Fighting in east Ukraine: the impact on industry and the economy

What impact will the ongoing destruction of Donbass have on the potential for economic recovery in Ukraine?

Professor Stefan Hedlund:

The destruction of the Donbass region due to the violence is going to have an major impact, both in the short term and long term.

We need to realise that Donbass is, or we should say, was the industrial heartland in Ukraine. It accounts, or accounted for, about 25 per cent of Ukrainian exports, and this is where the mining and heavy manufacturing were located.

What needs to happen if the Ukrainian economy is going to come back as an industrialised, modern economy, is that these industries will need to be restructured and it’s very difficult to see that happening anytime soon.

It’s not only the case that a lot of infrastructure is down, but there is a refugee problem as well. The Russian Migration Service now talks about 515,000 people now having taken refuge in Russia. So that’s the prospect for the real sector to turn around.

To that we may add that any government needs to raise taxes. And raising taxes in eastern Ukraine in the recent weeks and months has been incredibly difficult for obvious reasons. And even if the violence dies down and the authorities do succeed in snuffing out the rebellion, if the Russians don’t intervene too heavily, then it’s going to be very difficult for the government in Kiev to restore law and order in eastern Ukraine to the point where people willingly pay taxes to a government they experience as legitimate.

So if the government doesn’t really have the power to tax and spend in eastern Ukraine and the heavy industry is being destroyed, then that’s a very major setback for any prospects for recovery in the Ukrainian economy in the longer term as well.

(Photo credit:dpa)