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State strategy and private tragedy shape the Russian coal sector
THE ISCIP ANALYST
An Analytical Review
Volume XVI, Number 13, 27 May 2010
Energy Politics by Creelea Henderson
State strategy and private tragedy shape the Russian coal sector
This month Prime Minster Vladimir Putin, following twin blasts in Russia’s largest underground coal mine, flew out to the Kemerovo region in Western Siberia to tour the scene of the disaster and meet with relatives of those killed and injured. (1) He arrived three days after the explosions, when hope of rescue was slipping away for the miners and emergency workers who remained trapped in the Raspadskaya mine. Access to the mined had been cut off by rubble from collapsed structures on the surface, and by flood waters coursing through nearly 194 miles of underground tunnels that were already choked with explosive methane gas and fires. (2) As rescue efforts foundered, Putin stepped forward with a slate of relief initiatives: he ordered regional authorities to investigate the cause of the explosions and to assist the survivors with employment and housing; he announced that miners would continue to receive full pay while the Raspadskaya mine is out of operation; and he demanded to know why a nine-fold increase in spending on mine safety over the past decade had failed to reduce the number of fatalities in the industry. (3) Back in Moscow, President Dmitry Medvedev signed a law supplementing miners’ monthly retirement payments with proceeds from the national pension fund. (4) Seldom have Russian authorities at the federal level devoted so much attention to an industrial accident. Yet the extraordinary expression of concern from government officials so far has not been matched by managers at Evraz Group, the steel and mining giant that co-owns Raspadskaya mine. Their apparent indifference in the wake of the tragedy has sparked protest in the Kemerovo region, where this week miners and their families blocked a railway to demand better working conditions. “The main thing is that none of the managers came to ask for forgiveness, not one of them,” said one protestor. (5)
The mine disaster has focused new scrutiny on a sector of the Russian economy that has been long overshadowed by the country’s oil, gas and nuclear industries, bringing its peculiar features into sharp relief. Closure of one of the most productive mines in Russia has drawn attention to the important role of coal in the national energy mix, and underscored a fundamental disconnect between state strategic interests and the commercial interests of the private coal sector.
The fuel mix
Russia has established a reputation as a world leader in petroleum production. Less well known is the strength of the country’s coal sector. Russia has the world’s second-largest proven reserves of coal, behind only the United States. (6) The country is the world’s fifth-largest producer and third-largest exporter of coal. (7) In the past several years the growth rate of coal production in Russia has overtaken the growth rate of both oil and gas, driven mainly by demand for coking coal used in steel production and steam coal for export. (8) Russian policy makers have come to appreciate coal’s potential to fuel national power and industry, and are presently seeking ways to increase the share of coal in the country’s energy mix. Beginning in 2006, then President and now Prime Minister Putin set out a national energy strategy to capitalize on the rising price of oil and gas on foreign markets and boost export revenue to the national government. (9) Because gas exports generate greater revenue than coal exports, the Russian government devised a plan to reorient domestic power production toward coal-fired generation in order to redirect gas currently used in power generation to foreign markets. (10) According to the national energy strategy, coal will account for 37 percent of the energy used for domestic power generation in 2015, up from 28 percent in 2008. (11) The plan has proven difficult to put into practice, however, due to the peculiar disconnect between the state-controlled oil and gas sectors on the one hand and the privately owned coal and electricity sectors on the other.
State strategy/Private industry
The certainty of the government’s energy strategy has run up against the vagaries of the marketplace and a general unwillingness among coal producers to reduce their prices to levels competitive with gas. The Russian coal industry has been in private hands since about 2002, when most Siberian coal mines were sold at public auctions. At that time, the coal industry’s reputation as a dubious sector with uncertain revenue potential and high social liabilities dampened interest among many eligible Russian and foreign investors. This opened the way for regionally-based investors with preexisting interests in the coal and metals industries to acquire valuable assets without significant competition. Evras Group was one of several metals concerns that sought out steam and coking coal for steel production in 2002, and by 2009, its Raspadskaya mine was producing 13 to 14 percent of the total coking coal used to manufacture Russian steel. (12) Other coal producers have profited from monopoly conditions created by the country’s remote electricity markets and poor transport infrastructure, where regional power stations depend upon local coal fields for fuel supplies. (13) When the Russian electricity industry was restructured in 2008, investors in the sector pledged to expand national power generation capacity by commissioning new, coal-fired plants. With the onset of the global recession, however, international investment in the power sector has fallen off dramatically, jeopardizing the government’s plans to build domestic capacity; meanwhile power producers have begun to convert coal-fired generators to burn gas, as market prices for coal creep upward, while state controlled gas prices remain fixed. (14) Ultimately, the Russian state-controlled gas industry appears more amenable to the constraints of a national energy strategy than does the privately owned coal industry.
