‘KING COAL’ AND THE FUTURE OF THE UKRAINIAN DONBAS

David Marples

The separatist insurgence in Donetsk and Luhansk has raised questions about the future of this region as part of Ukraine. Opinion polls suggest that the supporters of separatism constitute only a small minority (http://uacrisis.org/kiis-survey-ukraines-southeast/). On the other hand, much of the population was disaffected by the events of the Euromaidan and alienated by the interim government that was formed after the departure of former president Viktor Yanukovych. In late May, about 1,000 miners took part in a pro-separatist rally against the Ukrainian government’s “anti-terrorist operation” in the region, led by a miners’ union with close ties to the former president (http://www.themoscowtimes.com/news/article/donetsk-miners-rally-in-favor-of-separatists-in-eastern-ukraine/501043.html).

UKRAINE, Donetsk – Coal miners line up to give out their equipment prior to leaving the Zasyadko mine following their work shift in eastern Ukrainian city of Donetsk on June 6, 2014.

Clearly many miners are disaffected and discontented. The question that should be at the forefront of attention perhaps is the future of the coal industry; a sector that has been struggling since the 1980s, but retains the potential to play an important role in Ukraine’s economic recovery. At the same time this area and industry were central to the authority of the ex-president, as well as his chief financial supporter Rinat Akhmetov, the major owner of privatized coal mines today. What is the current state of the Ukrainian coal industry and what role can it play in Ukraine following the election of its new president, Petro Poroshenko?

The importance of this region to Ukraine was highlighted during the recent election campaign by the most popular campaigner in Eastern Ukraine, former Deputy Prime Minister Serhii Tigipko, who stated that the Ukrainian government should create conditions for the population of the “South-East” that would prevent them from even considering separation. He suggested that it was important to struggle for Donetsk and Luhansk to remain in Ukraine, and that the hypothetical loss of the Donbas would have enormous negative consequences for the country: seven million people and in economic terms 30% of its GDP, and 25% of its exports. Essential in Tigipko’s view is decentralization of power, raising the influence of the regions, electing local governors, and expanding the use of the Russian language (http://www.segodnya.ua/politics/pnews/za-doneck-i-lugansk-nuzhno-borotsya-tigipko-521632.html). Granted the theoretical imposition of such policies, would they be enough to ensure the revival of the region? The response here is limited to the coal industry, which is the most important industry in the two major regions.

In the Soviet period, prior to the large-scale development of nuclear power, Donbas coal (by which is denoted here the Donetsk and Luhansk, but not the Russian Rostov part of the coalfield) fueled thermal power stations that accounted for up to 75% of Ukrainian electricity production. By 2011, however, that proportion had declined to one-third, despite the fact that coal reserves, at 54 billion tons, are practically infinite, equivalent to a further 390 years at the present rates of production (http://www.mbendi.com/indy/ming/coal/eu/ua/p0005.htm). In that same year 149 coalmines were operating in Ukraine, 120 of which were state-owned, employing 271,000 people. Since 2010, a program to privatize coal mines has been under way. Today the biggest private energy company, DTEK (Donbas fuel-energy company, the energy sector of Rinat Akhmetov’s company System Capital Management), produces about 20 million tons annually, roughly one quarter of the total coal output (http://eurocoal.org/pages/layout1sp.php?idpage-269). Prior to the present troubles, the privatization of about half the coalmines saw a rise in production peaking in 2012 that resulted in a coal surplus and concomitant lower coal prices  (see Table 1). The government thus asked some state companies to lower production and shut down 17% of mines on a short-term basis (http://www.coalage.com/features/3235-ukraine-faces-oversupply-crisis.html#.U5Y3qZSSxss).

Table 1: Ukrainian Coal Output, 2010-14 (in tons)

2010: 75.2

2011: 81.8

2012: 85.9

2013: 83.7

2014: 83.0 (projected)

[Approximately 62% of coal produced is steam coal used for energy generation and the remainder is coking coal]

Source: http://www.worldcoal.com/news/coal/articles/2013_coal_output_falls_in_Ukraine_466.aspx#.U5ZYVPmSxe8; http://sadovayagroup.com/operations/ukrainian-coal-market/ [Accessed June 10, 2014]

Unsurprisingly, the violent encounters between government and separatist forces in Eastern Ukraine in the spring of 2014 have had a negative impact on coal production. From January through April 2014, coal output declined by 0.4%, at 27.87 million tons, signifying a potential annual output of around 83 million tons (http://coal.steelguru.com/cis/16164/ukrainian_coal_mining_output_down_by_0_4pct_in_jan_apr_2014) (see Table 1). Paradoxically, however, a small drop in production may benefit the coal industry because of the likely rise in prices, as long as it does not have a significant impact on those industries dependent on coal: thermal power stations, coke, and metallurgical plants. In the case of the latter two sectors. Ukraine cannot provide all their needs because they require coking coal with low sulfur content, which, as Ilona V. Kochura points out, is only found regionally in the coalfields of the Russian Federation (http://gse.vsb.cz/2012/LVIII-2012-1-17-23.pdf). But the main critiques of coal mining in contemporary Ukraine are less about production per se, than about organization, planning, and renovation, all areas in which the country appears to be lacking.

