The impact of the war on the economy of the eastern cities of Ukraine: cases of Mariupol, Kramatorsk and Sloviansk

By Liudmyla Heraimovych

Introduction

The annexation of the Crimea and intensified hostilities in eastern Ukraine have negatively affected the economic and social development of the country. However, the most significant economic downturn occurred in areas directly involved in or bordering the zone of the military conflict. Among the main factors that caused the economic crisis in the east., we can define sharp decline in industrial production due to the closure, displacement or suspension of business, loss of infrastructure, reducing the number of jobs, a significant drop in income and the intensification of forced migration. This study is an attempt to assess the extent of the conflict's impact on the economic situation of Donbas local communities through the experience of the three cities - Mariupol, Kramatorsk and Sloviansk - and to provide practical recommendations to address problems identified based on the analysis of the collected data.

Fig. 1. Gross regional product per 1 person in actual prices, UAH1

Fig. 2. Real income of the population, % to the previous year2


1 Source: State Statistics Service of Ukraine.
2 Ibid.

Population (human capital)

Skilled workforce and effective consumer demand are indispensable elements for ensuring economic growth. As well as the balanced gender-age structure of the population, that makes another important prerequisite for sustainable urban development. The factor of internal migration significantly changed the demographic composition of the eastern cities that must be considered not only by the local authorities while implementing effective and reasonable policy, but also by representatives of local business and NGOs working in the conflict zone.

Mariupol is one of the largest settlements in Ukraine. Even though the city has a developed economy and is potentially attractive to economic migrants, it still loses its population each year: in the period from 2013 to 2016 the number of inhabitants decreased by 9.5 thousand people. This is due to high mortality rates, low fertility rates and insufficient migration of able-bodied population from other settlements. In 2014, almost 59 thousand internally displaced persons (hereinafter - IDPs) were registered in Mariupol, and this indicator continues to grow. At present, the IDPs make one-fifth of the total number of inhabitants of the city. Another persistent trend is the increase in the number of pensioners in the general population structure: in 2017, 56% of IDPs registered in the city were pensioners.

Fig. 3. Population Dynamics, Mariupol (City Council)3

IDP share,%

Fig. 4. Number of IDPs registered in Mariupol, people4


3 Source: Department of Statistics in the Donetsk region.
4 Source: according to the Mariupol City Council.

Kramatorsk currently is the administrative centre of the Donetsk region. According to 2017 data, the city has 189 thousand inhabitants, about 30% of which are forced migrants. Despite the fact that a significant part of the economically active IDPs population and local officials have moved to Kramatorsk, the number of inhabitants of the city is constantly decreasing and the demographic burden on the working population is increasing.

Fig. 5. Population Dynamics, Kramatorsk (city council)5

IDP share, %

Fig. 6. Number of IDPs registered in Kramatorsk, persons6


5 Source: Department of Statistics in the Donetsk region.
6 Source: according to the Kramatorsk City Council.

The population of Sloviansk is around 117 thousand people, and since the beginning of the military conflict, the city has lost about 15% of its inhabitants. Almost 35% of the city population is made of IDPs and 55% are pensioners. Both categories of the population usually require state support: additional resources needed to finance the social sphere (social housing, health care, etc.), which potentially creates an additional burden on the municipal budget.

Fig. 7. Population Dynamics, Sloviansk7

IDP share, %

Fig. 8. Number of IDPs registered in Sloviansk, people8


7 Source: according to the Sloviansk City Council.
8 Source: Department of Social Protection of the Donetsk Oblast.

Local economy

Prior to the conflict, Donetsk and Luhansk region created just over 14% of national GDP, in 2015 the total contribution of two regions decreased by half. After two years of armed confrontation, the economy of Donetsk region only in nominal terms decreased by 30%, and by 57% in Luhansk region, compared to 2013.

We can distinguish two groups of factors that reinforce each other significantly and affect the economic situation of Donbas.

  1. Local (warfare factors): the destruction of established business ties, loss of enterprises, economic losses due to damages of industrial and social infrastructure, migration of population to other regions, reduction of investment attractiveness, associated with high risk of loss or destruction of economic assets, the unpredictability of political the situation.
  2. Macroeconomic factors: devaluation of the hryvnia; high inflation; decline in domestic solvent demand; fluctuations of world prices on export groups of goods; the existence of the so-called "corruption" tax; the instability of the legislative framework; high administrative costs of doing business, etc.

