Kremlin Builds Patronage Economy in Ukraine’s Occupied Territories
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Executive Summary:
- The Kremlin has turned reconstruction activities in the occupied territories of Ukraine into a patronage system that enriches federal elites and loyal local governors.
- Deputy Prime Minister Marat Khusnullin oversees a vast federal program that channels millions of dollars via opaque procurement and “patron-region” partnerships.
- State corporations, such as Rostec, and companies tied to the Kremlin’s circle benefit greatly from seized assets and inflated contracts, while actual reconstruction remains slow and symbolic.
In October, the Russian government quietly announced plans to cut reconstruction spending in the occupied territories of Ukraine by 22 percent due to falling oil and gas revenues (The Moscow Times, October 1). At the same time, Russian officials unveiled several new showcase projects. They reopened facilities in Mariupol and Melitopol, demonstrating that reconstruction has become a tool of political theater and elite enrichment rather than genuine efforts at recovery (Komsomolskaya Pravda, October 30; Krym.Realii, November 2). The Russian government seeks to cement annexation through a patronage system in the occupied territories while pursuing personal enrichment. This approach prioritizes political visibility and control over genuine reconstruction that could improve the lives of residents of the occupied regions.
Top Russian officials have increased their visits to the occupied regions over the past year. Deputy Prime Minister Marat Khusnullin, the Kremlin’s chief curator for a state program for the restoration and socio-economic development of new regions through 2030, frequently travels to the occupied areas to inaugurate new housing blocks and inspect funded projects (Government of Russia, December 22, 2023, November 5).
First Deputy Chief of Staff of the Presidential Administration Sergei Kiriyenko and Deputy Prime Minister Dmitry Chernyshenko have likewise appeared in televised ceremonies to inaugurate university and school facilities and sports centers erected by occupation authorities (Government of Russia, April 30; Gazeta.ru, September 4; TASS, November 1). Russian President Vladimir Putin sometimes joins remotely to open healthcare, social, and residential facilities (Dan-News, June 10). These visits often coincide with the announcement of new subsidies to support the narrative of the successful integration of occupied regions.
The Kremlin’s state program for the restoration and socio-economic development of annexed regions, launched in December 2023, aims to ensure that social and economic standards in these regions align with those in Russia by 2030 (Government of Russia, December 22, 2023).
Since its launch, it has been gradually institutionalizing a multi-tier patronage network comprising 41 federal bodies and more than 80 regional administrations. These institutions are engaged in the reconstruction and integration of the occupied territories into Russia’s economic and legal space. Specifically, the Russian Ministries of Construction, Energy, Transport, and Housing lead sectoral programs, while state-controlled companies such as Russian Railways, Rosseti, and Rostec are responsible for executing strategic projects via long-term contracts (TASS, September 13). Since 2023, Russian authorities have also paired Russian regions and cities with occupied territories, such as Tatarstan with Luhansk, Chechnya with Mariupol, and the Moscow oblast with Donetsk, to allow decentralized financing and ensure political co-branding of reconstruction achievements (Fedpress, May 18, 2022; Tatar-inform, October 21; Komsomolskaya Pravda, October 28).
The Russian government channels funding to regional budgets via direct federal subsidies. At the same time, the Single Customer in the Construction Sphere (PPK), a public-law company, handles capital construction allocations, which are later approved by the Russian Ministry of Construction (PPK-EZ, November 5). The federal autonomous organization “RosKapStroy” then oversees implementation and verifies spending (Roskapstroy, November 5).
The Kremlin allocated 411 billion rubles (about $5.2 billion) in 2023 and 303 billion rubles (about $3.8 billion) in 2024 for reconstruction, while pledging nearly 940 billion rubles (about $11.8 billion) for 2025–2027 (RBC, April 21, 2023; Forbes.ru, January 22, 2024; TASS, September 13). Independent assessments, however, indicate a slow pace of reconstruction. For instance, at the current pace, rebuilding Mariupol alone would take almost 18 years, underscoring the symbolic nature of the campaign (Meduza, April 30).
