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How Russia finances the Ukrainian rebel territories

[photo1] The roubles are rolling in -- a 50 rouble note that a man from the large city of Luhansk has received as part of his salary in December, 2015

Since 2014, two unique state entities have been established in eastern Ukraine. They call themselves the "People's Republics" of Donetsk and Luhansk. But both the pro-Russian propaganda in the "republics" and the Russian President Vladimir Putin [63] think that a different name is more appropriate for the Ukrainian conflict region: "Novorossiya", in English: New Russia.

This conception -- based on ethnicity and culture and entirely against international law -- also explains what we know so far of Russia's support for the separatist territories.

Numerous studies have shown that, between the spring of 2014 and the summer of 2015, it was the Russian army who led the alleged separatists to one military victory after another against Ukraine. But hardly any information is available as to how the self-proclaimed People's Republics with their 3.8 million inhabitants have been able to cope economically and socially ever since.

Even before the conflict, industry in the region was mostly dilapidated. Since then, it lies almost entirely in ruins. Ukraine has cut the region off from almost all welfare benefits and the banking system. Officially, Russia only delivers relief supplies approximately twice a month in its now famous "humanitarian convoy" of several dozen white trucks. Overall, this is not nearly enough to guarantee a more or less intact life in an area the size of the German Bundesland Thuringia.

[photo2] The airport of Donetsk today -- the majority of the economic infrastructure of the regions in the east of Ukraine that are supported by Russia is similarly derelict

This extensive BILD investigation shows why millions of people can still lead a more or less bearable life in these areas.

Through numerous interviews with the concerned local population in the cut-off territory of "New Russia", insights into documents of the "People's Republic" and exclusive intelligence findings, a detailed picture has emerged of the extraordinary involvement of Russia in the affairs of its western neighbour.

The "People's Republics" were never financially viable

Although separatists in the regions of Donetsk and Luhansk already declared their independence from Ukraine in April 2014, the government in Kiev maintained most state services until June and partly July of the same year. The salaries for public servants continued to be paid; citizens could still use their accounts with Ukrainian banks.

It was only in the summer, when it became obvious that the regions could not be brought back under its control, that Ukraine adapted to the situation and ended most payments -- except pensions and benefits.

At that time, Alina, a young teacher, was living in the large city of Horlivka. She worked at the Elementary School No. 16. In July 2014, she received her last teacher's salary of about 117 euros in her Ukrainian bank account. After that, Ukraine stopped paying her salary. With the beginning of the new school year, the new leadership promised to continue paying all teachers -- but independently of their working age, and only 78 euros.

[photo3] The teacher Alina from the city of Horlivka, interviewed by BILD in December 2015. She has, in the meantime, fled to the city of Kramatorsk

The reality turned out to be different. Between September 2014 and February 2015, only one salary was paid to Alina and her colleagues. "That was at the beginning of the school year, to keep up the impression of normality, and so that we would come to work at all," says Alina. After that, the funding of all social services in both "People's Republics" broke down completely, because the ambitious aims of the new rulers were totally unrealistic.

Three more of those concerned confirmed to BILD that virtually no salaries and pensions were paid in the regions controlled by separatists in the winter of 2014-15.

The next salary, plus back pay for November only, did not follow until March 2015, both paid in Ukrainian hryvnia. It seemed, Alina says, that the Ministry of Education of the "People's Republic of Donetsk" was ordered to pay out as salaries the money reserves that had been held back until then. "They didn't seem to need the Ukrainian money anymore," the teacher remarks.

[photo4]

From April 2015 on, salaries began to be paid regularly again, and the salary losses of the previous months were also paid back. Area-wide (from June), they were paid in brand new Russian rouble notes and coins.

The old Ukrainian hryvnia salaries were converted 1 to 2 into new rouble salaries and then frozen. The actual exchange rate is one hryvnia to three roubles (in December 2015). This was a severe loss for millions of people, especially given that the food prices were adapted to the Russian standard and hence almost tripled.

[photo5] Rouble notes and the fragment of a "grad" missile, by Alina from Horlivka

Since the banks were no longer operating from summer 2014, the school director had to pick up the salaries each month at the "Republic's" Ministry of Education and then hand them out to the schools' teachers in cash. Alina does not know where the 4,000 roubles -- approximately 51 euros -- per month for the public servants came from.