Fig. 9. Dynamics of nominal GRP, % to previous year9

Fig. 10. Regions' contribution to Ukrainian GDP, %10


9 Джерело: Державна служба статистики України
10 Ibid.

Донецька і Луганська області характеризуються високим рівнем урбанізації (91% і 87% відповідно, середній показник по Україні – 69%), де міста відіграють вирішальну роль у створенні доданої вартості. Слід також зазначити, що великі міста, маючи більш диверсифіковану економіку, в цілому краще і швидше адаптуються до економічних потрясінь, ніж невеликі населені пункти.

Маріуполь - промисловий центр Донецької області, в якому зосереджено великі підприємства у сфері металургії та машинобудування. У 2013 році в місті реалізовано 35% всієї промислової продукції, виготовленої в Донецькій області, у 2016 році цей показник становив вже 78%. Така суттєва зміна пов’язана з виключенням із економічної статистики інших великих індустріальних міст, що знаходяться на непідконтрольній Україні території, та з реєстрацією підприємств групи «Метінвест» у Маріуполі. Виробнича сфера міста орієнтована на експорт, що робить її залежною від попиту та цін на міжнародних ринках і курсу валют (експортери виграють від знецінення національної валюти та курсових різниць: доходи в доларах чи євро, витрати – у гривнях).

Рис. 11. Обсяг реалізованої промислової продукції, м. Маріуполь11

% of that of the Donetsk region.

Рис. 12. Оборот роздрібної торгівлі, м. Маріуполь12

% of that of the Donetsk region.


11 Source: Department of Statistics in the Donetsk region.
12 Ibid.

The volume of retail trade also showed a positive trend: in 2016, in nominal terms, the corresponding indicator increased by almost 29% since 2013. The retail clients are mostly locals, whose purchasing power is growing every year, but given the high inflation, the changes are not very significant. Small business was affected in the most ways for the trade is the main source of its profit. The number of small businesses in the city declined by 6.5% compared to 2013.

Fig. 13. Income of the population of Mariupol, UAH13

Table 1. The number of operating enterprises in Mariupol14

2013 2014 2015 2016
Large 7 6 9 6
Medium 125 125 124 134
Small 2771 2702 2682 2593
Overall 2903 2883 2815 2733

The main volume of investments in Mariupol is carried out by large enterprises, the production capital intensity of which constantly requires investment to ensure the stable operation of the companies. The almost two-fold growth of investment volumes in 2016 compared to 2013 is more due to the peculiarities of statistical accounting: for the large companies from other settlements were registered here and not because of an increase of the investment rating of the city.

Fig. 14. Dynamics of capital investments Mariupol, UAH million15

% of that of the Donetsk region.


13 Source: according to the Mariupol City Council.
14 Source: Department of Statistics in the Donetsk region.
15 Source: Department of Statistics in the Donetsk region.

In the Kramatorsk economy, an important role is played by the manufacturing companies that are focused on foreign markets. In 2016 the city sold 32 billion hryvnias of industrial products: 15.5% of the Donetsk region, increasing this figure by 3.5 times from the 2013 level. To a greater extent, such growth is due to legal re-registration of large enterprises from the temporarily occupied territories, and not with the expansion of the existing ones.

Fig. 15. The volume of industrial production sold, Kramatorsk16

% of that of the Donetsk region.

Fig. 16. The turnover of retail trade in Kramatorsk17

% of that of the Donetsk region.


16 Source: Department of Statistics in the Donetsk region.
17 Ibid.

At the same time, retail trade turnover has not increased that rapidly, demonstrating an increase of 1.5 times the pre-crisis figure in nominal terms. The income growth against the backdrop of inflation was not too noticeable, but the retail sector received an additional development impetus because of increasing number of solvent consumers among the IDPs, which allowed the small businesses to continue their commercial activities and not to close massively.

