before would require serious upgrades to handle increased volumes further moves are taken to factor in political and human con- of imported raw materials. sequences of the economic splitting of Donetsk and Luhansk.

In sum, the impact of the full economic blockade of indus- Individual and collective behaviour and attitudes in con try in the NGCAs is negative, but tolerable for the Ukrainian flict are defined by an array of factors – of which economic Economic connectivity across the line of contact in Donbas, Ukraine 7

connectivity across the conflict line is just one. Private enter- their assessment of the ‘Donbas in’ and ‘Donbas out’ sce- prises from the NGCAs were selected as the subject of this narios from May 2015 to January 2017. research as independent economic actors whose decisions about the conflict are driven by economic considerations In 2016 the analysis expanded to include big businesses and and have macro- and micro-economic implications. Given the additional variables of economic operation, such as attitudes numerous variables that may affect economic and political to bank loans and future business plan. We have also assessed connectivity, we have compared economic behaviour and political connectivity between businesses from the NGCAs political attitudes of businesses with similar profiles, in terms and Ukraine. The data in the present study cover the period of size, sector, location and primary market. We have also from June 2016 through January 2017 and include small, 11 looked across different profiles to discern the relative weights medium and big private enterprises which have remained in of economic and political motivations pertinent to individual areas not controlled by the Ukrainian Government (NGCAs) categories of business without claiming general applicability. and those which have left those areas because of the con- This is important in view of the design of targeted and tailored flict and settled in the adjacent GCAs and in nearby regions. conflict-resolution measures that best factor in economic moti- We employed both quantitative and qualitative methods: vations, interests and capabilities of different types of business surveys, focus groups and in-depth interviews. Surveys were actors across the line of contact. carried out between July and October 2016, focus groups • Economic connectivity is defined in the present study in October and November 2016, and in-depth interviews as the degree of business interconnectedness across the during December 2016 and January 2017. conflict divide. (Some authors include relations between The survey respondents were entrepreneurs from the NGCAs private-sector and state institutions within economic con- who had either left to various destinations in Ukraine or stayed nectivity;9 in the present study, this aspect of connectivity in Donetsk and Luhansk. We used a ‘snowball’ technique is included within ‘political connectivity’.) to construct the sample. This is a non-probability sampling • Political connectivity is defined as the strength of the technique when a subject in the study is asked to help iden- connection between private entrepreneurs and the polit- tify other subjects of the same type – businesspeople in this ical and administrative centres, such as the Ukrainian state, case. This technique is particularly useful where it is difficult the self-proclaimed republics or Russia. to locate people to form a random representative sample. Interviewers from different social circles were recruited to • Optimism, resilience and political and social agency reach out to politically and ideologically diverse groups. The were assessed on the basis of the determination and surveys, focus groups and interviews were conducted under motivation to stay in business, planning horizon and scope strict confidentiality rules, and access to and openness of the of ambition with respect to business growth, assessment respondents and interviewees were facilitated by the credi- of the conditions necessary for business development, bility of the Centre for Humanitarian Dialogue, lead researcher and readiness to engage in political, civic or humanitar- and the team of field interviewers. No state authorities were ian activism. involved at any stage of the data collection.

The survey sample consisted of: Scope and research methods The present study is a continuation of the ‘Business oppor- • 167 small and medium-sized enterprises (SMEs) that tunities lost. . . and found’ research completed in December left Donetsk and Luhansk and settled in the adjacent 2015. The previous (2015)10 and present (2016/17) studies government-controlled areas (GCAs) of the two regions, focused on economic connectivity between businesses from including 25 in Kramatorsk, 10 in Artemovsk, 4 in Star- the NGCAs and their suppliers, customers and partners obelsk, 18 in Severodonetsk, 3 in Lysychansk, 30 in across the line of contact. The two studies cover the dynamic Mariupol, as well as in other regions of Ukraine, including of business and political imperatives that determined deci- 27 in Kharkiv, 25 in Dnipro, 25 in Zaporizhiia. sions of businesses from the NGCAs to stay or leave, retain • 64 SMEs in Donetsk and 40 SMEs in Luhansk.12 or cut off business ties across the line of contact, their actual and preferred legal and administrative framework as well as Among the surveyed 135 were males and 136 females. 8 Economic connectivity across the line of contact in Donbas, Ukraine

Qualitative data were collected through: In a situation of great polarisation, fear, insecurity and mis- trust, responses to direct questions are often not genuine and • focus groups with IDP SMEs in Kharkiv (6 males), hence have low validity. Instead, questions aimed at eliciting Kramatorsk (4 males and 4 females) and in Severodonetsk business-related reflections were posed and respondents (4 males and 3 females) were encouraged to think in terms of scenarios and dilemmas • in-depth interviews with SMEs in Donetsk (4 males and pertinent to the past, present and future of their business 4 females) and Luhansk (7 females and 3 males); with IDP regarding political, security, geopolitical and geo-economic entrepreneurs in the GCAs of the Donetsk and Luhansk dynamics. Respondents were asked to assess the best region and in the adjacent regions (2 males and 2 females) political-territorial framework for their business and economy, and with SMEs from Severodonetsk (1 male and 1 female), in general, in relation to the status of the NGCAs. Kharkiv (2 males and 2 females), Melitopol (1 male) and All surveys, interviews and focus groups were anonymous, Zaporizhiia (1 female) that used to have business ties and no references to names or enterprises are made in this with partners, suppliers or clients from the current NGCAs report. • in-depth interviews with big businesses that are or were fully or partially operational in the NGCAs of Donetsk (2 males), Kramatorsk (1 male) and Luhansk (5 males) regions. BusinessBusiness Businesssize size size

Economic connectivity across theBusiness line of contact size in Donbas, Ukraine 9 3% 3%3% 13% 13%13%

3% 1. Business size and operational13% Business size basis 48% 48%48% 48% 3% 36% 36%36% 13%

48% 1.1 Business size and sector Figure 1. Business profile:BusinessBusiness Donetsk size size SME sample 36% Micro-enterprises, employing fewer than 10 people, are dom- Business size inant among IDP SMEs (75%) compared to the Donetsk 3% 3% 13%13% (48%) and Luhansk (45%) samples (Figures 1, 3 and 5).36% This may be due to their greater mobility but also because 48%48% of personnel leaving for different destinations. Some enter- <10 people <10<1010 people-50 people people10-105051- 50people-250 people people51-51250-250> people251 people people > 251> 251 people people prises have registered new entities in the GCAs with a small staff, hence their micro-enterprise category, while their facili - 36%36% ties and all or part of the previous business remains in the <10 people 10-50 people 51-250 people > 251 people NGCAs. The remaining businesses are either re-registered as Business BusinesssectorBusiness sector sector <10 people 10-50 people 51-250 people > 251 people a new company under the self-proclaimed republics’ rules or operate without any registration. 22% 22%22% 19% 19%19% Business sector Business sector <10 people<10 people10-5010 people-50 people51-25051 people-250 people> 251> people 251 people In all SME samples, retail trade and services were the dom- Business sector 1% 1%1% 19% inant sectors (Figures 1, 2, 3, 4 and 5). 22% 8% 8%8% 22% BusinessBusiness sector sector19% 8% 8%8% 1% 1% Manufacturing and industrial SMEs that stayed in Donetsk 22%22% 19%19% 2% 2%2% 8% 8% make up 30% of the sample (Figure 1), while in Luhansk 3% 3%3% 1% 1% this proportion is only 10% (Figure 3). Manufacturing and 3%8%8% 3%3% 8% 8% industrial enterprises constitute 32% of all IDP SMEs that 8% 8% 2% 2% 3%3% 2% 2% left from Donetsk (Figure 2) and 24% of IDP SMEs that left 3%3% 3% 3% 3% 3% 34% 34%34% from Luhansk (Figure 4). Moving manufacturing facilities and hardware is undoubtedly more difficult than moving a trade 34%34%34% or a service business to a new place. However, the alterna- 34% tive of retaining business in the war-affected area may Manufacturing/industrybe Manufacturing/industryManufacturing/industryAgriculture AgricultureAgriculture Construction ConstructionConstruction Manufacturing/industryManufacturing/industry AgricultureAgriculture ConstructionConstruction yet more difficult. Severely constrained supplies and deliver- Extractive/processingManufacturing/industryExtractive/processingExtractive/processingExtractive/processingExtractive/processing industry industry industryServicesServicesAgriculture industryServices industryServicesServicesIT IT ConstructionIT IT IT ies of the produced goods across the line of conflict or even EducationEducation TransportTransport RetailRetail trade trade EducationExtractive/processingEducationEducation industry TransportServices TransportTransport IT Retail trade RetailRetail trade trade within the war-affected area, plus diminished and depopu-Manufacturing/industry Agriculture Construction Education Transport Retail trade lated internal markets, may have been considered worseExtractive/processing industry Services IT Business sector grouped than relocating for SME manufacturers. Many industrial andEducation Transport Retail trade manufacturing SMEs in Donbas worked within the production 22 % chain of big industrial enterprises and lost important clients after many big industries suspended production. Besides, 30 % to sell their products, manufacturers need a bar code and all the necessary documentation which can be obtained at the designated Ukrainian institutions.

IDP entrepreneurs said that it was still possible to take equipment relatively safely from Donetsk and Luhansk before the full-scale military escalation, although the majority had hoped the situation would be resolved within weeks. Many left for Crimea via mainland Ukraine to wait out a storm. However, by the end of summer 2016, the chances of relocating indus- 48 % trial facilities or even of carrying out a proper move were Manufacturing/ndustry Services Retail trade already slim and people started to leave in a rushed manner in response to imminent security threats from military action and banditry. Figure 2: Business sector: IDP SMEs from Donetsk sample Business sector

23% 32%

45%

Manufacturing/industry Services Retail trade

Figure 3. Business profile: Luhansk SME sample 22 % 30 %

10 Economic connectivity across the line of contact in Donbas, Ukraine

Business sector 48 % Business sector 10% Manufacturing/ndustry Services Retail trade 10%

40% Business sector Figure 2: Business sector: IDP SMEs from Donetsk sample 40% Figure 2. Business sector: IDP SMEs from Donetsk sample Business sector groupedBusiness sector Business sector 10% Business sector Business sector10% 40% 23% 32% 10% 40% 50% 40% 50%

50% Manufacturing/industry Services Retail trade Manufacturing/industry Services 50%Retail50% trade 45% Manufacturing/industry Services Retail trade Figure 4. Business sector: IDP SMEs from Luhansk sample Manufacturing/industryBusinessServices sizeRetailFigure trade 4. Business sector:Manufacturing/industry IDP SMEs from LuhanskServices Retailsample trade

Manufacturing/industry Services Retail trade Business size 8% Figure 4. Business sector: IDP SMEs from LuhanskBusiness sample sector Figure 3.Figure Business 3. profile: Business Luhansk profile: SME sampleLuhansk SME sample Figure 4. FigureBusiness 4.sector: Business IDP SMEs sector: from IDPLuhansk SMEs sample from Luhansk sample 8% Business sector Business size BusinessBusinessBusiness size size size Business45% sector Business size Figure 4. Business sector: IDP SMEs fromBusinessBusiness Luhansk sector sectorsample 45% 24 % 8%8% 8% 8% 34 % 24 % 24 %24 % 45% 34 % Business sector 47% 45%45%3445%34%% 47%

47% 24 % 47%47% 47% 34 %

< 10< people10 people 10-5010 people-50 people51-25051 people-250 people> 251 people> 251 people

< 10 people 10-50 people 51-250 people > 251 people 41 %

Business sector< 10 people< 10 people< 10 people10-5010 people-50 people10-50 people51-25051 -people25051 people-250 people> 251> people 251 people> 251 people Manufacturing/industry Services 41Retail% trade 41 % BusinessBusiness sector sector 41 % Business sector Manufacturing/industry Services Retail trade 7%7% 7% Manufacturing/industry Services Retail trade 2% 2% Figure 5: BusinessManufacturing/industry profile: IDP SME sample, combinedServices Retail trade BusinessBusinessBusiness sector sector sector 41 % 40% 7% 7% 7% Figure 5. BusinessBusiness profile:Business IDP size sizeSME sample, combined 40%40% 2% 2% 2% Figure 5: Business profile: IDP SME sample, combined Business size Figure 5: BusinessManufacturing/industry profile: IDP SMEServices sample,Retail combined trade 40%40% 40% 35%Figure 5: Business profile: IDP SME sample, combined 35% 4% 35% 4% 21%21% Figure35% 5:35% Business35% profile: IDP SME sample, combined 8% 3% 5% Manufacturing/industry Agriculture Construction 8% 3% 5% Extractive/processing8% industry Services IT Manufacturing/industry Agriculture3% 5% Construction Education 8% 8% Transport8% Retail trade Manufacturing/industry Agriculture3% 3% 5%3% 5% 5% Construction Extractive/processing industry Services IT 75% Manufacturing/industryManufacturing/industryManufacturing/industryAgricultureAgricultureAgriculture ConstructionConstructionConstruction 75% EducationExtractive/processing industryTransportServices Retail tradeIT Extractive/processingExtractive/processingExtractive/processing industry industryServices industryServicesServices IT IT IT Education Transport Retail trade < 10 people 10-50 people 51-250 people >251 people EducationEducationEducation TransportTransportTransport RetailRetail trade tradeRetail trade < 10 people 10-50 people 51-250 people >251 people

BusinessBusiness sector sector 12%12% 28% 28% 7%7% 7%7%

2%2% 8%8% 4%4% 4% 4% 28%28% Manufacturing/industry Agriculture Construction Manufacturing/industry Agriculture Construction Extractive/processing industry Services IT Extractive/processing industry Services IT Education Transport Retail trade Education Transport Retail trade

Business size

BusinessBusinessBusiness size size size 4% 21% Economic connectivity across the line of contact in Donbas, Ukraine 11 4% 4% 4% 21% 21%21%

75%

75% 75%75% < 10 people 10-50 people 51-250 people >251 people

< 10 people< 10 people< 1010 people-50 people10-5010 people-5051 people-250 people51-25051 -people250>251 people people>251>251 people people Business sector 1.2 Business dynamic since the beginning Business sector of the conflict BusinessBusinessBusiness sector12% sector sector 12% 12%12% Business dynamic was assessed for two different periods: 28% 7% 28% 28%28% 7% 7% 7% 7% • before August 2014 (before a full-scale military conflict 7% 7% 7% erupted and the majority of IDPs in the sample left Donetsk and Luhansk),14 and 2% 2%2%2% • from September 2014 onward. 8% 8% 8% 8% Expanding the timeframe to include months before the mili- 4% 4%4% 4% tary escalation in the Eastern Ukraine was important in order 4% 4%4% 4% 28% 28%28%28% to get a baseline of the normal business dynamic and elicit Manufacturing/industryManufacturing/industryManufacturing/industryManufacturing/industryBusinessAgricultureAgricultureAgriculture AgriculturesectorConstructionConstructionConstructionConstructionspecific conflict-related turning points in the business dynamic. Extractive/processingExtractive/processingExtractive/processing industry industryServices industryServicesServices IT IT IT Changes in the three sectors – manufacturing and industry, Extractive/processing industry Services IT EducationEducationEducation TransportTransportTransport Retail tradeRetailRetail trade traderetail trade, and services – were analysed separately to discern Education Transport Retail tradespecific trajectories of each sector that may have been affected

Business sector grouped by the conflict in different ways and to a different degree (Fig- Business sector ures 6 to 21). Percentage of the number of responses for each business dynamic category (growth, neutral, decline and freeze) 28% 29% per sector (manufacturing/industry, retail trade and services) were calculated as the ratio of the total number of the identical category-sector responses to the total size of the sample. 28% 29% The overall dynamic of the SMEs surveyed is universal across the three sectors and across the geographic samples. All businesses started from a relatively high ground in January 2014. Business activity began spiralling down reaching a low 43% point in the summer and autumn of 2014 but started going upward from July–December 2015. Slow but steady growth Manufacturing/industry Services Retail trade continued in January–June 2016. This points to the adaptabil- Manufacturing/industry Services Retail trade ity and resilience of SMEs from the Donbas NGCAs. Overall, conflict was unanimously assessed as bad for business. Micro-enterprises,Some businessesemploying fewer split theirthan 10operation people, betweenare dominant the twoamong IDP SMEs (75%) compared to Cases of emerging monopolies due to the departure of com- the Donetskterritories, (48%) and leavingLuhansk some (45%) personnel samples (Figuresin the NGCAs 1, 3 and to 5). keep This may be due to their greater petitors were rare and short-lived until a new equilibrium of the business afloat and with a smaller IDP business re- Micro-enterprises,mobility butemploying also because fewerof personnel than leaving 10 forpeople, different destinations.are dominant Somsupplye enterprises among and demand have IDP was SMEs established. (75%) compared to registered in the GCAs. Others had to start their business the Donetsk (48%)registered and new Luhanskentities in the (45%) GCAs with samples a small staff, (Figures hence their 1, micro 3 and-enterprise 5). This category, may while be their due to their greater facilities andanew all or and part lack of the the previous financial business means to remains recruit inpersonnel. the NGCAs. Big The remainingThe conflict businesses led to dramatically are decreased business activity mobility but alsoeither rebecause-registeredindustries ofas retained a personnel new company their industrial, underleaving themanufacturing self for-proclaimed different or extrac republics’ -destinations. inrules Donetsk or operate and Som Luhansk withoute enterprisesas any well as of the IDP have businesses in tive facilities, staff and management in the NGCAs. Some registration. their new locations. Entrepreneurs in Donetsk and Luhansk continue their operation and others have suspended produc- registered new entities in the GCAs with a small staff, hence theirreport micro an average-enterprise loss of 30–40% category, of clients. Some while of those their tion,13 depending on the owners’ and shareholders’ political who relocated have lost their entire business, while others In all SME samples, retail trade and services were the dominant sectors (Figures 1, 2, 3, 4 and 5). facilities and all or partattitudes, of the and previous on markets andbusiness export destinations. remains Some in the NGCAs.managed to Themove remainingtheir equipment acrossbusinesses the line of contactare Manufacturing and industrial SMEs that stayed in Donetsk make up 30% of the sample (Figure 1), while either re-registered asbusinesses a new have company remained operationalunder the under self the -Ukrainianproclaimed and republics’ re-assemble production rules or facilities. operate Yet others without continue any in Luhansk thisjurisdiction, proportion like is DTEKonly 10% and (Figure other companies3). Manufacturing belonging and to industrial shuttling enterprises between constitute the two territories taking advantage of the registration. 32% of all IDPRinat SMEs Akhmetov, that left fromand the Donetsk Industrial (Figure Union 2) ofand Donbas. 24% of SomeIDP SMEs that‘negotiated’ left from passage Luhansk of(Figure banned commercial items through 4). Moving manufacturinghave re-registered facilities with the and self-styled hardware authorities is undoubtedly or acquired more difficultthe Ukrainianthan moving checkpoints. a trade or15 aDespite the losses, lack of secu- service businessa new to Russian a new place. legal However,entity to continue the alternative their export, of retaining mostly business rity andin the inaccessibility war-affected of area proper banking and investment in In all SME samples,may be yet retail moreto Russia. difficult. trade Severely and services constrained were supplies the and deliveriesdominant of thethe sectors produced NGCAs, goodsafter(Figures 18 across months 1,the businesses 2, 3, 4 and seem to5). have partly line of conflict or even within the war-affected area, plus diminished and depopulated internal markets, Manufacturingmay and have industrialbeen considered SMEs worse thanthat relocating stayed for in SME Donetsk manufacturers. make Many u pindustrial 30% of and the sample (Figure 1), while in Luhansk thismanufacturing proportion SMEs isin Donbasonly 10%worked (Figure within the 3). production Manufacturing chain of big industrial and industrialenterprises and enterprises lost constitute 32% of all IDPimportant SMEs clientsthat afterleft manyfrom big Donetsk industries suspended (Figure production. 2) and Besides,24% of to IDPsell their SMEs products, that left from Luhansk (Figure manufacturers need a bar code and all the necessary documentation which can be obtained at the 4). Moving manufacturingdesignated Ukrainian facilities institutions. and hardware is undoubtedly more difficult than moving a trade or a service business to a new place. However, the alternative of retaining business in the war-affected area IDP entrepreneurs said that it was still possible to take equipment relatively safely from Donetsk and may be yet moreLuhansk difficult. before the fullSeverely-scale military constrained escalation, although supplies the majority and had deliveries hoped the si oftuation the would produced goods across the be resolved within weeks. Many left for Crimea via mainland Ukraine to wait out a storm. However, by line of conflictthe or end even of summer within 2016, thethe chances war- affectedof relocating area,industrial plus facilities diminished or even of carrying and out depopulated a proper internal markets, may have beenmove considered were already slim worse and people than started relocating to leave in afor rushed SME manner manufacturers. in response to imminent Many industrial and manufacturingsecurity SMEs threats in Donbasfrom military worked action and withinbanditry. the production chain of big industrial enterprises and lost important clients after many big industries suspended production. Besides, to sell their products, manufacturers need a bar code and all the necessary documentation which can be obtained at the designated Ukrainian institutions.

IDP entrepreneurs said that it was still possible to take equipment relatively safely from Donetsk and Luhansk before the full-scale military escalation, although the majority had hoped the situation would be resolved within weeks. Many left for Crimea via mainland Ukraine to wait out a storm. However, by the end of summer 2016, the chances of relocating industrial facilities or even of carrying out a proper move were already slim and people started to leave in a rushed manner in response to imminent security threats from military action and banditry.

