Industrial enterprises are idle, mines closing, with the number of officially and unofficially unemployed reaching 260,000.
This is why it is planned to create two special economic zones (SEZ) – Donetsk and Azov, along with a number of priority development territories, including 16 mining communities and two agricultural areas, Volnovakha and Maryinka districts.
Two-thirds of Donetsk oblast’s population live in these areas. The region also produces three-fourths of its industrial and one quarter of its agricultural products, making up 88% of its foreign trade turnover.
The free territories in Donetsk and Mariupol have been designated for establishing economic zones where special rules will apply. Imported raw materials and equipment will be customs and VAT exempt as will all exports from the zones.
The tax approach is somewhat different in the priority development territories, stipulating that the raw materials and hardware for investment projects will be import/export tax exempt for five years, provided the investment totals over $1 million.
Debates on the decree and the corresponding bill expose new obstacles. Already at the preparation stage the tax service demanded that the total sum of tax revenue not be reduced. In other words, even if the idle enterprise receives privileges for the production increase project, it will still have to pay the same amount of taxes. Potential investors favor investing money into a new company instead of covering the debts and tax liabilities of old ones.
Oleksandr Khriakov, Chairman of Donetsk Regional Small and Medium Business Association, said: “We will support such free economic zones, because we desperately need changes. However, we have many reservations. For instance, a special certificate allowing one to do business in this zone is stipulated. But is it not part of the territory of Ukraine or are the Ukrainian laws not valid there? Why does a working enterprise need another permit? We are alarmed by the fact that the authorities in certain cities subject to preferential investment procedures show anti-business attitudes. And who can guarantee that they will change their mind?”
Meanwhile, small businesses do not have much to hope for in these territories: only investors worth at least a million dollars will be income tax exempt. They will, in turn, attempt to receive a state guarantee on invested money. Considering the overall political situation, they prefer to wait and see the outcome of the 1999 presidential campaign.
Deputy chairman of Donetsk oblast state administration Andriy Kliuyev declares that the first results of such preferential investment procedures will come two or three months after their enactment Realists say it will be longer: 1.5 - 2 years: serious investment will start bringing profits only then. As for the special economic zones, it will take three or four years to build up the territory, which now consists of empty hectares in the streets of Donetsk and Mariupol.
When it comes to the special economic zones, industrialists do not even try to conceal their skepticism. Every investment project must undergo expert evaluation and receive permits from dozens of state institutions, the tax service, ecology service, and fire brigade included. Finally the special council for the territories’ development must confirm the project.
“Every director knows how much money and nerves will remain in the offices of bureaucrats in order to receive a license!” one of the supervisors said, hinting at unlimited opportunities for violations and abuse of power.
In their turn, people’s deputies representing the Communist Party and a given oblast in Parliament insist on more strict control so that the privileges granted would not open a legal way to evade taxes.
The delegation of people’s representatives from the Chinese province of Guanzhou, where three out of five free economic zones are situated, visited Donetsk in June. The effect of such zones in China is impressive: per capita income increased 15 times in 15 years. The province with 80 million population has practically solved the unemployment problem.
Is this Asian miracle possible in the Ukrainian steppes? The question is inappropriate, because they spent $9 billion on developing social, industrial, and transport infrastructures. 80% of this money came from China. During the first two years the enterprises were freed from income taxes completely. Later they paid an extremely small fee. Compare that with the Donbas: 20% income tax rate instead of 30% is not the bait to lure investors, especially when they know they will not find a single proper hotel within 200 kilometers of the area.
“The effect of such tax concessions may be felt in three to five years. Meanwhile, we can hardly make it through the summer,” states Valery Miller, head of the Donetsk independent trade unions’ association. “The situation at the enterprises is such that people will wait until September and then they will riot or strike, I don’t know what, but it will be terrible.”
The proclamation of free economic zones in miners’ settlements is meant torovide job placement for ex-miners. Meanwhile, the efforts to secure jobs in fairly promising spheres – public services and fast food – have failed due to lack of clients able to pay. Investors will obviously face the problem of trading their products and services. At the same time, there are 9,000 openings for miners in the Donetsk coal enterprises, but unemployed miners do not rush in: they demand jobs with timely wage payments.
The decree setting up free economic zones and introducing special investment procedures is a serious pre-election move, demonstrating Kyiv’s attention to the problems of this industrial region. It is also the trump card in the ongoing presidential canvassing game. But people are tired of words and fine gestures, which more often than not have nothing to do with real life.






