A free economic zone in the Donbas?

A free economic zone in the Donbas has surfaced in December 2025 as a proposed bargaining chip in peace talks, not simply as an economic instrument but as a spatial idea: a strip, district or cluster of districts in which commerce is encouraged, customs rules are relaxed and outside capital is invited in, while the guns fall silent and armies step back. In the reporting that has reached the public, the United States has been pressing a version of this concept that overlaps with a demilitarised buffer in Donetsk oblast, with Kyiv wary of any arrangement that looks like a disguised territorial concession. 

That combination, economic privilege plus military restraint, is not accidental. Negotiators reach for it because it promises to make peace pay, quickly, for people who have spent years seeing war destroy the very assets that might otherwise have kept them loyal to the state. It is also attractive to outside sponsors because it creates a narrative of reconstruction that can be packaged to parliaments and investors: not an open-ended subsidy to a ravaged region, but a zone that might, in time, fund its own recovery. Yet the Donbas is not Shenzhen in 1980 and it is not a blank slate. It is a mined, shelled, politically contested industrial heartland, with a traumatised population, a mangled property registry and a neighbour that has repeatedly used “special status” formulas as levers of influence. A free economic zone can therefore function either as a stabiliser or as a Trojan horse, depending on its design and the security architecture that sits around it.

Why negotiators reach for a free economic zone

The immediate logic is sequencing. If the parties cannot agree on sovereignty questions at once, they look for interim arrangements that reduce violence and create constituencies for calm. A free economic zone is meant to do three things at the same time.

First, it offers a “peace dividend” to communities nearest the front. If jobs, wages and municipal revenues improve measurably, local pressure against renewed fighting grows. Secondly, it offers outside guarantors a practical project to supervise: roads rebuilt, customs posts modernised, industrial sites cleared and reopened, supply chains redirected. Thirdly, it gives both sides a face-saving story. Ukraine can argue she is not surrendering her land but rebuilding it under Ukrainian law; Russia can argue that she has achieved a buffer and a dampening of NATO-facing military posture, even if Kyiv remains sovereign. The fact that the proposal has been paired, in some accounts, with a “neutral” or demilitarised area makes this logic explicit. 

This is also happening in a political climate where Ukrainians appear open to a ceasefire along present lines but resistant to major concessions, especially without binding security guarantees. That matters because any free economic zone that is understood as a disguised withdrawal or partition will be politically brittle, whatever diplomats sign. 

What “free economic zone” can mean in practice

The phrase is slippery. It can describe anything from modest tax incentives for reinvestment, to a customs and regulatory enclave that operates almost like an internal port. In the Donbas context, four models tend to be implied.

1. A reconstruction zone under Ukrainian sovereignty, with temporary tax and customs relief, fast-track permitting and a dedicated reconstruction authority.

2. A cross-line trade zone, in which specified goods can move under international monitoring, intended to reduce smuggling incentives and keep households supplied. This is the most politically sensitive because trade can legitimise de facto authorities.

3. A demilitarised buffer with economic privileges, presented as an “in-between” that reduces contact between armies while allowing civilian life to restart. Public reporting suggests this is close to what is being discussed at present. 

4. An internationally administered economic district, supervised by an external mission. This can reassure investors but can also look, to citizens, like outsourcing sovereignty.

The present debate is sharpened by talk that Ukraine would withdraw forces from parts of Donetsk oblast under such an arrangement, an idea President Zelenskyy has criticised as unfair in public commentary. 

The economic case, and its limits

There is a real economic argument for special measures in Donetsk and Luhansk. Even before 2022 the region had suffered years of war damage and dislocation. Ukrainian ministries and policy institutions have long discussed the extraordinary cost and timescale of stabilising the area and the need for special support measures. 

A free economic zone could, in principle, help in several concrete ways:

• Mobilising private capital for rebuilding logistics, light industry and housing, instead of relying entirely on state grants.

• Creating formal employment that competes with militia economies, smuggling networks and predatory “protection” rackets.

• Accelerating demining and infrastructure repair by bundling projects into investable packages, with clear milestones.

• Bringing displaced people back by creating wages and municipal services, not merely promises.

• Reorienting the Donbas away from dependency on Russian supply chains by anchoring it to Ukrainian and European markets, particularly if Ukraine’s European Union trajectory remains part of the diplomatic picture. 

But the limits are equally real. A free economic zone cannot conjure away security risk. Investors price risk before they price tax relief. If artillery can return in a month, low corporation tax is irrelevant. There is also the question of who benefits. If a zone enriches a small circle of intermediaries, or becomes a conduit for sanctioned goods, it will corrode legitimacy in Kyiv and in European capitals.

The central problem: security, not tax

The Donbas is not short of economic plans. It is short of credible guarantees that men with guns will not reappear, either openly or “without insignia”. European officials have reportedly warned that a demilitarised zone could become cover for future aggression, through covert deployments and hybrid tactics. 

