Russia faces extreme security and economic concerns which hinder its power as an exporter of oil and gas, and thus its national survival. Amid such an energy crisis the coal industry is set for a rebound in Russia, but its future is certainly not risk-free.
Annually the US Chamber of Commerce publishes the International Index of Energy Security Risk, which takes into account the 25 large energy-consuming countries, assessing security and risk. In its 2016 report, it was determined that Russia, with a risk score of 1,192 and coming in 20th place, is one of the least energy secure states in the world. In comparison, Norway, the most energy secure country in the index, has a total risk score of 733 and is 16 percent below the OECD average of 869. Russia exports large volumes of fossil fuel and is one of the world’s largest producers of natural gas, crude oil, and coal. Despite Russia’s diverse bounty of energy resources, its energy security remains volatile. Considering metrics measuring energy use, transportation, and emissions, Russia ranks extremely poor, and geopolitical conflicts create further volatility (1). Security concerns include an ongoing war in Eastern Ukraine following Russia’s unlawful annexation of Crimea in March of 2014, tension between Russia and NATO members, and the existing threat of terrorism and radicalization in the south of Russia. Furthermore, economic troubles have worsened, marked by weak growth and foreign investment, public and private-level corruption, and the downfall of the ruble. Additionally, the global drop of oil prices and worries over effective transport of energy resources to the rest of Europe pushed Russia into an emergency state, a natural result of the extreme reliance on its energy sector. Such economic and security issues hinder Russia’s power as an exporter, and thus its national survival. This report takes a closer look at the coal industry in Russia amid a state of energy chaos and the risks that come with its resurgence.
First, let’s take a look at the assets, also known as vulnerable responsibilities. These create Russia’s tremendous reliance on foreign and domestic consumption of its energy resources. Russia holds the world’s largest natural gas reserves and is second in production, behind the United States. It holds the second largest coal reserves and ranks sixth in production. Russia also has the seventh largest oil reserves and is third in production behind Saudi Arabia and the United States. Russia also maintains the world’s fifth largest electricity grid in terms of annual generation--1,069 terawatts per hour--and when the EU is excluded as an entity, it places fourth in carbon dioxide emissions. Russia is thus unsurprisingly one of the top five producers and consumers of electricity in the world, with fossil fuels (mainly natural gas) generating about 68 percent of Russian electricity followed by hydropower (20 percent) and nuclear (11 percent) (2).
The reliance on energy exports in the private sector, which is widely regulated by the state, is critical: in 2014 oil and gas companies earned 98 percent of all profits made by large Russian firms. Firms in the energy sector together earned almost 2 trillion rubles ($52 billion), while all other companies combined saw profits of only about 47 million rubles ($1.2 billion). Such findings shine light on Russia's failure to direct its economy away beyond energy sales. Its economy saw growth rates of around 7 percent annually as oil prices rose through the 2000s, but when oil prices fell from highs of above $100 per barrel to the recent lows of less than $50, the country went into a deep recession and forced the government to curb spending at dangerous levels. In addition, taxes from the energy sector make up around 50 percent of Russia's federal budget. In 2015, Prime Minister Dmitry Medvedev called for diversification away from oil and gas and the need to find new internal sources of investment (3). As a result, the coal industry is on the rise.
Faced with extremely low oil prices, concern over the transport of natural gas to Europe due to political reasons stemming from a conflict with Ukraine, and the threat of terror attacks on pipelines and energy-transport hubs, coal becomes a reasonable alternative despite environmental consequences. From a risk-analysis standpoint, considering its predominantly Siberian area of extraction, coal is located in regions free from conflict or serious terrorist activity. Also, unlike the transport of petroleum from Russia, which is majorly exported to Europe (volatile considering geopolitical tensions as Ukraine is critical transport territory), about half of Russia’s coal is exported to East Asia, which is much more reliable when looking at political-economic arrangements. Furthermore, this secure option contrasts with the fall of the coal industry in Eastern Ukraine, a once global powerhouse of coal production now in collapse due to a violent conflict between pro-Russian separatists and the Ukrainian government. Following the annexation of Crimea, Russian troops continue to occupy Ukrainian sovereign territory in Donbass, an area with immense coal reserves, and fighting still occurs despite ceasefire agreements, creating further uncertainty and therefore increased risk in the energy sector in Eastern Ukraine concerning which group maintains control of resources. New measures at the public and private and private level prove coal is making a significant return.