Some businesses split their operation between the two territories, leaving some personnel in the NGCAs to keep the business afloat and with a smaller IDP business re-registered in the GCAs. Others had to start their business anew and lack the financial means to recruit personnel. Big industries retained their industrial, manufacturing or extractive facilities, staff and management in the NGCAs. Some continue their operation and others have suspended production,xiii depending on the owners’ and shareholders’ political attitudes, and on markets and export destinations. Some businesses have remained operational under the Ukrainian jurisdiction, like DTEK and other companies belonging to Rinat Akhmetov, and the Industrial Union of Donbas. Some have re-registered with the self-styled authorities or acquired a new Russian legal entity to continue their export, mostly to Russia. 16.0

1.2 Business dynamic since the beginning of the conflict 14.0 Some businesses split their operation between the two territories, leaving some personnel in the NGCAs 12.0 to keep the business afloat and with a smaller IDP business re-registered in the GCAs. Others had to Business dynamic was assessed for two different periods: before August 2014 (before a full-scale start their business anew and lack the financial means to recruit personnel. Big industries retained their 10.0 military conflict erupted and the majority of IDPs in the sample left Donetsk and Luhansk),xiv and from industrial, manufacturing or extractive facilities, staff and management in the NGCAs. Some continue 8.0 September 2014 onward. Expanding the timeframe to include months before the military escalation in their operation and others have suspended production,xiii depending on the owners’ and shareholders’ the Eastern Ukraine was important in order to get a baseline of the normal business dynamic6.0 and elicit political attitudes, and on markets and export destinations. Some businesses have remained operational specific conflict-related turning points in the business dynamic. Changes in the three sectors4.0 – under the Ukrainian jurisdiction, like DTEK and other companies belonging to Rinat Akhmetov, and the manufacturing and industry, retail trade, and services – were analysed separately to discern2.0 specific Industrial Union of Donbas. Some have re-registered with the self-styled authorities or acquired a new trajectories of each sector that may have been affected by the conflict16.0 in different ways and0.0 to a Russian legal entity to continue their export, mostly to Russia. different degree (Figures 6 to 21). Percentage of the number of responses for each business dynamicSeptember -December January-June 2015 July-December 2015 January-July 2016 14.0 2014 category (growth, neutral, decline and freeze) per sector (manufacturing/industry, retail trade and 12 Economic connectivity across the line of contact in Donbas, Ukraine12.0 1.2 Business dynamicservices) since were calculatedthe beginning as the ratio of theof the conflict total number of the identical category-sector responses to Growth Neutral Decline Freeze the total size of the sample. 10.0

Business dynamic was assessed for two different periods: before August 2014 (before a full8.0-scale xiv Figure 10. Dynamics of services, Donetsk SME sample, before the military conflict military conflict eruptedFigure and 6. the Dynamics majority of of ma IDPsnufacturing in the sample and industry, left Donetsk Donetsk and SMELuhansk), sample,6.0 and before from the military conflict 25.0 September 2014 onward. Expanding25.0 the timeframe to include months before the military escalat4.0 ion in the Eastern Ukraine was important in order to get a baseline of the normal business dynamic and elicit 2.0 20.0 specific conflict-related turning20.0 points in the business dynamic. Changes in the three sectors – manufacturing and industry, retail trade, and services – were analysed separately to discern0.0 specific September-December 15.0January-June 2015 July-December 2015 January-July 2016 trajectories of each sector that15.0 may have been affected by the conflict in different ways and to a 2014 different degree (Figures 6 to 21). Percentage of the number of responses for each business dynamic 10.0Growth Neutral Decline Freeze category (growth, neutral, decline and freeze) per sector (manufacturing/industry, retail trade and 10.0 % Responses,

services) were calculated % Responses, as the ratio of the total number of the identical category-sector responses to 5.0 the Figuretotal size of6. the Dynamics sample. 5.0 of manufacturing and industry, Figure 10. DynamicsFigure of 10. services, Dynamics Donetsk SMEof services, sample, before Donetsk the military SME conflict sample,

Donetsk SME sample, before the military conflict before25.0 the military0.0 conflict Figure 6. Dynamics of manufacturing0.0 and industry, Donetsk SME sample, before the military conflict Before January 2014 January-April 2014 April-June 2014 June-September 2014 25.0 Before January 2014 January-April 2014 April-June 2014 June-September20.0 2014 Figure 7. Dynamics of manufacturingGrowth Neutraland industry,Decline DonetskFreeze SME sample, after the military Growth Neutral Decline Freeze 15.0 20.0 conflictFigure 7. Dynamics of manufacturing and industry, Donetsk SME sample, after the military 16.016.0

conflict 14.0 Figure14.0 11. Dynamics of services, Donetsk SME sample, after the military conflict 15.0 10.0 12.0 % Responses, 12.012.0 12.0 5.0 10.010.0 10.0 10.0

Responses, % Responses, 8.0 10.0 8.0 8.0 0.0 6.0 5.0 8.0 Before January6.0 2014 January-April 2014 April-June 2014 June-September 4.0 2014 6.0 4.0 6.0 0.0 2.0Growth Neutral Decline Freeze Before January4.0 2014 January-April 2014 April-June 2014 June-September 2014 2.0 4.0 0.0 Figure 7. Dynamics of manufacturing and industry, Donetsk SME sample, after the military 0.0 September-December January-June 2015 July-December 2015 January-July 2016 2.0 Growth Neutral Decline Freeze Figure 11. Dynamics of services, Donetsk SME sample, 2.0 September2014-December January-June 2015 July-December 2015 January-July 2016 conflictFigure 7. Dynamics of manufacturing and industry, Donetsk SME sample, after the militaryFigure16.0 since 11. Dynamics the military of services, conflict Donetsk2014 SME sample, after the military conflict Figure 7. Dynamics of manufacturing and industry, Growth Neutral Decline Freeze conflict 0.00.0 14.016.0 Growth Neutral Decline Freeze Donetsk SME sample,SeptemberSeptember since-December-December the militaryJanuaryJanuary--JuneJune conflict 20152015 July -December 2015 2015 JanuaryJanuary-July-July 2016 2016 12.0 20142014 12.014.0 12.0 Figure 12. Dynamics of manufacturing and industry, Luhansk SME sample, before the military Growth Neutral Decline Freeze 10.0 Growth Neutral Decline Freeze 10.012.0 Figure 12. Dynamics of manufacturing and industry, Luhansk SME sample, before the military conflict 10.0 8.010.0 conflict 8.0 25.0 8.0 8.0 FigureFigure 8. 8. Dynamics Dynamics of of retail retail trade, trade, Donetsk Donetsk SMESME sample,sample, before thethe militarymilitary conflict conflict6.0 25.0 6.0 6.0 20.0 4.0 20.0 6.0 20.0 4.0 20.0 4.0 18.018.0 2.0 4.0 2.0 15.0 16.016.0 0.0 2.0 15.0 14.014.0 0.0 September-December January-June 2015 July-December 2015 January-July 2016 2.0 10.0 12.0 September2014-December January-June 2015 July-December 2015 January-July 2016

0.0 12.0 % Responses, 2014 10.0 0.0 September-December 10.010.0January-June 2015 July-December 2015 January-July 2016 Growth Neutral Decline Freeze September2014-December January-June 2015 July-December 2015 January-July 2016 % Responses, 5.0 8.0 Growth Neutral Decline Freeze 2014 8.0 Responses, % Responses, Responses, % Responses, Growth Neutral Decline Freeze 5.0 6.06.0 Growth Neutral Decline Freeze FigureFigure 12. Dynamics 12. Dynamics of manufacturing0.0 of manufacturing and industry, Luhansk and SME industry, sample, before the military 4.04.0 Figure 12. Dynamics of manufacturingBefore and January industry, 2014 LuhanskJanuary-April SME 2014 sample,April-June before 2014 the militaryJune-September 2014 conflictLuhansk SME sample,0.0 before the military conflict Figure 8. Dynamics2.02.0 of retail trade, Donetsk SME sample, conflict Figure 8. Dynamics of retail trade, Donetsk SME sample, before the military conflict Before January 2014GrowthJanuary-AprilNeutral 2014DeclineApril-JuneFreeze 2014 June-September 2014 0.0 25.0 Figure 8. Dynamicsbefore ofthe retail military trade, Donetsk0.0 conflict SME sample, before the military conflict 25.0 20.0 BeforeBefore January January 2014 2014 January-AprilJanuary-April 20142014 April-June 20142014 June-SeptemberJune-September 2014 2014 Growth Neutral Decline Freeze 20.0 18.0 Growth Neutral Decline Freeze 20.0 Figure 13. Dynamics of manufacturing and industry, Luhansk SME sample, after the military 18.0 Growth Neutral Decline Freeze 20.0 16.0 conflict 16.0 Figure 13. Dynamics of manufacturing and industry, Luhansk SME sample, after the military 14.0 15.0 14.0 Figure 9. Dynamics of retail trade, Donetsk SME sample, after the military conflict15.0 conflict 12.0 Figure 9. Dynamics of retail trade, Donetsk SME sample, after the military conflict 30.0 12.0 10.0 16.0 10.0 10.010.0

Responses, % Responses, 25.0 8.0 % Responses, 8.0 14.0 Responses, % Responses,

Responses, % Responses, 6.0 20.0 6.0 12.0 5.05.0 4.0 4.0 10.0 15.0 2.0 0.00.0 2.0 8.0 BeforeBefore January January 2014 2014 January-AprilJanuary-April 2014 April-JuneApril-June 2014 2014 June-SeptemberJune-September 2014 2014 0.00.0 10.0 Before January6.0 2014 January-April 2014 April-June 2014 June-September 2014 Before January 2014 January-April 2014 April-June 2014 June-September 2014 GrowthGrowth NeutralNeutral Decline FreezeFreeze 4.0 5.0 Growth Neutral Decline Freeze Growth Neutral Decline Freeze Figure 13. Dynamics of manufacturing and industry, 2.0 0.0 Figure 9. Dynamics of retail trade, Donetsk SME sample, Figure 13. Dynamics of manufacturing and industry, Luhansk SME sample, after the military 0.0 FigureLuhansk 13. Dynamics SME of manufacturingsample,September since -andDecember industry,the militaryJanuary Luhansk-June conflict 2015SME sample,July-December after the 2015 militaryJanuary -July 2016 September-December January-June 2015 July-December 2015 Januaryconflict-July 2016 2014 FigureFigure16.0since 9. 9. Dynamics Dynamicsthe military of of retail retail conflict trade, trade, Donetsk Donetsk SME SME sample,sample, after the military conflictconflict conflict30.0 2014 Growth Neutral Decline Freeze 14.0 Growth Neutral Decline Freeze 25.0 12.0 20.0 10.0 Figure 14. Dynamics of retail trade, Luhansk SME sample, before the military conflict 8.0 Figure 10. Dynamics of services, Donetsk SME sample, before the military conflict15.0 25.0 6.0 25.0 10.0 20.0 4.0 20.0 5.0 2.0 15.0 0.0 15.0 0.0 September-December January-June 2015 July-December 2015 January-July 2016 September-December January-June 2015 July-December 2015 January-July 2016 2014 2014 10.0

10.0 % Responses,

Responses, % Responses, Growth Neutral Decline Freeze Growth Neutral Decline Freeze 5.0 5.0

Figure 10. Dynamics of services, Donetsk0.0 SME sample, before the military conflict Figure 14. Dynamics of retail0.0 trade, Luhansk SME sample, before the military conflict Before January 2014 January-April 2014 April-June 2014 June-September Before January 2014 January-April 2014 April-June 2014 June-September 2014 25.0 25.0 2014 Growth Neutral Decline Freeze

20.0 Growth Neutral Decline Freeze 20.0

Figure 15. Dynamics of retail trade, Luhansk SME sample, after the military conflict 15.0 15.0 Figure 11. Dynamics of services, Donetsk SME sample, after the military conflict 10.0 10.0 Responses, % Responses, Responses, % Responses, 5.0 5.0

0.0 Before January 2014 January-April 2014 April-June 2014 June-September 0.0 2014 Before January 2014 January-April 2014 April-June 2014 June-September 2014

Growth Neutral Decline Freeze Growth Neutral Decline Freeze

Figure 11. Dynamics of services, Donetsk SME sample, after the military conflict Figure 15. Dynamics of retail trade, Luhansk SME sample, after the military conflict

30.0 18.0 25.0 16.0 14.0 20.0 12.0 10.0 15.0 8.0 6.0 10.0 % Responses, 4.0 2.0 5.0 0.0 September-December January-June 2015 July-December 2015 January-July 2016 0.0 2014 September-December January-June 2015 July-December 2015 January-July 2016 2014 30.0 Economic connectivity across the line of contactGrowth inNeutral Donbas,Decline UkraineFreeze13 Growth Neutral Decline Freeze 18.0 25.0 16.0 14.0 20.0 Figure 14. Dynamics of retail trade, Luhansk SME sample, before the military12.0 conflict Figure 18. Dynamics of manufacturing and industry, IDP SME sample, after the military conflict 10.0 15.0 16.0 25.0 8.0 6.0 14.0

10.0 % Responses, 20.0 4.0 12.0 2.0 5.0 0.0 10.0 15.0 September-December8.0 January-June 2015 July-December 2015 January-July 2016 0.0 2014 September-December January-June 2015 July-December 2015 January-July 2016 6.0 2014 10.0 % Responses,

Responses, % Responses, 4.0 Growth Neutral Decline Freeze Growth Neutral Decline Freeze 2.0 Figure 14. Dynamics5.0 of manufacturing and industry, Figure 18. Dynamics of manufacturing and industry, 0.0 FigureLuhansk 14. Dynamics SME of retailsample, trade, sinceLuhansk the SME military sample, before conflict the military conflict FigureIDP 18. SME Dynamics sample, of manufacturing sinceSeptember the and -Decembermilitary industry, JanuaryIDPconflict SME-June sample, 2015 Julyafter-December the military 2015 conflictJanuary -July 2016 0.0 2014 Before January 2014 January-April 2014 April-June 2014 June-September 2014 25.0 16.0 Growth Neutral Decline Freeze Growth Neutral Decline Freeze 14.0

20.0 12.0 Figure 19. Dynamics of retail trade, IDP SME sample, after the military conflict Figure 15. Dynamics of retail trade, Luhansk SME sample, after the military10.0 conflict 15.0 20.0 8.0 18.0 16.0 16.0 16.0 6.0 10.0 % Responses, 16.0 Responses, % Responses, 14.0 14.0 4.0 14.0 12.0 14.0 12.0 2.0 12.0 5.0 10.0 10.0 12.0 8.0 0.0 10.0 8.0 0.0 % Responses, September-December10.0 January-June 2015 July-December 2015 January-July 2016

Responses, % Responses, 6.0 8.0 6.0 2014 Before January 20144.0 January-April 2014 April-June 2014 June-September 2014 8.0 4.0 6.0 Growth2.0 Neutral Decline Freeze % Responses, Growth6.0 Neutral Decline Freeze

2.0 % Responses, 4.0 0.0 0.0 4.0 Figure 15. DynamicsSeptember of retail-December trade, January Luhansk-June 2015 SMEJuly- Decembersample, 2015 January-July 2016 2.0 September-December January-June 2015 July-December 2015 January-July 2016 2014 2.0 Figuresince 15. Dynamics the military of retail conflict trade, Luhansk2014 SME sample, after the military conflict FigureFigure 19. Dynamics 19. Dynamics of retail0.0 trade, of IDP retail SME sample,trade, after IDP the SME military sample, conflict 20.0 Growth Neutral Decline Freeze since the military conflict0.0 September-December January-June 2015 July-December 2015 January-July 2016 20.018.0 Growth Neutral Decline Freeze September2014-December January-June 2015 July-December 2015 January-July 2016 16.0 2014 18.016.0 Growth Neutral Decline Freeze 16.014.0 14.0 Growth Neutral Decline Freeze 14.0 16.0 12.0 Figure 16. Dynamics of services, Luhansk SME sample, before the military 12.0conflict Figure 16. Dynamics of services, Luhansk SME sample, before the military14.0 conflict 12.010.0 Figure 20. Dynamics of services, IDP SME sample, after the military conflict 25.0 10.0 10.08.0 25.0 12.0 Figure 20. Dynamics of services, IDP SME sample, after the military conflict 16.0 Responses, % Responses, 8.0 8.06.0 16.0 10.0 14.0 Responses, % Responses, 20.0 6.04.0 20.0 6.0 14.0 Responses, % Responses, 8.0 12.0 4.0 12.0 2.0 4.0 10.0 2.0 15.0 6.0 10.0 0.0 % Responses, 8.0 15.0 2.0 8.0 0.0 September-December January-June 2015 July-December 2015 January-July 2016 4.0 6.0 6.0

September2014-December10.0 January-June 2015 July-December 2015 January-July 2016 0.0 % Responses, 4.0 2.0 % Responses, 4.0 Responses, % Responses, 10.0 2014 September-December2.0 January-June 2015 July-December 2015 January-July 2016 Responses, % Responses, Growth Neutral Decline Freeze 2.0 0.0 2014 0.0 Growth5.0 Neutral Decline Freeze 0.0 5.0 September-December JanuarySeptember-June 2015-DecemberJuly-December January 2015-June 2015JanuaryJuly-July-December 2016 2015 January-July 2016 GrowthSeptemberNeutral-DecemberDecline JanuaryFreeze-June 2015 July-December 2015 January-July 2016 2014 2014 Figure 16. Dynamics0.0 of services, Luhansk SME sample, 2014 0.0 Growth Neutral Decline Freeze before the military conflictBefore January 2014 January-April 2014 April-June 2014 June-September Figure 16. Dynamics of services, LuhanskBefore January SME 2014 sample,January-April before the 2014 militaryApril-June conflict 2014 June-SeptemberFigure2014 20. Dynamics of services, IDP SME sample, Figure 16. Dynamics of services, Luhansk SME sample, before the military conflict Figure2014 20. Dynamics of services, IDP SME sample, after the military conflict 25.0 Growth Neutral Decline Freeze since16.0 the military conflict 25.0 Growth Neutral Decline Freeze Figure 20. Dynamics of services, IDP SME sample, after the military conflict 14.0 GrowthGrowth NeutralNeutral DeclineDecline FreezeFreeze 16.0 20.0 12.0 20.0 14.0 Figure 17. Dynamics of services, Luhansk SME sample, after the military conflict10.0 12.0 15.0 Figure 17. Dynamics of services, Luhansk SME sample, after the military conflict8.0 Figure Figure 21.21. Reasons for the decline inin business,business, SME SME samples samples 10.0 15.0 6.0 18.0 8.0 Responses, % Responses, 4.0 10.0 16.0 6.0

Responses, % Responses, 10.0 2.0 14.0 % Responses, 4.0 35.00 Responses, % Responses, 0.0 12.0 2.0 30.00 5.0 September-December January-June 2015 July-December 2015 January-July 2016 5.0 10.0 0.0 25.00 2014 8.0 September20.00-December January-June 2015 July-December 2015 January-July 2016 0.0 6.0 201415.00 0.0 Before January 2014 % Responses, January-April 2014 April-June 2014 June-September 4.0 % Responses, 10.00 Before January 2014 January-April 2014 April-June 2014 June-September 2.0 2014 5.00 2014 0.0 0.00 Growth Neutral Decline Freeze September-December January-June 2015 July-December 2015 January-July 2016 Loss of clientsGrowthShrinkingNeutralLack of legal DeclineMore FreezeSome of Armed Lack of Less Other Growth Neutral Decline Freeze market possibility for expensive business hostilities freedom of investment 2014 Growth NeutralcooperatingDeclinesupplies Freezeactivities movement Figure 17. Dynamics of services, Luhansk SME sample, Figure 21. Reasons for thewith decline partners in business,became across the and clients on irrelevant line of Figuresince 17. Dynamics the military of services, conflict Luhansk SME sample, after the military conflict SME samples the other side contact Figure 17. Dynamics of services, Luhansk SME sample, after the military conflict Figure 21. Reasons for the decline in business, SME samples Growth Neutral Decline FreezeFigure 21. Reasons for the decline in business,Donetsk SME sample samplesLuhansk sample IDP entrepreneurs, Ukraine sample 18.0 35.00 16.0 30.00 14.0 25.00 The overall dynamic of the SMEs surveyed is universal across the three sectors and across the 12.0 Figure 18. Dynamics of manufacturing and industry, IDP SME sample, after20.00 the militarygeographic conflict samples. All businesses started from a relatively high ground in January 2014. Business 10.0 15.00 activity began spiralling down reaching a low point in the summer and autumn of 2014 but started going 16.0

8.0 % Responses, 10.00 upward from July–December 2015. Slow but steady growth continued in January–June 2016. This points 6.0 14.0 5.00 to the adaptability and resilience of SMEs from the Donbas NGCAs. Overall, conflict was unanimously Responses, % Responses, 4.0 0.00 assessed as bad for business. Cases of emerging monopolies due to the departure of competitors were 12.0 Loss of clientsrare Shrinkingand short-Lacklived of untillegal a newMore equilibriumSome of of supplyArmed and demandLack was of established.Less Other 2.0 market possibility for expensive business hostilities freedom of investment

0.0 10.0 cooperating supplies activities movement The conflict ledwith to partnersdramatically decreasedbecame business activity in Donetskacross the and Luhansk as well as of the IDP September-December January-June 2015 July-December 2015 January-July 2016 8.0 businesses in theirand clients new on locations. Entrepreneursirrelevant in Donetsk andline Luhansk of report an average loss of 30– 2014 the other side contact 40% of clients. Some of those who relocated have lost their entire business, while others managed to 6.0 Donetsk sample Luhansk sample IDP entrepreneurs, Ukraine sample

Responses, % Responses, move their equipment across the line of contact and re-assemble production facilities. Yet others

4.0 continue shuttling between the two territories taking advantage of the ‘negotiated’ passage of banned Growth Neutral Decline Freeze commercial items through the Ukrainian checkpoints.xv Despite the losses, lack of security and 2.0 The overall dynamic of the SMEs surveyed is universal across the three sectors and across the geographic samples.inaccessibility All businesses of startedproper frombanking a relatively and investment high ground in the in NGCAs, January after 2014. 18 Business months businesses seem to have 0.0 activity began spirallingpartly down recovered, reaching replaced a low pointold suppliers in the summ with ernew and ones, autumn reformatted of 2014 but their started businesses going and some even started new businesses. Profitability is still lower than before the conflict, but a steady tendency Figure 18. Dynamics of manufacturingSeptember and- Decemberindustry, IDPJanuary SME-June sample, 2015 afterJuly-December the military 2015 conflictJanuaryupward -July from 2016 July–December 2015. Slow but steady growth continued in January–June 2016. This points 2014 to the adaptability towardsand resilience growth of is SMEs evident. from the Donbas NGCAs. Overall, conflict was unanimously 16.0 assessed as bad for business. Cases of emerging monopolies due to the departure of competitors were Growth Neutral Decline Freeze The manufacturing and industry sector appears to be the fastest growing after the cessation of active 14.0 rare and short-lived until a new equilibrium of supply and demand was established. military activities in Luhansk (Figure 13), compared to retail trade and services, and reached its pre-war 12.0 The conflict led to dramaticallylevel of growth decreased by July 2016.business This activity can be inexplained Donetsk byand the Luhansk inclusion as weof thell as construction of the IDP business into this businesses in their category:new locations. reconstruction Entrepreneurs of buildings in Donetsk and andinfrastructure Luhansk report paid byan theaverage money loss transferred of 30– by Russia kept 10.0 Figure 19. Dynamics of retail trade, IDP SME sample, after the military conflict 40% of clients. Someconstruction of those who ser relocatedvices in high have demand. lost their entire business, while others managed to

8.0 move their equipment across the line of contact and re-assemble production facilities. Yet others continue shuttling between the two territories taking advantage of the ‘negotiated’ passage of banned 6.0 commercial items through the Ukrainian checkpoints.xv Despite the losses, lack of security and Responses, % Responses, 4.0 inaccessibility of proper banking and investment in the NGCAs, after 18 months businesses seem to have partly recovered, replaced old suppliers with new ones, reformatted their businesses and some even 2.0 started new businesses. Profitability is still lower than before the conflict, but a steady tendency towards growth is evident. 0.0

September-December January-June 2015 July-December 2015 January-July 2016 The manufacturing and industry sector appears to be the fastest growing after the cessation of active 2014 military activities in Luhansk (Figure 13), compared to retail trade and services, and reached its pre-war Growth Neutral Decline Freeze level of growth by July 2016. This can be explained by the inclusion of the construction business into this category: reconstruction of buildings and infrastructure paid by the money transferred by Russia kept construction services in high demand.

Figure 19. Dynamics of retail trade, IDP SME sample, after the military conflict 14 Economic connectivity across the line of contact in Donbas, Ukraine

recovered, replaced old suppliers with new ones, reformat- pragmatic considerations were factors. Manufacturing oper- ted their businesses and some even started new businesses. ations, such as those making machinery, with high-value- Profitability is still lower than before the conflict, but a steady added outputs and which used to serve the internal Ukrainian tendency towards growth is evident. market, Russia and CIS, Iran and other non-European markets see Russia as a more promising political-economic The manufacturing and industry sector appears to be the space due to high competitiveness of Ukrainian industry of fastest growing after the cessation of active military activities this type. in Luhansk (Figure 13), compared to retail trade and services, and reached its pre-war level of growth by July 2016. This This finding is in line with the proposed economic theory of can be explained by the inclusion of the construction business rebellion in different areas of Donbas that places the struc- into this category: reconstruction of buildings and infrastructure of local economy and priority markets as the defining ture paid by the money transferred by Russia kept construc- factor of the success of and popular support for the insur- tion services in high demand. gence. Machinery production locales appeared to be more supportive and active in the rebellion compared to the locales The services sector was the fastest growing among the IDP where extractive or metallurgic enterprises were dominant. SMEs (Figure 20), possibly due to the relative ease of resum- The underlying fear of losing important markets – predomi- ing services in a new place as no equipment or initial capital nantly non-EU in the former case and predominantly EU in was required. Retail trade was regaining growth more slowly the latter – was shown to be the driver of support for insur- than other sectors among IDP SMEs (Figure 19) because gency against Kiev.16 Extractive industries and metallurgic competition is high, owners’ financial resources were depleted, enterprises, that are less competitive in the Russian market which also makes borrowing from banks risky, and previous and export to Europe, opt for the re-integration of the NGCAs supply chains involving sources in the NGCAs were disrupted. into Ukrainian political and economic space.