This is why the free economic zone concept cannot be separated from verification. If negotiators want such a zone to stabilise rather than to endanger, it needs, at minimum:

• A clearly surveyed and mapped line of separation, with published coordinates and permitted force postures.

• Continuous monitoring, ideally with layered methods: patrols, fixed sensors, satellite observation and inspection rights.

• A defined response mechanism if violations occur, including automatic sanctions triggers or military assistance steps, because “consultations” are too slow in a crisis.

• Control of airspace and drones over the zone, because modern war in Ukraine is increasingly fought with unmanned systems.

Without these, a zone becomes a soft corridor for infiltration, sabotage and political intimidation.

Governance, law and the property maze

Even in peacetime, special economic zones succeed when governance is simple, predictable and insulated from rent-seeking. In the Donbas after years of occupation and combat, governance is the battlefield.

The first issue is law. Which courts adjudicate disputes? Which police force enforces contracts? What happens to documents issued under occupation? How are property rights restored when deeds have been destroyed, altered, or “re-registered” by de facto administrations? If investors suspect that tomorrow’s government will unwind today’s deals, capital stays away or arrives only as predatory capital.

The second issue is transitional justice. Reintegration policies have long emphasised that political and diplomatic means must be paired with legal clarity about occupied territories and accountability. A free economic zone that ignores accountability risks entrenching wartime profiteers. One that pursues punitive justice without a workable amnesty structure risks paralysing local administration. The balance is delicate: prosecute serious crimes, design screening mechanisms for public office, but allow ordinary people who simply survived to rebuild their lives.

The third issue is corruption. A zone that offers fast-track licensing and customs relief is, by definition, a zone in which officials have discretion. Discretion attracts bribes. The antidote is radical transparency: open contracting, public beneficial ownership registries for zone companies, digital customs clearance and external audit.

The political optics inside Ukraine

Because the zone is being discussed alongside troop withdrawals and a buffer, Ukrainians will naturally ask whether this is partition by another name. Reporting indicates President Zelenskyy has underlined that any territorial scheme would require a referendum or other democratic validation, while Russia has rejected the idea of Ukrainians deciding territorial concessions by referendum. 

This matters for design. If Kyiv wishes to avoid the charge that she is trading sovereignty for quiet, she would need to insist on several red lines:

• The zone operates under Ukrainian constitutional order, with Ukrainian institutions, even if an international mission assists.

• Local elections occur only when security conditions allow genuine competition, not under intimidation.

• Residents retain full access to Ukrainian public services and documentation.

• Any special tax treatment is time-limited and subject to parliamentary renewal, not a permanent “special status” frozen into a peace text.

Absent these safeguards, a free economic zone can look like a mechanism to create a semi-detached political space, vulnerable to capture.

The Russian incentive, and the danger

Russia might accept the language of commerce and rebuilding because it is cheaper than holding ruins and because it can be spun as proof that she has forced Kyiv to step back. Yet Russia also has incentives to ensure that any zone remains politically ambiguous. Ambiguity is leverage. If the zone’s security arrangements are weak, Moscow gains a staging area. If the zone’s governance is contested, Moscow gains a perpetual argument that Kyiv cannot govern the Donbas, so she must grant more autonomy.

That is why a free economic zone is only as good as the clarity around it. In peace processes, fuzzy language is often used to get signatures. In the Donbas, fuzzy language is an invitation to renewed conflict.

What a credible Donbas free economic zone would look like

If negotiators persist with this concept, its credibility would depend on a package, not a slogan.

1. Security first: an enforceable monitoring regime with clear consequences for violations, preferably tied to automatic economic penalties.

2. A reconstruction authority with strict transparency rules, staffed competitively, audited internationally and barred from political financing.

3. A property and restitution mechanism, including a claims court or tribunal process to resolve disputes quickly and fairly.

4. A demining and infrastructure plan that is front-loaded, because nothing else works if land cannot be safely used.

5. Sanctions compatibility: strict controls to prevent the zone being used to launder sanctioned commodities or supply military end users.

6. Democratic legitimacy: a clear statement that the zone does not prejudge sovereignty and that any permanent territorial settlement requires Ukrainian constitutional processes, even if that prolongs negotiations.

7. A sunset clause: the zone’s special regime expires unless renewed, so it remains a tool of reintegration rather than an alternative to it.

A free economic zone in the Donbas can be read in two ways. In the best case it is a bridge between ceasefire and reintegration, a practical apparatus for jobs, demining, contracts and the slow restoration of normal life. In the worst case it is a commercial wrapper around a buffer that freezes the conflict and creates a grey space ripe for intimidation, smuggling and renewed aggression. Recent reporting suggests the idea is being pushed precisely as a buffer mechanism, which makes rigorous verification and political legitimacy the decisive questions, not the tax rate. 

If peace talks use the free economic zone as a substitute for security guarantees, Ukraine will be asked to take on the highest risk in exchange for the vaguest promise. If however the zone is embedded in hard monitoring, legally clear governance and a democratic framework that does not smuggle in territorial surrender, it could become a component of a durable settlement, not merely a pause in the fighting.