War Is Not The Only Grave Problem For Eastern

Ukraine Coal Industry

JANUARY 9, 2015

In this photo taken on Oct. 30, 2014, a pro-Russian rebel stands guard as
miners prepare to go into an elevator at the Chelyuskintsev coal mine in
the city of Donetsk, eastern Ukraine. Pro-Russian rebels often threaten to
stop sending coal to Kyiv but the Ukrainian government could simply cut
off the electricity generated at a power station on its side. Without that
power, shafts will get flooded and could be lost entirely as an energy
source.

Dmitry Lovetsky/AP Photo

by Kirill Rodionov, independent journalist

*The article takes part in December round of MindSketch
produced by Maxim Eristavi

infographics by Alex Guzenko

 Ukrainian economy in grave need of cheap
energy to survive. But the war in eastern
Ukraine cuts the country out of its main
energy source coal. In fact the brutal armed
conflict is not the only major problem that
threatens the main energy bloodline of
Ukraine.

How crucial is Eastern Ukraine coal?

The collapse of coal production in the territories controlled by
the self-proclaimed DNR and LNR is an outcome of conflict in
eastern Ukraine. As of December 1, 2014, the coal reserves at
Ukrainian coal-fueled power plants decreased by 2.5 times
relative to the same period last year. Given this sharp deficit of
coal, Ukraines Cabinet of Ministers was forced to look for coal
abroad to cover the shortage. Ukrinterenergo, a state-owned
foreign trade company, signed a contract with British Steel Mont
Trading Ltd to purchase 1 million tons of coal from South Africa
in August. The first South African coal was delivered at the end
of October, but due to some political factors South African coal
was declared unfit for the usage. Because Ukraine cannot take
out about three million tons of coal from the Donbas (extracted
by Ukrainian state-owned mines), the nations leadership has no
choice but to continue looking for the alternative energy
suppliers. Kazakhstan could export coal to Ukraine from
Ekibastuz coal field and cover some of Ukraines needs.
Given reduced import of Russian gas, having a stable supply of
coal is critically important for the energy security of Ukraine.
Today, the major obstacles to its security are ongoing armed
conflicts in the war-torn region of Donbas, which halted the work
of 68 coal mines. However, even if the peace is established in
the region, the industry will still have many problems.

The eastern Ukraine coal crisis was bad

even before the war
Since the collapse of the Soviet Union, Ukraines coal industry
was in a severe crisis, which was a continuation of the trend that
started in the Soviet period: coal production fell from 216 million
tons in 1975 to 189 million tons in 1985 and even more sharply
later from 165 million tons in 1990 to 71 million tons in 1996.
The Donbas has been experiencing the difficulties typical for the
coal-mining regions of Germany (Ruhr), the UK (North East
England), Poland (Upper Silesia) and Russia (Kuzbass) in the last
third of the 20th century. A large number of unprofitable mines
and quarries, alive exclusively due to the financial support from
the state budget, was a clear signal that the industry needs a
thorough reform that would help to make the industry more
profitable.

Coal production in Ukraine, mln tons,1975-1996 and Average annual

production of one miner in Ukraine, Russia and Poland, tons of coal

Strong trade unions in the mining industry were a serious

obstacle to these steps. Although in the 1990s the number of
miners did not exceed 5% of total employment in Ukrainian
economy, miners triggered more than a half of all organized
strikes at that times. Their demands had not only economic (e.g.
provide each miners family with a separate apartment), but also
political, be it the constitutional nature provision to the
Declaration of State Sovereignty of Ukraine (1991) and holding
of early presidential elections (1993). Moreover, their actions
had a serious impact on the political spectrum within the higher
echelons of power. So in 1993 after the miners march on Kiev,
Yefim Zviagilskiy, who was the director of the Zasyadko mine
and the chairman of the Donetsk executive committee and
Donetsk City Council, was appointed to the First Deputy Prime
Minister. Largely because of his influence, the Cabinet allocated
the huge subsidies for the coal industry, the total amount of
which at the end of 1993 was a record-breaking: 3.8% of GDP.
The situation significantly changed after Leonid Kuchma was
elected as the President of Ukraine in 1994. Coming from
Dnepropetrovsk, he tried to limit the influence of the Donetsk
clan, which could have been done via restricting of the Donbass
coal industry. Given a high inflation and a severe contraction of
GDP, the government could reduce the amount of subsidies for
the coal mines to 0.7% of GDP in 1995. At the same time the
Cabinet began intensive negotiations with the World Bank which
lead to a program of radical reforms aimed to create a
competitive coal market in Ukraine.

