Adventures of coal from the "DNR", or price of the Russian World

Extraction and export of coal remains the main source of own income for the leadership of the so-called "DNR" and "LNR". This is because the neighbors of Ukraine continue to buy illegal coal from the territories of Donetsk and Luhansk oblast, not controlled by official Kyiv.

Thus, Turkey and Poland, as well as a number of other European countries, support the existence of separatist regimes in Donetsk and Luhansk - in violation of international law and previously adopted sanctions against those involved in the Russian aggression in Donbass. What is worse, in spite of the blockade, Ukraine itself, apparently, does not mind buying occupational coal, sponsoring the aggressor this way…

Klimkin's "tolerance"

The first reports on the establishment of coal sales from CADLO to Turkey and the EU countries appeared in the media as early as 2015. This "business" was controlled by the then separatist leaders Alexander Zakharchenko and Igor Plotnitsky, now it has partially passed to the management of representatives of group of the runaway Kharkiv oligarch Sergey Kurchenko – through the Gas-Alliance and Vneshtorgservis companies.

The incident with the Volgo-Balt 214 bulk carrier, which sank off the coast of Turkey on January 7, drew attention to this problem again. Since, as it turned out, there were 3 thousand tons of coal on board of the vessel leaving the Russian port of Azov – presumably, from the "DNR".

Volgo-Balt 214 stood towards the Turkish port of Samsun under the flag of Panama. The Turkish company Orbital Ship Management is official owner of the vessel.

Commenting on the situation with the drowned bulk carrier, Foreign Minister of Ukraine Pavlo Klimkin was brief and careful in expressions, having limited himself to a few evasive phrases.

"Regarding the origin of coal – we check it. We know about Russian attempts to mix coal from the occupied territories and Russian – and export it, not only to Turkey. We work with our partners to make an appropriate investigation – and not just about that", – he said.

But 3 weeks have already passed – but the MFA and its head remain silent about the results of the audit – if it ever took place. And it looks very suspicious. If it is legal coal from the Rostov oblast, i.e. from the Russian territory of Donbass – then why not to announce for the media: your information has not been confirmed. At least, not only journalists, but also all citizens of Ukraine (from whose pocket P.Klimkin and his subordinates receive a salary) in this case will be able to make sure: the diplomats are eating their own bread not in vain, they are doing something.

If this is illegal coal from CADLO, then for a start, it would be nice for P.Klimkin to call the Turkish ambassador to the MFA and hand an official note of protest on this matter over him.

Well, if the check was not carried out, then this can only mean one thing: unwillingness to set the course of events according to the second scenario. Although P.Klimkin assured at a briefing on January 9 that this was a very fundamental question for Ukraine.

"I spoke with our European partners, because we also have information that there were Russian attempts to export such mixed coal to some European countries as well. We have reasonable suspicions with some other countries that there were attempts to export this coal not only to Turkey", – he admitted.

Please note that the MFA head chose not to name countries that buy coal from the separatists. Although, according to him, it is referred to reasonable suspicions.

Strange "tolerance" of the Minister of Foreign Affairs of Ukraine on the "very fundamental issue" causes at least bewilderment – what for?

Coal agreement

Later, ex-governor of Luhansk, now deputy minister for temporarily uncontrolled territories Heorhiy Tuka made an explanation on this issue.

According to him, the difficulty is that the coal basin of Donbass is not only in Ukraine, but also partially enters the Rostov oblast of the Russian Federation.

"Therefore, it is almost impossible to prove via chemical analysis that coal which is marked as mined in the territory of Rostov oblast is actually from the Ukrainian Donbass", – the official explained.

It is interesting that he had previously argued the opposite. "If, for example, this coal is sold according to the documents of the Kuznetsk coal basin, it will be very easy to explore. If they name mines in Rostov – it will be more difficult, but I do not think that it is impossible", – H.Tuka stated on the air of 5 Kanal in August 2017.

Earlier, the media reported that Turkey and Spain were the main buyers of illegal coal from CADLO, followed by Italy, Poland, Bulgaria and Romania.

It should be noted that in Italy, the buyer was Unicoal SPA, which is part of the ENI state-owned company, one of the largest energy companies in Europe.

