Nick Kochan in London -
As winter grips the UK, a group of Russian coal companies with leaders closely linked to President Vladimir Putin are enabling British power companies to keep the country’s lights on – a precarious position as the sanctions rhetoric rises once again.
Three Russian firms, SUEK, KRU and SDS Coal, produce most of the imported coal to a country whose energy system is creaking. These firms export to the UK just under a $1.5bn worth of coal a year, according to Greenpeace. EU data show that the UK heads the list of European importers of Russian coal; it imports about 20mn tonnes of Russian coal each year, most of which is bought by the six big power generators.
Tony Lodge, a research fellow at the London-based Centre for Policy Studies think-tank and the author of “Clean Coal – A Clean, Secure and Affordable Alternative”, notes that while most of the talk is about Russian oil and gas, the UK has “a real liking for Russian coal coming from the Baltic in summer or Archangel in winter. I know of traders who are looking to double their coal import contracts to the UK now. This is hard stuff. It’s about keeping the lights on.”
At a time when the rhetoric on sanctions grows louder as the situation in Ukraine deteriorates, relying on growing quantities of Russian coal to bridge an energy shortfall is a dangerous position to be in, warns Chris Kitchen, general secretary of the National Union of Mineworkers. “If Prime Minister David Cameron says he does not like what Russia’s doing in Ukraine, Putin can always turn round and say he’ll be sending Russian coal east not west this year,” he says.
Russian coal has the benefit of quality and geography, says Nigel Yaxley, managing director of the Association of UK Coal Importers. The proximity of Russian ports in Murmansk and the Baltic makes Russia well placed to compete in the Atlantic market alongside Colombia, the US and South Africa.
However, while the Western sanction lists do not name any individuals linked to coal companies, that could change: the big Russian coal companies importing to the UK are all led by people with close ties to the Kremlin.
Siberian Coal Energy Company (SUEK) – whose latest annual report notes the UK is now the company’s most important export market after China, with 41% of “Atlantic” sales – has Andrey Melnichenko as its major shareholder and chairman. His companies are listed as strategic enterprises in Russia, allowing them in some cases to rely on the support of public institutions on a priority basis, and he is reported to be close to the inner circle of Putin.
Melnichenko’s business empire had its origins in the purchase of MDM Bank in the mid-1990s, but in the early 2000s he went on to acquire coal assets including SUEK and the nitrogen and phosphate fertilizer company EuroChem. A heavily publicised lawsuit with Shaft Sinkers, a contractor hired to drill a mining shaft, put it at odds with the trio of oligarchs who hold shares in Eurasian Natural Resources Corporation (ENRC), a major scandal-hit shareholder in Shaft Sinkers. This has caused EuroChem, and its founder, some embarrassment and expense.
Melnichenko, 42, is a very colourful character – even by the standards of Russian oligarchs. He is worth an estimated $11.4bn (according to Forbes rich list in 2014) and owns one of the world’s most striking super-yachts, the ‘A’, (named after his wife Aleksandra, a former Serbian model). The yacht was designed by Philippe Starck. Other assets include a Boeing 737, a villa in Antibes, an apartment overlooking New York’s Central Park and a £24mn property called the Harewood Estate in Ascot, Surrey.
Melnichenko also has connections to the British establishment. His long-standing advisor is George Cardona, once a special advisor to former chancellor Geoffrey Howe. Cardona is on the boards of SUEK’s parent companies (the Cypriot Madrake and the Bermudan company Westline), EuroChem and seven other Melnichenko companies.
Kuzbassrazrezugol (KRU) is majority-owned by a Russian copper company headed by Iskander Makhmudov called UGMK (also known as UMMC).
About 15 years ago, Makhmudov brought in Andrei Bokarev to run KRU. A measure of Bokarev’s achievement was the award of the Alexander Nevsky prize for services to the Sochi Olympics in April 2014. This was seen as an indication that he falls within Putin’s circle of trusted industrial advisers. Bokarev, who heads up Transmashholding, is involved as director, shareholder or board member in three different companies that have been placed under sanctions by the US, namely Kalashnikov, Rosneft and Transoil.
At the end of 2014, when announcing its third-quarter results, KRU revealed that the company’s coal production had fallen 3% on year in January-September 2014 to 32.58mn tonnes. This partly reflects the falling price of coal, which is down about 50% over the last two years.
Sibirskiy Delovoy Soyuz (SDS) – a subsidiary of the Siberian Business Union – produces more than 20mn tonnes of coal a year and is headed by Vladimir Gridin and Mikhail Fedyaev, who are close associates of the Russian president. Gridin serves in the State Duma for Putin’s United Russia Party and is deputy chairman of the Transport Committee. Fedyaev's son Pavel became State Duma deputy for United Russia in 2011.
Yaxley of the Association of UK Coal Importers says that if there were a breach in Russian supply for whatever reason, there are plenty of companies with coal ready to take up the slack. “This is a very flexible market,” he says.
However, even the most diehard proponents of sanctions on Russia cannot the escape the fact that it would be both costly and disruptive for the UK to sever imports of Russian coal. The Russian coal companies for their part have found a market that is an eager buyer of Russian coal. Declining demand from China is likely to push them further into the UK market.
Coal may be a more flexible energy source than gas, but the UK shows no signs of taking up the available alternatives. The scale of imports are such that customers would not be prepared to pay the higher costs that would result from importing coal from further away. Nor would the government want to in an election year. For the moment, Russian companies have a tight grip on the UK market and this is unlikely to loosen any time soon.
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