Big enterprises reported dramatic decline in productivity, and Overall, those who retain their industry and other assets also in exports due to the severely restricted railway con- operational in the NGCAs report zero profitability or even run- nection with GCAs. Exports from the Luhansk-based big ning at a loss. The following reasons were given for keeping enterprises fell to one thirtieth of their former value accord- businesses afloat: social responsibility for tens of thousands ing to the estimates of the respondents Coal mines reduced of employees, disastrous technical consequences of the coal extraction up to 2.5 times and instead were emptying disruption of certain industrial processes, such as in metal- out their storage due to the difficulty of taking coal to enter- lurgy or coalmining, the risk of terminally losing a business prises in the rest of Ukraine or to the Ukrainian sea ports for niche in a highly competitive global market. export. Railways run only during daylight and not after dark because of security concerns and curfews in the NGCAs. Losses of equipment, office space, vehicles, staff and part- In addition, carrying capacity is reduced due to the lack of ners have dealt heavy blows to all SMEs and big businesses. cargo wagons. Inaccessibility of old markets and disruption of supply chains due to the blockade has aggravated these conditions. Enter- Enterprises formerly part of the internal Ukrainian industrial prises engaged in smaller-scale production have managed and manufacturing cycles as well as exporters to the Russian to evacuate their dismountable equipment, carry it across market suffered significant losses during the first months of the line of contact in a hand luggage and then re-assemble. the military conflict due to disrupted transportation routes, Larger-scale industrial and production enterprises, includ- trade wars launched by Russia, and destruction and damage ing construction and extractive companies with heavy and caused by heavy fighting. Enterprises exporting to Russia were immovable equipment key to their operation, did not have hit by Russia’s sanctions against Ukrainian produce after the the opportunity to move easily. They either stayed and con- signing of the Deep and Comprehensive Free Trade Agree- tinued their work or disrupted business activities and left. ment (DCFTA) in 2016. As a result, interlocutors say, exports Many of those who ended up either staying or completely to Russia from industries in the NGCAs fell by up to 70%. disrupting their business activities alike had not anticipated the long duration of turbulent times. Hence, they did not Eventually the enterprises made a strategic choice with regard evacuate, sell or rent out their equipment when transport and to market orientation. Both political convictions and economic- banking links were still in place.17

Economic connectivity across the line of contact in Donbas, Ukraine 15 Losses of equipment, office space, vehicles, staff and partners have dealt heavy blows to all SMEs and big businesses. Inaccessibility of old markets and disruption of supply chains due to the blockade has aggravated these conditions. Enterprises engaged in smaller-scale production have managed to evacuate their dismountable equipment, carry it across the line of contact in a hand luggage and then re-assemble. Larger-scale industrial and production enterprises, including construction and extractive companies with heavy and immovable equipment key to their operation, did not have the opportunity 2. Economicto move easily. They either stayed and continued connectivity their work or disrupted business activities and left. Many of those who ended up either staying or completely disrupting their business activities alike had not anticipated the long duration of turbulent times. Hence, they did not evacuate, sell or rent out their equipment when transport and banking links were still in place.xvii

Losses of equipment, office space, vehicles, staff and partners have dealt heavy blows to all SMEs and big businesses. Inaccessibility of old markets and disruption of supply chains due to the blockade has aggravated these conditions.2. Economic Enterprises connectivity engaged in smaller -scale production have managed to the so-called ATO zone, areas adjacent to the line of con- evacuate2.1 theirChanges dismountable equipment, in markets carry it across the line of contact in a hand luggage and then tact, and 45% in the local markets in the Kharkiv, Zaporizhiia re-assemble.The tendency Larger-scale observed industrial and in production 2015 was enterprises, also seen including in construction2016: small and extractive companies with heavy2.1 and Changes immovable in equipment markets key to their operation, did not have the opportunityand Dnipro regions (Figure 24). Of businesses from Donetsk, to moveand easily. medium-sized They either stayed enterprises and continued their (SMEs) work or disruptedfrom thebusiness NGCAs activities and left. some 40% were oriented towards the broader Ukrainian mar- Many of those who ended up either staying or completely disrupting their business activities alike had mostly cateredFigure to 22.the Markets local for market businesses before (%) before the the conflict. conflict and inBefore July-October 2016,ket, Dwhileonetsk onlySME sample 25% of businesses in Luhansk used to operate not anticipated the long duration90.0 of turbulent times. Hence, they did not evacuate, sell or rent out their the conflict, the NGCAs accounted for aroundxvii 65% of markets equipment when transport and80.0 banking links were still in place. also in the Ukrainian market outside their place of residence for businesses in 70.0both Donetsk and Luhansk, rising to 80% in before the conflict. Since the eruption of armed conflict, Donetsk and 100.090%60.0 in Luhansk in the summer/fall 2016 (Fig- 50.0 Luhansk businesses have completely severed links with the 90.0 Lossesures of equipment,22 and 23). office 40.0IDP space, SMEs vehicles, in thestaff summer/falland partners have 2016 dealt heavycatered blows to all SMEs and 2. Economic connectivity80.030.0 Ukrainian market, while 20% of those who stayed in Donetsk big tobusinesses. the local Inaccessibility marketsResponses, % of at old their markets new and place disruption of residence of supply chains (40% due toin the blockade has 70.020.0 continue to be present in the broader Ukrainian market. aggravated these conditions.10.0 Enterprises engaged in smaller-scale production have managed to 60.0 evacuate their dismountable0.0 equipment, carry it across the line of contact in a hand luggage and then 2.1 Changes in markets50.0 re-assemble.Figure Larger22. Markets-scale industrial forNGCAs businessesand productionUkraine enterprises,(%)Russia before includingEurope the conflict constructionCIS Other and Interestingly,extractiveATO zone the share of enterprises that have re-oriented 40.0 Market

companiesand in with July-October heavyResponses. % and immovable 2016, equipment Donetsk key SME to their sample operation, did not have the opportunitythemselves towards the Russian market is miniscule, although Figure 22. Markets for businesses30.0 (%) before the conflict and in July-October 2016, Donetsk SME sample to move90.0 easily. They either stayed and continued their workBefore or disruptedJuly-October business 2016 activities and left. accounted for around 65% of markets for businesses in both Donetsk and Luhansk, rising to 80% in 20.0 Russian companies from the adjacent regions have mas- Many 80.0of those who ended up either staying or completely disrupting their business activities alike had Donetsk and 90% in Luhansk in the summer/fall 2016 (Figures 22 and 23). IDP SMEs in the summer/fall 10.0 sively expanded their products and services into the NGCA not anticipated70.0 the long duration of turbulent times. Hence, they did not evacuate, sell or rent out their 2016 catered to the local markets at their new place of residence (40% in the so-called ATO zone, areas 60.0 Figure0.0100.0 23. Markets for businesses (%) before the conflict and in July-October 2016, Luhansk SME sample equipment when transport and banking links were still in place.xvii markets. Many entrepreneurs pointed to the asymmetric 50.0 90.0 NGCAs Ukraine Russia Europe CIS Other ATO zone adjacent to the line of contact, and 45% in the local markets in the Kharkiv, Zaporizhiia and Dnipro nature of engaging with Russian businesses when they sell 40.0 80.0 Market regions (Figure 24). Of businesses from Donetsk, some 40% were oriented towards the broader 30.0 70.0 Responses, % their products andUkrainian services market, to clients while only in 25%and of from businesses the NGCAs, in Luhansk used to operate also in the Ukrainian market 20.0 Before July-October 2016 60.0 outside their place of residence before the conflict. Since the eruption of armed conflict, Luhansk 10.0 50.0 citing numerous official and unofficial barriers for their busi- 0.0 businesses have completely severed links with the Ukrainian market, while 20% of those who stayed in 2. Economic connectivity40.0 nesses to gain access to Russian markets. IDP entrepreneurs

NGCAs UkraineResponses. % Russia Europe CIS Other ATO zone Figure30.0 24. Markets for businesses (%) before the conflict and in July-October 2016, IDP SME sampleDonetsk continue to be present in the broader Ukrainian market. Market work hard to enter local markets in the areas of their new 20.0 100.0 70.00 10.0 residence, but alsoInterestingly, seem tothe be share strongly of enterprises motivated that have to re -reachoriented themselves towards the Russian market is 2.1Figure Changes 23. in Marketsmarkets for businessesBefore July-October (%) before2016 the conflict 90.0 0.0 out to further marketsminiscule, in although Ukraine Russian and companies beyond. from the adjacent regions have massively expanded their 80.0 60.00 NGCAs Ukraine Russia Europe CIS OtheraccountedATO zone for around 65% of markets for businesses in both Donetsk and Luhansk, rising to 80% in and100.0 in July-October 2016, Luhansk SME sample products and services into the NGCA markets. Many entrepreneurs pointed to the asymmetric nature of FigureFigure70.0 23.22. Markets Markets for for businesses businesses (%) (%) before before the theconflict conflict and inand July in-OctoberMarket July-October 2016, Luhansk2016, D SMEonetskDonetsk sample SME andsample 90% in Luhansk in the summer/fall 2016 (Figures 22 and 23). IDP SMEs in the summer/fall 90.090.0 engaging with Russian businesses when they sell their products and services to clients in and from the 60.0 50.00 Before July-October 2016 2016 catered to the local markets at their new place of residence (40% in the so-called ATO zone, areas 80.080.0 NGCAs, citing numerous official and unofficial barriers for their businesses to gain access to Russian adjacent to the line of contact, and 45% in the local markets in the Kharkiv, Zaporizhiia and Dnipro 50.070.070.0 markets. IDP entrepreneurs work hard to enter local markets in the areas of their new residence, but 40.0 60.0 regions2.2 (Figure Changes 24). Of businesses in supply from Donetsk, chains some 40% were oriented towards the broader 60.0 Figure40.00 24. Markets for businesses (%) before the conflict and in July-October 2016, IDP SME sample also seem to be strongly motivated to reach out to further markets in Ukraine and beyond. 30.0Responses. % 50.050.0 Ukrainian market, while only 25% of businesses in Luhansk used to operate also in the Ukrainian market 70.00 It is important to stress that parts of Luhansk region was less 20.040.040.0 outside their place of residence before the conflict. Since the eruption of armed conflict, Luhansk Responses. % 30.00 30.030.0 well connected 2.2to theChanges rest ofin supplyUkraine chains prior to the conflict Responses, %

10.0Responses, % businesses have completely severed links with the Ukrainian market, while 20% of those who stayed in 20.020.0 60.00 0.0 Donetskdue continueto inadequate to be presen infrastructure,t in the broader Ukrainian while market.the Donetsk region 10.010.0 20.00 xviii NGCAs Ukraine Russia Europe CIS Other ATO zone Figure 25. Supply chains (%) before the conflict and in July-October 2016, Donetsk SME sample 0.00.0 50.00 previously had better road links with the rest of Ukraine. This NGCAs UkraineUkraine RussiaRussia EuropeMarketEurope CIS CIS Other OtherATO zoneATO zoneInterestingly,partially the explains share of enterpriseswhy70.0 the thateconomic have re-oriented ties between themselves Donetsk- towards the Russian market is 10.00 Market 60.0 40.00 Before MarketJuly-October 2016 miniscule, although Russian companies from the adjacent regions have massively expanded their based SMEs and Ukraine50.0 were (and continue to remain) Before July-October 2016 products and services into the NGCA markets. Many entrepreneurs pointed to the asymmetric nature of Before July-October 2016 40.0 Figure 24. Markets0.0030.00 for businesses (%) before the conflict engagingstronger with Russian than businessesthose of when Luhansk-based they sell their products SMEs. and The services pattern to clients in and from the

Responses, % 30.0 Figureand 24. in Markets July-October for businesses 2016, (%)NGCAs before IDP Ukrainethe SME conflict sampleRussia and in JulyEurope-October CIS2016, IDPOther SME sampleATO zone Figure 24. Markets for businesses (%) before the conflict and in July-October 2016, IDP SME sampleNGCAs,identified citing numerous in the official201520.0 andresearch unofficial remained barriers for in their 2016: businesse the s shareto gain accessof to Russian 20.00 Market Responses, % 10.0 Figure70.00 23. Markets70.00 for businesses (%) before the conflict and in July-October 2016, Luhanskmarkets. UkrainianSME sampleIDP entrepreneurs supplies work for businesseshard to enter local in marketsDonetsk in the and areas Luhansk of their new residence, but 0.0 Before July-October 2016 also seem to be strongly motivated to reach out to further markets in Ukraine and beyond. 10.00 has dramatically reduced (FiguresFrom From 25 andFrom 26).From The FromdeclineFrom in From the No Other 60.0060.00 Ukraine Ukraine Russia Russia via other other NGCAs supplies directly via third directly third countries countries needed The tendency0.00 observed in 2015 was also seen in 2016: small and medium2.2 Changes-sized enterprises in supply (SMEs) chains from party party directly via third 50.00 Figure 25. Supply chains (%) before the conflict and in 50.00 the NGCAs mostlyNGCAs cateredUkraine to the localRussia marketEurope beforeCIS the conflict.Other Before ATO zone the conflict, the NGCAs party Market FigureJuly-October 25. Supply chains 2016, (%) before Donetsk the conflict SME and sample in July-October18 2016Source, Donetsk SME samplexviii 40.00 Before July-October 2016 40.00 70.0 Before July-October 2016 60.0 30.00

Responses, % 50.0 30.00 The tendency observed in 2015 was also seen in 2016: small and medium-sized enterprises (SMEs) from

Responses, % 40.0 the NGCAs mostly catered to the local market before the conflict. Before the conflict, the NGCAs xix 20.00 30.0 Figure 26. Supply chains (%) before the conflict and in July-October 2016, Luhansk SME sample 20.00 20.0 10.00 Responses, % 10.0 0.0 10.00 0.00 From From From From From From From the No Other Ukraine Ukraine Russia Russia via other other NGCAs supplies NGCAs Ukraine Russia Europe CIS Other ATO zone directly via third directly third countries countries needed 0.00 Market party party directly via third NGCAs Ukraine RussiaBefore July-OctoberEurope 2016CIS Other ATO zone party Market Source

The tendency observed in 2015 wasBefore also seen July-Octoberin 2016: small 2016 and medium-sized enterprises (SMEs) from Before July-October 2016 the NGCAs mostly catered to the local market before the conflict. Before the conflict, the NGCAs

The tendency observed in 2015 was also seen in 2016: small and medium-sized enterprises (SMEs) from Figure 26. Supply chains (%) before the conflict and in July-October 2016, Luhansk SME samplexix the NGCAs mostly catered to the local market before the conflict. Before the conflict, the NGCAs 16 Economic connectivity across the line of contact in Donbas, Ukraine

50.050.0 45.045.0 40.040.0 35.035.0 30.030.0 25.025.0 20.020.0 15.015.0 Responses, % Responses, % 10.010.0 5.05.0 0.00.0 FromFrom From From From From From FromFrom thethe NoNo OtherOther Ukraine Ukraine Russia Russia via other other NGCAs suppliessupplies directlydirectly via third directly third countries countries neededneeded party party directly via third Figure 26. Supply chains (%) before the conflict and inparty of further work with Ukrainian counterparts by Luhansk July-October 2016, Luhansk SME sample19 Source SMEs. Identically worded responses appeared in nearly

Before July-October 20162016 every interview, which may mean that this narrative had been 50.0 45.0 largely shaped by the Russian and local mainstream media 40.0 35.0 35.0 Figure 27. Supply chains (%) before the conflict and in the summer/fallor self-censorship. 2016, IDP SME sample 30.0 Figure 27. Supply chains (%) before the conflict and in the summer/fall 2016, IDP SME sample 25.0 25.0 80.0 20.0 80.0 15.0 70.070.0 Responses, % 10.0 According to all Luhansk businesses surveyed and inter- Responses, % 10.0 60.060.0 5.0 0.0 50.050.0 viewed, Russian produce that was initially unfamiliar and of 0.0 40.0 From From From40.0 From From From From the No Other From From From30.0 From From From From the No Other lower quality than Ukrainian products, has eventually never- Ukraine Ukraine Russia30.0 Russia via other other NGCAs supplies Ukraine Ukraine Russia20.0 Russia via other other NGCAs supplies Responses, % Responses, 20.0 directly via third directly % Responses, third countries countries needed theless squeezed Ukrainian goods out of the local market. directly via third directly10.0 third countries countries needed party 10.0 party directly via third party 0.0 party directly via third 0.0 party This is not least because the comparative advantage of the From From partyFrom From From From From the No From From From From From From From the No UkraineSourceUkraine Russia Russia via other other competitiveNGCAs supplies price was lost due to elevated transport expenses UkraineSourceUkraine Russia Russia via other other NGCAs supplies directly via third directly third party countries countries needed directly via third directly third party countries countriesand unofficialneeded payments at crossing points. However, in Before July-Octoberparty 2016 directly via third Before July-Octoberparty 2016 directly via third party Figure 27. Supply chains (%) before the conflict and in the party Luhansk in particular, there is widespread boycotting of Source summer/fall 2016, IDP SME sample Source Ukrainian goods where these are accessible. Figure 27. Supply chains (%) beforebefore thethe conflictconflict andand inin thethe summer/fallsummer/fall 2016, 2016, IDP IDP SME SME sample sample Before July-Ocrober 2016 80.0 Before July-Ocrober 2016 80.0 70.0 As a compensation for the heavily restricted movement across 70.0 60.0 60.0 the line of contact in the Luhansk region, where only one 50.0 It is important to stress that parts of Luhansk region was less well connected to the rest of Ukraine prior 50.0 It is important to stress that parts of Luhansk region was less well connected to the rest of Ukraine prior 40.0 20 40.0 to the conflict due to inadequate infrastructure, while the Donetskcrossing region previously point had is betteroperational road and limited to pedestrians, 30.0 to the conflict due to inadequate infrastructure, while the Donetsk region previously had better road 30.0 20.0 links with the rest of Ukraine. This partially explains why the economicthere ties is between intense Donetsk movement-based of people and trucks across the Responses, % 20.0 links with the rest of Ukraine. This partially explains why the economic ties between Donetsk-based Responses, % Responses, 10.0 10.0 SMEs and Ukraine were (and continue to remain) stronger than those of Luhansk-based SMEs. The 0.0 SMEs and Ukraine were (and continue to remain) stronger than thoseUkrainian of Luhansk border-based SMEs.with Thethe Rostov region of Russia. The dis- 0.0 From FrompatternFrom identifiedFrom in the 2015From researchFrom remainedFrom the in 2016:No the share of Ukrainian supplies for businesses From FrompatternFrom identifiedFrom in the 2015From researchFrom remainedFrom the in 2016:No the sharetance of Ukrainian is shorter, supplies and for businesses the crossing can be made by vehicle Ukraine Ukrainein DonetskRussia andRussia Luhansk via hasother dramaticallyother reducedNGCAs (Figuressupplies 25 and 26). The decline in Ukrainian supplies Ukrainedirectly viaUkraine thirdin DonetskdirectlyRussia andthirdRussia Luhansk party via countries hasother dramaticallycountriesother reducedNGCAs (Figuresneededsupplies 25 and and26). The without decline inrisk. Ukrainian It is nearly supplies exclusively vehicles with Ukrain- directly via thirdneededdirectly for businessthird party operationcountries incountries Luhansk and the substitutionneeded of Ukrainian with Russian suppliers is partyneeded for business operationdirectly invia Luhansk third and the substitution of Ukrainian with Russian suppliers is 21 partyparticularly evident. Donetskdirectly entrepreneursviaparty third retain some supply chainsian withregistration Ukraine, but plates also actively that cross the border. As a result, particularly evident. Donetsk entrepreneursparty retain some supply chains with Ukraine, but also actively increase their supplySource from Russia. IDP SMEs continue receiving suppliesbusinesses from Ukrainian and sources consumers (Figure from Luhansk have helped to increase their supplySource from Russia. IDP SMEs continue receiving supplies from Ukrainian sources (Figure 27). 27). boost local trade and services in the adjacent Russian region. Before July-Ocrober 2016 Before July-Ocrober 2016 Luhansk businesses purchase goods in Russia and bring Ukrainian supplies needed for business operation in Luhansk them back as either personal luggage or commercial cargo, It is important to stress that parts of Luhansk region was less well connected to the rest of Ukraine prior It isand important the tosubstitution stress that parts of of Ukrainian Luhansk region with was Russian less well connected suppliers to the is rest of Ukrainein which prior case they pay duties to the customs established by to the conflict due to inadequate infrastructure, while the Donetsk region previously had better road to theparticularly conflict due evident. to inadequate Donetsk infrastructure, entrepreneurs while the Donetsk retain someregion previously supply had better road links with the rest of Ukraine. This partially explains why the economic ties between Donetskthe-based self-proclaimed republic. However the issue of VAT remains links with the rest of Ukraine. This partially explains why the economic ties between Donetsk-based SMEschains and Ukraine with were Ukraine, (and continue but also to remain) actively stronger increase than those their of Luhansk supply-based SMEs.unresolved The and VAT cannot be reclaimed, hence business- SMEs and Ukraine were (and continue to remain) stronger than those of Luhansk-based SMEs. The patternfrom identified Russia. in the IDP 2015 SMEs research continue remained in receiving2016: the share supplies of Ukrainian from supplies forpeople businesses prefer to avoid registering commercial exchanges pattern identified in the 2015 research remained in 2016: the share of Ukrainian supplies for businesses in Donetsk and Luhansk has dramatically reduced (Figures 25 and 26). The decline in Ukrainian supplies in DonetskUkrainian and Luhansk sources has dramatically(Figure 27). reduced (Figures 25 and 26). The decline in Ukrainianbetween supplies businesses in Russia and in the self-styled repub- needed for business operation in Luhansk and the substitution of Ukrainian with Russian suppliers is needed for business operation in Luhansk and the substitution of Ukrainian with Russian supplierslics. When is this is not feasible, it is a consumer in the Luhansk particularly evident. Donetsk entrepreneurs retain some supply chains with Ukraine, but also actively particularlyGreat evident.difficulties Donetsk and entrepreneurs associated retain risks some involvedsupply chains in with retaining Ukraine, but also actively increase their supply from Russia. IDP SMEs continue receiving supplies from Ukrainian sourcesNGCAs (Figure who covers the extra cost. Russia’s humanitarian increase their supply from Russia. IDP SMEs continue receiving supplies from Ukrainian sources (Figure 27).business ties with the familiar and economically expedient aid aside, its role in assisting the private sector is largely 27). markets, partners and suppliers across the line of contact inflated, while the local economy of adjacent Russian areas

pushed SMEs in Donetsk and Luhansk to cut economic ties is the main beneficiary of the asymmetric supply chains. with Ukraine, which was reciprocated by Ukrainian suppliers and customers having disengaged from the NGCAs. It is important to stress that none of the surveyed entrepreneurs 2.3 Need for supplies across the line of in the NGCAs or outside has complained about the quality of the previous business ties. In 2015 nearly all SMEs in contact Donetsk and Luhansk expressed their regret at having lost SMEs in Donetsk and Luhansk have greater need of supplies ties with reliable partners. In 2016 some Donetsk SMEs are from across the line of contact (just over 50%) compared to still nostalgic about Ukrainian supplies, suppliers and cus- the IDP SMEs outside the NGCAs (24%) (Figure 28), which tomers; while in Luhansk individual experiences of positive points to the shortage of supplies there even with the sup- work relations with Ukrainian counterparts have been replaced plies from Russia having replaced supplies from Ukraine, while by a collective narrative of complete and irreversible sepa- IDP SMEs have access to alternative suppliers elsewhere ration from the Ukrainian state, which explains the rejection in Ukraine. 80.0 Economic connectivity across the line of contact in Donbas, Ukraine 17 70.0 60.0 50.0 40.0 30.0 Responses, % Responses, 20.080.0 10.070.0 0.060.0 Yes No Yes, but not in the current 50.0 circumstances

40.0 Donetsk Luhansk IDP entrepreneurs, Ukraine sample 30.0

% Responses, Figure 29.20.0 Need for specific supplies across the line of contact: Donetsk, Luhansk and IDP SME samples, Figure 28.2016 Need10.0 for supplies across the line of contact: nesses and among IDP SMEs residing in the GCAs decreased 0.0 Donetsk, Luhansk and IDPYes SME samples (%),No 2016 Yes, but not in thefrom current 15% to around 5%. 70.0 circumstances 80.0 80.0 Donetsk Luhansk IDP entrepreneurs, Ukraine sample 70.070.0 The upsurge of the demand for foodstuffs among Luhansk 60.0 60.060.0 Figure 29. Need for specific supplies across the line of contact: Donetsk, Luhansk and IDP SMEsSME samples, surveyed seems likely to be an anomaly of the small 50.050.0 2016 50.0 sample and is dissonant with the narrative of Luhansk entre- 40.0 40.0 30.030.0 preneurs about their lack of will to preserve any ties with Ukraine. Responses, % Responses, Responses, % Responses, 40.0 20.020.0 70.0 The surprising finding may be due to the change in the rel- 10.0 10.0 30.0 ative need for different supplies and needs to be analysed Responses, % 0.00.0 60.0 YesYes No No Yes, butYes, not but in the not current in the current against the total composition of the needed supplies. Thus, circumstances 20.0 circumstances Luhansk businesses did not need Ukrainian agricultural prod- Donetsk50.0 Luhansk IDP entrepreneurs, Ukraine sample Donetsk Luhansk IDP entrepreneurs, Ukraine sample 10.0 ucts, household maintenance products or construction mate-

Figure 29. Need for specific supplies40.0 across the line of contact: Donetsk, Luhansk and IDP SME samples, Figure 29. Need for specific supplies across the line of contact: Donetsk, Luhansk and IDP SME samples, rials any more, hence the relative increase in the need for 2016 Figure 29. Need0.0 for specific supplies across the line of 2016 Equipment Foodstuffs Agricultural Construction Household Free Nofoodstuffs. need However there may be an actual demand for contact: Donetsk,30.0 Luhansk and IDPproducts SMEequipment samples, and maintenance 2016movement Responses, % materials products across the line foodstuffs raised due to the increased number of people 70.0 of contact 70.0 20.0 Donetsk Luhansk IDP entrepreneurs, Ukraine sample returning to Luhansk, while the supply falls short of meeting

60.0 demand because of the decrease in local food industry.

