Caught between a rock and a hard place.

Photographer: Viktor Drachev/AFP/Getty Images

Winter Is Coming to Ukraine's Energy Supply

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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As NATO reported Russian troop movements in Ukraine and renewed fighting threatened to erupt in the country's east, the Kiev government is struggling to find a replacement for the coal it once received from the region controlled by pro-Russian separatists. But President Petro Poroshenko is now reconsidering the government's decision to make up the shortfall with imports from South Africa.  And with winter fast approaching, the uncertainty over the country's energy supply highlighted both Ukraine's challenges and the inability of its politicians' to meet them.

Ukraine extracts about 1 percent of the world's coal output, making it the third biggest producer in Europe and a traditional exporter. Donbass, an area in the country's east that includes the Donetsk and Luhansk regions, was a major mining center for the Soviet Union and contains more than 140 mines, only 37 of which remain under Ukrainian control.

The loss of the mining region forced Ukraine to seek energy supplies elsewhere. In August, the government signed a contract with U.K.-based trader Steel Mont to supply 1 million metric tons of coal from South Africa, Ukraine's first coal imports. The price was $86 per ton, or $112 including delivery costs.  Ukraine could have bought coal from Russia at the far lower price of  $80 per ton including delivery, but Energy Minister Yuriy Prodan justified the costlier South African imports on political grounds. "Sometimes you have to pay more for energy independence," he said.

On Nov. 7, Poroshenko condemned the deal, suggesting the price was too high, and the prosecutor general's office, suspecting corruption at the Energy Ministry, started an investigation.  Steel Mont announced this week that it was canceling the contract because of Ukraine's "political situation." The dispute over coal is an extension of the tension between the president and Prime Minister Arseniy Yatsenyuk, who are  in fraught talks to create a governing coalition after parliamentary elections last month. Poroshenko wants to give Prodan's energy portfolio to a political ally. 

There may be another reason for the spat. "The coal market is being redivided in Ukraine today,"  said Vladimir Zinevich, director of state-owned company Ukrinterenergo, which is responsible for the coal imports. "It looks to me as though the coal deliveries from South Africa are a nuisance to somebody."

Separate investigative reports from Pravda.com.ua and Theinsider.ua suggested that the "somebody" in question could be Sergei Kuzyara, a coal trader with close ties to Ukraine's deposed President Viktor Yanukovych. Kuzyara's plans to buy coal from Russia and the rebels in eastern Ukraine had found support in the Poroshenko camp. Such an arrangement could be lucrative. The rebels, despite the assistance they receive from Russia, need funds and would be willing to accept low prices for the coal they seized from the warehouses of state-owned mines.

At the same time, companies owned by Rinat Akhmetov, Ukraine's richest man and a Yanukovych ally, continue to export coal. At a recent Energy Ministry meeting, an Akhmetov representative explained that his company had long-term contracts to honor and needed the hard currency. Any purchases by the Ukrainian government would be paid in hryvnia, which has been losing value.

The situation is representative of the incompetence, corruption, cronyism and political infighting that have plagued Ukraine in its 23 years of independence. The International Monetary Fund and other organizations providing assistance to Ukraine should watch more closely how the money is being spent. This year, Ukraine paid out more than $500 million in subsidies to mines in rebel-controlled territory, much of that during the summer, when the fighting was heaviest. Ukraine has now stopped these payments, but the war in the east, which has cost thousands of lives, continues to create new opportunities for shady business dealings, even as Ukraine prepares for a new Russian onslaught. 

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor on this story:
Max Berley at mberley@bloomberg.net