When the Russian coal sector was privatized, the new owners faced several regulatory anomalies. First, the free-floating prices for their product did not reflect its associated environmental and health liabilities, nor were coal prices commensurate with the price of other fuels on the domestic market. In addition, the existing legal and regulatory framework did not adequately address environmental and safety measures. Although the laws were stiff, enforcement was lax. That situation partly was ameliorated through a system of taxation based on safety, with more dangerous enterprises paying more into the state welfare fund to compensate victims of coal mining accidents. However, the Raspadskaya mine disaster has exposed the limits of such state and private institutional arrangements, and Putin’s well-publicized response offers some indications as to the kinds of measures the Russian government may take to address such lapses in the future.
Addressing the owners of the mine and Kemerovo regional officials, Putin railed against the neglect of safety endemic throughout the coal sector, and warned that federal agents would be authorized to issue sanctions and shut down mines without a court order if violations continued to destabilize the industry. He stressed that the nation’s once notoriously lax oversight regime had been tightened and now regulators would perform surprise inspections at mines across the country. In addition, he proposed that compensation payments to victims and their relatives would be made mandatory. Missing from his statements was any suggestion that the Evraz Group steel magnates would be singled out for censure, or that the federal government would regard the Raspadskaya mine disaster as justification for targeted renationalization of coal industry assets. Putin has expressed sympathy toward the Kemerovo miners, but withheld blame from the mine owners. His visit to the region did not avert the miners’ unrest in the wake of the disaster, but it may have refocused their discontent onto the managers who failed to show a commensurate degree of concern. The Russian coal sector remains in the hand of private industrialists, but an emboldened regulatory regime will give the state the leverage needed to draw commercial interests into line with national energy strategies.
(1) “Putin Visits Mine as Death Toll Passes 50,” The Moscow Times, 12 May 10 via http://www.themoscowtimes.com/business/article/putin-visits-mine-as-death-toll-passes-50/405762.html#no.
(2) “Rescue Operations in Mine Won't Resume For a Week,” The Moscow Times, 14 May 10 via http://www.themoscowtimes.com/news/article/rescue-operations-in-mine-wont-resume-for-a-week/406027.html.
(3) “Putin calls for tighter mine controls after blast,” Reuters, 17 May 10 via http://www.reuters.com/article/idUSLDE64G1K720100517?type=marketsNews.
(4) “Putin Visits Mine as Death Toll Passes 50,” ibid.
(5) “Riot Police Break Up Miners' Protest,” The Moscow Times, 17 May 10 via http://www.themoscowtimes.com/news/article/riot-police-break-up-miners-protest/406048.html.
(6) Russia Energy Profile, EIA via http://tonto.eia.doe.gov/country/country_energy_data.cfm?fips=RS.
(8) Kevin Rosner, “Russian Coal: Europe’s New Energy Challenge,” The German Marshall Fund Climate & Energy Series 2010 via http://www.gmfus.org/publications/article.cfm?id=869&parent_type=P.
(9) “The Summary of the Energy Strategy of Russia for the Period of up to 2020,” Ministry of Energy of the Russian Federation, 2003 via ec.europa.eu/energy/russia/events/doc/2003_strategy_2020_en.pdf.
(10) Russia Energy Profile, EI, ibid.
(11) “The Summary of the Energy Strategy of Russia for the Period of up to 2020,” ibid.
(12) “Mine Death Toll Reaches 60, Missing Count Hits 30,” The Moscow Times, 13 May 10 via http://www.themoscowtimes.com/news/article/mine-death-toll-reaches-60-missing-count-hits-30/405848.html.
(13) Kevin Rosner, “Russian Coal: Europe’s New Energy Challenge,” ibid.
(14) “Russia power firms turn away from coal as cost surges,” Reuters. 7 Jul. 08. Via: (http://uk.reuters.com/article/idUKL0749460320080707).
By Creelea Henderson (Creelea@gmail.com)