In December 1996, the World Bank and Ukraines Cabinet of

Ministers signed an agreement on the allocation of 300 million
dollars intended for coal reform implementation. Over the next
four years about seventy unprofitable mines were closed, which
led to the dismissal of more than 150 thousand employees.
However, the industry continued to depend on the subsidies: at
the end of 2000 the subsidy was close to 1.1% of GDP. Yulia
Tymoshenko Deputy Prime Minister for Energy in a pro-reform
government of Viktor Yushchenko, who headed the Cabinet of
Ministers in 1999-2001apparently had to resign when the
government after an attempt to eliminate the subsidies. Vitaliy
Hayduk, her successor, previously worked as Deputy Head of the
Donetsk Regional Administration and was also involved in the
creation of the Industrial Union of Donbass Corporation that
traded gas. In December 2002 Viktor Yanukovych, the former
governor of the Donetsk region, became the Prime Minister and
ensured the preservation of coal industry subsidies. The
situation did not change after the Orange Revolution, too: during
the period from 2005 to 2010 the amount of subsidies increased
from UAH 3.3 billion (0.74% GDP) to UAH 7.7 billion (0.71%
GDP).

Eric Feferberg/AFP Miners return from their shift at the Kalinina coal mine
in the eastern Ukrainian city of Donetsk, controlled by pro-Russian rebels
on Monday

Whats wrong with Ukraines coal

industry?
A number of problems of the coal industry remains unresolved to
this day. First of all, the productivity is low. While the average
annual production of one miner in Poland in 2007 stands at 761
tons of coal, the Ukrainian counterpart got only 189 tons.
Difficult mining conditions (the average depth of current existing
mines is 700 m) result in an extremely high death and injury
rate: the number of deaths in mining accidents per 1 million ton
of coal extracted is 2.2 as of 2008. For comparison, in Russia,
even during the unfavorable for the coal industry year of 2007,
when the release of methane in the Ulyanovsk Mine took the
lives of 110 people, this rate was 0.77. The other Achilles heel of
the Ukrainian coal industry is maintenance of the non-market
pricing, a key role in which is played by The Coal of Ukraine
State Enterprise that buys the coal from state mines and resells
it to the power plants.

Learn from Russia

The Russian reform of the coal industry in the 1990s could be a
template for Ukraine. At the dawn of the first post-communist
decade, the industry experienced a severe crisis: In ten years
the coal extraction dropped in half. The restructuring process
began in 1994. Since that time 188 mines and quarries had been
liquidated and more than half a million people were dismissed.
The cornerstone of the reform was privatization: while in 1993
the share of coal extracted by the private companies was only
5.5%, by 2007 the share increased to 99.9%. The level of
production itself has grown over 30%.

The subsidies allocation from the federal budget were almost

entirely suspended. Existing unds were used t to finance the
social and environmental programs related to the settlement of
the restructuring consequences only. No less dramatic changes
were applied in the safety measures: the total death toll in the
Russian mines dropped from 277 people (1994) to 85 (2006).
The labor productivity in the industry increased dramatically:
from 1995 to 2008 the average annual output per employee
increased from 200 tons to 1350 tons of coal. Finally, for the first
time in its recent history Russia has become a net exporter of
coal: 120 million tons of coal mined in the country were
exported abroad in 2011. At the turn of the 1990s this looked
fantastic.

An important outcome of the industry restructuring is the

increase of the share of coal extracted in Russia in a cheap and
productive way up to two-thirds of its total production. The share
of costly and accident-prone underground mining fell from 50%
in the early 1990s to one-third in the mid-2000s. The main
production growth was achieved through developing fields in the
Far East and Siberia, while mines situated in Rostov region
(eastern Donbass) has a decline.
Sergei Ivanov and Vovka hunched over in a canoe-like vessel that they
call the Boat that will take them 390 feet below ground level inside this
illegal mine in Shahtersk, eastern Ukraine on April 28, 2014.

During their eight-hour shift they dig out and send up about 15 20
boat loads, between them they make about the equivalent of only
three US dollars for every load they told me.

Two month ago, they lost a friend and fellow miner at another illegal
mine when the steel cable attached to the Boat snapped and the
miner fell to his death deep underground. (Ghazi Balkiz/ NBC News)

6 steps to revive Ukraines coal industry

Judging from Russian experience, the collapse of the coal
industry in Ukraines Donbas was totally predictable and it is not
surprising that many mines are not competitive. Therefore, even
after peace returns to the Donbas, the region can have
sustained growth only if the government finishes the
restructuring process, which began two decades ago.

The coal industry of Ukraine needs a new round of reforms that

would finally switch the sector to the market economy.

The key transformation components should have been the

measures, which at the end of the last century, were used by the
majority of European coal-producing countries:

1. remove subsidies to unprofitable mines

2. subsequent closure of unprofitable mines
3. privatize profitable companies
4. liberalize prices
5. release surplus labor
6. provide targeted assistance to miners families

In summary, the Cabinet of Ministers of Ukraine will have to

complete the process of closing unprofitable mines, to privatize
the remaining state-owned coal mines, and to set free market
pricing by (i.e., disband the coal trade intermediary company
Coal of Ukraine). As the Russian coal industry restructuring
shows, a crucial factor of industry reform success is the
provision of the targeted financial support to the families of the
fired miners. However, given low social expectations among the
local residents in Donbass , this task may be easier than in other
cases: stopping the conflict will be the best form of social
support. The latter, however, depends on Russias political
leaders.