Diplomacy in Ukraine’s war-torn Donbas may be at a standstill, but momentous changes are taking place in the region’s economy. Key enterprises in the Donetsk and Luhansk self-proclaimed republics had for the last four years been under the de facto control of Sergei Kurchenko, once an oligarch from the inner circle of former Ukrainian president Viktor Yanukovych. Now he has been forced to cede that role to a Russian businessman with no prior ties to the Donbas. The Kremlin understands that the breakaway regions are set to remain on its balance sheet for a long time, so it is looking for the most efficient ways to manage the region, ousting odious figures engendered by the 2014 Ukraine crisis.

When the Donetsk and Luhansk regions declared their independence from Ukraine, a number of assets belonging to Ukrainian oligarch Rinat Akhmetov were left on their territory. For a time, they continued to operate as usual, despite the hostilities, remaining a source of jobs for local residents and taxes for the Ukrainian budget. Back then, the preservation of economic ties between Ukraine and its breakaway provinces was seen as an important component of their subsequent reintegration under the Minsk accords.

However, as the conflict dragged on, the economic ties began to disintegrate. In 2017, under pressure from the nationalists, Kyiv declared an economic blockade of Donetsk and Luhansk. The separatists responded by “nationalizing” Akhmetov’s enterprises, and later transferring some of those assets under the management of Vneshtorgservice, a company registered in another breakaway republic: South Ossetia.

Sergei Kurchenko Source: ПроФутбол Digital / YouTube.comThe ultimate beneficiary of Vneshtorgservice was said to be Kurchenko, who had fled to the Donbas region after Yanukovych’s ouster. Many members of the former president’s entourage viewed the region as a possible launching pad for a return to Ukrainian politics. Kurchenko’s initial attempt to put down roots in Donbas failed: in 2015, he was declared persona non grata for his role in interruptions in fuel deliveries to the region. However, eventually—and not without support from his benefactors in Moscow—Kurchenko and his representatives gained control over some of Akhmetov’s valuable assets, and became the unofficial bosses of the local economy. Vneshtorgservice alumni have since also entered regional ministries and legislative assemblies.  

Yet those new bosses showed little regard for the long-term interests of the Donbas economy, bleeding enterprises dry and causing delays in salary payments, increased social tensions, and strikes. At first, the local authorities cracked down on protests to protect Kurchenko’s interests, but when the participants of a strike at the Alchevsk metallurgical plant reached out for help to the Kremlin, that was the last straw.

In late 2020–early 2021, it became clear that Kurchenko’s reign in the Donbas was coming to an end. The regional authorities began “renationalizing” some of his assets and transferring them to local businessmen.

Then, in mid-June 2021, Luhansk and Donetsk officials announced that Vneshtorgservice enterprises had a new investor: Russian businessman and experienced executive Yevgeny Yurchenko. He has already promised to pay off all salary arrears before the end of the year, but considering the troubled state of Donbas industry, he is unlikely to have the resources to make serious investments in the region. Kurchenko also began by paying off debts and promising to find sales markets, but he ultimately did not live up to the hopes of the Kremlin.

The new investor will also be unable to radically change the situation. Donbas will remain a gray zone, which prevents its enterprises from joining the global market, where the metallurgy sector is doing well. It’s more likely that Kurchenko’s makeshift setup will be replaced with something more stable and more rational.  

Major Russian business considers Donbas assets too risky due to the threat of sanctions. Yurchenko may therefore become an intermediary for the injection of Russian budget funds into the Donbas economy. The Russian authorities may also find other ways of providing indirect assistance. The Ukrainian economist Alexei Kushch has asserted that there is a transition under way in the Donetsk and Luhansk economy to a model where “representatives of Russian financial-industrial groups are simply informed that they and their companies are now responsible for developing certain enterprises” in the breakaway regions.

Indefinite as Yurchenko’s plans may be, it is already clear that the introduction of a new investor strengthens Russian control over the economies of Donetsk and Luhansk, previously Kurchenko’s fiefdom. If anything, this is good news for local enterprises, which are receiving some basic guarantees. We may also see some representatives of the new management ascend to the region’s political elites.

The changes have already elicited a strong response from the local opposition, which views the appearance of a new investor as a clumsy attempt to placate mass discontent, and suspects Yurchenko of having ties to Viktor Medvedchuk, a Ukrainian politician believed to be close to Russian President Vladimir Putin.

For now, it’s difficult to say whether Medvedchuk is really linked with the new economic bosses of the Donetsk and Luhansk regions. Since he is currently in Kyiv under house arrest—and sanctions—he is unlikely to want to advertise such connections. At the same time, audio surveillance recordings published in Ukrainian media indicate that Medvedchuk has been in close contact with the elites of the breakaway regions and their Russian overseers since 2014, and his business is integrated into the local economy. It would not be surprising, therefore, if his influence in the Donbas increased.

Kurchenko’s departure from the Donbas is also a signal that the Donetsk and Luhansk regions are moving on from the wild days of economic piracy to more orderly exploitation schemes. The prospects of reintegrating the region under the Minsk accords are growing more illusory.

Donetsk and Luhansk are becoming another protectorate of Moscow, and the status quo may be preserved for decades to come. The Kremlin now needs to optimize its control over the territories, and it is hoping to do so using Russian-appointed executives who could become intermediaries between the Donetsk and Luhansk authorities, the Kremlin, and big business in order to create a paternalist showcase of the “Russian Donbas.”