The Kremlin has deeply embedded federal officials in the occupied governance structure. About 90 percent of senior appointees in regional administrations are Russian citizens, mostly drawn from the security services or the Russian Presidential Administration’s domestic policy bloc (Radio Svoboda, September 29, 2022). Graduates of Kiriyenko’s “Leaders of Russia” and “School of Governors” programs hold key positions in the occupied regions, ensuring the Presidential Administration’s direct oversight (Proekt.media, September 29, 2022). Additionally, local governors serve as public figureheads and administrative cover, with real authority residing with Kremlin-appointed federal curators.
Reconstruction in the occupied territories is carried out under simplified, non-transparent procurement rules that fail to ensure competition and accountability. The Kremlin’s federal oversight ensures that only trusted local and federal players receive contracts and federal transfers, forming a network of Kremlin-appointed curators and favored contractors that dominate reconstruction efforts. Khusnullin oversees the majority of the reconstruction funding allocated from the federal budget, with his companies receiving direct transfers from Moscow and selecting subcontractors to implement projects in cities such as Mariupol (24TV, May 2, 2024).
Most large-scale reconstruction contracts go to corporations linked to senior officials and oligarchs close to the Kremlin. For instance, in 2024, Rostec, a state-owned corporation chaired by Sergey Chemezov, a longtime associate of Putin, took over industrial assets from the occupied territories (TASS, July 10, 2017; Senat.inform, October 23, 2024). The Stakhanov Railway Car Building Plant and the Luhansk Aircraft Repair Plant were re-registered as subsidiaries of Rostec in 2024 (Senat.inform, October 23, 2024). These takeovers grant Rostec privileged access to federal funding and strengthen the Kremlin’s industrial presence across the annexed regions.
Moscow’s decrees on “abandoned property” and “federal integration” legalize the transfer of confiscated housing and businesses to Russian citizens or state enterprises. In October, the Russian government formally legalized such confiscations, allowing local proxies to redistribute property to imported teachers, police, and bureaucrats (RBC, October 23). Overall, 40,000 companies have been re-registered under Russian law, many functioning as mirror entities under the control of Russian directors (Youcontrol, December 16, 2024). This process enables businessmen from Moscow, Rostov, Chechnya, and Crimea to take over Ukrainian industries at minimal cost while gaining access to subsidies and tax incentives under newly established special economic zones (Re-Russia, March 28, 2023).
The governors of the occupied territories—Leonid Pasechnik (Luhansk People’s Republic), Denis Pushilin (Donetsk People’s Republic), Vladimir Saldo (Kherson oblast), and Yevgeny Balitsky (Zaporizhzhia oblast)—act as intermediaries in a vertical chain supervised by Kiriyenko and Khusnullin, with RosKapStroy serving as the main contractor (Dan-news, February 14, 2023). These governors oversee the local distribution of federal funding and receive minor shares in return, with the most significant profits flowing back to the Kremlin’s elite networks (Freedom, March 5, 2023).
The Kremlin’s reconstruction system delivers low-quality results. For instance, the Mariupol Drama Theatre began to fall apart within months after its supposed modernization (RBC-Ukraine, August 14, 2024; Radio Svoboda, July 10). Corruption cases, including the 2024 arrest of Deputy Defense Minister Timur Ivanov for embezzling funds allocated to Mariupol’s restoration, demonstrate how reconstruction funding has become a tool of enrichment and political loyalty within the Kremlin’s patronage structure (24TV, May 2, 2024). Ivanov’s associates earned over 17 billion rubles (about $209 million) from construction contracts in Mariupol alone. At the same time, affiliated firms financed his family’s personal expenses (Novaya Gazeta, April 25, 2024). It is not surprising that, following Ivanov’s removal, Khusnullin’s network efficiently took over construction projects, eliminating any competition and focusing profits within a narrow group of loyal contractors (RBC-Ukraine, August 14, 2024).
By transforming reconstruction into a mechanism of dependency and elite enrichment, the Kremlin is embedding occupied territories within Russia’s fiscal and administrative system at the expense of the territories themselves. The Kremlin’s continued control over the occupied territories is making any future efforts at reintegrating these territories with Ukraine politically and economically unfeasible.
