In Ukraine, a crisis of bullets and economics

By Anthony Faiola, Published: April 16

The Washington Post

DONETSK, Ukraine — As pro-Russia militants stormed City Hall here Wednesday, the interim Ukrainian government was battling more than just a separatist problem.

Kiev’s credibility is on the line as the central government tries to persuade residents fearful of economic hardship that their future lies with Ukraine rather than Russia.

Scenes of armed occupation unfolded Wednesday across eastern Ukraine. Besides the takeover of City Hall in this city of nearly 1 million, separatists farther north flew the Russian flag over six armored vehicles that fell into their hands after Ukrainian forces surrendered them, either willingly or through intimidation. The Defense Ministry said the loss came after a crowd of pro-Moscow residents, mingling with covert Russian operatives instigating violence in the east, blocked an advance by pro-Kiev forces.

Nevertheless, many residents here are not eager for the region to follow in the footsteps of Crimea, which was annexed by Russia last month. Ilya, a small-business owner who spoke on the condition that his last name not be used for fear of reprisals, considers himself solidly pro-Ukrainian. Still, the government in Kiev is managing to alienate citizens here, he said, with a little help from the West.

At a most dangerous and delicate time, just as it battles Moscow for hearts and minds across the east, the pro-Western government is set to initiate a shock therapy of economic measures to meet the demands of an emergency bailout from the International Monetary Fund.

“We don’t trust them,” Ilya said of the country’s interim leaders in the capital as he pushed his infant son in a stroller in the gardens behind City Hall.

Both the government and IMF say they have no choice. Interim Prime Minister Arseniy Yatsenyuk acknowledged that the package is “very unpopular,” but Kiev is broke and desperate for cash, and Russia is no longer seen as a viable benefactor.

No matter how much they publicly offer their unequivocal support for Kiev, the IMF and Western governments that have pledged up to $27 billion in loans refuse to toss their money down the black hole of corruption and waste that is the Ukrainian economy.

Especially here in the east, where cultural and economic ties to Russia are far stronger than in western Ukraine, the bailout is hurting the government’s popularity among an already skeptical audience.

Residents are bracing for the worst. A rollback of long-generous subsidies on natural gas will raise the rate consumers pay on their heating and cooking bills by roughly 63 percent next month. About 24,000 state workers and 80,000 police officers nationwide are set to be laid off. Taxes on vodka, beer and cigarettes will soon go up. Changes in property tax calculations mean that many Ukrainian homeowners will soon be paying more.

Ukraine is already a failed student of IMF programs, with the fund pulling the plug on a package for the previous government of former president Viktor Yanukovych after it abandoned pledged reforms. But at least one of the previous demands of the IMF — a more flexible exchange rate for Ukraine’s currency, the hryvnia — came to pass in February when the embattled Central Bank pulled back from defending the currency.

Since then, the currency has fallen precipitously, forcing the Central Bank to raise interest rates this week and driving up the cost of credit. Among the effects of a weaker currency: Prescription drug prices have soared because high-quality medicines here are imported.

Deepening resentment

In the long run, such austerity measures may be needed to help fix the broken economy , which appeared to reach new heights of corruption when Yanukovych was in power. But they are deepening the sense of resentment against the fragile new government in Kiev.

“How can they do this to us all at once?” said Ilya, who owns a heating supply company that sells German-made boilers in Donetsk. He buys his equipment in euros and sells in hryvnia, so the currency devaluation has increased his costs by 40 percent at a time when no one is buying.

“People are already scared; they don’t know who to trust,” he said. “They are pushing us toward Russia.”

IMF Managing Director Christine Lagarde said this month that Ukrainians must learn to help themselves. “If there is that collective drive to eliminate corruption, to establish good governance, to have good procurements, to have true prices for energy and to own their economic destiny,” change “will happen,” she told Euronews.

IMF demands are rarely popular, and countries around the globe from Argentina to South Korea to Greece have felt their sting. But Aleksey Kulyk, 32, a food industry manager in Donetsk and a pro-Ukrainian activist, said the political situation, coupled with Russian aggression, added a more dangerous element in Ukraine.

Pro-Russians “are using the IMF deal against us,” he said. “The truth of whether it is going to hurt as bad as they say does not matter anymore. This is what people believe, and these are people who trust only in their wallets.”

Calls for a referendum

The IMF deal is not the only government move that opponents in the east are latching onto. Following the protests in Kiev that forced Yanukovych to flee in February, the large ethnic Russian minority in the region was outraged by a new law that sought to lower the status of the Russian language in Ukraine. Although the law was quickly rescinded, it is still quoted by separatists who have occupied official buildings in several cities and towns.

At the same time, there is no doubt that the government’s first challenge is reclaiming control in the east. Ukrainian forces seem to be treading carefully, out of fear both of wounding civilians and of giving Russia a pretext to openly join the fight. But on the second day of a new campaign to reassert Kiev’s authority in the region, there were few signs of a turning of the tide.

On Wednesday morning, a squad of separatists backed by seven masked gunmen in camouflage stormed the headquarters of Donetsk’s mayor and local council. By afternoon, more than 40 pro-Russia militants had occupied the building, but were allowing officials to go about their business inside.

City workers shuffled to and from meetings under the watchful gaze of militants — many of them clutching automatic weapons — who loitered in the corridors. A few police officers strolled outside without attempting to intervene, evidence of the government’s tenuous grip on the region.

The militants said they are not connected with a similar group that occupied the regional headquarters in this city 10 days ago, but they issued at least one similar demand. They called for a referendum on May 11 with two questions: whether the populace agreed with the creation of a new Donetsk People’s Republic and, if so, whether it should be part of Ukraine or Russia.

“Why should we consider Russia a hostile state?” asked Alexander Zakharchenko, a commander of the militants at City Hall. “They are the closest people to us in the world.” He commands the Donetsk branch of a group called Oplot, a pro-Russia movement that started as a fight club of young men in the Ukrainian city of Kharkiv, to the north.

In this region of coal mines and machinery plants, where according to a local saying, “people work, not protest,” residents often tend to vote with their stomachs.

And there is no doubt that bread-and-butter issues are influencing the debate here. There are mixed feelings in the east, for instance, over the new government’s move to sign a trade deal with European Union that could lead Russia to slap higher duties on Ukrainian imports.

Ukrainian academics in the east, such as Yuri Makogon at Donetsk National University, are calling for a balanced economic relationship between Russia and Europe. Last year, Russian wrath over an earlier E.U. agreement led Moscow to crack down on Ukrainian imports. That prompted Yanukovych’s veto of the deal, which ultimately sparked a showdown with pro-Western protesters.

Fears of lost jobs if the relationship permanently sours between Kiev and Moscow run deep. For instance, Kramatorsk, the eastern city where pro-Russia residents joined hands to halt the advance by Ukrainian troops Wednesday, is home to the sprawling Novokramatorsky Machinery Plant, a manufacturer of mining equipment heavily reliant on exports to Russia.

“I don’t know how this will end, but for easterners, it cannot end with bad relations with Russia,” Ilya said.

Alex Ryabchyn contributed to this report.