Russia’s Minister of Energy Alexander Novak informed Prime Minister Dmitry Medvedev that the Ministry predicts that price of coal will continue to fall through 2016. Over the last five years, the price for coal (in rubles) has decreased by 21%, even when accounting for the currency devaluation. Additionally, export prices (in USD) for Russian coal have decreased 1.6 times for energy usage and 2.2 times for coking.
To maintain exports, the Ministry of Energy has suggested that it can offer incentives to coal producers to increase their exports, which have fallen as transportation tariffs have hurt profitability. Given the large distances Russia’s major coal producing areas are from their export markets, transportation costs account for a significant portion of the product. Medvedev has said that transportation costs can account for up to 50% of the cost of Russian coal, which makes the transit costs of coal much higher than other resources and reduces its attractiveness as an exportable good and negatively affects overall market share.
Domestically, coal has a relatively modest hold on the national energy market. This is the result of a heavily regulated natural gas market in the nation, which has caused coal consumption within Russia to drop by 50%, forcing coal producers to target export, rather than domestic, markets.
This does not bode well for Russia, despite a major coal deal being signed with China in 2010 that will see 475 million tons exported by 2035 or the 2012 announcement of a planned $120 billion investment for development of the coal industry to accommodate an ambitious plan to reach 85 million tons of coal exported to Asia annually by 2030.
Four years and an economic crisis later, this money does not appear to be reaching the mines. The recent tragedy at the Vorkuta coal mine in late February 2016 is but one example. While the investigation is ongoing and looking into safety code violations, it will be up to the Russian authorities to determine the nature of the incident and address it accordingly.
With an 11% share of the global coal export market and holding substantial reserves, Russia is right to invest in the industry. However, as is often the case in Russia, saying there will be investment is rather different from actual investment.
According to experts, the Russian government tends to view its role in the development of the coal industry predominantly as being in the infrastructure sector, providing inexpensive, reliable facilities such as ports and railroads. This view comes from the dominance of private or joint-stock companies in the national coal industry. So while the state will try to help develop the infrastructure to allow the industry to get the coal to market, it is up to the industry itself to improve its practices.
With current economic woes in Russia being in part caused by sanctions, but also heavily affected by the sharp decline in oil prices, the country seems to have no choice but to continue reliance on resource extraction, at least to carry it through the short to medium term before investments into different sectors can occur. As such, coal, with its heavy export potential despite the aforementioned decline, remains an important industry.
The companies will continue to do what they deem best for their profit margins, so the burden falls to the state to ensure that the industry is able to continue contributing at the highest level possible to the economy. The role of infrastructure developer taken by Moscow is one that can be justified in economic and security circles. The development of ports and rail lines need people to build and maintain them, which helps with unemployment. Infrastructure access will likely lead to the opening of new mines, which will need to be established and staffed, again, helping unemployment. The infrastructure development will also hold use for the security services, allowing for more transit options throughout the country, including the more remote regions.
If all of this sounds familiar, that’s because the Soviet Union tried to accomplish the same thing with the creation of the Baikal Amur Mainline Railway (BAM) in the Brezhnev era. The line still exists and is operational, but at a loss. However, it does service the many mining towns throughout Siberia along its route north of the Trans Siberian. The BAM region’s resources are underexploited - the infrastructure simply is not there yet because branches were not made going off the mainline towards all of the resource deposits. This is simply a precursor to today, where grand ideas for the exploitation of resources exist, but ultimately fall flat.
This presents the government with an opportunity, however expensive, to invest in the nation in an industry other than oil, gas, or the military. Coal, while not the cleanest burning energy source, is a resource that can inject more money into the economy. It is not a long-term solution, and it will not solve Russia’s current economic woes.
However, the coal industry does present an opportunity, a first step on the long road towards an economically better Russia. Lest modern Russia wishes to repeat the pitfalls of the BAM, and the Putin administration add to its list of inadequacies, which increasingly exemplify the Brezhnev era of stagnation, it is time to begin investing in something other than the military.
Ian Litschko holds a Masters in Politics and Economics in Eurasia from the Moscow State Institute of International Relations (MGIMO) and is currently working on his second Masters in Russian and Eurasian Studies at Carleton University. He is currently researching Russian military doctrine and Arctic security.
No comments:
Post a Comment