Before the crisis in the east began this year, Ukraine relied on coal to generate about 40 percent of its electricity. However, more than 70 percent of Ukraine's coal supplies are located in Donbas, which is now under the control of separatists. They have been transporting the area's coal to Russia, where some of it is sold back to Ukraine at a premium. In October, Ukraine's total coal production decreased 59 percent year-on-year. At the same time, firms have struggled to transport coal produced in government-controlled areas to factories in Ukraine's central and western regions because of large-scale infrastructure damage, especially to railways, in the east during fighting throughout the summer.
As a result of the lost production and lack of access to some coal resources, Ukraine is expected to face a shortage of 4 million metric tons of coal by the end of 2014. Kiev has reacted to the shortages by importing supplies from South Africa and Russia. However, after signing a deal in August to buy 1 million metric tons of coal from South Africa, the Ukrainian general prosecutor's office launched an investigation into the deal. The domestic political scandal led to the cancellation of the contract with less than half the coal delivered. One of the chief concerns regarding the deal was the differential between the price of the South African coal, at $112, and more affordable options, such as Russian coal, which costs about $91 per ton with transport and logistics already factored into the price.
On Nov. 12, the Ukrainian energy minister said Ukraine's coal reserves were low and that the country would have to import Russian coal during the winter months. Private Ukrainian energy firm DTEK had already imported about 1.3 million metric tons of anthracite coal from Russia this year, while state-run Centrenergo — in response to the ongoing shortages — reportedly signed a contract in mid-November to import more than 500,000 metric tons of coal from Russia by the end of the year. Coal supplies to both DTEK and Centrenergo, however, have now been suspended.
In response to the cutoff, Centrenergo announced Nov. 17 that it had held talks with U.S. company Recursion Ventures regarding a potential purchase of thermal coal. Even if a deal is reached, similar to the South African coal purchases, U.S. supplies will likely be more costly than supplies imported from neighboring Russia, and the plan will encounter domestic opposition for financial reasons. Thus, securing coal from Russia will remain one of Ukraine's top objectives.
This development comes at a time when the Kremlin is pressing Kiev in an effort to elicit both political and military concessions. Moscow has pressed Kiev to resume talks with the separatist leadership using the format for the Minsk talks, where representatives from Russia, Ukraine, the Organization for Security and Co-operation in Europe and separatist groups discussed the cease-fire without direct U.S. or EU mediation. Among the separatists' chief demands is the withdrawal of Ukrainian troops from certain strategic points, such as the Donetsk airport and the crossroads at Debaltseve. Ukraine has opposed returning to the Minsk talks while also continuing to engage in small-scale fighting along the line of contact in the east. Nevertheless, the cutoff will allow the Kremlin to wield leverage over Kiev and pressure it to agree to concessions in the ongoing negotiations.