60.0 10.0 Apparently foodstuffs from Russia are still less favoured than 50.0 Ukrainian products, of which there are only memories left, by 50.0 0.0 40.0 Equipment Foodstuffs Agricultural Construction Household Free theNo Luhansk need consumers as evidenced from interviews and products equipment and maintenance movement 40.0 materials products across the linefocus groups. 30.0 of contact Responses, % Donetsk Luhansk IDP entrepreneurs, Ukraine sample 30.0 Responses, % Luhansk SMEs tend voluntarily to boycott Ukrainian prod-

20.0 ucts. However the stark refusal to work with Ukrainian goods 20.0 Figure 30 Need for supplies across the line of contact: Donetsk, Luhansk and IDP entrepreneurs,xxii 10.0 that only a year ago had been clearly favoured over Russian Ukraine samples (%), 2015 10.060.0 ones may be also because of the surveillance and persecu- 0.0 50.0 Equipment Foodstuffs Agricultural Construction Household Free No need tion by the new leadership and self-appointed inspectors, 0.0 products equipment and maintenance movement 40.0 materials products across the line Equipment Foodstuffs Agricultural Construction Household Free No need often armed, for having goods with Ukrainian symbols or even of contact 30.0 products equipment and maintenance movement Donetsk Luhansk IDP entrepreneurs,materials Ukraineproducts sampleacross the line with routine Ukrainian-language labels on display. Some 20.0 Responses, % Responses, of contact cases of punishment for the ‘propaganda’ made others alert 10.0 Donetsk Luhansk IDP entrepreneurs, Ukraine sample Figure 30. Need for supplies across the line of contact: 0.0 and selective in what they were bringing across the line of 22 Donetsk,Equipment LuhanskFoodstuffs andAgricultural IDP entrepreneurs,Construction Household UkraineFree No need products equipment and maintenance movement contact. A surprisingly high percentage of IDP entrepreneurs Figuresamples 30 Need for (%),supplies 2015 across the line of contact: Donetsk,materials Luhanskproducts and IDPacross entrepreneurs, the line xxii 50.0 of contact in need of equipment from the NGCAs comprises those who Ukraine samples (%), 2015 45.0 Donetsk SME sample Luhansk SME sample IDP entrepreneurs, Ukraine sample 40.0 60.0 need to evacuate their own equipment from the NGCAs. 35.0 50.0 30.0 25.0

40.0 In one year, from 2015 to20.0 2016, the percentage of busi-

30.0 % Responses, 15.0 nesses needing supplies 10.0from across the line of contact 20.0

% Responses, 5.0 10.0 0.0 Equipment Foodstuffs Agricultural Construction Household Free No need 0.0 Figure 31. Need for supplies across the line of contact: products equipment maintenance movement Equipment Foodstuffs Agricultural Construction Household Free No need and materials products across the products equipment and maintenance movement Donetsk, Luhansk and IDP SME samples combined (%), materials products across the line line of of contact 2015 and 2016 contact Donetsk SME sample Luhansk SME sample IDP entrepreneurs, Ukraine sample 2015 2016 50.0

45.0

The composition of the needed supplies has also changed 40.0 35.0 Figureamong 31. Need those for supplies who across still the line require of contact: goods Donetsk, Luhansk from and across IDP SME samples the line 30.0 25.0 combinedof contact (%), 2015 (Figures and 2016 29 and 30). In 2015 every item was in 20.0

Responses, % Responses, 15.0 demand on both sides. In 2016 substitutes to supplies from 10.0 across the line of contact have been found, but unevenly across 5.0 0.0 SMEs in Donetsk and Luhansk have greater need of supplies from across the line of contact (just over the categories of supplies. The percentage of the Luhansk Equipment Foodstuffs Agricultural50%) comparedConstruction to the IDPHousehold SMEs outsideFree the NGCAsNo need (24%) (Figure 28), which points to the shortage of products equipment maintenance movement supplies there even with the supplies from Russia having replaced supplies from Ukraine, while IDP SMEs needing foodstuffs increased from 15% to over 40%, and materials products across the SMEs have access to alternative suppliersline of elsewhere in Ukraine. while the demand for food products among Donetsk busi- contact The composition2015 2016 of the needed supplies has also changed among those who still require goods from across the line of contact (Figures 29 and 30). In 2015 every item was in demand on both sides. In 2016 Figure 31. Need for supplies across the line of contact: Donetsk, Luhansk and IDP SME samples substitutes to supplies from across the line of contact have been found, but unevenly across the combined (%), 2015 and 2016 categories of supplies. The percentage of the Luhansk SMEs needing foodstuffs increased from 15% to over 40%, while the demand for food products among Donetsk businesses and among IDP SMEs residing in the GCAs decreased from 15% to around 5%.

The upsurge of the demand for foodstuffs among Luhansk SMEs surveyed seems likely to be an anomaly SMEs in Donetsk and Luhansk have greaterof the small need sampof suppliesle and fromis dissonant across thewith line the of narrative contact (justof Luhansk over entrepreneurs about their lack of will 50%) compared to the IDP SMEs outsideto preserve the NGCAs any (24%)ties with (Figure Ukraine. 28), whichThe surprising points to finding the shortage may be of due to the change in the relative need supplies there even with the suppliesfor from different Russia supplies having replaced and needs supplies to be analysed from Ukraine, against while the totIDPal composition of the needed supplies. SMEs have access to alternative suppliersThus, elsewhereLuhansk businesses in Ukraine. did not need Ukrainian agricultural products, household maintenance products or construction materials any more, hence the relative increase in the need for foodstuffs. The composition of the needed suppliesHowever has also there changed may be among an actual those demand who still for require foodstuffs goods raised from due to the increased number of people across the line of contact (Figures 29returning and 30). Into 2015Luhansk, every while item the was supply in demand falls short on both of meeting sides. In demand 2016 because of the decrease in local substitutes to supplies from across thefood line industry. of contact Apparently have been foodstuffs found, but from unevenly Russia areacross still the less favoured than Ukrainian products, of categories of supplies. The percentage of the Luhansk SMEs needing foodstuffs increased from 15% to over 40%, while the demand for food products among Donetsk businesses and among IDP SMEs residing in the GCAs decreased from 15% to around 5%.

The upsurge of the demand for foodstuffs among Luhansk SMEs surveyed seems likely to be an anomaly of the small sample and is dissonant with the narrative of Luhansk entrepreneurs about their lack of will to preserve any ties with Ukraine. The surprising finding may be due to the change in the relative need for different supplies and needs to be analysed against the total composition of the needed supplies. Thus, Luhansk businesses did not need Ukrainian agricultural products, household maintenance products or construction materials any more, hence the relative increase in the need for foodstuffs. However there may be an actual demand for foodstuffs raised due to the increased number of people returning to Luhansk, while the supply falls short of meeting demand because of the decrease in local food industry. Apparently foodstuffs from Russia are still less favoured than Ukrainian products, of 18 Economic connectivity across the line of contact in Donbas, Ukraine

decreased from 71% to 55% in the combined sample of the for some applicants from the big-business sector seemed Donetsk and Luhansk businesses in and outside the NGCAs to be quite high given their declining production and minimal (Figure 31). This marks a clear tendency to substitute supplies profits. As a result businesses either re-registered in Russia, from across the line of contact with supplies from elsewhere were shut down or found creative ways to circumvent the ban. or to operate businesses in survival mode, with minimal supplies. Risks, difficult logistics and unofficial and official pay- These barriers effectively cut off the majority of SMEs that ments make supply chains from Ukrainian sources increasingly had stayed in the NGCAs but were willing to continue busi- economically inexpedient and simply dangerous for businesses ness with their Ukrainian suppliers and clients. Commercial in the NGCAs. goods, according to the 2015 regulation, could not be transported across the line of contact by any transport besides the railway, which was not expedient for small commercial 2.4 Freedom of movement quantities traditionally transported by road. This was particularly prohibitive for perishable foodstuffs that had to be Freedom of movement across the line of contact has been delivered quickly. curtailed since the active phase of the military conflict, and restrictions were authorised after the first ceasefire agree- The need for free movement among SME samples is signifi- ment in Minsk. On 11 January 2015, the Security Service of cantly less pressing in 2016 in comparison to 2015 (Figures Ukraine (SBU) introduced the Temporary Order on Control 28 and 29) Donetsk and IDP SMEs have mixed feelings of the Movement of People, Transport Vehicles and Cargo about their reduced motivation to cross the line of contact: along the Contact Line in Donetsk and Luhansk regions which some have made a conscious politically-motivated choice regulated movement into and out of the ATO zone and came while others regret that this vital channel has been gradually into effect on 21 January 2015. With this order in place, made inaccessible. Interviews with Luhansk SMEs confirm there is no possibility of passing through a checkpoint upon that the inclination to cross to the Ukrainian side of the divide showing ID, as before. The new Temporary Order required is weak if not absent. Mostly, blame for the restricted move- all movement into and out of the ATO zone to be conducted ment and criminalisation of business transactions between through the seven designated government-controlled check- the two territories is attributed to the Ukrainian side. This stirs points through the seven corridors and with a special permit resentment not only because of the disruption of business issued by the security service. The initial manner of imple- and income generation for SMEs, but also because of the mentation with paper permits and cumbersome and non- restrained ability to move freely, to receive social payments transparent approval procedures was heavily criticised by the and pensions guaranteed by law. Individual residing in Luhansk international community and outraged the population in the blame the Ukrainian state for having infringed on their fun- NGCAs.23 Since July 2015, electronic permits were intro- damental rights. A narrative of resistance is strong among duced and a more organised system was established for pass- the Luhansk SMEs. They feel proud of having survived and ing through the checkpoint on the Ukraine-controlled side. are determined to build their republic from scratch.

However, commercial goods were completely banned from SMEs in Luhansk are particularly vocal about Ukraine having crossing the line of contact. Rules for taking commercial cut them off, but no one mentioned the ban on Ukrainian cargo across the line of contact were set by the ATO head- foodstuffs introduced by the LPR leadership as early as Jan- quarters on 12 June 2015.24 The only goods that could cross uary 2015 and harassment and extortions at the checkpoints were either those under 50kg and worth less than 1,000 of the self-proclaimed republic. Instances of harassment and UAH or those exempted from the ban by the National Secu- corruption by the Ukrainian military at the checkpoints are rity Council, ATO headquarters and specialised ministries or widely recounted and become incorporated into the narra- other agencies, depending on the nature of goods. Criteria tive of Ukraine having pushed them away, trying to make for granting permissions were neither clear nor fair accord- them starve. None of the surveyed and interviewed entre- ing to the interlocutors in this study, preference was given to preneurs used the services of the humanitarian-logistical the enterprises that had re-registered in the GCAs and those centres established at the Ukrainian checkpoints. They either vital for Ukraine’s national interest within the critically impor- never heard about these centres or heard that these are tant industrial and energy chains. Rumours about the corrupt no better than the conventional informal payment system at procedure for getting on the list are not rare. The ‘entrance fee’ the checkpoints. Free movement with Russia has not replaced the need to move freely in and out of Ukraine among the surveyed Donetsk SMEs and even some of the Luhansk SMEs: people still want to stay connected with Freeparticular movement people, with companies Russia has and not institutions replaced thethere, need albeit to move political freely conditionality in and out ofcomes Ukraine first among in the casethe surveyedof the Luhansk Donetsk entrepreneurs. SMEs and even Besides, some theof th marketse Luhansk and SMEs: business people opportunities still want to are stay very connected different withand particularnot interchangeable. people, companies Overall, andeconomic institutions connectivity there, albeitbetween political the GCAs conditionality and NGCAs comes is getting first inweaker, the case ofand the substitutes Luhansk entrepreneurs. for suppliers across Besides, the theline marketsof contact and are business being found opportunities elsewhere. are However, very different the and Economicnotobjective interchangeable. needconnectivity for economic Overall, across connectivity economic the line ofconnectivity iscontact felt by inhalf betweenDonbas, of the Donetsk theUkraine GCAs and 19and Luhansk NGCAs entrepreneursis getting weaker, from andthe samplesubstitutes and forby 30%suppliers of the across IDP entrepreneurs. the line of contact Apart are from being ‘objective’ found elsewhere. economically However, backed the objectivepreferences need for for continuing economic to connectivity receiving certain is felt supplies by half of from the theDonetsk other and side, Luhansk subjective entrepreneurs factors are alsofrom theimport sampleant. Theseand by include 30% of relations the IDP entrepreneurs. with individual Apartpeople, from discomfort ‘objective’ about economically changing abacked working system preferencesthat may have for required continuing years to receivingto establish, certain and uncertaintysupplies from about the othernew supplies side, subjective and suppliers. factors are also important. These include relations with individual people, discomfort about changing a working system

that may have required years to establish, and uncertainty about new supplies and suppliers. 2.5 Difficulties in maintaining economic relations

2.5Figure Difficulties 32. Engagement in maintaining in economic relations economic with NGCAs: relations IDP entrepreneurs, Ukraine sample (%)

The resentment within Luhansk and Donetsk NGCAs withFigure 32.Figure Engagement 32. Engagement in economic in relations economic with relations NGCAs: IDP with entrepreneurs, NGCAs: Ukraine sample (%) regard to the limited opportunities to cross to and from the IDP entrepreneurs, Ukraine sample (%) Ukrainian GCAs seemingly contradicts the lack of support 49% or outward rejection of the current Ukrainian leadership’s course and blame for waging war against its own people, a 49% popular line in the daily discourse there. However Donetsk 51% SMEs are far less enthusiastic about the future prospects of the DPR, about quarter of them being convinced that 51% only re-integration into Ukraine will bring peace and business development. Figure 33. Difficulties in maintaining economic relations with NGCAs: IDP entrepreneurs, Ukraine sample Free movement with Russia has not replaced the need (percentageto Figure 33.of those Difficulties whoDo not engage in havemaintaining economicin economic economic relations relations relations withHave NGCAs)with economic NGCAs: relations IDP entrepreneurs, Ukraine sample move freely in and out of Ukraine among the surveyedFigure (percentage 33. Difficulties of those in maintaining who engage economic in economic relations relations with NGCAs:with NGCAs) IDP entrepreneurs, Ukraine sample (percentage of those who engage in economic relations with NGCAs) Donetsk SMEs and even some of the Luhansk SMEs: people(percentage of those whoDo not engage have economicin economic relations relations withHaveDo NGCAs) noteconomic encounter relations any Figure 33. FigureDifficulties 33. in maintainingDifficulties economic in maintaining relations witheconomicdifficulties NGCAs: IDPrelations entrepreneurs, with Ukraine sample still want to stay connected with particular people, com- difficultiesDo not encounter any (percentageFigure 33. NGCAs:Difficulties of those whoIDPin maintaining engageentrepreneurs, in economic Ukraine relations withsampleDo NGCAs:NGCAs) notdifficulties encounter (percentage IDP entrepreneurs, any of Ukraine sample panies and institutions there, albeit political conditionality Do not encounter any (percentagethose of those who who engage engage inin economic economic relations relations withdifficultiesCorruption NGCAs) with NGCAs) at checkpoints comes first in the case of the Luhansk entrepreneurs. Besides, Do notCorruption encounter at any checkpoints 23% difficultiesCorruption at checkpoints the markets and business opportunities are very different 23% 34% CorruptionDo not encounter at checkpoints any 23% 34% difficultiesDanger for individuals and and not interchangeable. Overall, economic connectivity 34% goodsDanger crossing for the individuals line of and 23% Corruption at checkpoints between the GCAs and NGCAs is getting weaker, and sub- 34% contactgoods crossing the line of 17% 34% DangerCorruption for individualsat checkpoints and stitutes for suppliers across the line of contact are being 17% goodsDifficultcontact crossing logistics the line of 23% 10% goodsDifficult crossing logistics the line of 8% 8% contact 17% 8% 34%10% DangercontactDifficult for individuals logistics and found elsewhere. However, the objective need for economic 17% 23% 8% 8% 34% 10% DifficultDangergoods crossing for logistics individuals the line and of connectivity is felt by half of the Donetsk and Luhansk entre- 8% 10% No possibility to engage in 17% 8% 8% goodsNocontact possibility crossing to the engage line of in preneurs from the sample and by 30% of the IDP entrepre- contactlegal economicNo possibility activities to engage in 17% 10% Difficult logistics 8% with thelegal other economic side activities neurs. Apart from ‘objective’ economically backed preferences 8% NoDifficult possibility logistics to engage in 10% with the other side for continuing to receiving certain supplies from the other 8% 8% legalOther economic activities with theOther other side side, subjective factors are also important. These include Nowith possibility the other to side engage in OtherNolegal possibility economic to activities engage in relations with individual people, discomfort about changing legalwith theeconomic other side activities a working system that may have required years to establish, and ready to be resumed in the NGCAswith once the other the side situation Other and uncertainty about new supplies and suppliers. Half of thenormalises. IDP entrepreneurs, Yet others many of in whom the leftservice their entiresectorOther businesses, provide equipment, services offices and staff in Half of the IDP entrepreneurs, many of whom left their entire businesses, equipment, offices and staff in the NGCAs,Half ofto maintain the their IDP clients entrepreneurs, business on ties both with many sidesclients of whom orwithout partners left their being across entire thephysically businesses, line of contact pres equipment, (Figure- offices32). Of and staff in these,Half ofthe 34% the NGCAs,ent IDPdo notthere.entrepreneurs, maintain experience Some business anymanyfamily difficulties ties of businesses whom with ,clients whileleft their orothers have partners entire mention split, businesses, across younger corruption the equipment,line gener ofat contactcheckpoints,- offices (Figure and difficult 32). staff Of in logisticsthe NGCAs,these, andation maintain34% lack do havingof legalnot business experience possibilitymoved ties with toanyto engagethe clientsdifficulties government-controlled inor economic partners, while others acrossactivities mention the with line territories, corruptiontheof contact other side, (Figureat checkpoints, among 32). otherOf difficult 2.5 Difficulties in maintaining economic these,problemsHalf oflogistics 34% the (Figure IDPdo and notentrepreneurs, 33). lackexperience These of legal results anypossibilitymany difficulties need of whom to engagebe, whileleft assessed their inothers economic entire against mention businesses, theactivities corruptionmarket withequipment, orientation theat checkpoints, other offices of side, the and amongIDP difficult staff other in problemsthese, 34% while(Figure do not 33).parents experience These resultsstayed any difficulties need to torun be, while assessedtheir others business against mention the or corruptionmarket guard orientation busiat checkpoints,- of the IDP difficult relations entrepreneurslogisticstheHalf NGCAs, ofproblems the and IDP maintain lack thatentrepreneurs,(Figure of havelegal business 33). settledpossibility These tiesmany in results witha to newof engage whomclients needlocation inlefttoor economic bepartners –their hardlyassessed entire acrossanyactivities againstbusinesses, are the catering with linethe themarketof equipment, tocontact other markets orientation side, (Figure offices in among the 32). ofNGCAs.and theotherOf staff IDP in entrepreneurslogistics andness lack that assets.of havelegal settledpossibility in a to new engage location in economic – hardly anyactivities are catering with the to other markets side, in among the NGCAs. other Someproblemsthese,the NGCAs,entrepreneurs keep34% (Figure domanufacturingmaintain not 33). experience that business These have goods results anysettledties in difficultieswith needthe in clients NGCAsa to new be, while orlocationassessedand partners manageothers – against hardly acrossmention to take theany the them corruptionmarketare line catering ofacross orientationcontact at theto checkpoints, markets (Figureline of of the contact32). in IDP thedifficult Of NGCAs.to Half of the IDP entrepreneurs, many of whom left their entire theentrepreneurslogisticsthese, governmentSome 34% and dokeep lack notthat- manufacturingcontrolledof experience havelegal settledpossibility territories; any goodsin difficulties a to new engage inothers thelocation ,NGCAs whilehavein economic – puthardly othersand their manage anyactivitiesmention business are to catering takecorruptionwith operations themthe to other markets acrossat oncheckpoints, side, hold, the in among the linebut NGCAs. ofconsider difficult othercontact to Some of those who had fled the war-affected area later businesses, equipment, offices and staff in the NGCAs, maintheirSomeproblemslogistics- thebusiness keep and government (Figure manufacturing lack alive of33). andlegal -Thesecontrolled ready possibility goods results to be territories;in needtotheresumed engage NGCAs to beothers in in assessedand the economic havemanageNGCAs againstput activitiesonce to their take thethe business them marketwithsituation theacross operations orientation other normalises. the side, line on of ofamong hold,Yetthe contact othersIDP but other toconsider in tain business ties with clients or partners across the line theentrepreneursproblemsof governmentservicetheir returned(Figure business sector that-controlled 33). provide havealive toThese andsettledtheir services territories; results ready offices in ato toneed new their be others resumedtolocation andclients be have assessedworkshops on –in puthardly theboth their againstNGCAs sidesany business areand withouttheonce catering marketresumed theoperations being situation toorientation marketsphysically onpro normalises. -hold, in of presentthe butthe NGCAs. considerIDP Yet there. others in contact (Figure 32). Of these, 34% do not experience anySometheirentrepreneurs thebusiness familykeep serviceduction manufacturing businesses alive that sector have andthere. provide readyhave settled goods Some split, to services inbe in ayounger theresumed newsuch NGCAsto location their generationbusinesses in and theclients – manageNGCAshardly havingon both anyoncewere to moved takeare sides the includedcatering them situation without to the across to government beingnormalises.inmarkets thethe physicallyline in of -the controlledYet contact NGCAs. otherspresent to in there. difficulties, while others mention corruption at checkpoints,territories,theSome governmentservice Some keepDonetsk whilesectorfamilymanufacturing- controlledparents providebusinesses and stayed servicesLuhanskgoods territories; have to in split,torun the theirSME others their NGCAsyounger clients samples.business have and generation on putmanage both or their guardThe sides tohavingbusiness economic takebusiness without themmoved operations assets.being across rationaleto the physically the ongovernment linehold, ofpresent but contact consider-controlled there. to Sometheirthe government territories,business family businesses alive -whilecontrolled and parents readyhave territories; split, tostayed be younger resumed to others run generation their in have the business putNGCAs havingtheir oronce business guard moved the businesssituation tooperations the government assets. normalises. on hold, - controlledYetbut othersconsider in difficult logistics and lack of legal possibility to engage Some in familyfor businesses this decision have split, was younger the depletion generation ofhaving savings moved and to the inacces government- -controlled Someterritories,thetheir service business of those whilesector alivewho parents provide andhad readyfled stayed services the to wartobe torun resumed-affected their their clients business in area the on later NGCAs both or returnedguard sides once business withoutthe to thsituationeir assets.being offices normalises. physically and workshops present Yet others and there. in economic activities with the other side, among other probSometerritories,- of thosesibility while who parentsof had bank fled stayed loans the warto duerun-affected their to the business area prohibitively later or returnedguard businesshigh to th interesteir assets. offices rates and workshops and resumedSomethe serviceSome family production sectorof businesses those provide who there. have had services Some fledsplit, suchthe youngerto theirwar businesses-affected clients generation onwere area both having includedlater sides returned moved without in the to toDonetsk beingthe their government physicallyoffices and Luhansk and -presentcontrolled workshops SME there. and lems (Figure 33). These results need to be assessed against and reluctance of banks to give loans to IDPs, let alone Somesamples.territories,resumed offamily those The while businesses economic productionwho parents had rationalefledhave stayed there. the split, wartoSome for youngerrun- thisaffected suchtheir decision generation businessesbusiness area was later or the having were returnedguard depletion included movedbusiness to thof toeirin savings assets. thethe offices governmentDonetsk and and inaccessibility workshopsand- controlledLuhansk and of SME the market orientation of the IDP entrepreneurs that have set bankresumedterritories,- samples.loans productionentrepreneurs whiledue The to parents the economic there. prohibitiv stayed Some residingrationaleely to such runhigh forbusinessestheir ininterest thisthe business decision NGCAs, rates were or and was includedguard reluctance andthe business depletion inlack the of Donetsk ofassets.banks of govern savings to and give -andLuhansk loans inaccessibility to SME IDPs, let of tled in a new location – hardly any are catering to marketsSome alonesamples. in bank entrepreneursof those Thement loans economic who duesupport. had toresiding therationalefled prohibitiv the Programmesin thewar for NGCAs,- thisaffectedely highdecision and interest areaof lack wasbusiness later of ratesthe government returned depletion and assistance reluctance to support.thofeir savings offices of run Programmesbanks and and by inaccessibility to workshops give of loans business and toof IDPs, let the NGCAs. Some keep manufacturing goods in the NGCAsSomeassistancebankresumed aloneloans of those productioninternational run dueentrepreneurs bywho to international the had there. prohibitiv fled residingagencies Some the agencies elywar such inhigh- affectedthe businesseswere interestwere NGCAs, areaveryvery rates and were laterimportant importantlack and includedreturned of reluctance government in quickly in toin the th ofquicklyeir Donetskproviding banks support.offices to proand and gives Programmeso -Luhansk calledworkshops loans ‘seed’ to SME IDPs, of and business let xxv alonesamples.resumedmoneyassistance entrepreneursxxv Theproductionand economicother run support,by there.residing international rationale Some such in the for suchas NGCAs, agenciesrethis -businessestraining decision and were and25lack waswere very socialof the government includedimportant depletioncontracts, in in the support. of butquickly savingsDonetsk could providingProgrammes andnot and accommodateinaccessibility Luhansk so- calledof businessSME ‘seed’ of all and manage to take them across the line of contact to the vidingxxv so-called ‘seed’ money and other support, such as assistancebanksamples. moneyloans The run due economic byand to international the other prohibitiv rationale support, agenciesely for such high this as interestwere decision re-training very rates was important and andthe social depletionreluctance in contracts,quickly of of savingsproviding banks but couldtoand gives oinaccessibility -notcalled loans accommodate ‘seed’ to IDPs, of let all government-controlled territories; others have put their busi- xxv re-training and social contracts, but could not accommodate alonebankmoney loans entrepreneursxxv and due other to the support, residing prohibitiv such in elythe as highNGCAs, re-training interest and and lackrates socialof and government contracts,reluctance support. but of banks could Programmes tonot give accommodate loans of to business IDPs, all let ness operations on hold, but consider their business aliveassistancealone entrepreneursall run applicants’ by international residing needs in agencies the NGCAs, given were and the very lack scale important of government of migration. in quickly support. providing Smaller- Programmes so-called of ‘seed’ business assistancemoneyxxv and run other by international support, such agencies as re-training were very and important social contracts, in quickly but providing could not s oaccommodate-called ‘seed’ all moneyxxv and other support, such as re-training and social contracts, but could not accommodate all 20 Economic connectivity across the line of contact in Donbas, Ukraine

