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YASYNUVATA, UkraineThe bang of nearby artillery fire echoed off the facade as Vladimir Trubchanin inspected his charred, Stalin-era office building.

The war went right through the building. Those were the windows of my office, the 45-year-old factory director said, pointing to some blackened holes.

It has been a bad year for his Yasynuvata Machine-Building Plant, which produces giant digging equipment used in coal mines. In September, the factory found itself on the front line in Ukraines conflict with Russia-backed separatists.

The front has moved down the road, but the factory is still reeling. Production has all but halted. Three quarters of the staff of about 800 are gone. The plant has ended up in a rebel pseudo-state. Nearly all the documents went up in flames in the main office, as artillery shells blasted out the factory floors windows and parts of the walls and roofs.

The sweeping collapse of industry in Ukraines eastern Donetsk and Luhansk regions has reverberated across the country, posing serious problems for the government and the rebels alike.

Should businesses like Mr. Trubchanins fail, the separatist-held regionwith a pre-conflict population of about 4.5 millionwill face an even dimmer future.

Alexander Khodakovsky, leader of the separatist Vostok battalion, warned that export-focused factories in the Donetsk region could end up as scrap metal if they were to lose their ties to the Ukrainian market.

Remember the old saying, Demand creates supply, Mr. Khodakovsky told a group at the local university on Nov. 24. If we provoke the destruction of market channels at this time with some sort of careless actions, well lose everything.

The rest of Ukraine stands to lose, too. Before the conflict, the two regions accounted for about 16% of Ukraines gross domestic product and roughly a quarter of industrial output, as well as almost all the countrys coal production. Much of that is now cut off.

Industrial production in Ukraine for the month of October shrank by 16.3% from a year earlier. The decline, combined with dwindling foreign-exchange reserves, has sent Ukraines currency plunging farther than any other in the world this year.

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Collapse of Industrial Heartland Reverberates Across Ukraine