[photo6] Alina also shows us rouble coins. They were mostly minted in 2014 and were handed out in the occupied territories since April 2015

"The banks that paid out pensions and the money transporters were heavily guarded by soldiers with guns." Today, armoured tracked vehicles still follow the columns of Russian army trucks that arrive in Horlivka and other cities once a month with millions of roubles, a witness said to BILD.

Russia finances everything, even job-creation measures

Much has happened in the self-proclaimed "independent (!) states" since April 2015. The majority of the economy has been nationalized. Salaries in the private and public sector, pensions and benefits for single and disabled persons etc. are paid more or less regularly in roubles.

In September 2015, the "People's Republic of Luhansk" officially declared the rouble to be, by law, the state currency. Similar proclamations came from Donetsk in October.

Even job-creation measures were then undertaken with Russian money in the occupied territories. Maria lives in the city of Antratsyt in the Luhansk region, close to the Russian border. After troops loyal to Russia took over power, she lost her job, because she did not agree with the new rulers on several issues.

[photo7] Maria T. is 23 and lives in the city of Antratsyt in the self-proclaimed People's Republic of Luhansk. BILD talked to her via Skype

Since September 2015, she is part of a job-creation measure that the government in Luhansk has initiated for tens of thousands of newly unemployed persons. For cleaning class rooms and sweeping the streets she is now earning 2,436 roubles, which is about 30 euros, per month

[photo8] Maria is holding 50 rouble notes up to the camera: her mother's pension, of about 30 euros, has to suffice for Maria and her son for the month

"I can buy five chickens from that, that's all." At the time of the interview, at the end of December 2015, she had also not yet received her salary for November. In the local job centre, a few days earlier, she was told: "We are sorry, but the money comes from Moscow, it's probably cancelled or will come later."

[photo9] It looks like a lot, but is not even 30 euros. Maria's food money for herself and her son Ukrainian-Russian double pensions are essential for survival

Maria and her one-year-old son can only survive, because the young mother has her mother's Russian "republic pension" that her mother gives to Maria in cash. Like many other pensioners, Maria's parents drive to the Ukrainian part of the regions of Luhansk and Donetsk once per month to receive their regular pensions in hryvnia. This is only possible in the free part of the region and requires a journey of several days, taking the travelers over the frontline.

[photo10] Maria's mother's rent for November 2015. The batch has a red "December" 2015 stamp in Ukrainian and a blue label by the "Bank of the People's Republic of Luhansk" in Russian

BILD is in contact with more pensioners from the territories occupied by Russia. Every month they face the risks and exertion of crossing the frontline. In the city of Luhansk, one of these persons -- who wishes to remain anonymous -- receives a pension of 1,243 hryvnia (50 euros) and 2,248 roubles (28 euros) per month. That is hardly enough for the most essential needs.

In the Donetsk region alone, 25,000 people cross the contact line between Ukraine and the occupied territories each day, Pawlo Zhebriwskyi, Governor of the region, tells BILD. Of the 638,000 registered refugees in the region, 250,000 in fact mostly still live in the "Republics".
It is safe to assume that many of them are pensioners and benefit claimants who use their status as refugees in order to cope financially with their everyday lives.

[photo11] Pawlo Zhebriwskyi, Governor of the city of Kramatorsk, talking to BILD

However, Zhebriwskyi points out that Ukraine does not intend to prohibit this. "Double pensions are surely a problem," he says. But, the politician explains, it is not in the interest of Ukraine to punish its citizens in the occupied territories. The raids at the border checkpoints are merely directed at smugglers who want to profit from people's misfortunes or "support the terrorists with money".

A high-level security official also justifies Ukraine's policy of not taking action against the double pension recipients, even though, in theory, they could: "Who wants to blame these people?" They live under rough conditions in the occupied territories, and their Russian "republic pensions" are "not particularly high. It is very hard to survive there, even if you receive both pensions."

The tweet shows smuggled goods, as well as money and credit cards, seized by Ukrainian border police.