An analysis published in a Kyiv-based newspaper (no author was cited) offered a forthright criticism of the current leaders of independent Ukraine for the decline of the industry. It noted that in spring 2014, most coal enterprises had continued to work despite the blockade of Slavyansk and Kramatorsk. Yet miners were afraid of the forthcoming removal of subsidies to unprofitable mines, which would force Ukraine to raise imports of gas, the cost price of which exceeds coal more than 1.8 times, even taking into account state subsidies. The impact on those industries that depend on Donbas coal would also be catastrophic, it continued. Yet the newly elected president [Poroshenko] appeared ready immediately to sign an Agreement on economic integration with the EU, meaning that Kyiv would have to completely abandon subsidies in all sectors of the economy, including the coal industry. In the independent period, moreover, many industrial research institutes had been closed and their financing practically ended. The branch has long needed a full “technical retooling” to make it cost effective, but instead the region has been sucked into war and is being dragged into the European Union (http://www.rg.kiev.ua/page5/article30891/).

In truth, the problems of the region are somewhat deeper than the above article suggests. For many years, and especially during the Yanukovych presidency, the coal industry has been mired in corruption. In an important investigative article, Denys Kazansky and Serhiy Harmash reveal the findings of the East-European-based Organized Crime and Corruption Reporting Project. They show how companies connected to former government officials and businesses owned by the former president’s son—and almost all linked in some way to the former president— regularly sold coal on the black market. About 11% of Ukraine’s annual coal output is derived from illegal mines that operate outside both the state and private system, and can be found wherever coal seams exist, including in fields and around private homes. Miners work for abysmal pay and in very dangerous conditions in so-called kopanki (illegal coal mines), mainly around Donetsk. MP Oleh Medunytsya (For Ukraine faction) requested an investigation after it was noted that the amount of coal transported on railways exceeded official annual production by almost 6 million tons. The coal mined at kopanki is sold at about 20% of the official price to managers and “businessmen,” who in turn resell it at “normal” prices to buyers (http://getq.am/eng/print/54829).

Another critique of this practice was offered by First Deputy Minister of Energy and the Coal Industry Yurii Zyukov (he took up the post only in April), who noted the high rates of corruption and that state mines were selling coal to private companies at cheap prices, with numerous intermediaries taking a slice of the profits, before it was resold to the ultimate buyers for higher prices (http://coal.steelguru.com/cis/16216/ukrainian_cabinet_to_sell_off_coal_mines_and_reduce_subsidies_report). Most coal mines in Ukraine are unprofitable. Eighty percent have been operating for more than two decades without being modernized or upgraded, coal seams are very deep, and methane gas explosion are common. In 2004, the Ukrainian government established a state company, putting an end temporarily to privatization—Vyhillya Ukrainy (http://www.mbendi.com/indy/ming/coal/eu/ua/0005.htm). In 2008, nonetheless, during Yulia Tymoshenko’s second term as Prime Minister under President Viktor Yushchenko, some $22 million worth of illegal coal was sold to electric power stations. The situation was no better after Nikolay Azarov (Prime Minister under Yanukovych) cancelled Vyhillya Ukrainy’s monopoly in the spring of 2010, because that decision allowed private entrepreneurs to profit from the underground sales of coal (http://hetq.am/eng/print/54829).

Donbas miners justifiably have felt for some time that they are a forgotten factor in what was once considered a proud industry. Indeed coal mining could in theory be revived, especially as a means to avoid future reliance on Russian oil and gas. Much depends on the major oligarch Akhmetov, assuming that he can retain his large holdings in the industry both from separatists and demands for the closure of losing mines by the IMF, in return for its now-essential loan to Ukraine (http://uk.reuters.com/article/2014/03/27/uk-ukraine-crisis-idUKBREA2J1E820140327). In the past Ukrainian miners have demonstrated that once called into action they can be a formidable force, particularly during the coal miners’ strike in the late Soviet period, which turned briefly into a powerful political movement. Today, however, they appear to be at a crossroads, not least because of the unstable political situation and the uncertainty of their position within independent Ukraine.

How can the financially struggling Kyiv government invest sufficient funds in the industry to modernize it and, if not, how many coal mines would survive 100% privatization? Without doubt that would entail closures and job losses. As was the case with the recent presidential elections, the industry may have to rely on its oligarchs, regardless of their past deeds or affiliations. In the past these figures plundered Ukrainian industry and resources for their own benefits. Today the Donbas miners no doubt hope Akhmetov and others make some sacrifices for the good of the country. Coal is no longer “king” in Ukraine, but it is plentiful and a potential source of economic survival—it remains the most viable long-term resource the country possesses. And while few miners wish to see their regions separate or be answerable to separatists, they oppose just as vehemently the corrupt practices in the coalfields and the current inclination of Kyiv leaders to orient Ukraine toward Europe.

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