South Ossetia has emerged as an unlikely banking center, providing financial services that connect Russia and the self-declared, Kremlin-backed breakaway republics in eastern Ukraine, according to officials in all three regions.

While the eastern Ukrainian “people’s republics” are intent on reorienting their economies toward Russia, in the short term, Moscow must prop up large industrial enterprises in Donbas. The de facto capital of South Ossetia, Tskhinvali, plays an important role in facilitating Russian subsidies.

In April, the de facto authorities in the Donetsk People’s Republic announced that they were putting the bulk of the territory’s massive industrial enterprises under a little-known holding company reportedly based in South Ossetia. And for the last two years Tskhinvali has hosted a bank that manages payments between Moscow and the two eastern Ukrainian breakaway republics, Luhansk and Donetsk.

The holding company, Vneshtorgservis, now controls the nine biggest plants in Donetsk and the three biggest in Luhansk. The firm is reportedly run by Vladimir Pashkov, a Russian citizen and former deputy governor of the Irkutsk region in Siberia, according to comments by the de facto Donetsk Minister for Trade and Industry, Alexei Granovsky, published in Russia’s Kommersant-Vlast weekly in early May.

De facto officials in Donetsk did not return a request for comment from EurasiaNet.org about the company’s place of registration. The press office of Luhansk separatist leader Igor Plotnitsky also refused to comment.

But a former senior official in the Donetsk de facto republic, Alexander Khodakovsky, wrote on his blog that the company was registered in South Ossetia, and complained that the arrangement was not in the interests of the people of Donbas: “As long as we don’t have a legal basis for these holding companies, we will always have grounds to suspect the [de facto Donbas] government of double-dealing and hypocrisy, of a willingness to return everything to the old oligarchs, or to sell them to people … for whom the interests of our Republic are not even a passing concern.”

Officials in South Ossetia also did not respond to written questions submitted via email from EurasiaNet.org. However, local leaders have officially confirmed the banking link. In early April, outgoing de facto President Leonid Tibilov told a visiting delegation from Donetsk that the newly formed “young republics” should support each other: “What we managed to do for you is to open an international bank,” Tibilov said, according to the official news agency RES.

Tibilov did not name the bank, but it has been identified on multiple occasions by separatist officials from Ukraine as the “International Clearance Bank” (Mezhdunarodny Rashchyotny Bank / MRB). The website of South Ossetia’s Central Bank lists its address as Stalin Street 20. In turn, the central banks of both the Donetsk and Luhansk “people’s republics” have identified South Ossetia’s MRB as their official international correspondence bank.

This bank is believed to have operated for two years now, and observers believe it exists primarily to funnel cash from Russia to the separatist republics, which are largely dependent on outside financial support. And its role is likely to have grown considerably since March 1, when the separatists in Donetsk and Luhansk brought all Ukrainian-held industrial plants under their control.

The move, partly an answer to a trade blockade imposed by Ukrainian activists, was meant to improve the revenues of the breakaway republics by forcing the plants to pay their taxes locally. However, an unintended consequence was a cut off in the supply of raw materials from Ukraine. That, in turn, led to the departure of much of the industries’ management, either fired by the new separatist authorities or withdrawn by the Ukrainian owners. As a result, production at the plants has ground to a halt.

South Ossetia is the world’s only territory that has formally recognized the two “people’s republics.” South Ossetia itself was recognized by Russia in 2008, after Moscow crushed an attempt by Georgia to recapture the territory. All but Russia, along with a handful of states, consider South Ossetia to still be a part of Georgia.

In a video interview published in April, Donetsk’s parliamentary speaker and chief international envoy Denis Pushilin explained that “all processes” regarding payments, raw materials and their documentation for the relevant plants “go through the country that has recognized us – that is South Ossetia.”

Moscow so far has shied away from recognizing the Donbas republics, ostensibly because they are under Western sanctions already, but also because such a move would threaten to scuttle the Minsk agreement, which Russian President Vladimir Putin signed along with his counterparts in Ukraine, France, and Germany. (Georgia’s other breakaway republic, Abkhazia, also has not formally recognized Donetsk or Luhansk, although it does maintain friendly relations with the Ukrainian separatists.)

As long as Russia does not recognize the “people’s republics,” companies wishing to do business there face multiple logistical hurdles, including a significant risk of being hit by sanctions from Ukraine. Thus, South Ossetia’s role as a little Switzerland for Donbas plays a useful part for Russia and Russian firms wishing to disassociate themselves from the destination of their transactions.

“If in doubt, Moscow will always say that this is a problem between South Ossetia and Ukraine,” said Alexei Malashenko, a Caucasus expert and director of studies of the Berlin-based Dialogue of Civilizations think tank.
by Nikolaus von Twickel