scale industrial enterprises could have moved their entire Economic connectivity is being teams to a new place but were deterred by lack of government support with housing and basic services to enable steadily disrupted in Donbas, against people move out with their families. For these reasons, in the wishes of the majority of the business addition to a variety of personal and political considerations, some collectives were split between the two territories communities across the line of contact. and either continued to operate across the line of contact or Donetsk and IDP SMEs rarely regarded closed business in the NGCAs. sustaining business relations as intrinsically Businesses in the NGCAs continue reassessing costs of bringing supplies across the line of contact or catering to tied to political loyalties. markets in Ukraine outside the NGCAs. In the earlier stages of the conflict, the links were more robust due to well- not want to cooperate with the NGCAs or Russia because established business patterns and because Ukrainian sup- of ethical considerations. However, SMEs across the line of plies were more competitive in terms of quality/price ratio. contact – a few among the Luhansk SMEs surveyed and However, with time the restrictions have been tightened on many among the Donetsk and IDP SME samples – are both sides, bribes demanded at checkpoints have increased ready to re-establish business links with their former clients and the Ukrainian hryvna has been washed out of the eco- or suppliers once the conflict is resolved. nomic space of the NGCAs. With the artificially inflated hryvna/rouble, retaining business links with partners across Luhansk SMEs seem to have drifted further away from the the line of contact has become increasingly costly and Russian Ukrainian market and suppliers compared to their Donetsk supplies have started to replace Ukrainian ones. colleagues. This may be because more Donetsk SMEs had had customers outside local markets in the rest of Ukraine, New arrangements introduced in 2014 have effectively pre- had been further-integrated into production and service cluded enterprises in the NGCAs from obtaining certificates networks and had been exporting more compared to the of origin, licences and other authorisation documentation, or Luhansk SMEs. IDP businesses are predominantly actively carrying out money transfers to purchase or sell goods and seeking new niches in other regions of Ukraine and are not services. These restrictions include the Resolution of the intending to return home in the near future. Thus, the IDP Cabinet of Ministers of Ukraine No. 595 as of 7 November business community is most closely linked to the Ukrainian 2014, On the Issues of Financing of State Institutions, Payment political and economic space, followed by the Donetsk busi- of Social Benefits to Citizens and Provision of Financial Sup- nesses, while the Luhansk business community has largely port for Some Enterprises and Organisations of Donetsk detached from the Ukrainian economic space and found and Luhansk Oblasts, and the Decree of the National Bank itself building closer ties with Russian suppliers while cater- of Ukraine of 9 August 2014 No. 466 suspending any bank ing predominantly to the limited local market. and other financial institutions’ operations in the NGCAs as well as the suspension of postal services. Businesses outside the current NGCAs but within the adjacent areas and 2.6 Conclusions formerly connected with enterprises in Luhansk and Donetsk have also had to reduce or terminate contacts mostly because Economic connectivity is being steadily disrupted in Donbas, of the illegal nature of supplying from the NGCAs spare against the wishes of the majority of the business commu- parts or other goods necessary for their business or making nities across the line of contact. Donetsk and IDP SMEs official contracts for services. They have had to find alterna- rarely regarded sustaining business relations as intrinsically tive suppliers, resulting in greater transport costs. tied to political loyalties. Luhansk SMEs, on the contrary, tend to place political loyalty before economic imperative, and Service and manufacturing businesses that were in a chain mostly boycott Ukrainian supplies and markets. Personal of production with big industrial enterprises that remained links with business partners appears to have been a counter- in the NGCAs have suffered the most. However, business balance to the political rift, maintaining connections between reputation, including outside Ukraine (in Europe and else- businesses divided by conflict and maintaining the possi- where) was a more important asset. Some businesses would bility of restoring connectivity in future. Economic connectivity across the line of contact in Donbas, Ukraine 21

Imposed difficulties and risks have pushed entrepreneurs ment and legality of business transactions are regarded as toward alternative markets, suppliers and clients: key barriers to retaining or restoring business links and reinvigorating the economy on both sides of the conflict. • Luhansk SMEs have drifted away from the Ukrainian market by substituting nearly all Ukrainian supplies with Russia as a business destination is not a substitute for Russian ones Ukraine for private enterprises in Donbas. SMEs and big businesses from Donbas that are exporters or involved in services • Donetsk SMEs remain partly linked with Ukrainian sup- such as transport consider having an opportunity to cater pliers and customers to both markets as an economic advantage. However the • nearly half of the IDP SMEs retain business links with dynamic since 2014 shows that catering to both markets in the NGCAs. the current circumstances causes moral discomfort, comes at a reputational cost and is risky amid turbulent political Some large industrial enterprises from the NGCAs have relations between Russia and Ukraine. re-registered in the GCAs and are on the list of exempt companies. They can then transport their products to the Humanitarian-logistical centres established by the Ukrainian GCAs and on to export destinations, including Russia. Big side with the aim of facilitating trade in basic products are not businesses not exempt from the export ban either re-register known to or not used by SMEs in Donetsk and Luhansk. in Russia or operate through intermediaries and smuggle No one surveyed had ever used these services because they their produce across the Ukrainian–Russian border currently obtain supplies from elsewhere and/or consider the centres not controlled by Ukraine. The lack of both freedom of move- a corrupt arrangement. 22 Economic connectivity across the line of contact in Donbas, Ukraine

3. Political connectivity 3. Political connectivity 3. Political connectivity 3.1 Business nature and registration In the Luhansk SME sample3.1 there Business are virtually nonature enterprises and registration 3.1 Business nature and registration that kept their registration in Ukraine (Figure 35). Nearly all The Donetsk and Luhansk SMEs surveyed differ signifi- 3. Political connectivity SMEs in Luhansk have re-registered with the authorities of cantly with respect to the proportions that retained their the self-proclaimed republic.Figure 34. Place of registration and company type: Donetsk SME sample (% of all companies) Figureregistration 34. Place in Ukraine. of registration Overall, 28% and of companies company from type: the Donetsk SME sample (% of all companies) 3.1sample Business that operate nature in Donetsk and retain registration their Ukrainian regis - IDPs from the NGCAs have mostly re-registered in the GCAs Place of registration tration as the sole registration (9.38%) or in combinationPlace ofwith registration and just a few of them retain registration in the NGCAs as registration with the de facto authorities locally (18.75%) well (Figure 36). However about 15%50.0 of IDP entrepreneurs do Figure 34. Place of registration and company type: Donetsk SME sample (% of all companies) (Figure50.0 34). not have any registration. This rather45.0 high percentage could 45.0 40.0 Figure 34. Place of registration and companyPlace type: Donetsk of registration SME sample (% of all companies) 40.0 35.0 35.050.0 30.0 30.045.0 25.0 25.040.0 20.0

20.035.0 3. Political % Responses, 15.0 connectivity Responses, % Responses, 15.030.0 10.0 10.025.0 3.1 Business5.0 nature and registration 20.05.0 0.0 Responses, % Responses, 15.00.0 Figure 34. Place of registrationUkraine andUkraine company and NGCAs type: DonetskRussia and SME NGCAs sample (%NGCAs of all companies)No registratrion 10.0 Ukraine Ukraine and NGCAs Russia and NGCAs NGCAs No registratrion Limited company (ZAO) Privately held corporation Publicly held corporation 5.0 Limited company (ZAO) Privately held corporation Publicly held corporation Place of registration Private company Limited liability company (ООО) Self-employed individual (FLP) 0.0 Private company Limited liability company (ООО) Self-employed50.0 individual (FLP) Ukraine Ukraine and NGCAs Russia and NGCAs NGCAs No registratrionregistration No registration 45.0 Limited company (ZAO) Privately held corporation Publicly held40.0 corporation Private company Limited liability company (ООО) Self-employedFigure35.0 individual35. Place (FLP) of registration and company type: Luhansk SME sample Figure 35. PlaceNo registration of registration and company type: Luhansk SME sample 30.0 25.0 Place of registration Figure 35. Place of registration and companyPlace type: Luhansk of registration SME sample 20.0 100 Figure100 35. Place of registration and company type: Luhansk SME sample % Responses, 15.0 10.080 80 Place of registration 5.060 60 0.0 100 40 Ukraine Ukraine and NGCAs Russia and NGCAs NGCAs No registratrion 40 80 % Responses, 20 Responses, % Responses, 20 Limited company (ZAO) Privately held corporation Publicly held corporation 60 0 Private company Limited liability company (ООО) Self-employed individual (FLP) 0 Ukraine and NGCAs Russia and NGCAs NGCAs No registratrion 40 Ukraine and NGCAs Russia and NGCAs NGCAs No registrationregistratrion Responses, % Responses, 20 Limited company (ZAO) Privately held corporation Publicly held corporation Limited company (ZAO) Privately held corporation Publicly held corporation Private company Limited liability company (ООО) Self-employed individual (FLP) 0 Private company Limited liability company (ООО) Self-employed individual (FLP) Ukraine and NGCAs Russia and NGCAs NGCAs Figure 35. PlaceNo Noregistratrion of registration registration and company type: Luhansk SME sample No registration Limited company (ZAO) Privately held corporation Publicly held corporation Place of registration Private company Limited liability company (ООО) Self-employed individual (FLP) Figure100 36. Place of registration and company type: IDP SME sample Figure 36. PlaceNo registration of registration and company type: IDP SME sample 80 60 Figure 36. Place of registration and company type: IDP SME sample 40

Responses, % Responses, 20

0 Ukraine and NGCAs Russia and NGCAs NGCAs No registratrion

Limited company (ZAO) Privately held corporation Publicly held corporation Private company Limited liability company (ООО) Self-employed individual (FLP) No registration

Figure 36. Place of registration and company type: IDP SME sample 3. Political connectivity 3.1 Business nature and registration Economic connectivity across the line of contact in Donbas, Ukraine 23 Figure 34. Place of registration and company type: Donetsk SME sample (% of all companies) Place of registration 50.0 45.0 40.0 35.0 Figure 36. Place of registration and companyPlace type: IDP of SME registration sample 30.0 80 25.0 70 20.0 60 % Responses, 15.0 50 10.0 5.0 40 0.0 30 Ukraine Ukraine and NGCAs Russia and NGCAs NGCAs No registratrion Responses, % Responses, 20 Limited company (ZAO) Privately held corporation Publicly held corporation 10 Private company Limited liability company (ООО) Self-employed individual (FLP) 0 Ukraine Ukraine and NGCAs Russia and NGCAs NGCAs No registratrionregistration

Limited company (ZAO) Privately held corporation Publicly held corporation Private company Limited liability company (ООО) Self-employedFigure individual35. Place (FLP) of registration and company type: Luhansk SME sample No registration Place of registration

100 Thebe Donetsk explained and by theLuhansk lack of decisiveSMEs surveyed reasons to differcompletely significantly of the withpresent respect authorities to thein Kiev proportions impossible. thatResentment abandon the idea of return to territories in NGCAs, instead towards Ukraine for the warfare and for having cut them off 80 retainedstarting their a new regi businessstration in ina newUkraine. location. Overall, Many entre28% of companieswas invariably from cited the by samplethe Luhansk that entrepreneurs operate in inter- Donetskpreneurs retain lack theirfinancial Ukrainian means to registration start legal operation as the forsole registrationviewed and surveyed (9.38%) as or the in rationale combination60 for their withrejection of re-registering, and are deterred by the need to accumulate the common state framework. By contrast, they believe in registrationfunds before with starting the to de pay facto tax as authorities required in Ukraine. locally They (18.75%) the (Figure future of 34their). republic and say40 they are trying to make are also concerned to avoid being taxed for operations in it survive and develop it either as % Responses, an independent entity or as the NGCAs as most probably taxes are already paid to the 20 In the Luhansk SME sample there are virtually no enterprisespart of Russia.that kept their registration in Ukraine breakaway republics. 0 (Figure 35). Nearly all SMEs in Luhansk have re-registeredIDP withSMEs the that authorities relocated to ofthe the GCAs self and-Ukraineproclaimed currently and alsoNGCAs Russia and NGCAs NGCAs No registratrion republic.Interviews and focus groups indicate a variety of motives operate in the NGCAs depend on informal arrangements among SMEs that continue to operate in the NGCAs for such as relatives or friends running the Limitedbusiness company or guard (ZAO)- Privately held corporation Publicly held corporation keeping either or both registrations. Micro and small entering the assets without any registration. They may have two IDPsprises from in the NGCAs, NGCAs predominantly have mostly in retail re-registered trade or services in the GCAsdifferent and companies just a few registered of them in the retain NGCAPrivate registrationand companyin the GCA, in Limited liability company (ООО) Self-employed individual (FLP) and catering exclusively to the local market, had little choice while in reality they are one and the same business. This the NGCAs as well (Figure 36). However about 15% of IDP entrepreneurs do not have anyNo registrationregistration. but to register with the local authorities and follow the estab- mode allows for functioning in the NGCAs as a local enter- Thislished rather rules, high even percentage if precarious and could constantly be explained changing. Afterby the lackprise, of while decisive retaining reasons Ukrainian to completely registration. Thisabandon implies the theidea first of yearreturn of lawlessness, to territories banditry in NGCAs and racketeering, instead asstarting double a new accounting busine andss indouble a new taxation, location. an option Many that few the dominant ‘regulatory’ framework, many are satisfied with can afford. Figure 36. Place of registration and company type: IDP SME sample entrepreneursthe seemingly lacknormalised financial system means of the to collection start legal of tax, operation for re-registering, and are deterred by the needalthough to accumulate all stated that funds the rulesbefore of the starting game change to pay fre tax- as SMEsrequired that keep in Ukraine. their Ukrainian, They registration are also and concerned whose busi to- quently. However, many of those who have obeyed the new nesses operate in the NGCAs treat the current situation as avoidrules being are critical taxed of for the operations authorities for in theirthe incompetenceNGCAs as most probablyabnormal and taxes transitory are already and are convinced paid to the that breakawaythe break- republics.and self-interest as apparent drivers of their decisions. away entities have no economic future outside Ukraine’s legal and administrative framework. They are highly vulner- In Luhansk nearly all businesses surveyed are registered in able and operate at risk of prosecution both under Ukraine’s Interviewsthe self-proclaimed and focus republic groups only. indicate They explain a variety their decision of motives Criminal among Code SMEs clause that on continue financing terrorismto operate26 and in by the the NGCAsby political for keeping convictions eit thather make or both their individualregistrations. acceptance Micro andNGCA small local enterprises authorities. in the NGCAs, predominantly in retail trade or services and catering exclusively to the local market, had little choice but to register with the local authorities and follow the established rules, even if precarious and constantly changing. After the first year of lawlessness, banditry and racketeering as the dominant ‘regulatory’ framework, many are satisfied with the seemingly normalised system of the collection of tax, although all stated that the rules of the game change frequently. However, many of those who have 24 Economic connectivity across the line of contact in Donbas, Ukraine

Big companies, such as major mines and metallurgic facto- 3.2 IDP entrepreneurs in Ukraine ries with Ukrainian and foreign shareholders, like DTEK of (before February 2017) Rinat Akhmetov or the Industrial Union of Donbas, have managed to continue operation in the NGCAs while retain- Restrictions on the movement of commercial cargo across ing only Ukrainian registration. For such companies, special the line of contact introduced by the Ukrainian government in arrangements have been made and were formalised as May 2015 are commonly referred to as ‘blockade’. However, early as June 2015.27 They retain their registration and pay the ban by the authorities of the self-proclaimed LPR on the 31 tax in Ukraine, while providing jobs and paying salaries to entry of Ukraine-produced foodstuffs from December 2015 hundreds of thousands of people in the NGCAs. This com- or customs procedures and duty collection at the line of promise has been in place since the early days of the armed contact introduced by the DPR are rarely or never included escalation, officially permitted by the Ukrainian government.28 in the notion of the blockade by respondents in the NGCAs. The authorities in the NGCAs have never been completely Donetsk and Luhansk SMEs are unanimous in their negative happy with the arrangement and have kept approaching assessment of the economic blockade by the Ukrainian side. the directors of the enterprises with demands to national- IDP SMEs are divided on this matter (Figure 37). ise them, and to collect environmental or land-use taxes, Interestingly, both supporters and opponents of the blockade among others. The arrangementagree is nevertheless that it is: volatile and not sustainable, according to interlocutors from the industrial sector that operates in the NGCAs but is fully incorporated into the Ukrainian legal and Since all of the enterprises with special arrangementsThe arrangement are is nevertheless volatile and not sustainable, according to interlocutors from the economic system.• Somenot respondentsworking and even does suggested not achieve that, ifits not goal for the political will of the major exporting their produce, including to Russia and Europe,shareholder,industrial they sector the thatsystem operates would in not the have NGCAs lasted but to is date,fully incorporatedgiven current into unprofitability the Ukrainian of the legal bu andsiness due have had to be vigilant with regard to not compromisingtoeconomic high theoperational system. • Some costs,fosters respondents severely corruption restricted even at suggested checkpoints transport that, options if not and for loss the of political the Russian will of market the major that used legal basis of their operations within the internationalshareholder, system. the system would not have lasted to date, given currentxxix unprofitability of the business due to constitute about• 22%makes of Donetsk ordinary and people 43% of suffer Luhansk exports. With high coal prices, the mines The major argument in favour of keeping the arrangementmanageto high operational to balance theircosts, expenditures severely restricted with profit, transport but this options model and of loss operation of the Russianis unsustainable. market that used xxix was that hundreds of thousands Ukrainian citizens to and constitute their about• 22%selective of Donetsk and favoursand 43% oligarchicof Luhansk businessesexports. With high coal prices, the mines families, a sizeable part of the population currently residingmanage toin balance their expenditures with profit, but this model of operation is unsustainable. Half of the big industrial• not enterprisesbeneficial infor Donetsk Ukraine and Luhansk have eased operation altogether. Their the NGCAs, remain within the Ukrainian legal spaceowners (an argu have- moved their activities to other regions of Ukraine or overseas.xxx ment aimed at the Ukrainian constituency). ThisHalf helps of the to big industrial• preventing enterprises any inlegal Donetsk business and Luhansk engagement, have eased for those operation who altogether. Their want it, with the other side xxx guarantee social stability in the impoverished NGCAowners3.2 areasIDP have entrepreneurs moved their activities in Ukraine to other (before regions of February Ukraine or overseas.2017) where authorities have extremely limited capacity to provide • making Ukraine economically absent from the NGCAs. jobs outside the public sector fully subsidised byRestrictions3.2 Russia IDP entrepreneurs on the movement in of Ukraine commercial (before cargo across February the line 2017) of contact introduced by the (an argument for the audience on the other side ofUkrainian the line government However, in May supporters 2015 are commonly and opponents referred of to the as ‘blockade’. blockade However,draw the ban by the of contact). authoritiesRestrictions of on the thediffering self movement-procl conclusions.aimed of commercial LPR on Those the entrycargo in favourof across Ukraine ofthe the- lineproduced blockade of contact foodstuffs argue introduced from Decemberby the 2015Ukrainianxxxi or governmentcustomsthat procedures it: in May 2015 and dutyare commonly collection referredat the line to ofas contact‘blockade’. introduced However, by thethe banDPR by are the The arrangement is nevertheless volatile and not sustainable,authoritiesrarely or never of the included self-procl in theaimed notion LPR ofon the the blockade entry of Ukraineby respondents-produced in thefoodstuffs NGCAs from. Donetsk December and xxxi according to interlocutors from the industrial sectorLuhansk2015 that or SMEs customs are• unanimous proceduresshould be in and totaltheir duty negative collection assessment at the line of theof contact economic introduced blockade by by the the DPR Ukrainian are operates in the NGCAs but is fully incorporatedside.rarely into IDP orthe neverSMEs areincluded divided in onthe this notion matter of the (Figure blockade 37). by respondents in the NGCAs. Donetsk and • provides military security for Ukraine. Ukrainian legal and economic system. Some respondents Luhansk SMEs are unanimous in their negative assessment of the economic blockade by the Ukrainian even suggested that, if not for the political will of side.theFigure major IDP 37. SMEs Attitude are divided to economic on this blockade: matter (Figure IDP SME 37). sample shareholder, the system would not have lasted to date, given Figure 37. Attitude to economic blockade: current unprofitability of the business due to high Figure opera 37.- AttitudeIDP to SME economic sample blockade: IDP SME sample tional costs, severely restricted transport options and loss 42% of the Russian market that used to constitute about 22% 42% of Donetsk and 43% of Luhansk exports.29 With high coal 58% prices, the mines manage to balance their expenditures with profit, but this model of operation is unsustainable. 58%