Small volumes were delivered to Greece, Georgia, Moldova and even to Morocco. For example, in the case of them, it is really possible to confine ourselves to an informal conversation at the ministerial level.

However, supplies to Italy and especially to Turkey are systemic in nature and require a rigorous response. Why is not it followed still?

Only in June 2017, the Ministry of Energy and Coal Mining of Ukraine sent a letter to the MFA, having proposed to warn 8 countries through the Ukrainian embassies about the risk of illegal coal supplies from CADLO.

It was about Turkey, the Netherlands, Spain, Moldova, Bulgaria, Belgium, Poland and Romania. Ukrainian diplomats were instructed to inform local ports, customs, existing and potential buyers about this.

However, to inform is only the first step. And what to do if the received information is ignored – as, for example, in the case of Turkey? Why is there no further reaction?

Maybe there are some high political considerations, forcing to sacrifice national interests a little in order to achieve much more in future?

For example, it is known that Ukraine has been negotiating with Turkey about a free trade zone for a few years and is now in the final straight.

Therefore, the assumption that Kyiv does not want to raise the issue of Turkish procurement of coal from CADLO in order not to exacerbate relations or disrupt signing of an agreement with the important trading partner of Ukraine immediately appears.

But according to the media reports with reference to diplomatic sources, the document which is being prepared is generally unfavorable for Ukraine.

In particular, duties on import of Ukrainian agricultural and steel products remain. And these are the positions for which Ukrainian manufacturers are competitive in the Turkish market. These are the sectors due to which Ukraine could significantly improve its negative foreign trade balance.

But… according to all the same sources, it was decided at the state level to make certain concessions to Turkey for the sake of maintaining its support for the Crimean Tatar movement, non-recognition of the Crimea annexation and in gratitude for the assistance in receiving the Tomos for the Orthodox Church of Ukraine.

In this case, it turns out that for the sake of these questions, the leadership of the country is ready to close its eyes to the indirect support of the separatists in Donetsk and Luhansk by Turkish energy companies.

Such an approach can hardly be called consistent with national interests and justified in terms of diplomatic strategy.

On the other hand, the "tolerance" of the head of the Ukrainian MFA mentioned above in response to the Volgo-Balt 214 bulk carrier incident and to the problem in general is being immediately explained: the coal smuggling from CADLO was made part of a chain of unspoken political and economic agreements.

There is another delicate nuance that does not allow Ukrainian diplomats to raise their voices in talking about this issue with European partners.

As it was repeatedly noted in the materials of journalistic investigations, Ukrainian energy companies themselves bought illegal coal from the uncontrolled territories of Donbass.

It was imported under the guise of Russian and South African, mainly to the power plants that are part of the PAO Centrenergo state-owned company. There were also shipments of coal production without any accompanying documentation at all. Perhaps, it is worth recalling here that it was current Minister of Energy and Coal Ihor Nasalyk who, being a deputy from the PPB, traveled to occupied Donetsk, where he held talks with "Minister of Revenues and Duties of the DNR" "Tashkent" about the coal supplies. That is, the Ukrainian authorities had contacts and communication channels for illegal supplies for sure.

European partners are well aware of it and can always ask the same P.Klimkin on occasion: "Why, then, do you yourself support the separatists?". And the head of the Ukrainian MFA has no response.

At year-end 2018, Ukrainian consumers, according to the documents, purchased coal in Russia for $1.824 billion.

Nothing left but to assume how much of this money has remained in Donetsk and Luhansk in the pockets and on the accounts of leaders of the local "fighters for independence".

Profitable business

The media reported on small exposed consignments of coal from the "DNR"-"LNR". For example, in 2017, sales volume to Turkey was estimated at 340 thousand tons, to Spain – at 200 thousand tons, to Ukraine – at 75 thousand tons, to Italy – at 61 thousand tons, to Poland – at 32 thousand tons, to Romania – at 30 thousand tons and to Bulgaria – at 26 thousand tons.

These data were obtained on the basis of studying the Russian customs declarations. But, as it was already noted, deliveries are often being made without any documents at all.

