Ukraine’s coal industry hits a wall, but who will pay for the fallout?

by Oleg Savitsky, National Ecological Center of Ukraine

DTEK Komsomolets Donbasa coal mine, which stopped operations after heavy shelling in November 2014. Photo: UNN

DTEK Komsomolets Donbasa coal mine, which stopped operations after heavy shelling in November 2014. Photo: UNN

From 2005 to 2013, international commercial banks invested more than 1.5 billion euro in Ukraine’s coal industry, fuelling a massive increase in coal-fired power generation and mining. The country is now paying a high price for this investment. The country is torn by a conflict around the fossil fuel producing Donbas region, and Ukrainians are left with the consequences.

For many years, control over gas and coal supplies in Ukraine – which is the most corrupt country in Europe – provided enormous private profits for the corrupt post-soviet establishment and associated business groups. In 2006, the government of Ukraine failed to reform the coal industry (which actually would have meant unpopular policies such a closing down a big number of mines) and surrendered it to the powerful Donetsk clan. Consequently, the coal industry became a source of immense profit for former President Yanukovych and his entourage and a black hole in country’s budget, with ever-increasing state subsidies for coal mining, which reached 1.5 billion Euros in 2013. Instead of reforms in the energy sector, we saw the rise of a criminal regime, which eventually drove the country to national disaster.

This situation could have been avoided if international investment in Ukraine was directed responsibly and towards sustainable solutions such as modernization of infrastructure, energy efficiency and development of renewables. Instead we saw international banks supporting the rise of the dirty energy monopoly owned by Ukrainian oligarch Rinat Akhmetov. In 2005-2013 Deutsche Bank, Uni Credit Bank and ING Bank were the largest investors in the fossil fuel industry in Ukraine, providing numerous loans for Ukraine’s biggest coal company. Since 2005, the lion’s share of Ukraine’s coal industry is managed by DTEK, which is privately owned by Akhmetov. DTEK had a 46% share of domestic coal mining in 2013 and currently operates 9 of 14 Ukrainian coal-fired power plants. DTEK holds a monopoly on electricity exports from Ukraine to EU countries such as Hungary, Slovakia, Romania and Poland.

In 2011-2012 Rinat Akhmetov added $3 billion to his net worth by buying a number of state-owned coal power plants, facilitated by his political ally, corrupt ousted President Viktor Yanukovych. As a trade-off Alexander Yanukovich, the president’s elder son, was Akhmetov’s key partner in several businesses. As a result, Alexander saw his wealth increase by well over 7,000 per cent since his father took office. In 2014 he was worth more than $510 million.

During Yanukovich’s presidency, Akhmetov also acquired a 49-year concession for two of the largest coal-mining enterprises of Ukraine – “Rovenkianthracite” and “Sverdlovantracite”. As a result of these privatisations and dodgy dealings, in 2011 exports of dirty coal-based electricity from Ukraine increased by 43.7% and in 2012 soared by another 52.5%. This reflected the overall DTEK strategy to “export coal with electric wires”.

In September 2013, just a few months before the start of the Euromaidan uprising, Deutsche Bank, together with Raiffeisen Bank International, Erste Group Bank, UniCredit Bank Austria and Gazprombank gave DTEK a US$375 million loan for development of infrastructure to export even more thermal coal and coal-based electricity from Ukraine to Europe.

This financing was actually wasted, as coal mining in the Donbas region has collapsed. Since 2014, after the outbreak of the conflict in Donbas, Rovenkianthracite and Sverdlovanthracite have been running at between a quarter and a third of their capacity, mainly due to the destruction of railway infrastructure. In peacetime, they produced up to 40,000 tonnes of coal a day; now output is reduced to just 8,000 tones. In general, military conflict has damaged a significant part of DTEK’s mining assets, which along with other factors is driving DTEK out of the business.

Railway infrastructure near Donetsk city. Photo: RIA_news

Railway infrastructure near Donetsk city. Photo: RIA_news

 

On 13 March 2015 DTEK posted a full-year net loss of 19 bn hryvnia (US$833m) after a net profit of 3bn hryvnia (US$161m) in the previous year. This year, DTEK faces payments on a record amount of its debt: up to $950m, including $200m for eurobonds that mature on 28 April.

It’s about time for European commercial banks to realize their mistakes andstop any financial support for DTEK and its owner, whose reputation is as murky as his dirty business. The biggest investors of DTEK such as Uni Credit Group, Deutsche Bank and ING Bank should not bail out DTEK’s debt and prop up the embattled Ukrainian coal baron, instead they should help Ukrainians kickstart the renewable energy industry and obtain real energy independence from Russia, who now controls a big part of coal supplies to Ukraine.

The sustainability reports and websites of these three banks are full of commitments and warm words related to climate change and the environment, but their 2005-2013 performance in Ukraine was in stark contrast with their declarations and has done a lot of damage. Instead of sustainable development, banks have contributed to strengthening chains of inefficiency and corruption, which are binding Ukraine to the dirtiest sources of energy – coal and nuclear. Will they ever fix it? Not likely.

Ukrainians have had enough of dirty coal and all that comes along with it, so banks should at least stop backing Ukraine’s dirtiest energy. We do not want new wars for fossil fuels in Europe, so it would better for everyone if Ukraine’s coal stayed in the ground.