Saving Donbas: how to develop frontline territories?
The war slowed down the development of cities on the front lines, whose economic activity was concentrated around the coal industry and energy. Locals believe that no one should speculate on the free economic zone, as if Donbas demands something again. On the contrary, they oppose social security, payments, and subsidies. But then, where should one search for new development sources for miners' cities?
Declining hostilities in Donbas raise hopes for a relatively early peace in the region and the return of the occupied territories to Ukrainian control. This raises the question of restoring the economic potential of Donbas or its economic transformation.
Meanwhile, the territories are occupied. Ukrainian authorities' primary task is to make the standard of living in the frontline territories favorably different from that in the occupied territories. Frontline cities have an important mission: to be an example for the occupied territories.
Economic activity is the best argument for Ukrainians coming from the occupied parts of Ukraine. This applies to creating conditions for business and improving infrastructure in frontline communities.
However, proximity to the front line and the likelihood of active hostilities are holding back the surge of new investment in the region.
Meanwhile, traditional industries in the region, such as the coal industry, were stagnant and subsidized from the state budget before the war, although they provided employment for a large part of the population.
City of miners
Driving up to the center of Toretsk, we're facing a local photo location: a blue-yellow inscription "Toretsk—the city of miners." For residents, this isn't just a slogan, but everyday life and lifestyle. The coal industry was a key development point, which offered employment to residents and provided income to the budget.
However, it seems the industry is living out the last decades. There are 7 mines in the city, of which 3 are currently operating: Toretska, Tsentralna, and St. Matrona of Moscow mines. Although Toretsk is located four kilometers from the front line, the war was only a catalyst for the coal industry decline.
"Job cuts, mines closing, rising coal costs have been a constant phenomenon since the 1990s. Despite this, mines are still Toretsk's city-forming enterprises. 90% of the local budget's own revenues are personal income tax (PIT), paid from employees' salaries. Coal companies pay 40% of all salaries. In other words, we see a significant dependence on mine business of the city's economy, jobs for the population, and filling the treasury," Andrii Hrudkin, project manager of "On the Collision Line," board member of the Gromady.dn.ua public organization.
According to the head of the miners' union, Vasyl Shcherban, about 5,000 people worked in the city's mines five years ago. Currently, 2,900 employees remain employed.
They started closing subsidized mines in Toretsk and its suburbs in 2002 when the Artem mine was shut down. Later, the Nova mine was closed, and after the start of the war, Pivdenna, on the line of armed conflict, closed.
"The Pivnichna mine will get restructured on January 1, 2021. It used to employ 1,300 people, now it has 60-75 employees. According to the project, they plan to flood the mine naturally. Only security guards will work here, up to 30 people," Vasyl Shcherban says.
But even those who remain working don't receive their salaries in full. The debt for the past months is about 63 million hryvnias.
"Now we are waiting for the allocation of UAH 1.4 billion to repay debts on salaries to miners. From December 20, this money should drop to the accounts," the chairperson of the miners' union says.
Due to the peculiarities of coal and shed development specifics, extracting "black gold" in Toretsk is unreasonably expensive. Electricity costs alone account for over 40% of the coal cost. Meanwhile, for instance, the electricity cost is about 7% of the coal cost in the mines of the Lviv region.
Coal is also sold at a lower price than before, which further reduces coal industry profitability. According to Vasyl Shcherban, until January 1, 2020, the average price of coking coal was UAH 2,050 per ton. Now its cost is 1,500-1,600 UAH. The price of thermal coal also fell by about UAH 500.
"We ship it to the Avdiivka Coking Plant. They refuse to buy coal at a higher price because they've bought coal in Russia at a lower price and are buying it now," Shcherban says.
Photo: State Enterprise "Toretskvuhillia"
The relevant ministry has prepared a program to support the coal industry in the amount of 14.2 billion hryvnias, but in the 2021 budget's final version, the Verkhovna Rada reduced these expenditures to 4.5 billion hryvnias.
"Of this amount, we plan to spend UAH 3.1 billion on salaries, liquidation of unpromising mines, but there are no funds for labor protection, technical re-equipment, and capital mine construction," the head of the specialized association states.
However, like others, he understands the coal age is ending and the mines need to be closed. In May 2020, the Coordination Center for the Transformation of Coal Regions was established in Ukraine.
It includes relevant government officials, heads of regional state administrations, deputies, representatives of coal mining companies, trade unions, and associations of local governments. In particular, the representatives of Toretskvuhillia.
"One of the center's main tasks is to analyze the real state of the economy and social security in mining towns, find new directions for local economic development and job creation," says Kostiantyn Krynytskyi, head of the energy department of Ecodia, a public organization, actively advocating the elimination of the coal industry.
Mining community representatives also provided their vision for the transformation project. They are in favor of a slow closing to allow mines to run for at least 10-15 years, in the meantime, creating new jobs.
