Economic: Donovia

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The Caucasus countries that possess hydrocarbon resources will continue to depend on the oil and gas industries to drive their economies, while those that do not possess such resources will attempt to tie themselves to hydrocarbon-rich nations. Both Ariana and Atropia face geopolitical difficulties in exporting their oil and natural gas. Bordered by adversaries, the Arianians and Atropians must rely on tenuous routes to export their resources. For Gorgas and Limaria, which lack extractive or mature industries, transshipment of hydrocarbon products or providing other services to oil-wealthy countries will be their primary short- to medium-term means to achieve economic development.

Donovia continues to recover from a collapse two decades ago that crippled its economy. All nations of the Caucasus have relatively high inefficiency due to corruption, government involvement in the economy, and/or lack of export industry development.

Donovia’s current economic structure and situation stem from a sudden internal financial collapse that occurred 20 years ago. The Donovian government instituted major changes at that time, liberalizing the banking, tax, and private enterprise systems to assist recovery. These reforms, coupled with vast natural resources, enabled the country to stabilize economically and gradually recover.

Table of Economic Data

Measure	Data	Remarks (if applicable)
Nominal GDP	$1.78 trillion	Agriculture 3.7%, Industry 53.9%, Services 42.4%
Real GDP Growth Rate	-0.2%	5 year average 3.0%
Labor Force	69.1 million	Agriculture 19.6%, Industry 42.0%, Services 38.4%
Unemployment Rate	8.3%	Increasing
Poverty Rate	12.1%	% of population living below the international poverty line
Net Foreign Direct Investment	$345.31 billion	$55.18 billion outbound
Budget	$210.47 billion revenue $273.18 billion expenditures
Public Debt	12.3% of GDP	Excludes Viaprom debt
Inflation	10.2%	Increasing, 5 year average 10.0%

Participation in the Global Financial System

Over the past decade, the Caucasus nations made considerable efforts to integrate themselves into the global financial system. While focused on local conflicts, the Caucasus region opened to other countries to increase global markets for its products, especially petroleum, and looked to the West for economic developmental aid, usually in the form of loans and grants.

IMF/World Bank/International Development Aid

In the past 20 years Donovia has transformed itself from an aid recipient to a donor country. Struggling in the decade after its financial collapse, Donovia took advantage of its membership in  the IMF to receive several loans, all of which have since been repaid. The World Bank (WB) has provided over $11 billion in financing for more than 65 projects in the country since the collapse, including 14 that are currently active for a combined $1.4 billion. The vast majority of the current projects focus on improvements in governance issues such as judicial reform and customs development, while others pertain to economic development and natural resource management. At present, Donovia is working to position itself as a major donor country, with a foreign aid budget of $450 million and a $7 billion fund created specifically to assist struggling neighbors.

Foreign Direct Investment

Donovia has implemented considerable economic reforms in recent years, including large-scale privatization and price liberalization, in order to attract foreign direct investment (FDI). Still lacking, however, is a legal and regulatory environment based on rules and applied consistently throughout the country. Property rights need to be revised in particular, including contractual  rights, dispute resolution, and acceptable accounting practices. Donovia currently possesses total FDI of $238 billion, with $34 billion of that amount being added last year. This is expected to increase to $50-60 billion annually within the foreseeable future. Sectors that have recently seen significant FDI include energy, high-tech, transportation and infrastructure, and food and beverage.

Economic Activity

Donovia’s current economic structure and situation directly results from the Four Traitors incident two decades ago. Prior to this, the country made extensive use of profits from its vast natural resources to heavily influence neighboring countries through political and economic means (aid, grants, industrial projects, etc.). This ended abruptly when Donovia experienced a major economic collapse precipitated by discovery of a massive embezzlement scheme perpetrated against the government.

Member of Parliament Yassar Akbari, General Ibrahim al-Fatem, Ismail Jinat of the Jinat crime family, and Viaprom CFO Muhammad Hafiz, conspiring together, embezzled tremendous amounts of money from the Donovian government over a period of eight years. Referred to as the Four Traitors, these men fled the country when the situation was discovered 20 years ago. The Donovian government spent considerable time and effort in attempts to recover both the Traitors and the lost funds— around 20% of government revenue for the years in question—but met with no appreciable success.

