Ukraine's Coal War: Sales to Loyalists Fund Separatist Fighters

  • West dependent on regions outside its control for energy
  • Illegal pit mines supplement lost shipments from producers

Just 200 yards from where Malaysia Airlines MH17 crashed last year in rebel-held eastern Ukraine, commerce is winning over war. Miners working in an illegal, hand-dug pit are extracting coal that’s destined to be sold to loyalists in the west. 

It’s a rare accord for the two sides, still embroiled in a 19-month conflict that has killed more than 8,000 people and engendered sanctions and boycotts. The trade benefits everyone. The central government gets coal for its depleted reserves and pro-Russian separatists in the east, where most of the country’s deposits are located, get some of the infusion of cash.

Miner Viktor stands by a mine near Donetsk.

Photographer: Ulia Surkova/Bloomberg

“As long as we’re independent, we don’t care where the coal is shipped, even to Ukraine,” said a miner who identified himself only as Viktor and whose nearby village has been a recruiting ground for rebel fighters. “The main thing is, we get paid.”

The arrangement has its pitfalls, said Volodymyr Omelchenko, director of energy studies at the Razumkov research center. Sidestepping sanctions to buy from the east risks strengthening the separatists and bolstering their militias at a time when peace talks haven’t resolved how much autonomy the east may get. Embattled regions won’t vote in local elections to be held across Ukraine on Sunday, and disputes continue about how the areas will be governed.

Dangerous Mines

The accord has also sparked growth in unregulated pit mining -- illegal under Ukrainian safety laws -- as separatists turn to fast, albeit treacherous, operations to meet a surge in pre-winter demand. That method of mining helps replace lost shipments from coal companies such as DTEK Energy that find it almost impossible to move the fuel out of the disputed regions because of transport difficulties. The government has lost access to 55 of its 90 state-owned mines, according to the Energy Ministry.

Rail shipments of coal from rebel-held areas in the Luhansk and Donetsk regions are increasing day by day, Organization for Security and Co-operation in Europe representative Martin Sajdik said on Tuesday.

“Ukraine instead should be pursuing a strategy of lowering to a minimum its dependency on energy carriers coming from provinces outside the government’s control,” said Omelchenko of the Razumkov center in Kiev. “If Ukraine buys energy from occupied territories, it will always be dependent on them and will finance these militants.” Coal accounts for a quarter of electricity generation in Ukraine and is also vital for household heating and metal production, a key industry. Half of coal-fired utilities are designed to burn only anthracite, found in abundance in eastern Ukraine.

Energy Minister Volodymyr Demchyshyn says working with the rebels lessens the need to buy more expensive coal from sources as far away as South Africa and keeps down household tariffs and domestic energy production costs. He told reporters in September that Ukraine will be getting around 600,000 tons of coal from the east each month.

Spurning Russia

“The government doesn’t have much choice other than to buy coal from either the separatists or Russia,” which Ukraine blames for stoking the rebellion, said Otilia Dhand, an analyst at political risk adviser Teneo Intelligence in Brussels.

DTEK, Ukraine’s largest private power producer, posted a first-half loss of 20.8 billion hryvnia ($957 million) and reported in July that thermal coal stockpiles are at a “critical” low.

"Financially DTEK has no alternative but to ensure deliveries of coal from areas outside government control,” Executive Director Dmitry Sakharuk said in an interview in Kiev in September. “We will do all we can to bring coal from there.”

In 2014, Ukraine ran short of coal needs by about 5 million tons after output fell 22.3 percent, leading to black- and brown-outs and energy rationing across the country. Demand for more coal from domestic sources is sparking a resurgence in pit mining, in which miners dig by hand, shoring up the sides with rough planks and digging out the fuel with picks and shovels.

About 10 illegal coal mines are operating in the Petropavlovskiy district, where MH17 was brought down by a missile last year, local council head Natalia Voloshina said. The business is tolerated as long as owners pay taxes to the local rebel authority from revenue derived from selling fuel, she said.

Higher Prices

Demchyshyn told a news conference earlier this year that Ukraine agreed to buy coal from uncontrolled areas at 1,100 hryvnia ($51) per ton plus value-added taxes. That’s more than the 600 hryvnia to 800 hryvnia per ton owners of pit mines can get from local residents living in separatist-held areas.

At the mine, south of the city of Donetsk, dungaree-clad workers grab pickaxes and shovels and shimmy down a sloping wooden ramp, risking asphyxiation, black lung and mineshaft collapses. But even 1,000 hryvnia a week is better pay than other jobs in the village area, Viktor said.

“The work is very dangerous,” he said. “The economic situation is difficult, and we can’t really pick where to sell. But Ukraine is our neighbor, so it’s logical to have trade with it.”

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