"We understand that the future closing of mines will hit the cities around the mine very hard, since they were created, in large part, to ensure its functioning. Planning the closing of coal enterprises needs to be fair to the local population, which will lose their jobs, and the economy of cities that will be left without their main enterprise, because 40-80% of local budgets of coal cities are filled with tax revenues from mines," Kostiantyn Krynytskyi explains.
The average salary of miners is about 15 thousand hryvnias. Those who work directly in the stall receive 22-25 thousand hryvnias. Meanwhile, the average salary in other Toretsk sectors is UAH 8,600.
Photo: State Enterprise "Toretskvuhillia"
Closing mines without developing alternative industries will mean a complete decline for the city, because in Toretsk, apart from mines, there are only small businesses that serve the city-forming industry. In particular, it's retail trade and the field of services. But purchasing power needs to be maintained through something.
"In 2003, we closed the Artem mine in the namesake town where about 5 thousand people lived at that time. It was one of the most promising mines in terms of mechanization and reserves of coking coal. A new horizon was prepared in 2000. For mine development, they needed the investment of UAH 15 million, and to close this mine, it was necessary to spend UAH 85 million. After the mine was closed, only ruins remained in the town. The city fell into decay," the head of the trade union says sadly.
Kostiantyn Krynytskyi says that when it comes to diversifying the local economy, there's no single universal solution that can be applied to every coal city.
"Each coal city has its strengths and weaknesses one needs to analyze and determine which enterprise makes sense to open. Perhaps in one city, it's better to open a new production (shoes, clothes), in another one, it may be educational institutions, making the city a center of education. Another one may develop tourism," he says.
"There should be something in the mines' place. Maybe factories. The mine is a wonderful industrial platform, which has electricity, access roads, connected railways," Vasyl Shcherban agrees. "They discussed that they'd create an industrial park on the site of the Pivnichna mine. They'd talked for three years and everything subsided, possibly because of the location being near the line of conflict."
Photo: State Enterprise "Toretskvuhillia"
According to official data, about 67,000 people live in Toretsk. However, in reality, the city population is much lower. This is attested to by employment statistics. According to 2019 results, a little over 8,000 people are officially employed in Toretsk. There are no statistics of those officially unemployed in 2019. However, back in 2015, about 1.5 thousand individuals were registered at the Employment Center, and in 2018, this figure was less than a hundred.
Business, developing in the city, is a small business, mainly services, and trade. If 87 sole proprietors were registered in Toretsk in 2014, in 2017, their number increased to 220. As of late 2019, there are 197. However, these enterprises cannot exist independently.
"A lot of small businesses opened here after the war's active phase. These are shops, cafes, mini-bakeries, production shops, and workshops. Yes, these aren't big factories, but these people have definitely chosen their path," Andrii Hrudkin notes.
According to him, among the operating enterprises, there's a bread-baking plant, a phenolic plant, and several small machine-building enterprises besides a coal one. In total, these are only 787 jobs. We can talk about their modernization and expansion, but are the owners interested in it?
"Coal production is declining, people are being laid off. So, we've united to develop entrepreneurship as the only way to develop the city," says Vilina Saienko, a member of the "On the Collision Line" Coalition, head of the city's only organization uniting active entrepreneurs, "Center of Initiatives of Entrepreneurs of the City of Toretsk."
In the photo, representatives of the only organization in the city uniting active entrepreneurs, "Center for Entrepreneurship Initiatives of Toretsk"
According to her, coal production, which provided the largest income to the local budget and provided employment to most residents, has been declining in recent years. They've no other large enterprises in the city and soon, because of the proximity to the front line, they won't appear as it's an enormous risk.
What are the problems?
People who moved from the occupied cities opened their businesses here. However, even for developing small businesses in the city, there are several obstacles. First, administrative ones.
In Toretsk, instead of a local council, there's a military-civil administration with less authority. Until recently, the MCA had the right to enter lease agreements for land and communal property with entrepreneurs for only one year. It was hard to plan a business in such conditions.
With the efforts of local activists, i.e. the "On the Collision Line" Coalition, it was communicated to the people's deputies that this norm needs changing through adopting a relevant law.
"We've recently managed to ensure land and property be leased for 5 years. President hasn't signed the law yet, but if he does, it'll be a relief for business," Andrii Hrudkin says.
One more problem is the fact that a tax office is absent in the city. The nearest is in Mariupol. Due to the complex logistics and road conditions, it's difficult to get there.
"To receive or renew a license, for instance, for selling alcohol or tobacco products, you need to go to Mariupol. It's 5-6 hours on the road. We have entrepreneurs who have this process taking more than a month. Inspections are coming, but it's hard to get a license. It's impossible to contact them, so there's a risk of coming to Mariupol and returning with nothing," Vilina Saienko says.
Medium and large businesses don't wish to invest in a new production in the city. The risks are too high: lack of protection from the state and no preferences.
"We offered entrepreneurs from other cities to open branches in Toretsk. But they believe that we're on the contact line, and such investments should be insured. Therefore, without an effective property and business insurance mechanism, we aren't ready to take such risks," Vilina Saienko says.
According to her, the business isn't ready for insurance in private companies and wants state guarantees. In addition, there's a demand for business lending. The popular lending program "5-7-9" doesn't work in the region.