Fig. 17. Income of the population of Kramatorsk, UAH18

Table 2. The number of operating enterprises in Kramatorsk19

2013 2014 2015 2016
Large 2 4 7 6
Medium 65 63 69 71
Small 981 994 1054 971
Overall 1048 1061 1130 1048

За останні роки в місті не було засновано нових компаній, що могли б створити додаткові робочі місця і забезпечити потік інвестицій в муніципальну економіку. Тому інвестиційні показники міста не зазнали суттєвих змін і були відносно постійними: після падіння в 2014 році, обсяги інвестиції почали відновлюватись, у 2016 році номінальний показник перевищив 1 млрд. гривень, що становило 105,8% від значення 2013 року.

Рис. 18. Динаміка капітальних інвестицій м. Краматорськ, млн грн20

% від показника Донецької обл.


18 Джерело: за даними Краматорської міської ради.
19 Джерело: Головне управління статистики у Донецькій області.
20 Джерело: Головне управління статистики у Донецькій області.

У Слов’янську немає великих експортоорієнтованих підприємств, які б приносили місту значні доходи. Відтак падіння обсягів промислового виробництва було найбільш помітним: у 2016 році показник реалізації продукції становив трохи більше 50% від аналогічного у 2013 році.

Рис. 19. Обсяг реалізованої промислової продукції, м. Слов’янськ21

% від показника Донецької обл.

Рис. 20. Оборот роздрібної торгівлі, м. Слов’янськ22

% від показника Донецької обл.

The retail trade has become an important source of development of the local economy. This sphere was able to recover after a crisis fall, and in 2016 the growth amounted to 17% or 142 mln. UAH from the 2013 level. The restrictive factors for the industry were the reduction of real incomes and reduction of the number of consumers (the city lost more than 19 thousand people since the beginning of the conflict). The decrease in the number of small businesses was just over 6% from 2013, and the number of the medium-sized enterprises, which gave the work a fairly large part of residents, has also shown a significant decrease.

Fig. 21. Income of the population of Sloviansk, UAH23

Table 3. The number of operating enterprises in Sloviansk24

2013 2014 2015 2016
Large
-
Medium 36 40 39 29
Small 735 696 699 691
Overall 771 736 738 720

21 Source: Department of Statistics in the Donetsk region.
22 Ibid.
23 Source: Department of Statistics in the Donetsk region.
24 Ibid.

Despite the difficult economic conditions, in 2016, the volume of capital investments into economy amounted to 182.5 million UAH, showing an increase of 32% from the level of 2013, which in quantitative terms is around 44 million UAH. The positive investment dynamics in 2015 allows us to predict the stabilization of the economic situation of the city in the long run.

Fig. 22. Dynamics of capital investments Sloviansk, million UAH25

% of that of the Donetsk region.


25 Source: Department of Statistics in the Donetsk region.

Municipal Finance

In contrast to the indicators of economic development, which were quite varied, the budget sphere of the cities studied is characterized by common trends. The city budgets were balanced by income and expenditure, with the exception of a slight budget deficit in 2013. During 2014-2016, in nominal terms, budgets grew mainly due to increased revenues from the official transfers and an increase in tax revenues.

Fig. 23. The dynamics of the revenues of local budgets mln UAH26

Fig. 24. The local budget expenditures per 1 inhabitant, UAH27

The structure of the income is dominated by transfers: 50% for Mariupol budget, 63% for Kramatorsk and 64% for Sloviansk; and the income tax (hereinafter - PIT): 30%, 21%, and 17% respectively28. The significant growth in PIT (personal income tax) revenues to all of the local budgets (except Sloviansk in 2014) in 2013-2016 was due to changes in legislation (the normative charges of PIT increased by 10% in 2015 and the tax rate increased from 15% to 18% in 2016); increase in nominal wages due to inflation and legal registration of large enterprises in Mariupol and Kramatorsk, which started to pay income tax to the budgets of these cities.

The expenditures account for the largest share of social protection and securitycosts: 22% in Mariupol, 33% in Kramatorsk, 36% in Sloviansk; education costs: an average of 25% for all cities; and health care: about 18%. Most of the expenditures are the operating costs that are allocated for salaries of public employees, utility payments, public subsidies and so on.