The materials of one of the investigations say about the documented export of 1.3 million tons of coal from CADLO for 2015.

At the same time, the authors themselves note that the real figure, taking into account smuggling, is several times higher. Let us try to estimate its scale by the calculation method.

According to the separatists, the total for the "DNR" coal output in January-November was 7.362 million tons. In this case, 7.8-7.9 million tons can be expected by the end of the year.

Now such state-owned companies are working there: Torezantratsyt, Makiivvuhillia, Donetsk Coal Energy Company (DCEC), Komsomolets Donbassa Mine, Zasiadko Mine and Donbass mine management.

Torezantratsyt, Komsomolets Donbassa and Makiivvuhillia are leaders in terms of output.

In recent years, production at the Makiivka association has stabilized at around 1 million tons - although the pre-war volumes surely exceeded 2 million tons.

At year-end 2018, the miners of Makiivvuhillia reported on the production of 1.1 million tons, Torezantratsyt reported on 2.054 million tons for 11 months, DCEC – 800 thousand tons in 2017, Zasiadko Mine – 471 thousand tons for 8 months in 2018, Donbass mine management reported on the mining of 53.7 thousand tons during several months, Komsomolets Donbassa – 141-155 thousand tons.

In this case, we find that production of 7.8-8.0 million tons in the "DNR" is quite a correct indicator. Especially since new lavas were commissioned in separate mines last year.

Luhanskvuhillia works in CALO, renamed by the separatists as Centrugol. This association is considered to be "state republican enterprise" and is controlled by the self-proclaimed "LNR" authorities.

At year-end 2018, Luhanskvuhillia reported on the production of 1 million tons, having doubled the figure compared with 2017 due to the introduction of new lavas – mainly at the Bilorichenska Mine.

The Krasnodonvuhillia, Rovenkyantratsyt and Sverdlovantratsyt associations, which belonged to Rinat Akhmetov until 2017, are now handed over to Vneshtorgservis of S.Kurchenko.

In total, these associations produced about 7-7.3 million tons in 2018, including 1.5-1.8 million tons from Krasnodonvuhillia. Therefore in general, the indicator is about 8 million tons for the "LNR" and 15-16 million tons – for CADLO in total.

Now about the consumption. The main consumers of coking coal are Yasynovsky, Makiivka, Yenakiieve and Alchevsk coking plants. All of them are "under Kurchenko", i.e. transferred to the management of Vneshtorgservis.

This company operates specifically: for example, employees are paid wages in cash, brought to the company in bags, without any bank account entries.

It is not surprising that there is no official information about the production at these plants. Earlier it was reported that Makiivka Coking Plant produced 127 thousand tons of coke for 5 months in 2017, Yasynovsky Coking Plant – 108 thousand tons and Yenakiieve Coking Plant – 68 thousand tons.

In this case, on condition of the uninterrupted operation of these enterprises, their annual production in 2017 amounted to 305 thousand tons, 259 thousand tons, 163 thousand tons, or 727 thousand tons in aggregate.

Let us take into account the report of the "Ministry of Economic Development of the DNR" on the 2.2 times growth of coke production over 2018 in monetary terms.

Let us take into account the calculation of the rise in prices for Ukrainian coke in 2018 to $264/t against $219/t in 2017, i.e. by 20.5%, and we will get an increase in production up to 1.3 million tons in volume terms.

This figure looks close to reality, taking into account the general faint and subconscious state of industry in the "republics".

There is no information on the export of coke from CADLO, these volumes are being absorbed by the Alchevsk Iron & Steel Works and Yenakiieve Metallurgical Plant.

From December 2017 to December 2018, Alchevsk Iron & Steel Works produced 1.5 million tons of steel and rolled products. This volume requires 800-850 thousand tons of coke and 1.04-1.105 million tons of coal.

This means that the Yenakiieve Metallurgical Plant took 400-500 thousand tons of coke remaining in the "DNR" – since Alchevskkoks continues to stand idle, and deliveries of this raw material are possible only from CADO.

In total, such coke production ensures consumption of about 1.7 million tons of coking coal – i.e. all the current production of Krasnodonvuhillia and Zasiadko Mine.