The effect of the Four Traitors on the Donovian economy was instantaneous and enormous. Massive government spending cuts and layoffs were instituted, as well as an immediate curtailing of all foreign aid and the abrupt dissolution of many economic agreements with neighboring countries. Unemployment tripled overnight, while government aid became all but impossible to obtain. Considerable social unrest resulted, and the military had to be called out to maintain order.

In an attempt to recover from this crisis, Donovia decided to base its economy on free-market principles. The country has made considerable progress in the past two decades, but much remains  to be done. Laws and business regulations remain complex and contradictory, and implementation is both inconsistent and heavily influenced by politics and corruption. The situation is gradually improving, though, with a noticeable decrease in difficulties during the past 10 years and an increased number of businesses both seeking and receiving redress through the courts.

The Donovian economy focuses primarily on industry (54% of GDP) and the service sector (42%),  with agriculture playing a minimal role (4%). Unlike its southern neighbors, the country’s labor pool is distributed fairly proportionally to its influence, with 42% of personnel working in industry, 38%  in services, and 20% in agriculture. Donovia maintains trade relations with Limaria, Atropia, and Ariana, while its economic interactions with Gorgas are limited at best.

Economic Actors

In many ways, Donovia’s economy continues to operate in the same way it has for decades. Prior to the Four Traitors, state-run enterprises such as Viaprom (oil) and Vianeft (natural gas) played a large political role, with those in charge both giving and receiving the benefits of tight relations with the political elite. Despite considerable economic reforms, these relationships have remained largely intact and unchanged. Companies that were privatized after the Four Traitors were almost always sold to the same individuals that ran them while under State control. These corporate  heads continue to work within the system to maintain their mutually beneficial relationship with top politicians and prevent economic reforms that would challenge their position by introducing genuine competition at the corporate level.

Trade

A net exporter, international trade contributes significantly to the Donovian economy. Hydrocarbons constitute a major portion of the trade, as oil and natural gas account for 82% of Donovia’s total exports. Other export commodities include metals, manufactures, military hardware, and electricity. Imports are machinery, pharmaceuticals, plastics and plastic products, iron, and medical equipment. Major trade partners include Olvana, Germany, the Netherlands, Italy, the Ukraine, the United States, and South Torbia. Regionally, Donovia has strong relations with Limaria and maintains trade with Ariana and Atropia, but has almost no economic relations with Gorgas. In addition, Donovia is subject to targeted international sanctions due to its active nuclear program, which influences both trading partners and products imported/exported.

Speculation concerning the future of the Arctic sea ice has prompted a flood of businesses to prepare for the opening of a Northwest Passage and a Trans Polar Route providing an economic highway between Europe and Asia. Countries are working to provide more access through the pack ice. A number of icebreakers exist, are under construction, or are planned. For example, Olvana has three icebreakers and a fourth is under construction. Donovia has the largest icebreaker fleet in the world. It is vital for both military and civilian use. The icebreakers accompany softer ships through the ice along Donovia’s northern coasts, then guide them into the mouths of large rivers.

Commercial Trade

Donovia presents a strong commercial trade sector, with exports totaling $400 billion per year and $250 billion of annual imports. Oil accounts for 51% of the country’s exports, while natural gas  claims an additional 31%. Manufactures, such as vehicles, and industrial equipment also play important export roles. Imports such as pharmaceuticals and plastics fill the demand that domestic capacity is unable to fully supply.

Military Exports/Imports

Last year Donovia exported $20 billion in military hardware to other countries, including Olvana, Ariana, India, Limaria, Vietnam, Saudi Arabia, Venezuela, and Algeria. Equipment sold and leased includes ships, submarines, airplanes, tanks and conveyance vehicles, weaponry, and ammunition. Donovia also provided equipment maintenance and force training to foreign countries.

Economic Diversity

Donovia possesses an industrial-based economy coupled with a relatively strong services sector and a weak agricultural sector. Significant industrial areas include energy, manufacturing, and mining. Industry accounts for 54% of the country’s GDP, services claim 42%, and agriculture produces the remainder (4%). Exports are nearly all industrial in nature, with energy claiming 82% of the total. Large deposits of gold and rare earths promise to increase a strong mining sector, and  manufacturing rounds out the country’s varied industries.

Energy Sector

The energy sector dominates the industrial segment of Donovia’s economy. Vast oil and natural gas deposits exist in central and southern Donovia, as well as large oil fields in the Caspian Sea. Profits from these resources were the basis for Donovia’s strong regional influence prior to the uncovering of the Four Traitors. Afterward, continued exploitation of oil and natural gas provided the government with a reliable revenue stream during the economic collapse and subsequent reforms.