Table 4. Some social indicators29

The number of hospital beds for 10 thousand people
The number of pupils in schools, thousand people
The number of children in pre-schools, thousand people
2013
2016
2013
2016
2013
2016
Mariupol
77,0
79,1
35,6
35,7
15,8
14,0
Kramatorsk
54,7
54,3
15,2
15,7
5,9
5,6
Sloviansk
71,6
69,5
10,7
10
3,6
4,1

Even taking into account the fact that the emergence of IDPs in the studied cities did not cause excessive pressure on social infrastructure, the financing needs for development projects (affordable housing, programs for economic and social integration of IDPs, environmental projects, etc.), which are especially actualized in post-conflict cities, cannot be fully addressed only at the expense of revenues of local budgets and state subsidies. Therefore, some eastern communities (Mariupol, Kramatorsk, Sloviansk – only 2 projects) successfully co-operate with international donors and non-governmental organizations on attracting additional funding. In order to ensure better interaction between the government and civil society and increase the efficiency of spending of budget funds, in Kramatorsk the participatory civil budget has been launched in 2017, and in Mariupol (the city target program has not yet been approved) and Sloviansk this mechanism is scheduled to be implemented in 2018.


26 Source: reports on the implementation of the budget of Mariupol, Kramatorsk, Sloviansk in 2013-2016
27 Ibid.
28 The average figures for 2013-2016 are calculated.
29 Source: Department of Statistics in the Donetsk region.

Conclusions

  1. The military actions in the East began simultaneously with the deterioration of the overall economic situation in Ukraine. As a result, a rapid economic downturn has taken place in the Donetsk and Luhansk regions, and from 2016 there has been a slight economic recovery.
  2. Donetsk and Luhansk regions are highly urbanized regions, therefore the cities are the main centres of economic activity. The war has contributed to an increase in economic inequality between eastern settlements and the concentration of economic flows in large cities.
  3. The demographic changes caused by the emergence of IDPs only accelerated the pre-conflict trend: the number of urban residents is reduced, and the ageing of the population takes place.
  4. The analysis of statistical information has shown that migration of IDPs does not predominantly create an additional pressure on social infrastructure (schools, kindergartens, hospitals) of investigated cities, however, as numerous studies indicate (for example, the report of the International Organization for Migration) displaced persons often need housing and employment assistance.
  5. Економіка східних міст, що орієнтована на енерго- та ресурсозатратну промисловість, у сучасних умовах не може забезпечити високу рентабельність, у зв’язку з чим відбувається повільне, але постійно зменшення кількості робочих місць. Тому існує запит на реалізацію місцевих програм, що орієнтовані на перекваліфікацію та підвищення конкурентних переваг місцевих жителів, в т.ч. ВПО, на ринку праці.
  6. Для невеликих населених пунктів необхідні індивідуальні стратегії, які буде спрямовано на подолання структурних диспропорцій в місцевій економіці, що особливо важливо для мономіст Сходу.
  7. З метою розробки локальних програм розвитку та налагодження продуктивної співпраці між владою, громадами та представниками неурядового сектору існує потреба у постійному моніторингу великої кількості соціально-економічних параметрів, що ускладнюється відсутністю або недостатньою кількістю необхідної інформації на веб-сайтах органів місцевого самоврядування.

Рекомендації

Для представників місцевої влади:

  • враховувати демографічні тенденції та гендерну складову при розробці програм і стратегій розвитку;
  • розробити програми перекваліфікації населення та стимулювання створення нових робочих місць;
  • розміщувати у відкритому доступі актуальну інформацію щодо економічного та соціального становища населених пунктів;
  • залучати громадськість до процесу бюджетного планування і розподілу коштів, в т.ч. шляхом впровадження партисипативного бюджету;
  • створювати умови для побудови ефективного діалогу між владою, місцевим бізнесом і громадою;
  • залучати до розробки планів (стратегій, концепцій) розвитку профільних експертів та громадськість.

Для громадських організацій:

  • здійснювати попередню оцінку потреб та проблем громад і залучати місцевих жителів до розробки проектів;
  • збільшити кількість проектів, особливо економічних, що орієнтовані на жителів невеликих міст Донбасу;
  • впроваджувати освітні проекти, що будуть сприяти набуттю вмінь та навичок, які найбільш затребувані на ринку праці;
  • проводити інформаційні заходи для місцевої влади щодо можливостей залучення грантового фінансування локальних проектів та особливостей співпраці з міжнародними донорами.

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