Half of the big industrial enterprises in Donetsk and Luhansk have eased operation altogether. Their owners have moved Blockade is needed Blockade is not needed their activities to other regions of Ukraine or overseas.30 Blockade is needed Blockade is not needed

Economic connectivity across the line of contact in Donbas, Ukraine 25

Those in favour of lifting the blockade argue that it 3.3 Preferred political–territorial status of NGCAs in Donbas • serves private interests of the Ukrainian authorities, self- proclaimed authorities in the NGCAs and Russia Welcomed or not, the two self-proclaimed republics of DPR and LPR are a reality for businesses situated in those terri- prevents business development • tories. Respondents acknowledged that there had been pro- • cuts off vital economic connections with the other side. gress towards the normalisation of business operation and the business environment after the first year of looting and Supporters of the blockade place security first and regard ruthless extortion and expropriation by the self-proclaimed the porous line of contact as breaching Ukraine’s military leaders of the republics. Donetsk and Luhansk SMEs diverge security. This leads to their resolute conviction that com- in their assessments of the sustainability of the current sta- plete sealing of the line of contact will strengthen security tus quo, economic viability of the two entities and on the of the government-controlled territories. The population in pros and cons of the political–territorial options ranging from the NGCAs is of secondary concern and needs to prove its re-integration into Ukraine to full secession. loyalty to the Ukrainian state as a condition of return. Sealing out the NGCAs in their view will make local residents regret Luhansk SMEs are nearly unanimously devoted to political their choice or even rebel against the de facto authorities. project of an independent LNR as they invariably call the An option of re-taking the territories militarily is a viable strat- self-proclaimed entity and believe in its future outside Ukraine, egy to supporters of the blockade. and possibly integration into Russia. The current leadership of the self-proclaimed republic is often regarded by the Opponents of the blockade draw their predominantly eco- business class as corrupt and incompetent and more of an nomic justification from the assumption that the end goal is obstacle than a help to the development of the republic. to re-integrate the NGCAs peacefully. They put economic However this does not seem to challenge their commitment and humanitarian considerations forward and propose more to the LNR and their determination to cut ties with Ukraine. effective use of the ‘soft power’ of Ukraine through economic The discourse of resistance to the oppressive and hostile presence in the NGCAs. Ukrainian state seems to serve as the main motivator in business: survive and thrive against all odds. SMEs from The restrictions have made an impact on political connec- Luhansk, overall, demonstrate primacy of political consider- tivity between business actors across the line of contact. ations, to which business rationale is secondary. The two-year period of restricted movement and criminal- ised economic exchange has dealt a serious blow for the The big Luhansk enterprises are manufacturers and export- business of the vast majority of SMEs and to their attitude ers or engaged in the service sector that thrives on network- towards the other side. Interestingly, Luhansk entrepre- ing for business contacts and customers and access to neurs are most vocal and unanimous about Ukraine having large markets. They are more economically minded and cut them off and cite their rejection of any possibility of re- more aware of the drawbacks of non-recognition than the integration as caused by hostile behaviour of Kiev. However, SMEs. They acknowledge the benefits of staying within they downplay bans and restrictions introduced by the Ukraine’s legal space without necessarily accepting Ukraine’s authorities of the self-styled republics. This discourse has current leadership. However, this does not seem to be a pop- been internalised by them and strengthened by local and ular strategy among the – very few – big exporting enter- Russian media messages. prises still operating in Luhansk. According to the estimates of the interlocutors in this study, export volume from Luhansk As previously noted, the Luhansk region had always been fell by a factor of 30. less connected to the rest of Ukraine due to inadequate infrastructure. The Donetsk region is better connected, with Members of the business community in Donetsk appear to be individuals crossing the contact line more often. There is cur- more business-minded overall, compared to their colleagues rently one crossing point between the areas under the con- in Luhansk. They are able to assess political–territorial options trol of the LNR and GCAs of Ukraine, while there are five from the perspective of their individual businesses, for which crossing points between the areas under the control of the they unanimously endorse freedom of movement and legal LNR and GCAs of Ukraine. and administrative clarity and transparency. They also stress 26 Economic connectivity across the line of contact in Donbas, Ukraine

Businesspeople, even those not in best option. Many prefer the prospect of large-scale national reform that would turn Donbas into a modern and prosper- favour of the post-Maidan developments ous industrial hub. in the country, became quickly disillusioned For enterprises with important business links with clients or about prospects of the enactment of self-rule suppliers in Ukraine or other countries, including Russia, in the breakaway territories. registration in Ukraine allows them to continue serving markets and retaining business links with suppliers and partners outside the NGCAs. This allows them to obtain officially recognised certificates of origin and for supplies to be shipped a wider macro-economic perspective, factoring in compe- to an address in Ukraine. tition, access to markets elsewhere and banking as stimulating economic development. For small retail companies in For those who have chosen loyalty to the self-proclaimed Donetsk, the balance is steadily shifting towards Russian republics, but nevertheless require proper legal credentials supplies because of the increased costs and risks associ- in order to export to Russia and beyond, and to carry out ated with bringing goods from across the line of contact. bank transfers, local registration in an unrecognised entity is However, many still express their willingness to resume co- problematic. Registration of a new enterprise in Russia can operation with Ukrainian suppliers and expand to Ukrainian become a solution. Intermediaries that are companies already markets. Bigger enterprises clearly opt for the return of the under sanctions, Russian state and non-state agencies entire Donbas into the Ukrainian legal space, to regain access and other companies, including banks from South Ossetia, to bank loans and proper transport and other necessary can ensure that big Russian companies integrated into the infrastructure. global market engaged in trading raw materials with enterprises in the NGCAs do not appear in the multi-actor deals. Many respondents from Donetsk rate managerial capacity of the de facto local authorities very as very poor and wait The decision to switch jurisdiction from Ukraine to Russia for the leaders of Ukraine, Russia and the self-proclaimed has not usually been immediate or without hesitation. Some republics to resolve the conflict. Although they refer to the companies eventually re-orienting themselves towards the DPR as a real entity, few believe it is a viable one. Business- Russian market, including by means of registering in Russia, people, even those not in favour of the post-Maidan devel- had initially tried to get on the list of companies allowed to opments in the country, became quickly disillusioned about take their goods across the line of contact. Only after assess- prospects of the enactment of self-rule in the breakaway ing the pros and cons of the requirement to re-register in the territories, having seen and experienced banditry, murders and GCAs did they decide that double registration, and hence looting by the leadership and its incompetence in adminis- double taxation, was too costly (especially given declin tration and economic affairs. Some businesses have moved ing profits). In addition, it was reported that go-between out, while others stayed and eventually adjusted to the new services offered to ensure a company was on the list were order. However, many remain in a slate of unclear identity, too expensive. Registration in the self-proclaimed republics resentful of the restricted movement in one’s own country was either a matter of principle or the only way to keep a and yet living and working outside the country’s framework. business in profit.

The Donetsk business community demonstrates a range of political preferences with respect to the future status of the NGCAs – a more diverse picture than in politically homoge- 3.4 Conclusions neous Luhansk. The bottom line is the urgent need to oper- Nearly one third of SMEs operating in Donetsk retain their ate in the internationally recognised legal field. Many are aware registration in Ukraine as their sole registration or in combina- of the unlikelihood of independence of the breakaway repub- tion with registration with the de facto authorities. No Luhansk lics and of the equally unlikely prospect of being absorbed SMEs have retained sole Ukrainian registration, having all by Russia. Immediate or gradual renewal of political, admin- re-registered with the de facto authorities. IDP SMEs have istrative and economic links with Ukraine – although not nec- overwhelmingly registered in the GCAs, while 15% still oper- essarily with the current leadership – are regarded as the ate without any registration. Economic connectivity across the line of contact in Donbas, Ukraine 27

Decisions about the place of legal registration for SMEs SMEs in Donetsk exhibit a range of preferences for political– were based on a combination of political, security and eco- territorial status. They view possibilities from the perspective of nomic considerations. Those who have re-registered in the their individual businesses, for which they unanimously endorse GCAs, but continue their operation in the NGCAs, are most freedom of movement and legal and administrative clarity and vulnerable to sanctions from both Ukrainian and the de transparency. They also take a wider macro-economic per- facto authorities of the NGCAs. Most often, this implies spective, factoring in competition, access to markets else- double taxation. where and banking as stimulating economic development.

Big exporters are mostly registered in Ukraine only. The status Economic restrictions on doing business with suppliers and quo of non-payment of taxes in the self-proclaimed repub- customers across the line of contact have long been referred lics was considered as fragile and unsustainable in the long to by ordinary people as an economic ‘blockade’. This has run. Registration in the self-proclaimed republics is incompat- negatively impacted political connectivity between SMEs in ible with export operations and manufacturing for markets the NGCAs and the Ukrainian state and people. outside the NGCAs. Supporters of the blockade prioritise security and consider For big enterprises that have left the Ukrainian legal frame- that complete sealing of the line of contact will strengthen work, the decision was not necessarily obvious or politi- security of the government-controlled territories. They feel that cally motivated. The procedure for getting on the list of the those in the NGCAs are of secondary concern and must companies exempt from the ban on commercial transac- prove their loyalty to the Ukrainian state as a condition for tions was considered to be non-transparent and corrupt. return. Sealing out the NGCAs, according to this view, will Visibility in the NGCAs made companies vulnerable and make local residents regret their choice or even rebel against few could withstand the pressure to register with the de the de facto authorities. An option of re-taking the territories facto authorities. militarily is a viable strategy in the view of those who support the blockade. Luhansk-based SMEs are overwhelmingly in favour of the political future of the LPR as an entity independent from Opponents of the blockade draw their predominantly eco- Ukraine, either seeking its own statehood or integrating into nomic justification from the assumption that the end goal is Russia. The future economic trajectory of the LPR is seen as peaceful reintegration of the NGCAs. They stress economic away from Ukraine, which is regarded as hostile. Economic and humanitarian considerations and propose more effective ties with Ukraine are not desired or considered economically use of the ‘soft power’ of Ukraine through economic pres- expedient by the majority of Luhansk enterprises. ence in the NGCAs. 28 Economic connectivity across the line of contact in Donbas, Ukraine

SMEsSMEsSMEs in in inDonetsk Donetsk Donetsk exhibit exhibit exhibit a a rangea range range of of of preferences preferences preferences for for for political political political––territorial–territorialterritorial status. status. status. They They They view view view possibilities possibilities possibilities fromfromfrom the the the perspective perspective perspective of of of their their their individual individual individual businesses, businesses, businesses, for for for which which which they they they unanimously unanimously unanimously endorse endorse endorse freedom freedom freedom of of of 4.movementmovementmovement Economic and and and legal legal legal and and and administrative administrative administrative clarity clarity clarity and and and transparency. transparency. transparency.and They They They also also alsopolitical take take take a a widera wider wider macro macro macro--- connectivity: economiceconomiceconomic perspective, perspective, perspective, factoring factoring factoring in in incompetition, competition, competition, access access access to to to markets markets markets elsewhere elsewhere elsewhere and and and banking banking banking as as as stimulating stimulating stimulating economiceconomiceconomic development. development. development.

futureEconomEconomEconomicic icrestrictions restrictions restrictions on on on doing outlookdoing doing business business business with with with suppliers suppliers suppliers and and and customers customers customers across across across the the the line line line of of of contact contact contact have have have longlonglong been been been referred referred referred to to to by by by ordinary ordinary ordinary people people people as as as an an an economic economic economic ‘blockade’. ‘blockade’. ‘blockade’. This This This has has has negatively negatively negatively impacted impacted impacted politicalpoliticalpolitical connectivity connectivity connectivity between between between SMEs SMEs SMEs in in inthe the the NGCAs NGCAs NGCAs and and and the the the Ukraini Ukraini Ukrainiananan state state state and and and people. people. people.

4.1SupportersSupportersSupporters Conditions of of of the the the blockade blockade blockade for prioritise prioritise prioritise improvement security security security and and and consider consider consider of that that that the complete complete complete sealing sealing sealing of of doof the the the notline line line of makeof of contact contact contact long-term plans. Cessation of armed hostili- businesswillwillwill strengthen strengthen strengthen security securityenvironment security of of of the the the government government government-controlled-controlled-controlled territories. territories. territories. They They They feel feel feel that that that those those thoseties in in inremainsthe the the NGCAs NGCAs NGCAs highare are are on the agenda of business communities ofofof secondary secondary secondary concern concern concern and and and must must must prove prove prove their their their loyalty loyalty loyalty to to to the the the Ukrainian Ukrainian Ukrainian state state state as as as a a conditiona condition conditionon both for for for return. return. return.sides of the line of contact, which not only points to LiftingSealingSealingSealing theout out out the economicthe the NGCAs, NGCAs, NGCAs, according according blockadeaccording to to to this thisis this twiceview, view, view, will willas will make importantmake make local local local residents residents residentsfor SMEs regret regret regret their their theirthe choice choice choice fragility or or or even even even of rebel rebel rebelceasefire but also reflects the overwhelming SMEsinagainstagainst againstDonetsk in Donetsk the the the de de deand factoexhibit facto facto Luhansk authorities. authorities. aauthorities. range of compared Anpreferences An An option option option of of of forreto re re-taking -politicalIDPtaking-taking entrepreneursthe the –theterritorial territories territories territories status. militarily militarily militarily in They is is viewisa a viablea viable viable possibilities strategy strategy strategy in in inthe the the from the perspective of their individual businesses, for which they unanimously endorseimportance freedom of of a lasting truce before any political or economic theviewviewview GCAs of of of those those those (Figure who who who support support support 39). the Comparedthe the blockade. blockade. blockade. to survey results in 2015, movement and legal and administrative clarity and transparency. They also take a widerproposals macro- can be negotiated. economictheOpponentsOpponentsOpponents number perspective, of of ofofthe the the those blockade blockade blockade factoring for draw whomdraw drawin competition, their their their the predominantly predominantly predominantly economic access to economic blockadeeconomic marketseconomic justificationelsewhere justification justificationwas an and from from from banking the the the assumption assumption assumptionas stimulating that that that economicimpedimentthethethe end end end development.goal goal goal is is forispeaceful peaceful peaceful business reintegration reintegration reintegration development of of of the the the NGCAs. NGCAs. NGCAs. has They slightlyThey They stress stress stress decreased economic economic economic and and and humanitarian humanitarian humanitarian inconsiderationsconsiderations considerationsall communities and and and propose propose propose (Figure more more more 39). effective effective effective use use use of of of the the the ‘soft ‘soft ‘soft power’ power’ power’ of of of Ukraine Ukraine Ukraine through through through economic economic economic Econompresencepresencepresenceic restrictions in in inthe the the NGCAs. NGCAs. NGCAs. on doing business with suppliers and customers across the line 4.2of contact Investment have patterns before and after long been referred to by ordinary people as an economic ‘blockade’. This has negatively impacted politicalThis is connectivity indicative between of Donetsk SMEs in theand NGCAs Luhansk and the business Ukrainian state circles and people.the conflict wanting to stay economically connected with Ukraine irre- Supporters4.4.4. Economic Economic Economic of the blockade and and and politicalprioritise political political security connectivity: connectivity: connectivity: and consider that future future future complete outlook outlook outlook sealing of theSMEs line of from contact the conflict-affected Donbas did not apply for spective of the de facto current division, while IDPs have loans after the outbreak of armed hostilities in the summer will4.14.1 strengthen4.1 Conditions Conditions Conditions security for for forof improvement theimprovement improvement government-controlled of of of the the the business business territories.business environment Theyenvironment environment feel that those in the NGCAs are ofeconomically secondary concern and and politicallymust prove theirdisengaged loyalty to the from Ukrainian the stateNGCAs as a condition of for2014, return. although around a third of the sample did before

Sealingand investedout the NGCAs, their according energy to and this resourcesview, will make into local building residents a regret new their choice90.0 or even rebel FigureFigureFigure 38 38 38. .Conditions .Conditions Conditions for for for improvement improvement improvement of of of the the the business business business environment, environment, environment, 2016 2016 2016 January90.0 2014 (Figure 40). Borrowing money from banks, in againstlife elsewhere the de facto orauthorities. believing An optionthat the of re economic-taking the territories blockade militarily will is a viablegeneral,80.0 strategy was in the not a popular trend among entrepreneurs in view40 40of40 those who support the blockade. accelerate the fall of the de facto regimes. 70.0 353535 the sample, which is in line with the overall tendency in Opponents of the blockade draw their predominantly economic justification from theUkraine assumption60.0 where that only 22% of businesses apply for bank loans.32 Economic303030 incentives are important for 33% of IDP entrepre- the end goal is peaceful reintegration of the NGCAs. They stress economic and humanitarianHowever50.0 SMEs that left the NGCAs demonstrated a higher- considerationsneurs252525 compared and propose to 15% more and effective 17% use for of Donetsk the ‘soft power’ and Luhansk.of Ukraine through economic than-average40.0 rate of taking out loans, which may indicate presence202020 in the NGCAs. This may mean that businesspeople in Donetsk and Luhansk 30.0 151515 greater scale of business and/or greater profitability. Before prioritise basic security and freedom of movement and do 20.0 101010 4.not Economic expect economic and political stimuli connectivity: to be provided future and possiblyoutlook 10.0 555 Figure 40. Borrowing history, Donetsk, Luhansk and IDP 0.0 4.1 Conditions000 for improvement of the business environment SME samplesBefore January (%) 2014 Before January 2015 Before January 2016 Did not take a loan FigureLiftingLiftingLifting 38. economic economic economic Conditions CeasationCeasationCeasation for of of of improvement EconomicEconomicEconomic ProvisionofProvisionProvision the of ofbusiness of OtherOtherOther Donetsk sample Luhansk sample IDP entrepreneurs, Ukraine sample environment,blockadeblockadeblockade 2016warfarewarfarewarfare incentivesincentivesincentives armedarmedarmed security security security 90.0 Figure 38. Conditions for improvement of the business environment, 2016 90.0 DonetskDonetskDonetsk sample sample sample LuhanskLuhanskLuhansk sample sample sample IDPIDPIDP entrepreneurs, entrepreneurs, entrepreneurs, Ukraine Ukraine Ukraine sample sample sample 80.0 40 Figure 41. Source of loans, Donetsk, Luhansk and IDP SME samples (%) 70.0Figure 41. Source of loans, Donetsk, Luhansk and IDP SME samples (%) 35 90.0 60.090.0 30 80.0 FigureFigureFigure 39.Figure 39. Conditions 39. Conditions 39. Conditions Conditions for forimprovement forimprovement for improvement improvement of theof the ofbusiness theof business the business businessenvironment, environment, environment, environment, 2015 2015 2015 2015 50.0 80.0 25 70.0 50 50 50 50 40.0 20 45 45 45 45 60.0 30.0 40 40 40 40 30.0 15 50.0 35 35 35 35 20.0 40.0 10 30 30 30 30 40.0 10.0 30.0 5 25 25 25 25 30.0 0.0 20 20 20 20 20.0

Responses, % Responses, % Responses, % Responses, % Responses, Before January 2014 Before January 2015 Before January 2016 Did not take a loan 0 15 15 15 15 Before January 2014 Before January 2015 Before January 2016 Did not take a loan Lifting economic Ceasation of Economic Provision of Other 10.0 10 10 10 10 Donetsk sample Luhansk sample IDP entrepreneurs, Ukraine sample blockade warfare incentives armed security 0.0 5 5 5 5 Figure0.0 41. Source of loans, Donetsk, Luhansk and IDP Ukrainian bank Foreign commercial Private person Did not take out a Donetsk sample0 0 0 0Luhansk sample IDP entrepreneurs, Ukraine sample Ukrainian bank Foreign commercial Private person Did not take out a SME samples (%) bank loan Figure 39. ConditionsLiftingLifting economicLifting economicLifting for economic economicimprovement Ceasation Ceasation Ceasation ofCeasation of of Economic ofof Economic theEconomic Economic business Provision ProvisionProvision of Provision of of ofOther OtherOtherOther blockadeblockadeblockadeblockadewarfarewarfarewarfarewarfareincentivesincentivesincentivesincentivesarmedarmed securityarmed securityarmed security securityFigure 41. Source of loans, Donetsk, Luhansk and IDP SME samples (%) Donetsk sample Luhansk sample IDP entrepreneurs, Ukraine sample environment, 2015 90.0 Figure 39. Conditions for improvement of the business environment, 2015 90.0 KharkivKharkivKharkivKharkivMariupolMariupolMariupolMariupolDonetskDonetskDonetskDonetskLuhanskLuhanskLuhanskLuhansk 80.0 50 45 70.0SMEs from the conflict-affected Donbas did not apply for loans after the outbreak of armed hostilities in 40 LiftingLiftingLifting theLifting the economic the economic the economic economic blockade blockade blockade blockade is twice is twice is astwice is importanttwiceas importantas importantas important for for SMEs forSMEs for inSMEs Donetsk SMEsin Donetsk in Donetskin andDonetsk and Luhansk and Luhansk and60.0 theLuhansk comparedLuhansk summer compared compared compared toof IDP2014,to IDP to IDPto although IDP around a third of the sample did before January 2014 (Figure 40). 35 Borrowing money from banks, in general, was not a popular trend among entrepreneurs in the sample, entrepreneursentrepreneursentrepreneursentrepreneurs in the in the inGCAs the inGCAs the (FigureGCAs (FigureGCAs (Figure 39). (Figure 39). Compared 39). Compared 39). Compared Compared to surveyto surveyto surveyto results survey results results in results 2015, in 2015, in 2015,thein 2015,the number 50.0the Borrowingnumber the number ofnumber thoseof those ofmoney thoseforof those for fromfor for banks, in general, was not a popular trend among entrepreneurs in the sample, 30 whomwhomwhom thewhom the economic the economic the economic economic blockade blockade blockade blockade was was an was animpediment was impedimentan animpediment impediment for forbusiness forbusiness for business businessdevelopment development development development has has slightlywhich has slightly has slightly decreasedis slightly indecreased line decreased decreased with in all in the all in allinoverall all tendency in Ukraine where only 22% of businesses apply for bank 25 40.0 communitiescommunitiescommunitiescommunities (Figure (Figure (F 39igure (F ).39igure This). 39 This ).39is This indicative). is This indicative is indicative is indicative of Donetskof Donetskof Donetskof andDonetsk and Luhansk and Luhansk and Luhansk busiLuhansk business business busicirclesness circlesness circles loans.wanting circles wanting wantingxxxii towanting However stayto stayto stayto staySMEs that left the NGCAs demonstrated a higher-than-average rate of taking out 20 30.0