The volumes of Makiivvuhillia, which also produces coal of rank K, remain unclaimed for domestic consumption in the "republics".

Of course, it is not at all necessary to send all Krasnodonvuhillia products to the separatist-controlled coking plants and to send everything for export from Makiivvuhillia – rather, a mixed supply scheme is used. Nevertheless, it turns out that approximately 1.1 million tons of coking coal are exported abroad during the year.

Now about the steam coal.

The main consumer here is Starobesheve thermal power plant, which uses steam coal of rank ASH and T.

When operating at full capacity, its power units burn 1.4 million tons of coal per year. There is also Zuyevska TPP capable of using 860 thousand tons.

The rest of steam coal goes to household consumers, but they do not need much – taking into account the fact that several million displaced people has left CADLO.

According to the self-proclaimed authorities, the "DNR" required 173 thousand tons of coal for privileged categories of the population for 2018, the "LNR" – 33 thousand tons.

We get that about 4 million tons of coal are used by CADLO for technical needs per year, and another 1-2 million tons – by domestic consumers. Total up to 6 million tons.

Thus, the annual illegal export of coal from the uncontrolled territories is approaching the mark of 10 million tons per year.

This is much more than data of the Russian analysts, who reported 1.5-2 million tons of illegal coal supplies from the Ukrainian Donbass in 2017-2018.

Apparently, they also use figures of the official customs statistics – whereas most of the coal is being smuggled without documentation.

This means pretty good revenues for those who came to power in Donetsk and Luhansk on the topic of "Donbass Independence" – taking into account the growth in world prices for thermal coal from $42 to $100/ton over the past 2 years.

However, because of the illegal origin, the local "masters of the universe" are forced to give the coal produced in CADLO to foreign traders at $22/ton, according to data of journalistic investigations.

But even in this case, the annual revenue is $220 million – quite a good incentive to cling to the ideas of the Russian World till the last breath.

Shame or sanctions?

The main sales channel are Russian ports on the Sea of Azov. Railway shipments to the EU via Belarus are not profitable from the point of view of logistics – shipping by sea is much preferable.

This is indirectly confirmed by the official Russian statistics.

For example, the port of Rostov provided transshipment for export of 1.21 million tons of coal in prewar 2012, and in 2018 – already 2.1 million tons. There were even more in 2017: 2.33 million tons.

810 thousand tons of coal went through the port of Azov in 2012, 1.3 million tons – in 2018, and an increase from 650 thousand to 753 thousand tons in 2017 through the Taganrog port (in 2018, the figure dropped to 625 thousand tons).

At the same time, only Ukrainian or Russian Donbass coal is exported through the Azov ports. Deliveries of Siberian and Far Eastern coal go through the Pacific ports, and of North and Siberian – through the Baltic.

Back in 2012, Rostov Governor Vasily Golubev complained about the unprofitability of the local coal industry, which in total gave about 3.6-3.8 million tons per year. And at year-end 2017, that is, after the "nationalization" in the LDNR, the oblast reported an increase in coal output by 37%, to 5.8 million tons – despite the fact that the increase in Russia as a whole was only 4%.

Where did this rapid rise come from, what happened? It is quite obvious that the increase in the indicator was obtained at the expense of coal exported from CADLO and sold under the guise of Russian.

Earlier, Minister for Temporarily Occupied Territories and Internally Displaced Persons Vadym Chernysh noted in an interview with the media that there are 3 ways to stop coal smuggling from the uncontrolled territories.

These are Ukrainian and international economic sanctions, criminal prosecutions by the Ukrainian justice and practice of promulgating companies and individuals involved in smuggling.

"This is the so-called name and shame mechanism – when the names of people and the names of firms involved in schemes are announced publicly. In the international community, this builds their respective reputation and then hurts the business", - the head of the Ministry for Temporarily Occupied Territories and Internally Displaced Persons explained in January this year.

But so far, there is neither one nor the other, or the third. As already noted, this is due to the fact that the Ukrainian party itself is not perfect in this matter.

And the self-proclaimed authorities of the "LNR"-"DNR" continue to enrich themselves, taking advantage of the unprincipledness of the Ukrainian leadership.

Vitaliy Krymov, OstroV