Donbas coal bonanza

Illustration by Andrzej Zaręba

The story of the coal mines belonging to Rinat Akhmetov’s holding, which were taken over by the separatists at the beginning of 2017, is the best illustration of the situation. Akhmetov, who hails from the Donets Black Coal Basin, is the wealthiest Ukrainian and in his best period was the richest oligarch in the former Soviet Union. For years the oligarch, with a dark past and Tatar roots, had concentrated his political activity on Viktor Yanukovych’s Party of Regions. He was its sponsor and one of its de facto general managers.

From de facto recognition to blockade

When in 2014 Yanukovych fled the country under pressure from the protesting Ukrainians, Akhmetov engaged in a risky game which could have cost him dearly. On the one hand, sitting in his byzantine mansion in Donetsk’s botanical garden, he called for Ukraine’s unity. On the other, he quietly supported the pro-Russian separatist movements. He hoped they would become controllable leverage allowing him to maintain a powerful position in the new post-Maidan Ukraine where calls for controls over oligarchic wealth were still ripe.

In time, it turned out that the new Kyiv government had not seriously considered its own calls for deoligarchisation and Akhmetov began to negotiate with Petro Poroshenko, the president elected in May 2014 in the wake of the protests. At the same time the separatists controlled by Russia, while still protecting his mansion from plunder, gradually became a burden for Akhmetov. Today, the deal with Poroshenko is clear and it seems that Akhmetov will quietly support the president’s re-election efforts. One of the reasons is Akhmetov’s expulsion from Donetsk. His companies on the separatist territories initially operated in a double legal regime. The mines were outside of Ukraine’s control, yet they paid taxes to Kyiv and paid its workers in hryvnia (Ukraine’s national currency); the extracted coal was sent to Ukraine and foreign markets as a Ukrainian product, while the mine’s management was fully controlled by the holding’s centre in Kyiv.

As the political scientist Oleksandr Nykonorov, a leading expert on Donbas separatism who died in a tragic car accident in September 2017, explained to me, Russia limited the operational freedom of the self-proclaimed authorities in Donetsk and Luhansk to smaller companies. These were plundered by the commanders of various pro-Russian armed and paramilitary units in the initial phase of the conflict. The big businesses, on the contrary, enjoyed Moscow’s protection and, as the German Bild reported, Akhmetov’s representative even took part in the sessions of the Russian secret “government” for Donbas.

The situation changed in 2017, when the government in Kyiv, under pressure from the right-wing opposition, established a trade embargo with the occupied-Donets Black Coal Basin. Earlier, when the blockade was still being advocated by activists and did not enjoy the government’s support, the separatists requested – with a green light from the Kremlin – that all factories operating on their territory pay taxes to the separatist budget. When Akhmetov refused, his mines were stormed by armed men who announced they were taking control of his companies.

Complex web

At the same time, however, the management of the mines was transferred to the Luhansk branch of Vneshtorgservis. The company is registered in Tskhinvali – South Ossetia’s capital – and is commonly associated with Serhiy Kurchenko. In Yanukovych’s times, Kurchenko was known as the president’s banker, one of the young wolves in his circle who ruthlessly took control of different sectors of the economy. After Yanukovych’s fall, Kurchenko moved to Moscow but never stopped doing business in Donbas.

South Ossetia is not an accidental location. Since 2008 Russia has recognised it as an independent state. The rest of the world – excluding Nauru, Nicaragua and Venezuela – treats it as a breakaway Georgian province. But having a pariah status in international affairs has its advantages. In no other place could Kurchenko have set up such a business. And that is why South Ossetia is the only place in the world that recognised the independence of the DNR and LNR.

Besides Vneshtorgservis, Tskhinvali hosts another key institution for the separatists: the Mezhdunarodny Rashchyotny Bank. Separatist companies have their accounts in this bank, through which they finalise transactions. South Ossetian officials publically acknowledge the bank’s purpose while Vladislav Surkov – the Kremlin’s curator of the separatists – admitted the crucial importance of South Ossetia in opening the DNR and LNR to the world. The chain is simple. South Ossetia recognises the republics in order to do business and trade with them. Russia recognises South Ossetia so it can do there what it cannot openly do in Donetsk and Luhansk. On a note, Russia has not recognised the independence of the DNR and LNR. Through Tskhinvali, the money earned by the self-proclaimed republics are legalised within the Russian banking system. Recently, it has been suggested that this go-between also may work the other way round and Russia may start sending weapons to Donbas through South Ossetia.