Oil

Donovia operates 72 oil production fields—61 onshore and 11 offshore, in the central and southern parts of the country and in the Caspian Sea. Last year the country exported 5.4 million billion barrels per day (bbl/d), accounting for just over half of its total exports. The remaining 2.7 million bbl/d (of a total daily production of 8.1 million bbl/d) went to domestic use. Donovia produces about 8.9% of all global oil.

Natural Gas

Donovia possesses massive natural gas resources, in both the northern the southern parts of the country and in the Caspian Sea. Consisting of five developed and three undeveloped fields, Donovia boasts the largest proven reserves of any country worldwide. The country exports 179 billion cubic meters of natural gas per year, accounting for 31% of its total exports.

Donovian “Arctic [liquefied natural gas] LNG 2” project in Uttreneye is expected to produce more than seven billion barrels of oil equivalent (boe) hydrocarbons in the form of gas and condensate. Production capacity when the project is completed is expected to be 19.8 metric tons per year, or 535,000 boe per day. Production is expected to begin in 2023.

Agriculture

Donovia has only 12% arable (cultivated) land and possesses only a small agricultural sector. Agriculture accounts for 4% of GDP, but employs 20% of the country’s labor force. Grains such as wheat, corn, and barley are the primary crop, and are grown primarily in the North Caucasus region. Sugar beets, sunflower seeds, tea, soybeans, flax, and potatoes round out the major agricultural products grown. Animal products include dairy and meat, the latter mainly consisting of beef and poultry. Hogs are rarely raised, as they are considered unclean by the majority Muslim population. Small family farms and private gardens provide approximately one-third of the country’s food supply.

Forestry

Forests are prevalent in the far north, the Volga Hills, and in/around the Greater Caucasus and Ural Mountains, and mainly consist of oak, birch, pine, and spruce. The area enjoys small but profitable timber and paper industries, despite rather onerous governmental regulations. These regulations, coupled with lack of real government oversight at the federal level, have resulted in both considerable local corruption and sizeable illegal movement of Donovian timber across international borders.

Mining

Mining plays a considerable role in Donovia’s economy, both domestically and through exports. The country possesses some of the world’s largest deposits of gold, nickel, coal, potash, iron, uranium, diamonds, phosphates, and copper, among others. Only a few years ago, vast deposits of rare earths were discovered in the east, with quantities estimated as the second-highest in the world. Donovia produces metals, minerals, and mineral oils in great quantities and exports them to numerous countries, including the United States.

With Arctic sea ice receding, large deposits of metals and rare earths are being discovered in Donovia. Several new mines are being developed along the Yamal Peninsula and in other Arctic coastal areas. There is also a new ore mine being developed on Novaya Zemlya, Donovia at the 72nd Parallel – it will be the northernmost mine in the world.

Manufacturing

Manufacturing makes up a sizeable portion of Donovia’s industrial capacity, with large metal, food, transportation, medical, industrial, and military equipment sectors. The first five industries were privatized following the Four Traitors incident and, after struggling for the first few years, recovered almost completely. The military equipment sector continues to be state-owned and state-run and produces air, ground, and naval weapons and platforms. These include but are not limited to ground vehicles (tanks and armored vehicles), naval vessels (ships and submarines), and aircraft (fighters, bombers, and multirole). The country also produces radar equipment, telecommunication devices, and electronic warfare systems, as well as arms and ammunition. All manufacturing sectors—especially those for steel, aluminum, and military hardware—enjoy significant export markets.

Services

With economic reforms and the privatization of substantial portions of the economy, the service industry has grown considerably. It currently employs 38% of the work force and contributes 42% of the nation’s GDP. One main sector is services related to energy, such as machining. Business-related services, including financial, advertising, marketing, and retail, saw an explosion after the reforms. Tourism is the final contributing sector, and mainly focuses on the cultural attractions in and around Moscow.

Banking and Finance

Public Finance

Donovia has gone through considerable growing pains during the past decade as it continued to move into a free marketplace. First to come was a major overhaul of the tax structure, decreasing and simplifying taxes and rates in order to increase voluntary participation and reduce fraud. Then the country experienced a slowly improving economy, with inflation decreasing from a high of 60% 12 years ago to single digits only seven years later. Oil revenues increased at the same time, allowing the government to run on a surplus. Donovia’s monetary unit, the lela, grew in strength, and foreign currency holdings increased as well. Public debt decreased, and the government paid off the last of its post-Four Traitors external debt. Inflation began to increase again four years ago, and the recent global financial crisis hit the country hard. The combination of dropping oil prices and economic stabilization measures forced the government to run a deficit starting two years ago. The only positive result of the crisis was a reduction in the inflation rate, which once again reached single digits.