[twitter] English Luhansk
@loogunda
[edited]#Maryinka CP: Border Guards detained a man heading occ territory w/bank cards, blank UA passports, ~90000UAH
1:59 AM - 19 Dec 2015

In contrast to the pensions, Ukrainian social benefits are, as of December 2015, tied to residency in the area controlled by Ukraine. More than 300,000 families from the now occupied territories received those benefits until the end of 2014, Vitaly Muzychenko from the Ukrainian Ministry for Social Affairs explains to BILD. Since then, the payments for the regions of Donetsk and Luhansk have fallen by about 70 percent.

[photo12] Vitaly Muzychenko, Director in the Department for Social Benefits of the Ministry for Social Affairs in Kyiv

At the same time, payments in other parts of Ukraine have risen by exactly the same number, which means that the affected persons of the 1.5 million registered domestic refugees mostly still claim these benefits, according to the Director.

He also thinks it is possible that tens thousands of these persons have merely registered as refugees, but still live in the "People's Republics". In practice, however, it is almost impossible to verify this or even to prevent it.

Apparently, hundreds of thousands of Ukrainians in the self-proclaimed states in the east of Ukraine, supported by Russia, still claim Ukrainian social benefits and pensions to somehow make ends meet for themselves and their families. This is how ruinous the welfare system is in the occupied regions - despite the financial support by Russia.

The source of the money for eastern Ukraine

The question remains, of where the many millions of euros for salaries come from each month, and how they arrive in the "People's Republics". The Ukrainian intelligence service is also interested in this question. It is particularly keen on interrupting the stream of cash to 30,000 or more fighters, of which around 17,000 are paid Russian mercenaries.

BILD met with a high-ranking representative of the intelligence service in Kiev and gained exclusive insight into the service's knowledge about the topic.

It is alleged that virtually the entire civil state budget of the separatist territories is organized via funds for "humanitarian aid" from Russia. The Russian government coordinates these money sources.

[photo13] 2,000 roubles in 100- and 500-rouble notes. The photograph was sent to BILD by an interviewee from the separatist city of Luhansk.

According to BILD's investigations, there is indeed in Russia an "Inter-ministerial Commission for the Humanitarian Support of the Affected Areas in the Southeast of Donetsk and Luhansk" that was founded on December 14, 2014.

The Commission, which is attached to the "Ministry of Economic Development of the Russian Federation" has held its meetings secretly, in contrast to other Commissions such as the also newly established "Crimea Commission".
-- Three and a half months after the establishment of the Commission, the area-wide supply of salaries in roubles for the "affected areas" began.

Funding of the anti-Ukrainian forces in Donbass

According to intelligence service information, the money for the "terrorists" -- as Ukraine calls them -- or the "United Forces of New Russia", respectively -- as they are called in the occupied territories -- mainly comes from two sources:

[1] From "Non-Government Funds" of the Russian Federation that, upon close inspection, turn out to be very close to the government in Moscow.

[2] From former Ukrainian politicians and oligarchs who fled to Russia after the downfall of the pro-Russian President Viktor Yanukovych, and who are now working to destabilize Ukraine.

"Individual persons or organizations pay for their preferred units". These funds are coordinated and topped up by the Kremlin or the local Russian intelligence in the, effectively, controlled east of Ukraine.

The new rulers in the concerned territories do not deny Russia's overwhelming influence on their state budgets. The influential "Donetsk People's Republic Member of Parliament" Alexander Khodakovsky said in an interview with a Russian newspaper that 70 percent of the "Republic's" budget stems from Russia's "financial aid".

The real numbers could be even more revealing. BILD talked to an employee of the city council of Stakhanov, a city in the occupied region of Luhansk with 77,000 inhabitants.

She revealed that merely 5 to 7 percent of the city budget stems from taxes and the "Republic's" means. More than 90 percent of the roubles available in December 2015 were "imported from outside". The civil servant can only explain this by assuming that Russian money was paid to the city.

This is how the money gets to the Donbass

For moving money to the Ukrainian Donbass, the Kremlin primarily used banks in the Georgian region of Abkhazia, which has been occupied by Russia since 2008. The banking system developed there, says the Ukrainian intelligence service, provides the structures that are needed to divert billions of roubles from the state budget and other sources and to redesignate them.