Responses, % Responses, economicallyeconomicallyeconomicallyeconomically connected connected connected connected with with Ukraine with Ukraine with Ukraine irrespectiveUkraine irrespective irrespective irrespective of theof the ofde theof defacto the factode currentdefacto currentfacto current division, current division, division, whiledivision, while IDPswhile whileIDPs have IDPs have IDPs have have 15 loans, which may indicate greater scale of business and/or greater profitability. Before the conflict, all economicallyeconomicallyeconomicallyeconomically and and politically and politically and politically politically disengaged disengaged disengaged disengaged from from the from the fromNGCAs the NGCAs the NGCAs and NGCAs and invested and invested and invested investedtheir their energy their energy their 20.0energy and energy and resources and resources and resources resources into into into into 10 enterprises that did take out loans had dealt exclusively with Ukrainian banks (Figure 41). The buildingbuildingbuilding abuilding new a new alife new a life elsewhernew life elsewher life elsewher elsewhere ore believingore believingore believingor believing that that the that the economicthat the economic the economic economic blockade blockade blockade blockade will will accelerate will accelerate will accelerate10.0 accelerate the the fall the fall of the fall theof fall the ofde theof de the de de 5 companies that left the NGCAs had been borrowing 1.5–2.0 times more than those that stayed. 0 factofacto regimes.facto regimes.facto regimes. regimes. 0.0 Entrepreneurs from the Donetsk sample were taking out loans more actively than those from Luhansk Lifting economic Ceasation of Economic Provision of Other Ukrainian bank Foreign commercial Private person Did not take out a blockade warfare incentives armed security (28% and 22%, respectively). bank loan EconomicEconomicEconomicEconomic incentives incentives incentives incentives are are important are important are important important for for33 %for33 of for% 3 3IDPof %3 3 IDP of%entrepreneurs IDPof entrepreneurs IDP entrepreneurs entrepreneurs compared compared compared compared to 15%to 15%to(28% and 15%to and 15%17% and and 17% andfor 22%, 17% forDonetsk 17% forDonetskrespectively). for Donetsk Donetsk bank loan andand Luhansk.and Luhansk.and Luhansk. Luhansk.This This may This may Thismean may mean may meanthat meanthat businesspeople that businesspeople that businesspeople businesspeople in Donetsk in Donetsk in Donetskin andDonetsk and Lu andhansk Lu andhansk Lu hanskprioritiseLuhansk prioritise prioritise prioritise basic basic securityDonetskbasic securitybasic security sample andsecurity and and and Luhansk sample IDP entrepreneurs, Ukraine sample Kharkiv Mariupol Donetsk Luhansk freedomfreedomfreedom freedomof movementof movementof movementof movement and and do and donot and donot expect donot expect not expect economic expect economic economic economic stimuli stimuli stimuli to stimuli beto beprovidedto providedbeto beprovided provided and and possibly and possibly and possibly dopossibly donot donot make donot make not make make longlong-termlong-termlong -plans.term -plans.term plans.Cessation plans. Cessation Cessation Cessation of armedof armedof armedof hostilities armed hostilities hostilities hostilities remains remains remains highremains high on high onthe high onthe agenda onthe agenda the agenda of agenda businessof businessof businessof businesscommunities communities communities communities on on on on Lifting the economicbothboth sidesblockadeboth sidesboth ofsides the ofsides is the oftwiceline theof line of the asline contact,of importantline contact,of contact,of whichcontact, which for whichnot SMEs which not only not inonly pointsnotDonetsk only points only points to points and theto the tofragilityLuhansk theto fragility the fragility of fragilitycompared ceasefireof ceasefireof ceasefireofSMEs toceasefire but IDP but also from but also reflectsbut alsothe reflects also reflectsconflict the reflects the the -affected the Donbas did not apply for loans after the outbreak of armed hostilities in entrepreneurs inoverwhelming theoverwhelming GCAsoverwhelmingoverwhelming (Figure importance importance 39). importance importanceCompared of aof lasting aof lasting to aof lastingsurvey trucea lasting truce beforetruceresults beforetruce before any in before 2015,any political any political anythe political ornumberpolitical economicor economicor ofeconomicor thoseeconomic proposals proposalsthe for proposals summer proposals can can be can obef can 2014, be be although around a third of the sample did before January 2014 (Figure 40). whom the economicnegotiated.negotiated. blockadenegotiated.negotiated. was an impediment for business development has slightly decreasedBorrowing in all money from banks, in general, was not a popular trend among entrepreneurs in the sample, communities (F igure 39 ). This is indicative of Donetsk and Luhansk business circles wanting to staywhich is in line with the overall tendency in Ukraine where only 22% of businesses apply for bank economically connected4.24.2 Investment4.2 Investment4.2 with Investment Investment Ukraine patterns irrespectivepatterns patterns patterns before beforeof thebefore before andde and facto afterand after andcurrent after the after the division,conflict the conflict the conflict whileconflict IDPs haveloans. xxxii However SMEs that left the NGCAs demonstrated a higher-than-average rate of taking out economically and politically disengaged from the NGCAs and invested their energy and resourcesloans, into which may indicate greater scale of business and/or greater profitability. Before the conflict, all building a new life elsewhere or believing that the economic blockade will accelerate the fall of the de FigureFigureFigure 40.Figure 4 Borrowing0. 4 Borrowing0. 4 Borrowing0. Borrowing history, history, history, Donetsk, history, Donetsk, Donetsk, Donetsk,Luhansk Luhansk Luhansk andLuhansk and IDP and IDP SMEand IDP SME IDPsamples SME samples SME samples (%)samples (%) (%) (%) enterprises that did take out loans had dealt exclusively with Ukrainian banks (Figure 41). The facto regimes. companies that left the NGCAs had been borrowing 1.5–2.0 times more than those that stayed.

Entrepreneurs from the Donetsk sample were taking out loans more actively than those from Luhansk Economic incentives are important for 33% of IDP entrepreneurs compared to 15% and 17% forEntrepreneurs Donetsk from the Donetsk sample were taking out loans more actively than those from Luhansk and Luhansk. This may mean that businesspeople in Donetsk and Luhansk prioritise basic security(28% and and 22%, respectively). freedom of movement and do not expect economic stimuli to be provided and possibly do not make long-term plans. Cessation of armed hostilities remains high on the agenda of business communities on both sides of the line of contact, which not only points to the fragility of ceasefire but also reflects the overwhelming importance of a lasting truce before any political or economic proposals can be negotiated.

4.2 Investment patterns before and after the conflict

Figure 40. Borrowing history, Donetsk, Luhansk and IDP SME samples (%) Economic connectivity across the line of contact in Donbas, Ukraine 29 FigureFigureFigure 42 42 .42 Taking. .Taking Taking out out out a aloan: a loan: loan: an an anideal ideal ideal bank: bank: bank: Donetsk, Donetsk, Donetsk, Luhansk Luhansk Luhansk and and and IDP IDP IDP entrepreneurs, entrepreneurs, entrepreneurs, Ukraine Ukraine Ukraine samples samples samples 90.090.090.0 80.080.080.0 70.070.070.0 60.060.060.0 50.050.050.0 40.040.040.0

Responses, % Responses, 30.0 % Responses, % Responses, 30.030.0 20.020.020.0 10.010.010.0 0.00.00.0 Figure 42.UkrainianUkrainian UkrainianTaking DPR/LPRoutDPR/LPRDPR/LPR a loan: ForeignForeign Foreignan ideal RussianRussianRussian bank: bank bank bankDo DoDonetsk, Donot not not need need need Other OtherOther businesses seem to have limited their horizons to the local bankbankbank bankbankbank commercialcommercialcommercial a aloan aloan loan Luhansk and IDP entrepreneurs,bankbankbank Ukraine samples market and local resources exclusively. IDP entrepreneurs Figure 42. Taking out a loan: an ideal bank: Donetsk, Luhansk and IDP entrepreneurs, Ukraine samples DonetskDonetskDonetsk sample sample sample LuhanskLuhanskLuhansk sample sample sample IDPIDPIDP entrepreneurs, entrepreneurs, entrepreneurs, Ukraine Ukraine Ukraine sample sample sample in Ukraine demonstrate a strong tendency for hoping to 90.0 be able to borrow from both Ukrainian and foreign commer- 80.0 EntrepreneursEntrepreneursEntrepreneurs70.0 that that that stayed stayed stayed in in Donetskin Donetsk Donetsk nevertheless nevertheless nevertheless consider consider consider Ukrainian Ukrainian Ukrainian and and and foreign foreign foreign cialcommercial commercial commercial banks. banks banks banks as as as thethethe 60.0preferred preferred preferred option option options sfor sfor for taking taking taking out out out a aloan a loan loan (Figure (Figure (Figure 42). 42). 42). Luhansk Luhansk Luhansk-based-based-based entrepreneurs entrepreneurs entrepreneurs appear appear appear to to to completelycompletelycompletely50.0 disregard disregard disregard hypothetical hypothetical hypothetical borrowing borrowing borrowing from from from the the the bank. bank. bank. This This This is is ais astriking a striking striking difference difference differenceBusinesses between between between thefrom the the both regions are highly uncertain about the twotwotwo40.0 NGCAs, NGCAs, NGCAs, with with with Donetsk Donetsk Donetsk entrepreneurs entrepreneurs entrepreneurs considering considering considering the the the possibility possibility possibility of of ofthe the the resumpt resumpt resumptpossibilityionionion of of ofbusiness business business and and and andmodalities of taking out a bank loan. Rates of

legallegal % Responses, legal30.0 relationships relationships relationships with with with Ukrainian Ukrainian Ukrainian and and and foreign foreign foreign banks. banks. banks. This This This is is inis in linein line line with with with the the the desire desire desire ofthose of ofDonetsk Donetsk Donetsk who SMEs SMEs SMEs did to to notto have an answer to the question regard- returnreturnreturn20.0 to to tothe the the legal legal legal space space space compliant compliant compliant with with with international international international norms norms norms in in orderin order order to to togrow, grow, grow, while while whileing Luhansk Luhansk Luhanskrealistic businesses businesses businesses prospects of borrowing and did not believe this seemseemseem10.0 to to tohave have have limited limited limited their their their horizons horizons horizons to to tothe the the local local local market market market and and and local local local resources resources resources exclusively. exclusively. exclusively. IDP IDP IDP is a feasible option are 52% among the Donetsk sample entrepreneursentrepreneursentrepreneurs0.0 in in Ukrainein Ukraine Ukraine demonstrate demonstrate demonstrate a astrong a strong strong tendency tendency tendency for for for hoping hoping hoping to to tobe be beable able able to to toborrow borrow borrow from from from both both both UkrainianUkrainianUkrainian andUkrainian and and foreign foreign foreign DPR/LPRcommercial commercial commercial Foreign banks. banks. banks. Russian bank Do not need Other and 62% in the Luhansk sample (Figure 43). About 20% of bank bank commercial a loan bank Donetsk entrepreneurs from the sample felt that the option FigureFigureFigure 43. 43. 43. Taking Taking Taking out out out a aloan: a loan: loan: a arealistic a realistic realistic bank: bank: bank: Don Don Donetsk,etsk,etsk, Luhansk Luhansk Luhansk and and and IDP IDP IDP SME SME SME samples samples samplesxxxiiixxxiiixxxiii Donetsk sample Luhansk sample IDP entrepreneurs, Ukraine sample of taking out a loan from a Ukrainian or foreign bank was realistic, as opposed to 5% in Luhansk. the conflict, all enterprises that did take out loans had dealt Entrepreneursexclusively that with stayed Ukrainian in Donetsk banks nevertheless (Figure consider 41). The Ukrainian companies and foreign commercial banks as Of IDP entrepreneurs, 15% thought it was impossible to the thatpreferred left the option NGCAss for taking had out been a loan borrowing (Figure 42). 1.5–2.0 Luhansk- basedtimes entrepreneurs more appear to get a bank loan but 50% felt certain about being able to completelythan those disregard that hypothetical stayed. borrowingEntrepreneurs from the bank.from Thisthe is Donetska striking difference between the two NGCAs, with Donetsk entrepreneurs considering the possibility of the resumptiontake of business out a and loan from a Ukrainian bank, with another 11% sample were taking out loans more actively than those from legal relationships with Ukrainian and foreign banks. This is in line with the desire of Donetskconsidering SMEs to it feasible to borrow from a foreign commer- Luhansk (28% and 22%, respectively). return to the legal space compliant with international norms in order to grow, while Luhanskcial bank. businesses seem to have limited their horizons to the local market and local resources exclusively. IDP entrepreneursEntrepreneurs in Ukraine that demonstrate stayed in aDonetsk strong tendency nevertheless for hoping consider to be able to borrow from both Overall, the elicited pattern of attitudes towards borrowing UkrainianUkrainian and foreign and commercialforeign commercial banks. banks as the preferred from a bank as an integral business-investment strategy clearly options for taking out a loan (Figure 42). Luhansk-based Figure 43. Taking out a loan: a realistic bank: Donetsk, Luhansk and IDP SME samplesxxxiiipoints to the distinct business development models adopted entrepreneurs appear to completely disregard hypothetical by the entrepreneurs residing in Donetsk and Luhansk and FigureborrowingFigureFigure 42 42 .42 Taking. .Taking Taking from out out out thea aloan: a loan: loan:bank. an an anideal ideal ideal bank: bank: bank: Donetsk, Donetsk, Donetsk, Luhansk Luhansk Luhansk and and and IDP IDP IDP entrepreneurs, entrepreneurs, entrepreneurs, Ukraine Ukraine Ukraine samples samples samples those who have left the NGCAs. The former do not consider 90.090.090.0 borrowing from the bank a feasible or desirable option due to This80.0 is80.080.0 a striking difference between the two NGCAs, with 70.070.070.0 legal obstacles and decline in business turnover, which makes Donetsk entrepreneurs considering the possibility of the 60.060.060.0 the already high interest rate even less attractive. IDP entre- resumption of business and legal relationships with Ukrain- 50.050.050.0 preneurs, by contrast, appear to become more hopeful with ian and40.040.040.0 foreign banks. This is in line with the desire of the partial50.0 or complete revival of their business activities and

Donetsk % Responses, 30.0 % Responses, % Responses, 30.030.0 SMEs to return to the legal space compliant with 45.0 20.020.020.0 are willing40.0 to take risks in order to grow. international norms in order to grow, whereas Luhansk 35.0 10.010.010.0 30.0 25.0 0.00.00.0 20.0 UkrainianUkrainianUkrainian DPR/LPRDPR/LPRDPR/LPR ForeignForeignForeign RussianRussianRussian bank bank bankDoDo Donot not not need need need OtherOtherOther Figure 43. Taking out a loan: a realistic bank: Donetsk, (%) Responses 15.0 bankbankbank bankbankbank commercialcommercialcommercial a aloan aloan loan 10.0 33 4.3 Reasons to stay in business Luhansk and IDP SME samplesbankbankbank 5.0 0.0 DonetskDonetskDonetsk sample sample sample LuhanskLuhanskLuhansk sample sample sample IDPIDPIDP entrepreneurs, entrepreneurs, entrepreneurs, Ukraine Ukraine Ukraine sample sample sample Figure 44. ReasonsOther income toBelieve stay in thein returnbusiness,Believe in the Donetsk,future It is an adaptation LuhanskOther 60.0 generating options of stability market growth mechanism of sorts and IDP SMEare samplesworse or non- (%) existent 50.0 EntrepreneursEntrepreneursEntrepreneurs that that that stayed stayed stayed in in Donetskin Donetsk Donetsk nevertheless nevertheless nevertheless consider consider consider Ukrainian Ukrainian Ukrainian and and and foreign foreign foreign commercial commercial commercial banks banks banks as Donetskas as sample Luhansk sample IDP entrepreneurs, Ukraine sample 50.0 thethethe 40.0preferred preferred preferred option option options sfor sfor for taking taking taking out out out a aloan a loan loan (Figure (Figure (Figure 42). 42). 42). Luhansk Luhansk Luhansk-based-based-based entrepreneurs entrepreneurs entrepreneurs appear appear appear to to to 45.0 completelycompletelycompletely disregard disregard disregard hypothetical hypothetical hypothetical borrowing borrowing borrowing from from from the the the bank. bank. bank. This This This is is ais astriking a striking striking difference difference difference40.0 between between between the the the 30.0 35.0 4.4 Prospects for the next six and twelve months twotwotwo NGCAs, NGCAs, NGCAs, with with with Donetsk Donetsk Donetsk entrepreneurs entrepreneurs entrepreneurs considering considering considering the the the possibility possibility possibility of of ofthe the the resumpt resumpt resumptionion30.0ion of of ofbusiness business business and and and 20.0

Responses, % Responses, 25.0 legallegallegal relationships relationships relationships with with with Ukrainian Ukrainian Ukrainian and and and foreign foreign foreign banks. banks. banks. This This This is is inis in linein line line with with with the the the desire desire desire of of ofDonetsk20.0 Donetsk DonetskFigure SMEs45. SMEs SMEs Prospects to to to for the next six months, Donetsk, Luhansk and IDP entrepreneurs, Ukraine samples (%) returnreturnreturn10.0 to to tothe the the legal legal legal space space space compliant compliant compliant with with with international international international norms norms norms in in orderin order order to to togrow, grow, grow, while while while (%) Responses Luhansk15.0 Luhansk Luhansk businesses businesses businesses 10.0 80.0 seemseemseem0.0 to to tohave have have limited limited limited their their their horizons horizons horizons to to tothe the the local local local market market market and and and local local local resources resources resources exclusively. exclusively. exclusively.5.0 IDP IDP IDP entrepreneursentrepreneursentrepreneursIt isin in Ukrainein Ukraine UkraineUkrainian demonstrate demonstrate demonstrate Foreign a astrong a strongRussian strong tendency banktendency tendencyDo not for for needfor hoping hoping hoping Do not to to havetobe be beable able able to to toborrow borrow borrow0.0 70.0 from from from both both both impossible to bank commercial a loan an answer 60.0Other income Believe in the returnBelieve in the future It is an adaptation Other UkrainianUkrainianUkrainian and and and foreign foreign foreign commercial commercial commercial banks. banks. banks. generating options of stability market growth mechanism of sorts take out a bank 50.0are worse or non- existent loan 40.0 FigureFigureFigure 43. 43. 43. Taking Taking Taking out out out a aloan: a loan: loan: a arealistic a realistic realistic bank: bank: bank: Don Don Donetsk,etsk,etsk, Luhansk Luhansk Luhansk and and and IDP IDP IDP SME SME SME samples samples samplesxxxiiixxxiiixxxiii Donetsk sample Luhansk sample IDP entrepreneurs, Ukraine sample 30.0 Donetsk sample Luhansk sample IDP entrepreneurs, Ukraine sample

20.0

4.4 Prospects10.0 for the next six and twelve months Businesses from both regions are highly uncertain about the possibility and modalities of taking0.0 out a Business Business Retain current No prospects Waiting for Other bank loan. Rates of those who did not have an answer to the question regarding realisticFigure 45. prospects Prospectsdevelopment forof the next development six months, positions Donetsk, in a Luhansk andfavorable IDP entrepreneurs, Ukraine samples borrowing and did not believe this is a feasible option are 52% among the Donetsk(%) sample and 62%in Ukraine in in the NGCAs new place conditions the Luhansk sample (Figure 43). About 20% of Donetsk entrepreneurs from the sample80.0 felt that theDonetsk sample Luhansk sample IDP entrepreneurs, Ukraine sample option of taking out a loan from a Ukrainian or foreign bank was realistic, as opposed70.0 to 5% in Luhansk. Of IDP entrepreneurs, 15% thought it was impossible to get a bank loan but 50% felt60.0 certainDonetsk about SMEs being are least optimistic about immediate possibilities to continue their business operation. able to take out a loan from a Ukrainian bank, with another 11% considering it feasible50.0 to borrowOnly 15% from of them a are planning to develop their business in their current place of residence as opposed 40.0 to 40% of the Luhansk-based entrepreneurs and 70% of the IDP SMEs (Fig. 45). foreign commercial bank. 30.0 Prospects for the next twelve months

20.0 Overall, the elicited pattern of attitudes towards borrowing from a bank as an integral10.0 businessFigure- 46. Prospects for the next twelve months, IDP SMEs sample (%) investment strategy clearly points to the distinct business development models adopted0.0 by the Business Business Retain current No prospects Waiting for Other entrepreneurs residing in Donetsk and Luhansk and those who have left the NGCAs. The developmentformer do development not positions in a favorable consider borrowing from the bank a feasible or desirable option due to legal obstacles andin Ukrainedeclinein in the NGCAs new place conditions business turnover, which makes the already high interest rate even less attractive. IDP entrepreneurs,Donetsk sample Luhansk sample IDP entrepreneurs, Ukraine sample by contrast, appear to become more hopeful with the partial or complete revival of their business activities and are willing to take risks in order to grow. Donetsk SMEs are least optimistic about immediate possibilities to continue their business operation. Only 15% of them are planning to develop their business in their current place of residence as opposed to 40% of the Luhansk-based entrepreneurs and 70% of the IDP SMEs (Fig. 45). 4.3 Reasons to stay in business Prospects for the next twelve months

Figure 44. Reasons to stay in business, Donetsk, Luhansk and IDP SME samples (%) Figure 46. Prospects for the next twelve months, IDP SMEs sample (%) 30 Economic connectivity across the line of contact in Donbas, Ukraine 70 50.0 45.0 40.0 60 35.0 30.0 25.0 50 20.0

