Russia’s ‘Coal Weapon’: Hampering Kazakhstani Exports to Ukraine

The press service of the Ministry of Trade and Integration of Kazakhstan reported, on October 25, that Russia’s current ban on the transit of some Kazakhstani goods contradicts the fundamental principles of the Treaty on the Eurasian Economic Union (EEU). Russia’s restrictions are negatively affecting Kazakhstan’s economy, especially its coal industry and, in particular, coal exports to Ukraine. According to Kazakhstani authorities, the Central Asian republic’s coal miners are losing more than $11 million monthly. Also, Russia is practicing unjustified stoppages of coal-carrying rail cars near the Ukrainian border (Government.kz, October 25). Incidentally, in September, Kyrgyzstan also accused Russia of a similar practice (Kommersant, September 10). According to Mykhaylo Volynets, a Ukrainian member of parliament and the chairperson of the Confederation of Free Trade Unions, in October Russia began blocking coal exports to Ukraine via Belarus (Kosatka.media, October 3).

While Russia is artificially complicating regional coal exports to Ukraine, it is simultaneously increasing its own influence in the coal sector’s so-called “gray trade” that flourishes within the temporarily occupied and uncontrolled territories of Ukraine (ORDLO—i.e., eastern Donbas). Russian oligarchs and security services personnel (siloviki) are notably engaging in shadowy business ventures (trade in coal and other raw materials) that bring in billions of rubles in profits (Gazeta Prawna, September 10). This smuggling scheme is not a novelty (see EDM, February 12). In March 2017, when Kyiv’s trade and economic blockade on the ORDLO began, all coal mines (which earlier belonged to Ukrainian oligarch Renat Akhmetov) were nationalized by the Moscow-backed militants and fell under the “roof” (protection) of Russian curators. Since then, this shadow business has undergone significant changes. And in March 2018, exiled Ukrainian oligarch Serhiy Kurchenko gained control over the railway line between occupied Donbas and the Russian border (Nv.ua, October 27).

According to investigative journalists in the ORDLO, illegal (yet, well organized) coal production and export are flourishing and reaching an industrial scale, which is happening despite the ongoing conflict and international sanctions. According to insiders from the Ukrainian energy sector, the production and export of anthracite coal from occupied Donbas have already reached 50 percent of pre-war levels. Notably, small-scale smugglers and large exporters use the same fraudulent transportation scheme: coal mined in the ORDLO is mixed with Russian-produced shipments and sold as “Russian” to Europe and Ukraine through Kurchenko’s companies registered in breakaway South Ossetia (Nv.ua, October 28). From the ORDLO, that mixed coal is exported via land (the Russian Railways Logistics) and sea (through the ports of the Sea of Azov) routes, finding its way to Romania, Turkey, the Netherlands and Germany (Politua.org, December 9, 2017; Nv.ua, October 29, 2019). The simplest way to ship coal is to use a port of another separatist region (Abkhazia) or to reload from one transport vessel to another in the open sea. Additionally, hundreds of thousands of tons of Donbas-origin coal have been sold through Belarus.

Official statistics show that in 2018, Belarus became one of the largest coal exporters in Europe, which is perplexing given the fact that the country has no domestic coal mines (let alone anthracite reserves). From March 2017 until the end of 2018, Belarus exported more than 350,000 tons of anthracite to Poland and Slovakia. At the same time, however, this East European country itself imported only 172,800 tons of coal from Russia (Nv.ua, October 29). More than likely, all participants within this smuggling chain, from the lowest level to intermediaries in Poland, the Czech Republic (Czechia) and Slovakia, share a triple margin among themselves.

In Donbas, the oligarch Kurchenko plays a key intermediary role between Russian authorities and local small, medium and large businesses. The oligarch owns Gas Alyans Company, LLC (registered in Nizhny Novgorod, Russia) and Vneshtorgservice (registered in Tskhinvali, the capital of the unrecognized “Republic of South Ossetia”). Since March 2017, Vneshtorgservis has taken under its control all metallurgical plants and coal mines that were nationalized in the ORDLO (Politua.org, December 9, 2017).

Kurchenko has achieved incredible success in Donbas. Since last year, he has not only monopolized railway transport in occupied eastern Ukraine but has also legitimized a practice of small-scale illegal mining: the final product is now sold directly to his business entities. By doing so, Kurchenko has been able to put under nearly total control the whole ORDLO coal industry, from various minor mining and transportation-related issues to being able to set the price and ensure supplies in large quantities (Argumentua.com, October 29). Moreover, despite the fact that, in July, Donbas coal miners complained to local separatist authorities about Vneshtorgservis (the issue stemmed from extended payment delays), Kurchenko continues to confidently and successfully conduct his business in this area (RBC, July 10). One possible explanation may be the fact that Kurchenko enjoys the political patronage of Russian Deputy Prime Minister Dmitry Kozak as well as Russian Deputy Minister for Economic Development Sergey Nazarov (Politua.org, December 9, 2017). According to Ukrainian sources, Vneshtorgservice is only formally owned by Kurchenko—the company’s main beneficiaries are actually Rostec corporation CEO Sergey Chemezov and Sergey Beseda, a colonel general of the Federal Security Service (FSB) (Ukrinform.ru, May 28, 2019). That said, it bears noting that Kurchenko’s South Ossetian company is only one element in a complex chain of regional coal smuggling, where the role of Russian “shadow players” is most pivotal. Aside from state-controlled corporations (such as Russian Railways) that ensure transportation of the commodity, Russian companies are also engaged in selling the coal to EU and North Atlantic Treaty Organization (NATO) members (Nv.ua, October 28).

By using coal as a weapon, Russia is pursuing three main objectives. First, Moscow secures its control over Donbas, where coal smuggling remains one of the main (and most indispensable) means of managing and financing local militant formations. Second, by controlling Donbas and its coal resources as well as precluding/barring other countries (such as Kazakhstan) from exporting coal (or achieving full export capacity) to Ukraine, Moscow is able to further pressure Kyiv—this gains relevance especially prior to winter time. Finally, the coal trade remains a useful source of “shadow income” for Russian oligarchs and personalities close to the ruling elite. As such, multiple stakeholders in the “Russian World” and beyond will do what they can to preserve this scheme as long as they can—and as long as the West continues to do nothing about it.