Nevertheless, in addition to online payment methods, the money transported into occupied eastern Ukraine almost exclusively took place in cash. The closed-down banks in the regions of Donetsk and Luhansk have hardly been reactivated by Russia at all.

[photo14] The "Bank of the People's Republic of Donetsk" branch in Donetsk advertises the Russian online payment system "WebMoney" from the computer game "World of Tanks". Regular banking business is not possible

Approximately seven million 50-, 100-, and 500-rouble notes are required each month in order to pay the salaries that Russia took over. The intelligence service mostly knows how this money is travelling. The five tons of bank notes are not delivered by the "humanitarian aid convoy" that arrives every few weeks. The latter mostly serves as propaganda. Also, Ukrainian customs is now allowed to examine the contents of the convoy.

Instead, heavily guarded trains bring tons of bank notes and coins into Ukraine -- illegally, of course -- once a month. On board these trains are not only the salaries for civil and military work, but also tons of ammunition and other war material.

According to Ukraine, the money is transported by heavily guarded military convoys from the three big train stations into the cities and villages of the occupied Donbass. There it is paid out to the people in banks or state offices -- or nationalized offices.

[photo15]

There is evidence that these trains of the Kremlin-controlled Russian Train Line actually exist and that they have, at least, ammunition on board. Pro-Russian rebels posted a picture in April 2015 that showed them at the train station of Sukhodilsk. Clearly visible in the background: carriages of the Russian train company, containing crates of ammunition.

[photo16] Rebels at the train station of Sukhodilsk in eastern Ukraine. Behind them is a train of the Russian public train company, fully loaded with ammunition.

Salaries in Ukraine cost Russia one billion euros per year

According to BILD's calculations, Russia has to spend approximately 79 million euros per month in order to pay the public service salaries and the pensions in the controlled territories.

BILD refers to official documents of the two "People's Republics" and individual statements about salaries in various areas.
For the pensions of 653,000 people in the occupied region of Donetsk and 425,791 pensioners in the region of Luhansk alone, Russia pays 2,418,378,168 roubles per month -- that corresponds to just over 30 million euros.

[photo17]

The 30,000 Russian and Ukrainian fighters, who are still working for the "People's Republics" or their donors, are particularly expensive. Whereas a teacher earns around 50 euros per month in the "Republics", a soldier -- depending on his rank -- earns between 90 and 465 euros, which is up to nine times as much.

Even if Russia's expenses were limited to the salaries in the public, mostly nationalized , sector and individual social services such as pensions, these costs of approximately one billion euros per year are comparable to the state budgets of countries like Armenia or the Republic of Moldova.

This corresponds to 0.6 % of yearly expenses in the Russian state budget.

However, these expenses are probably only one part of Russia's overall expenses for the supported regions in the east of Ukraine. Subsidized gas, fuel, oil, and food, humanitarian payments in kind and also the ammunition for continuing the war against Ukraine should also amount to several hundred millions euros per year.

Deception of the international community

The details of Russia's funding of the "separatist regions" in eastern Ukraine that BILD has researched reveal the true intentions in Putin's government -- in two respects:

[1] First, they are proof of a continuous and obvious violation of the territorial sovereignty of Ukraine, and they expose the tight links between the self-proclaimed "People's Republics" and the Russian Federation. These links consist in nothing less than the east-Ukrainian conflict zone's total financial dependence on Moscow.

[2] It can, second, be seen that Putin's Russia is not in the least interested in implementing the signed Minsk Agreement from September 2014. The agreement intends for the medium-term reintegration of the corresponding regions under Ukrainian control. Instead, Russia's policy can rather be considered as the long-term stabilization of the internationally unacknowledged construct of the "People's Republics" of Donetsk and Luhansk and the stabilization of their status quo.

[photo18] Putin rules the biggest country on earth. Nonetheless, Russia has annexed several additional territories since 2008, partly by use of force

To sum up, it was apparently more than "foresight" by Vladimir Putin when he called the concerned areas "New Russia" in 2014. Taking a closer look at the welfare situation in the "rebel areas", they are best described as a colony of Russia that was established and is kept alive by Moscow.

We would like to thank the Ukrainian blogger "English Lugansk", who supported BILD with its research in Donbass.