Taxation

Donovia passed major tax reform 19 years ago in an effort to decrease tax avoidance and support private industry. Federal taxes include corporate (15%), flat income (20%), and national sales (10%), as well as tariffs and levies on specific items. Various taxes exist at the republic and local level, including personal property, real estate, and additional sales tax. While these reforms helped fuel economic growth, the existence of both national and regional sales taxes that can reach a combined 21% has encouraged both illegal barter and under-the-counter (black market) transactions of goods and services.

Financial Policy

The Donovian government has taken a relatively conservative approach to fiscal policy during the past two decades. In addition to major tax reform, the government saved a considerable portion of  the revenues generated by the petroleum and mining industries, allowing it to run surpluses for several years. However, the recent financial crisis combined with decreasing commodity  prices during the same period had considerable adverse effects. Donovia was forced into deficit spending two years ago, and may well run deficits for the next five years.

The Central Bank of Donovia handles the country’s monetary policy, which is limited to managing the value of the Donovian lela against other currencies. This is accomplished by pegging the value of the lela to a basket of euros and US dollars, with the euro/dollar ratio determined by the bank. Changes to the basket are performed through buying and/or selling each foreign currency.

Inflation

Inflation has been a major problem in Donovia, with the country experiencing double-digit numbers for most of the past two decades. While inflation was rampant after the Four Traitors, reaching a high of 60% 12 years ago, increases in global energy prices and a revised tax structure led to a reasonable 9% rate seven years later. It began to climb again four years ago with rising food costs and increased borrowing by domestic banks and companies, again hitting double digits until the recent financial crisis. At the present time, the Donovian inflation rate stands at 10% and increasing.

Currency Reserves

Foreign currency reserves for Donovia total $179 billion, with holdings of 43% US dollars, 43% euros, 8% British pounds, and the remainder in South Torbian yen, Swiss francs, Canadian dollars, Australian dollars, and Norwegian kroner. The latter four were added in the past two years due to the weakening of both the US dollar and euro. These reserves, which are managed by the Central Bank of Donovia, are used to control the Donovian lela.

Public Liabilities/Debt

Public debt for Donovia currently stands at 12.3% of GDP. However, the country has considerable stock in domestic banks and corporations, including the largely state-owned oil company Viaprom, that have considerable external debt. When this is included in the calculation, Donovia’s public debt increases to 16.2% of GDP.

Private Banking

Though growing, the private banking sector is not without problems. Large state banks located primarily in the Moscow region dominate the market, resulting in little competition. These banks are unskilled at assessing credit risk and favor loans to large corporations, viewing small to mid-size businesses as high-risk. In addition, bank books are riddled with non-performing loans. Finally, most banks do not enjoy a high level of trust by the general public. Weak governance and a lack of transparency combine with reporting deficiencies and a strong perception of corruption to reinforce this tendency.

Banking System

Donovia’s banking sector remains small but growing, with deposits and demand for loans on the increase. Despite the country’s secular orientation, the number of sharia-compliant banks is approximately equal to the number that charge interest. Most Donovians keep their savings in bank accounts, which are federally insured for up to 50,000 lela (around $25,000). Around eight years ago, loan demand was so high that banks were forced to borrow significant amounts from foreign lenders. As much as half of current Donovian banking assets take the form of loans despite continued double- digit annual increases in deposit amounts.

Stock/Capital

The Donovian Stock Exchange (DSE) opened 19 years ago as a method to encourage foreign investment. Business lines include stocks, bonds, corporate securities, and futures trading, and the DSE index is published globally. The DSE currently has 817 different companies listed for a total value of $583 billion.

Informal Finance

The hawala system, an informal trust-based money transfer system commonly found in Muslim countries, serves as an alternative to the Donovian formal banking system for loans and monetary transfer. These transactions work on an honor system, without paper transactions or promissory notes. Few Donovians make use of this system outside of a small percentage of the country’s conservative Muslims and those associated with terrorist/criminal groups.