Responses (%) Responses 15.0 40 10.0 5.0 0.0 30 Other income Believe in the returnBelieve in the future It is an adaptation Other

generating options of stability market % Responses, growth mechanism of sorts are worse or non- 20 4.4 Prospectsexistent for the next six and operational (Figures 46 and 47). However SMEs in Donetsk Donetsk sample Luhansk sample IDP10 entrepreneurs, Ukraine samplebecome more optimistic as the time horizon expands, while twelve50.0 months Luhansk SMEs become less clear about their plans beyond Donetsk45.0 SMEs are least optimistic about immediate0 possi- 4.440.0 Prospects for the next six and twelve months the very immediate future. Donetsk-based SMEs generally 35.0 Entry into Return home Business in Business No plans Not bilities to continue their business operation. Only 15% of them tend to be more economically minded, hoping for minimal 30.0 new markets and resume both development interested in areFigure planning25.0 45. Prospects to develop for the next their six business months, Donetsk, in their Luhansk current and place IDP entrepreneurs, of legal Ukraine and securitysamples conditions to improve soon in order to re- outside of business territories at the local the lost residence(%) 20.0 as opposed to 40% of the Luhansk-based entre- engage with markets and suppliers, irrespective of the final Responses (%) Responses 15.0 the place of there market markets preneurs80.010.0 and 70% of the IDP SMEs (Fig. 45). political solution of the conflict. Luhansk SMEs are equally 5.0 residence 70.0 unclear about the time horizon for the final settlement of the 0.0 60.070 Other income Believe in the returnBelieve in the future It is an adaptation conflict,Other nevertheless they have subdued their business oper- Prospects50.0 generating for optionsthe nextof twelvestability monthsmarket growth mechanism of sorts are worse or non- ation to the local market and supplies that are increasingly When40.060 the planningexistent horizon expandsFigure to a year, 47. the Plans pattern for thesecluded next 12 and months, shrinking, Donetsk and are unable and Luhanskto enter the SME Russian samples 30.0 of six-monthDonetsk planning sample remains,Luhansk sample with theIDP majority entrepreneurs, of Ukrainebusi -sample market and compete with Russian supplies. 20.050 50 nesses trying to establish themselves locally and become 10.0 45 4.4 Prospects0.040 for the next six and twelve months40 Figure 46. Prospects for the next twelve months, Figure 45.Business Prospects Business for Retain the current next No six prospects months,Waiting Donetsk, for Other IDP SMEs sample (%) development development positions in a favorable Figure 45. Prospects for the next six months, Donetsk, Luhansk35 and IDP entrepreneurs, Ukraine samples Luhansk30 in Ukraineand IDPin the entrepreneurs, NGCAs new place Ukraine samplesconditions (%) 70 (%) 30 Donetsk sample Luhansk sample IDP entrepreneurs, Ukraine sample

Responses, % Responses, 60 80.0 20 25 50 70.0 20 60.0Donetsk SMEs are least optimistic about immediate possibilities to continue their business40 operation. 10 % Responses, 15 Only 15% of them are planning to develop their business in their current place of residence as opposed 50.0 10 30 to 40% of the Luhansk-based entrepreneurs and 70% of the IDP SMEs (Fig. 45). 40.0 0 % Responses, Prospects for the next twelve months 5 20 30.0 Entry into Return home Business in Business No plans Not 0 10 20.0Figure 46. newProspects markets for the nextand twelve resume months, IDP bothSMEs sample development (%) interested in Business in two 0 Business Establishment of Re-establishment Business No plans 10.0 outside of business territories at the local the lost territories developmentEntry into Return homein businessBusiness in tiesBusiness with Noof plans businessNot ties development at 0.0 the place of there market new markets and resumemarkets both development interested in Business Business Retain current No prospects Waiting for Other Ukraineoutside of outsidebusiness suppliers,territories at clients the local with suppliers,the lost the local market developmentresidence development positions in a favorable thethe place NGCAs of there and partnersmarket in clientsmarkets and in Ukraine in the NGCAs new place conditions residence Russia partners in Donetsk sample Luhansk sample IDP entrepreneurs, Ukraine sample Ukraine Figure 47. Plans for the next 12 months, Donetsk and LuhanskFigure SME 47. Planssamples for the next 12 months, Donetsk and Luhansk SME samples Figure 47. Plans for the next 12 months, Donetsk and Luhansk SME samples Donetsk SMEs are least optimistic about immediate possibilities to continue their business50 operation. Donetsk sample Luhansk sample 45 Only 15% of them are planning to develop their business in their current place of residence as opposed 50 40 to 40%45 of the Luhansk-based entrepreneurs and 70% of the IDP SMEs (Fig. 45). 35 Prospects for the next twelve months 30 40 25

When the planning horizon20 expands to a year, the pattern of six-month planning remains, with the Figure35 46. Prospects for the next twelve months, IDP SMEs sample (%)

Responses, % Responses, 15 30 majority of businesses trying10 to establish themselves locally and become operational (Figures 46 and 25 5 47). However SMEs in Donetsk0 become more optimistic as the time horizon expands, while Luhansk 20 Business in two Business Establishment of Re-establishment Business No plans SMEs become less clear aboutterritories their plansdevelopment beyond in business the ties with very of business immediate ties development future. at Donetsk-based SMEs

Responses, % Responses, 15 Ukraine outside suppliers, clients with suppliers, the local market the NGCAs and partners in clients and 10 generally tend to be more economically minded, hopingRussia forpartners minimal in legal and security conditions to 5 improve soon in order to re-engage with markets and suppliers,Ukraine irrespective of the final political solution 0 Donetsk sample Luhansk sample of the conflict. Luhansk SMEs are equally unclear about the time horizon for the final settlement of the Business in two Business Establishment of Re-establishment Business No plans territories developmentconflict, in neverthelessbusiness ties withWhen they theof have planningbusiness subdued horizon ties expandsdevelopment their to a year,business the at pattern operation of six-month planning to the remains, local with market the and supplies that Ukraineare outside increasingly suppliers, secluded clientsmajority withand of businesses suppliers,shrinking, trying to the andestablish local are themselves market unable locally to andenter become the operational Russian (Figures market 46 and and compete with the NGCAs and partners47). in Howeverclients SMEs andin Donetsk become more optimistic as the time horizon expands, while Luhansk Russian supplies.Russia SMEs becomepartners less clear in about their plans beyond the very immediate future. Donetsk-based SMEs generally tendUkraine to be more economically minded, hoping for minimal legal and security conditions to improve soon in order to re-engage with markets and suppliers, irrespective of the final political solution Donetsk sample of theLuhansk conflict. Luhansk sample SMEs are equally unclear about the time horizon for the final settlement of the conflict, nevertheless they have subdued their business operation to the local market and supplies that are increasingly secluded and shrinking, and are unable to enter the Russian market and compete with Russian supplies. When the planning horizon expands to a year, the pattern of six-month planning remains, with the majority of businesses trying to establish themselves locally and become operational (Figures 46 and 47). However SMEs in Donetsk become more optimistic as the time horizon expands, while Luhansk SMEs become less clear about their plans beyond the very immediate future. Donetsk-based SMEs generally tend to be more economically minded, hoping for minimal legal and security conditions to improve soon in order to re-engage with markets and suppliers, irrespective of the final political solution of the conflict. Luhansk SMEs are equally unclear about the time horizon for the final settlement of the conflict, nevertheless they have subdued their business operation to the local market and supplies that are increasingly secluded and shrinking, and are unable to enter the Russian market and compete with Russian supplies. Economic connectivity across the line of contact in Donbas, Ukraine 31

While the percentage of the outward-looking SMEs in both Estimates of time needed to put all Donetsk and Luhansk is slightly above 15%, the diametrically opposite market orientations are evident for this sub- big industries that were not destroyed category. In their narratives, all emphasised lack of legal back into full operational mode range from status and insecurity making any business plans ephemeral. Some in Donetsk clearly hope for the return of the territo- three to five years. ries to the Ukrainian legal field. Others in Donetsk and all surveyed in Luhansk see some sort of an agreement on the Reconstruction of Donbas: how soon? status of the disputed territories between the stakeholders Many admit that, once a mutually satisfactory solution is found, – Ukraine, the self-proclaimed republics and Russia – as a which most often implies re-integration of the NGCAs into minimum condition to reinvigorate their business through Ukraine, and the sides re-establish relationships, the economy re-starting legal operations. This implies the expansion of will re-start sooner than human relations will be repaired. markets, export opportunities and availability of bank loans. Estimates of time needed to put all big industries that were not destroyed back into full operational mode range from Some IDP entrepreneurs have returned home and re-started three to five years. At the level of SMEs, respondents said their business in accord with local requirements because their that they would re-enter lost markets and re-engage with prospects in the Ukraine-controlled areas were even gloom- clients and suppliers within days or months. Full restructur- 34 ier. The number of returnees is not small and their pres- ing and modernisation of Donbas industry could take up to ence is felt, judging by the increase of clients and demand 20 years but the upside is that then it may become interna- for services reported by local businesses in the NGCAs, tionally competitive. which in turn conditioned their relative growth after recession. However compared to the results of our 2015 research,35 hopes among IDP entrepreneurs to go home in the foresee- Is Donbas an asset or a liability for Ukraine? able future are fading and giving way to the determination In the present study, entrepreneurs from Donbas were those to start a new life in a new place. offering assessments of the region. The most popular line of discourse was that Donbas is a region of enormous wealth, Entrepreneurs who had left the NGCAs and settled in the and that industry is Ukraine’s strength rather than a weak- government-controlled territories have little inclination to go ness. Many from the region forecast Ukraine’s agrarian future While the percentage of the outward-looking SMEs in both Donetsk and Luhansk is slightly above 15%, back, although very few excluded this option altogether (Fig- without Donbas, which is a way of saying that the expect the urediametrically 48). The opposite proportion market of orientations IDPs who arewould evident be for willing this sub to -returncategory. In their narratives, all emphasised lack of legal status and insecurity making any business plans ephemeral. Ukraine’sSome in Donetsk status as a heavily industrialised and globally- is declining as the conflict persists, regardless of obvious clearly hope for the return of the territories to the Ukrainian legal field. Others in Donetskexporting and all economy to seriously suffer. surveyedhardship in Luhansk and lacksee some of governmental sort of an agreement support on the for status resettlement. of the disputed territories between the Atstakeh theolders same – Ukraine,time, the the share self-proclaimed of those republics who would and Russia like to– as leave a minimum Bigcondition business to presents a global overview of Donbas as a part reinvigoratethe NGCAs their businessis not growing.through re -starting legal operations. This implies the expansionof certain of markets, global markets, notably coal and metals, there- export opportunities and availability of bank loans. fore viewing the region as one of the main economic assets of Ukraine. Recent modernisation has made the Alchevsk Figure 48. Plans to return, IDP SMEs sample (%) Figure 48. Plans to return, IDP SMEs sample (%) metallurgic industry the leader in this sector in Europe, an 90 investment that might become a waste of funds if an end 80 to the conflict is not achieved soon. Donbas is a region with 70 industries competitive in non-European markets, some of them 60 quite promising at the moment, such as Iran. Developing 50 diversified destinations for industrial outputs from Donbas 40 is regarded as the most viable policy – including for sustain-

Responses, % Responses, 30 ing peace and security. 20 36 10 Accounts on the significance of Donbas are diverse . Political 0 and social significance (software) need to be incorporated Will return together Will return when Will not return Do not have plans to into economic analysis of the industrial outputs (hardware) and with Ukraine there is peace and under any return clarity circumstances calculate economic value in terms of the totality of resources.

Some IDP entrepreneurs have returned home and re-started their business in accord with local requirements because their prospects in the Ukraine-controlled areas were even gloomier.xxxiv The number of returnees is not small and their presence is felt, judging by the increase of clients and demand for services reported by local businesses in the NGCAs, which in turn conditioned their relative growth after recession. However compared to the results of our 2015 research,xxxv hopes among IDP entrepreneurs to go home in the foreseeable future are fading and giving way to the determination to start a new life in a new place.

Entrepreneurs who had left the NGCAs and settled in the government-controlled territories have little inclination to go back, although very few excluded this option altogether (Figure 48). The proportion of IDPs who would be willing to return is declining as the conflict persists, regardless of obvious hardship and lack of governmental support for resettlement. At the same time, the share of those who would like to leave the NGCAs is not growing.

Reconstruction of Donbas: how soon?

32 Economic connectivity across the line of contact in Donbas, Ukraine

4.5 Conclusions • Few of the Donetsk SMEs are considering leaving the territory, mostly because of lack of prospects elsewhere • Some Donetsk SMEs clearly hope for return of the terri- and because of attachment to their home communi- tories to the Ukrainian legal field. Others in Donetsk and ties although they do not exclude Ukraine as a potential all surveyed in Luhansk see some sort of agreement on destination. Luhansk SMEs are determined to stay and the status of the disputed territories as an essential con- would under no circumstances move to Ukraine. dition for reinvigorating their businesses. • Minimal possibility to legally engage in business relations • Donetsk SMEs are less optimistic when considering near- across the line of contact is generally acceptable and term prospects, compared to IDP and Luhansk SMEs. sufficient for SMEs in Donetsk and in other regions in This is largely the case because Donetsk SMEs seem to Ukraine that used to do business with the current NGCAs be more concerned with economic expediency rather in Donbas to re-establish economic activities with former than the political outcome of the conflict. Luhansk SMEs suppliers, customers and partners. Luhansk SMEs put are similarly uncertain about political outcomes, however political resolution as a pre-condition for economic rela- they have already limited their economic activities to an increasingly shrinking local market as they are unable to tions with the Ukrainian counterparts. expand or compete with Russian entities. • When a satisfactory, even if provisional solution, is found • About 15% of Donetsk SMEs are ready to expand into and the sides re-establish relationships, expectations the Ukrainian market, with 5% ready to establish links are that the economy will re-start sooner within months with the Russian market. Luhansk SMEs indicate similar or years. Respondents expect that human relations will proportions but in reverse, with the larger share looking take longer to repair, and that they will require a gener- to Russia. The majority among both SME communities ational change. are planning to operate in their local market. • Big businesses and SMEs alike consider Donbas indus- • Compared to the results of our 2015 research,37 hopes try and other resources to be an asset to Ukraine, and among IDP entrepreneurs of returning home are fading. integral to certain global markets, such as coal and Most entrepreneurs who left the NGCAs and settled in metals. Developing diversified destinations for industrial the government-controlled territories have no plans to outputs from Donbas is regarded as the most viable return, although very few excluded this option altogether. policy – including for sustaining peace and security. Economic connectivity across the line of contact in Donbas, Ukraine 33

Endnotes

1 Mirimanova, N. (2015) ‘Business opportunities lost. . . and found’, wp-content/uploads/2016/08/Economic-Connectivity_eng_13_07-3. Centre for Humanitarian Dialogue. compressed.pdf

2 Temporary Order on Control of the Movement of People, Transport 10 Mirimanova, N. (2015) ‘Business opportunities lost. . . and found’, Vehicles and Cargo Along the Contact Line in Donetsk and Luhansk Centre for Humanitarian Dialogue. Regions was in force since 21 January 2015 as amended on 16 June 2015. 11 Enterprise size here is defined by number of employees: micro = 0–10, Exemption of certain commodities and raw materials were approved small = 10–50, medium = 51–250, big = over 250; see Neighborhood by the government. See ТИМЧАСОВИЙ ПОРЯДОК контролю за SME Financing: Ukraine, European Investment Bank, February 2016. переміщенням осіб, транспортних засобів та вантажів (товарів) через лінію зіткнення у межах Донецької та Луганської областей 12 The smaller sample size in Luhansk was due to the increasing difficul- [Temporary rules of the control of the crossing of the line of contact ties in reaching out to people and the high rate of declined invitations within the limits of the Donetsk and Luhansk regions by persons, vehi- for participation in the study. However, the high uniformity of responses cles and cargo (goods)] and the Annexes 4 and 5, 12.06.2015, 24.06.2016.] demonstrates a clear trend among Luhansk entrepreneurs. available at http://sfs.gov.ua/diyalnist-/zakonodavstvo-pro-diyalnis/ 13 Расследование РБК: на чьи деньги живет Донбасс, [RBC investi- nakazi-pro-diyalnist/63768.htmlhttp://sfs.gov.ua/diyalnist-/zakono gation: with whose money does Donbass live?] http://www.rbc.ru/ davstvo-pro-diyalnis/nakazi-pro-diyalnist/63768.html; At the end of investigation/politics/15/06/2015/5579b4b99a7947b063440210 2015 the self-styled Luhansk People’s Republic (LPR) banned foodstuff produced in Ukraine by virtue of having put forward a requirement 14 The IDP SME sample was divided into two sub-samples of Donetsk that Ukrainian produce enters LPR through the border with Russian and Luhansk residents. The sub-samples were then added to the cur- Federation only, not even by transiting the adjacent self-proclaimed rent Donetsk and Luhansk samples to track the dynamic of business Donetsk People’s Republic (DPR). Only small quantities for personal use from January to August 2014. were allowed. In contrast, the DPR has never banned Ukrainian goods, 15 The self-proclaimed Donetsk People’s Republic established a ‘customs but introduced so-called customs duties. See СОВЕТ МИНИСТРОВ regime’ in July 2015 and introduced duties that are universal for any ЛУГАНСКОЙ НАРОДНОЙ РЕСПУБЛИКИ, ПОСТАНОВЛЕНИЕ goods entering the de facto republic, including from Ukraine. No от 29 декабря 2015 г. №02-04/414/15. Ukrainian products were banned. See Постановление от 12.02.2016 3 http://www.rnbo.gov.ua/documents/441.html N1-10 «О внесении изменений и дополнений во Временное поло- жение о таможенном тарифе Донецкой Народной Республики, 4 See, for example https://ru.hromadske.ua/posts/deputat-hosdumy-rf- утвержденное Постановлением Совета Министров Донецкой donbass-nado-zabyrat-k-seberain.ru; http://novosti.dn.ua/article/6698- Народной Республики N19-29 от 16.10.2015» kak-budut-rabotat-y-kuda-sbyvat-produkcyyu-zavody-nepodkontrol noy-terrytory; http://www.rbc.ru/politics/15/03/2017/58c7f8c69a7947 16 Zhukov, Y. (2015) ‘Trading hard hats for combat helmets: the econom- 312027714e ics of rebellion in Eastern Ukraine’, Journal of Comparative Economics, 1 November 2015; ‘Украина привыкает жить, не торогуя с Россией’, 5 See, for example http://en.interfax.com.ua/news/economic/410421.html Ведомости, 23.11.2015, https://www.vedomosti.ru/economics/articles/ 6 https://bank.gov.ua/control/en/publish/article?art_id=45199781&cat_ 2015/11/23/617942-ukraina-ne-torguya-rossiei (English version: ‘Ukraine id=76291; Saha, D. and Kravchuk, V. (2017) ‘Trade suspension and com- adapts trade links to soften Russian economic blow, Financial Times, 22.11.2017, https://www.ft.com/content/f2795d64-8eb6-11e5-a549- pany seizures in non-controlled area: economic impact on government- b89a1dfede9b controlled area’, German Advisory Group, Institute for Economic Research and Policy Advising, Policy Briefing Series [PB/06/2017], May 17 Rinat Akhmetov managed recently to relocate his large, modern med- (www.beratergruppe-ukraine.de/wordpress/wp-content/uploads/ ical centre from Donetsk to Mariupol, with all the equipment and per- 2017/06/PB_06_2017_en.pdf); wiiw Opinion Corner: Economic effects sonnel, but the majority of businesses could not afford this move. of Donbas trade blockade, 1.06.2017, https://wiiw.ac.at/wiiw-opinion- 18 The category ‘Before the conflict’ comprises IDP SMEs from Donetsk. corner-economic-effects-of-donbas-trade-blockade-n-224.html 19 The category ‘Before the conflict’ comprises IDP SMEs from Luhansk. 7 See, for example ‘India-Sri Lanka Relations: Strengthening SAARC, 2013’; Pugh, M., Cooper, N. and Goodhand, J. (2004) War economies 20 https://www.hrw.org/news/2017/02/17/ukraine-dangers-unnecessary- in a regional context: challenges of transformation, Lynne Reiner Pub- delays-crossing-points, 17 February 2017. lishers, London, Boulder; Mirimanova, N. (2012) ‘Prospects for the 21 SMM OSCE reports. regulation of trans-Ingur/i economic relations: stakeholder analysis’, International Alert. http://www.international-alert.org/sites/default/ 22 In the 2015 study, IDP SMEs were surveyed in Kharkiv and Mariupol. files/Caucasus_TransInguri_EconRelationsAnalysis_EN_2012.pdf 23 See, for example http://www.osce.org/ukraine-smm/156791?download 8 Mirimanova, N. (2015) ‘Business opportunities lost. . . and found’, =true Centre for Humanitarian Dialogue. 24 Cabinet of Ministers of Ukraine, Resolution No. 1035 on restrictions on 9 Yesmukhanova, Y. and Ackles, D. ‘Economic connectivity in Ukraine: the supply of certain goods (works, services) from temporarily occupied a regional focus’, CASE-Ukraine, http://www.case-ukraine.com.ua/ territory to another territory of Ukraine and/or from another territory 34 Economic connectivity across the line of contact in Donbas, Ukraine

of Ukraine to the temporarily occupied territory, adopted 16 December 30 Расследование РБК: на чьи деньги живет Донбасс, [RBC investi- 2015 (Про обмеження поставок окремих товарів (робіт, послуг) з gation: with whose money does Donbass live?] http://www.rbc.ru/ тимчасово окупованої території на іншу територію України та/або investigation/politics/15/06/2015/5579b4b99a7947b063440210 з іншої території України на тимчасово окуповану територію), 31 http://sovminlnr.su/akt/06.01.2016/7.pdf http://zakon3.rada.gov.ua/laws/show/1035-2015-%D0%BF 32 Рейтинг інвестиційної привабливості регіонів України 2014, 25 UNDP programmes, for example. Підготовлено Київським міжнародним інститутом соціології у 26 Кримінальний кодекс України, Стаття 258-5. Фінансування партнерстві з Інститутом економічних досліджень та політичних тероризму (Criminal Code of Ukraine, Article 258-5, Financing of консультаційна замовлення Державного агентства з інвестицій terrorism), http://kodeksy.com.ua/kriminal_nij_kodeks_ukraini/statja- та управління національними проектами України, Kiev 2014 [Kiev 258-5.htm; there were cases of businesspeople based in the GCAs but International Sociology Institute and Institute for Economic Research having business links with the NGCAs being arrested for the ‘financing and Political Consulting, Investment attractiveness rating of the regions of terrorism’: https://inforesist.org/sbu-arestovala-top-menedzhera-seti- of Ukraine, Kiev, 2014]. supermarketov-za-finansirovanie-dnr/ СБУ арестовала топ-менеджера 33 Russian banks were put in a separate category and were excluded from сети супермаркетов за финансирование «ДНР» (SBU arrested a top- the foreign commercial banks category. manager of the supermarket chain for the financing of the “DPR”) 34 They were counted as part of the Donetsk or Luhansk samples accord- 27 ТИМЧАСОВИЙ ПОРЯДОК контролю за переміщенням осіб, ing to their current location. транспортних засобів та вантажів (товарів) через лінію зіткнення у межах Донецької та Луганської областей [Temporary rules of 35 Mirimanova, N. (2015) ‘Business opportunities lost. . . and found’, the control of the crossing of the line of contact within the limits of Centre for Humanitarian Dialogue. the Donetsk and Luhansk regions by persons, vehicles and cargo (goods)] 36 See, for example, ‘The significance of the Donbas’, http://www.dw. and Annexes 4 and 5, 12.06.2015, 24.06.2016.] available at http://sfs. com/en/the-significance-of-the-donbas/a-17567049; ‘The economy of gov.ua/diyalnist-/zakonodavstvo-pro-diyalnis/nakazi-pro-diyalnist/ the Donbas in figures’, German Advisory Group and Institute for 63768.htmlhttp://sfs.gov.ua/diyalnist-/zakonodavstvo-pro-diyalnis/ Economic and Policy Consulting, June 2014, http://www.ier.com.ua/ nakazi-pro-diyalnist/63768.html files/publications/Policy_Briefing_Series/TN_04_2014_en.pdf 28 Ibid. 37 Mirimanova, N. (2015) ‘Business opportunities lost. . . and found’, 29 ‘The economy of the Donbas in figures’, German Advisory Group and Centre for Humanitarian Dialogue. Institute for Economic and Policy Consulting, June 2014, http://www.ier. com.ua/files/publications/Policy_Briefing_Series/TN_04_2014_en.pdf Economic connectivity across the line of contact in Donbas, Ukraine 35