Domestically, the government is approving new coal power stations through 2020, as gas will drop from 68 percent of energy supply to 50-57 percent, while coal will increase from 25 percent to 38-39 percent. The Unified Energy System of Russia projects the country will more than double its coal consumption (4). Meanwhile, exports will only continue to rise. In June, Energy Minister Alexander Novak projected the whole-year coal production for 2016 to be 390 million metric tons--a 4.3 percent increase. Novak also claimed that the Asia-Pacific region is its highest priority for the future, signifying the slow shift away from Europe (5). In fact, the recent Russian-China energy partnership calls for coal to be reliably exported out of Siberia and the Russian Far-East to fuel growing markets in Asia and while allowing adequate technologies and intellectual property to be attained in avoidance of Western sanctions. Russia is also increasing the exportation of coal to China using the Trans-Siberian railway: 3.5 million tons of coal crossed the Russian-Chinese border in 2012; that doubled to 7 million tons in 2013 and is only set to rise with the implementation of the 2014 “Road Map on the Development of the Russia-China Partnership for the Coal Industry.” According to the “Coal Industry Development Program” coal production in Russia will increase to 380 million tons in 2020 and 430 million tons in 2030. State-sponsored companies have plans to not only build new coal plants but to also increase the capacity of the country’s coal terminal ports up to 300 percent. In order to achieve such goals, at least $200–$360 billion of investment is needed to update existing coal-fired power plants by 2030. The Russian government can only provide $13 million of this funding, so the rest is left to energy companies and investors (2).
Though it appears Russian coal is on the rise again, investment in the industry is still filled with risk. While advantages include practically limitless deposits of coal, competitive returns on investment, creation of jobs and the rural economic modernization of areas such as Siberia, maintaining geopolitical ties with Asia, and developing coal technology, risks include stranded assets, social costs of the mining process, effects on climate change, and the lack of private investment to fund new projects which are required to maintain increased production levels. Russia’s poor business climate, widespread corruption, state interference, and and a lack of market demand to invest in new coal projects when oil and gas investment opportunities are considered more secure and profitable all contribute to an underwhelming amount of investment in its economy. The average rate of return for oil and gas extraction normally tops double digits, even coming close to 20 percent in some years, while the main source for coal, electricity or heat supply, has returns below 5 percent. Private investors are also less likely to invest in coal when most developed and developing countries, including Russia, are incentivizing renewable energy resources in understanding the long term benefits of their development. Additionally, the decrease in technical skills and education throughout the industry, corruption at the local level, and dependence on foreign technology makes coal a less attractive investment (2). While political-security reasons such as the safety of Siberian coal zones, closer partnerships with East Asia, and the danger of a reliance on oil and gas exports to Europe will allow Russia to increase coal production. But a necessary investment to modernize the coal industry is limited due to a heavy set of risks.
(1) US Chamber of Commerce. International Index of Energy Security Risk 2016 Edition (2016): Institute for 21st Century Energy. US Chamber of Commerce. Web.
(2) Gorbacheva, Natalia. "Pain without Gain? Reviewing the Risks and Rewards of Investing in Russian Coal-fired Electricity." Applied Energy. Applied Energy, 15 Sept. 2015. Web. 04 Sept. 2016.
(3) Hobson, Peter. "Energy Sector Accounts for 98% of Russian Corporate Profits." MT. Moscow Times, 24 Sept. 2015. Web. 04 Sept. 2016.
(4) SRK News. "The Russian Coal Industry." SRK Worldwide. SRK Consulting, 2016. Web.
(5) "Coal Production to Rise in Russia." Coal Age. Mining Media International, 30 June 2016. Web.
Image: © Rotarepok | Dreamstime.com - Moscow urban scene
Daniel Orlov currently attends the University of Southern California where he is majoring in International Relations with a minor in Geospatial Intelligence and Human Security. He is a midshipman in the United States Navy, en route to becoming a surface warfare officer. He started work in the field of foreign policy in Russia, where he interned for two full summers at the Center for Policy Studies in Russia (PIR Center). Then, in 2014 he interned at the Geneva Center for Security Policy for the start-up of the US Department of State-sponsored Global Community Engagement and Resilience Fund to counter terrorism. Over the summer of 2016 he attended Career Orientation Training in Naval Region Southwest for training exercises with the Marine Corps, surface ships, submarine, and aviation communities. Mr. Orlov enjoys research in the fields of risk analysis, conflict resolution, naval strategy, and trade.