Heavy outgoing artillery fire shook the already ruined northern outskirts of Donetsk on March 20, as Russian-backed rebels appeared to step up efforts to push Ukrainian forces back from the city.

A bne IntelliNews reporter witnessed artillery fire from a howitzer positioned near railway tracks in the vicinity of the city's ruined airport, firing westwards towards the closest Kyiv-controlled settlements. Other audible artillery fire appeared to include outgoing salvoes from rebel multiple rocket launchers.

These artillery barrages would appear to constitute a clear breach of the peace agreement signed in Minsk on February 12, which envisaged both a ceasefire and a withdrawal of heavy weaponry from the front lines in the year-old conflict between Ukraine's government and Russian-backed separatists in the Donbas region of East Ukraine.

After losing control of Donetsk Airport in January, Ukrainian forces still hold the villages of Opytne and Piskiy and the town of Avdeeka on the north-west outskirts of Donetsk. These settlements may now present a fresh target for rebels despite the Minsk ceasefire.

Rebel forces captured the strategic railway junction town of Debaltseve, which lies midway between Donetsk and Luhansk, on February 18 – despite the ceasefire formally entering into force on February 15 - and since then they have increased pressure on Kyiv-held settlements on the outskirts of Luhansk and Mariupol, as well as Donetsk. Rebel leaders have said they intend to capture government-controlled areas in Donetsk and Luhansk regions.

There was little sign of return fire from Ukrainian positions. But a rebel sentry at a blockpost on a road leading to the airport claimed that fighters from Ukraine's nationalist Right Sector group were trying to enter the district of Spartak from the Ukraine-held village of Pesky. He argued that the rebel artillery fire was a response to what he said were 'provocations' by the Ukrainian armed forces.

The Organisation for Security and Cooperation in Europe (OSCE) monitoring mission to Ukraine reported on March 18 that it witnessed an exchange of fire between rebel and Ukrainian government forces on the north-west outskirts of the city using “heavy mortars, artillery, heavy machine gun and main battle tanks”. On March 17, the OSCE reported incoming shell fire from rebels targeting Ukrainian government positions at Pisky.

Ukraine's defence ministry said on March 20 that three troops had been wounded but none were killed over the previous 24 hours. Authorities in the self-proclaimed Donetsk People's Republic (DPR) said in a press statement on March 20 that Ukrainian forces had shelled rebel-held towns 33 times over the previous 24 hours, with some casualties among the rebel ranks.

Embryonic state

Rebel shelling of Ukrainian positions close to Donetsk appear to have spiked since March 16, when Ukraine's parliament voted to declare the rebel-held territories “temporarily occupied territories”. At the same time, the parliament voted through measures required by the Minsk peace agreement stipulating that the rebel-held territories should receive special administrative status. However, the legislature made this status dependent on elections being held in the territories according to Ukrainian legislation, something the rebels refuse to consider. 

Denis Pushilin, deputy speaker of the DPR council, used the parliamentary resolution on "temporary occupied status" to justify what he called “state-building measures” the rebels now plan, he told journalists on March 20.

“We will now focus on state-building. Kyiv's actions have made us more autonomous and independent,” Pushilin said. Measures to strengthen the DPR's autonomy are taking the form of state organisation of the economy, the rebel authorities acknowledge. 

The breakaway region's authorities have supervised the work of major local industrial companies since the summer of 2014, and are now proceeding to formalise this control by conducting piecemeal nationalisation.

As bne IntelliNews wrote, on March 9 the DPR nationalised the major Donetsk coking coal producer Zasyadko Mine, owned by former Party of Regions grandee Yufim Zvyagilsky. On March 13, authorities also declared they would nationalise major local coal-washing plants, which are owned by the family of ousted former president Viktor Yanukovych. Other nationalised industrial assets included the huge Donetsk mining engineering plant Dongormash, formerly part of tycoon Rinat Akhmetov's System Capital Management holding. Parts of the plant are now believed to be used for repairs of rebel armour.

The self-proclaimed DPR authorities are also moving towards setting up a local mobile phone operator, its head of telecoms Viktor Yatsenko announced on March 20. He said the operator would operate only within its own network on rebel-held territory, and present an alternative to Ukrainian networks that are subject to "total wiretapping" by Ukrainian special services.

Currency switch

Authorities in the DPR and the neighbouring allied Luhansk People's Republic (LPR) plan to introduce the ruble and the dollar as legal tender as of March 25 in order to free the rebel-held territories from dependency on Ukraine's hryvnia. “Ukraine's hryvnia will gradually be diluted out of the currency supply in the [Donetsk People's] republic,” the self-styled economy minister Evgeniya Samokhina said on television on March 19.

This may pave the way for direct Russian financing of the rebel-held territories, enabling payment in rubles of pensions and social benefits that Ukraine has stopped paying, as well as salaries for state employees. However, there is currently no sign of shops pricing products in rubles, or of any rubles in circulation.

DPR authorities are still struggling to improvise a rudimentary financial system, given that Kyiv has excluded it from the national payment system. Tax payments and payments for utilities currently have to be made in cash, either directly to the utility companies or at a branch of the so-called "Central Republican Bank" - which in fact comprises the former local branches of Ukraine's largest commercial bank Privatbank. 

Following re-registration of all local companies, the DPR currently levies a 20% tax on turnover, with no value added tax. It will also become possible to pay taxes in rubles, Samokhina said on March 19.

A new electronic payment system is in the offing, local authorities claim, but plans for it to be based on rubles mean that it will be of little practical importance in the immediate future, according to local entrepreneurs interviewed by bne IntelliNews. In the meantime, authorities say they can use the postal service to deliver benefit payments.

According to bne IntelliNews sources, the new government is still severely cash-strapped, with rebel ministers paid salaries of only UAH7000 (around $300), less than half of the UAH15000 it reportedly pays to rebel fighters.

One contribution that Kyiv has itself inadvertently made to the embryonic statehood of the Donetsk People's Republic is introducing a tough regime of permits for individuals travelling from rebel-held territories in East Ukraine to government-controlled territories and vice versa. Logically, the permits can only be acquired from Ukrainian police on government-controlled territory, making applying for them a Catch-22 situation for  Donbas residents. 

It was also possible to confirm anecdotal reports of verbal and physical abuse of locals by Ukrainian government forces at the crossing points. A clearly drunk Ukrainian policeman accosted a driver at gunpoint and, accusing him of being under the influence of drugs, made the man strip naked, before the presence of a foreign journalist caused him to stop the harassment.