Coal dependent
During the years of Ukraine's independence, coal production has decreased 5 times and the number of employees in the industry reduced from almost 1 million in 1990 to about 35 thousand people in 2020. The region's specificity is that cities were created around coal mining and coal processing plants. They assumed that majority of the population would be employed in these sectors.
If Toretsk lived at the expense of mines, then Shchastya was formed around a coal-fired power plant. Avdiivka is around a coking plant, for which coal is the main raw material. All these giant enterprises were tied to extracting local coal. On one occasion, Luhansk TPP, on the city outskirts, was the most powerful in the USSR and Europe.
However, now the industry is passing into history, and no one creates new large enterprises. In Shchastya, as in Toretsk, only service sectors of the economy were formed.
"The situation is very sad because the residents don't have money. The power plant gives primary income, but only about 500 people remain to work in it. Earlier about 3.5 thousand worked there. Reductions occurred literally in recent years," says Oleksii Hanziuk, entrepreneur and chairperson of the local council of entrepreneurs, established a few months ago this year.
Halyna Kalinina worked at Luhansk TPP as an engineer, Maryna Danyliuk was a technician, but a few years ago, they were fired because of optimization. The optimization plan was presented before the war. According to this plan, only operational personnel should remain at the station. Other employees were to be removed from the organization.
"We prayed for this station. It is our city-forming enterprise. The station's management was in charge of cleaning and organizing events. Until DTEK came. They gave the community center and other infrastructure facilities to the city's balance sheet," Marina Danyliuk says.
Halyna is already retired, Marina had to work for a year and a half at the time of her dismissal, so the employment issue isn't important for them now. But this issue worries many city residents.
According to Oleksii Hanziuk, because of this, most residents left the city; others went to earn money abroad.
Oleksii Hanziuk bought a premise in Shchastya before the war and equipped a gym, a coffee shop, and a sauna there.
"I've been to Odesa, Kyiv. There, gyms are packed. We've got a single gym in the city, but almost no locals visit it. Only those living in big cities and coming to Shchastya for a while to visit their parents or on business attend the gym," the entrepreneur notes.
The city has virtually no small businesses. Only food trade. "The primary spot for entrepreneurs is the market. It's difficult to make money in the city. All young and promising girls and guys leave as if it's the village. If you take away the station, everything will collapse, everything depends on it," Oleksii Hanziuk says.
The war in eastern Ukraine has complicated the situation. Two-thirds of state-owned mines remained in the occupied territories of the Donetsk and Luhansk region. The state now owns 33 mines, 29 of them are unprofitable.
Meanwhile, Europe plans to become the world's first carbon-neutral continent by 2050. Some countries have already announced the dates of the complete elimination of coal use in energy: France (2022), Italy (2025), Greece (2028), Germany (2038), the Czech Republic (2038).
Given the European course, which Ukraine also supports, there's no other way than diversification of the economy for coal-dependent mono-cities. Dependence on one town-forming enterprise should be a relic of the past.
Coal sector transformation and closing of mines should be planned in advance, based on a strategic vision for developing coal regions. After all, the earlier the planning process begins, the less negative social and economic consequences will be in the future.
"Of course, we need transformation. We've got no alternative, but this process should be as public as possible. We need to involve local experts and the public. We need to learn what the future holds for our cities and work with the central government to plan a strategy and implement it. We are aware that the state won't build new plants and factories here, and it's not effective. But it's essential to create inclusive conditions for investors, and not only for regional ones," the coordinator of the "On the Collision Line" project says.
This year, the "Ecodia" public organization together with the Ukrainian Office of the Friedrich Ebert Foundation commissioned a survey to understand how the local population of 7 mining towns in the Donetsk region assesses the future development of the region in the event of mines closing.
Thus, some respondents answered that they saw the point in developing manufacturing, as the production of tiles (paving, interior), bricks (for example, from slag heaps), dish factories, garment factories, equipment for producing alternative energy; agricultural sector, repair of agricultural machinery, the production of machinery parts; food industry (juices, confectionery, bakery products).
Representatives of the "On the Collision Line" Coalition together with the relevant ministry came to the same conclusions. The region can be helped by creating a business insurance fund against military risks, an investment agency, available loans, in particular, unlocking the "5,7,9" program, and an inclusive tax system.
"The Ministry of Reintegration also proposes to create a venture capital fund, introduce a tax on withdrawn capital, exempt businesses from paying import duties on equipment and other proposals. It's important not to speculate on the free economic zone, as if Donbas demands something again. On the contrary, we're against social benefits, some payments, and subsidies," Andrii Hrudkin says.
Therefore, mines closing is an irreversible process. And it's crucial to think about creating alternative jobs, otherwise, we may face the decline of coal regions and the mass migration of their residents.
Photo: Dmytro Torets
The "On the Collision Line" project was made possible by the sincere support of the American people through the United States Agency for International Development (USAID). The article is a personal opinion of the author and doesn't reflect the official position of USAID.