In the meantime, the captured mining companies are being overexploited. Workers are occasionally paid with vouchers for the workplace cafeteria and there is no proper maintenance of the mines, which leads to a high risk of damage and even crumbling throughout Donbas. The coal that is mined is transported to Russia and further re-exported with the profits going into the pockets of Kurchenko and the separatist officials such as Oleksandr Melnychuk, the former vice minister of fuel, energy and coal industry of the LNR. Melnychuk, largely unknown before the war, together with his brother and associates created a network of companies over a short time, registered them all over the world from Cyprus, Hong Kong, Saint Kitts and Nevis, to Poland, the United Kingdom, Russia, Ukraine and the LNR. Their businesses have one aim: to facilitate the sale and export of Donbas anthracite or hard coal.

The coal is transported to the Russian port city of Rostov-on-Don, or by train located at the Russian-Ukrainian border. From the port it goes by ship to Georgia, Romania or Turkey. By rail, it is transported through Russia and Belarus and later to Poland and further West to several other EU countries like Austria, Bulgaria, the Czech Republic and Italy. An investigation that we carried out in Poland together with my colleague Karolina Baca-Pogorzelska and published with the Polish daily Dziennik Gazeta Prawna found that several companies’ boards officially include people connected with the separatists; not only Melnychuk, but also the head of the local structures of the Donetsk Republic organisation in Shakhtarsk, which plays the role of the ruling party in the DNR.

Initially, the coal entered foreign markets as a Ukrainian product. Later, certificates marked the country of origin as unknown. Recently, Russia has been increasingly appearing on the certificates. The separatists exploit the fact that in the EU there are no mines with anthracite – a type of coal used mainly in industry – and thus there are no tariffs and little regulations related to its import. Formally, the EU has not introduced an embargo on trade with the separatists, although some legal experts point out that such practices are in breach of the ban for financing separatist organisations.

The Polish authorities and the European Commission explain the shady imports with the lack of embargo. Ukraine launched a criminal case against the sales. But the most decisive reaction came from the United States. In January and February 2017, Melnychuk and some of his companies, including the Poland-registered Doncoaltrade, were added to the list of people and businesses subject to sanctions. Their assets were frozen and they can no longer export to the US. Melnychuk himself was banned from entering the country. If there was political will, the EU could have done the same, if only at Poland’s request. For the time being, however, there is no will, neither in Brussels nor in Warsaw.

Struggle for influence

Melnychuk discarded his shares in the Ugolnye Tekhnologii company, which was the main anthracite exporter until Kurchenko’s companies began to dominate the market. The Russian government oversaw the operation. The person responsible for the process was the vice minister of economic development, Sergey Nazarov, who was born in Gukovo, at the Russian-Ukrainian border. Nazarov also heads the Russian inter-departmental commission co-ordinating humanitarian aid to Donbas.

The press officer of the economic development ministry acknowledged in an interview with Dziennik Gazeta Prawna that the government in Moscow aids the DNR and LNR in exporting their products abroad. Nazarov himself openly talked to Bloomberg about the volumes of coal re-exported this way. However, the question of what share of the profits from the trade returns to the separatist budgets and how much is appropriated by the company owners remains unanswered.

According to Ukrainian officials, coal sales account for 60 per cent of the self-proclaimed republics’ income. Journalists working for such media as Ukrainian Novoye vremya, Liga.biznes.net and Russian Novaya gazeta, reported that those overseeing the process shared the profits for each tonne of Luhansk coal sold with then LNR leader, Ihor Plotnytsky. There is no evidence to suggest that the old rules have changed. After several months of Leonid Pasichnyk’s rule, his associates should have taken control of at least part of the coal trade profits.

The struggle for influence in the economy is often brutal. In 2015 the Luhansk secret services physically assaulted the minister for fuel, energy and coal industry, Dmytro Lyamin. As people familiar with the case reveal, Lyamin did not want to grant the representatives of power structures access to the financial flows from the anthracite trade. Officially, the reason was his alleged links to Ukrainian authorities. The “detention” was recorded and broadcast by separatist media.

In February this year, the DNR conducted even more arrests. Twenty-two officials were detained, including Eduard Holenko, the minister for energy. The official reason was corruption, but the nature of both regimes suggests that someone influential must have become interested in the profits from the coal trade. According to the DNR’s official data, industrial production fell by 70 per cent between 2013 and 2015, while coal extraction decreased by 67 per cent between 2013 and 2016. In all of this, these conflicts will continue to exacerbate as the share of the pie is diminishing due to bad management and lack of investment.

Translated by Agnieszka Pikulicka-Wilczewska.

Michał Potocki is the op-ed editor of the Polish daily Dziennik Gazeta Prawna. He is the co-author of two books about contemporary Ukraine: Wilki żyją poza prawem. Jak Janukowycz przegrał Ukrainę (Wolves Live Outside the Law. How Yanukovych Lost Ukraine) and Kryształowy fortepian. Zdrady i zwycięstwa Petra Poroszenki (The Crystal Piano. Betrayals and Victories of Petro Poroshenko).

coal, Donbas, Ukraine