Employment Status

Employment status is high in Donovia, with relatively stable unemployment for the past decade. The current low birth rate and short male life expectancy allow for both reduced competition and increased upward mobility in employment, thus opening up more entry-level positions for younger Donovians. While this grants the individual worker more employment opportunities, it harms the economy through a lack of workers. There is a considerable foreign labor market, but most of these positions are black market in nature due to official government favoritism toward Donovian Arabs.

Illegal Economic Activity

A part of the Donovian political system for decades, corruption is integral to the Donovian economic system and only continues to expand and increase. It can be as small as bribing a traffic officer to avoid getting a ticket, or as large as paying off government officials to prevent false criminal charges or physical destruction of a business location. Some activities that would be normal business activities in other countries are either illegal or considered suspect by the Donovian security  services. There are particular risks involved in any commercial activity with the Donovian military- industrial complex. Any misunderstanding or dispute in such transactions can attract the involvement of the security services and lead to investigation or prosecution for espionage. Rules governing the treatment of information remain poorly defined. Foreign businesses, including some major international corporations, have either limited expansion in the country or considered pulling out entirely due to the pervasiveness of these problems and their associated uncertainties.

Incidents of unprovoked, violent harassment against racial and ethnic minorities regularly occur throughout Donovia. People most at risk are those of African or Asian descent. These same groups of people are also at risk for harassment by police authorities. It is not uncommon for foreigners in general to become victims of harassment, mistreatment, and extortion by law enforcement and other officials. Police do not need to show probable cause in order to stop, question, or detain individuals.

Organized crime has made itself an increasingly pervasive part of the Donovian system since the Four Traitors. It is inextricably linked to government corruption, with non-governmental persons and government employees working hand-in-hand for both power and profit. It is highly probable that criminal organizations approve, if not directly sanction, all medium- and large-scale illegal activity in the country.

The Donovian Mafia is well-organized and has branches and contacts in many nations, including the United States and the European Union. With former security service and military personnel among its members, the Donovian Mafia possesses a wide range of capabilities, including electronic surveillance, human intelligence networks, explosives and firearms expertise, and associations with government officials in Donovia and neighboring countries.

Social and labor organizations often act as a cover for illegal economic activities. Foremost among these groups is the Pan-Donovian Law Enforcement Brotherhood. Publicly this group purports to champion charitable causes as a means of cementing partnerships between police organizations and their respective local communities. In reality it is a national network that ensures citizens remain willing to bribe police officials in order to avoid harassment, arrest, incarceration, and physical abuse. Another important phony organization present in Donovia is the National Inter-Business Cooperative. Although this organization’s written charter suggests nothing more sinister than a Donovian version of the Chamber of Commerce, its members are often steeped in government-corporate corruption (typically involving bribes to avoid taxes), extortion, and almost universal corporate espionage.

Finally, the Pan-Caucasus Miner’s League has less to do with improving the lot of downtrodden miners than facilitating wildcat mining that pays slave wages under atrocious working conditions. The League has been thoroughly infiltrated by the Donovian mafia, which is notorious for smuggling, extortion, and extra-legal mining, hydrocarbon, and timber operations. For this reason, many in Donovia view the Miners’ League as little more than an extension of the mafia.

Illegal activities in Donovia take many forms. Those that are usually associated with organized  crime include trafficking in humans, drugs, and small arm; money laundering; extortion; and fraud. Criminal groups may also engage in corruption, terrorism, abduction, export of contraband, and smuggling of radioactive substances. The mining, oil, gas, and timber industries see their share of illegal activities and heavy influence by organized crime groups. All of these areas see participation by both organized crime and government officials. The Jinat crime family, which produced the infamous Traitor Ismail Jinat, is heavily invested in the mining trade. Another organized crime group is the Al Iksir Cartel, which operates in northern Atropia and southern Donovia.

Summary

Complex economic interplay between the Caucasus countries binds them together. Limaria, Gorgas, and Atropia were strongly affected by the reduction of Donovian influence two decades ago. The oil- rich countries of Ariana and Atropia must use their Limarian and Gorgan neighbors to transship hydrocarbon resources to other countries. Limaria and Gorgas must develop a free-standing economy despite significant corruption, lack of developed industries, and natural resource shortages. Over all of this, Donovia seeks to limit Arianian influence and return to its former position as unquestioned regional hegemon. This economic interdependence will likely drive regional conflicts as the nations struggle amongst themselves to exploit riches created by oil and natural gas.