Ukraine may turn to Donbass rebels to source coal

By bne IntelliNews November 25, 2014

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Ukraine may continue its controversial practice of buying thermal coal from mines in the Russian-backed secessionist republics in the eastern region of Donbass, as its attempts to diversify suppliers internationally have hit the rocks.

Ukraine energy ministry Yury Prodan said on November 24 that Russian shipments of anthracite thermal coal to Ukraine had been suspended. Ukraine needs this specific type of coal to fire massive power stations across the country, which were previously supplied from mines in Ukraine's eastern war-torn Donbass region that are now under control of Russian-backed rebels.

The revelation that Kyiv had bought over $100m worth of such coal from the Donbass mines - crucially paid for in domestic currency hryvnia  - since the start of the Russia-backed insurgency in the region, sent political shockwaves through the country in late October.

As of September, Ukraine contracted for anthracite coal to be shipped from South Africa at a significantly higher price - and paid in hard currency at a time when Ukraine is experiencing a dollar drought, as the National Bank of Ukraine desperately tries to shore up the currency.

The shipments from South Africa also proved controversial, since they were carried out by trading companies journalists alleged may have political links in Ukraine, in an affair dubbed Coalgate. Other pundits argued that Coalgate was prompted by the government itself as an alibi for discontinuing unaffordable imports of coal.

On November 12, Prodan announced that the South African company had discontinued supplies, and that no other international traders were ready to import coal to Ukraine, since they did not feel Ukraine was a reliable partner after the Coalgate scandal. Instead Ukraine would have to source anthracite from Russia or Donbass, he said.

Sourcing coal from Russia - a country many in Ukraine believe to be an aggressor  - proved equally controversial, but went ahead, as Ukraine's coal stockpiles dwindled at the onset of winter. Finally on November 24, Prodan announced that this option was also ruled out - although no corresponding information came from Russia.

According to sources quoted by internet portal The Insider, the reason that import of coal has failed is that the National Bank has informally prohibited the sale of hard currency to importers for this purpose. Ukraine is on the verge of default, according to many observers, and is desperately conserving its remaining hard currency to prop up the currency and pay hard currency gas bills to Russia and service foreign debt. Coal purchases from Donbass can be paid in hryvnia, and may also make the rebels more pliable in the future.

"For Ukraine the purchase of Donbass coal is the best option from the economic point of view," a government source told The Insider. "But it is not clear how to explain this to society, since the sellers are responsible for military activity causing the deaths of Ukrainians. "


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