Yesterday, a new report by CREA was unveiled, reinforcing our worst fears regarding the inadequacy of the price cap and the widespread violations plaguing the transportation and supply of crude oil to EU markets. Russia persists in leveraging European-insured tankers to boost its oil exports while engaging in the laundering of environmentally harmful russian oil in Asia.
Simultaneously, the Climate Strategies organization released a groundbreaking report titled "Unveiling the True Potential: A Closer Look at Kuzbass and the russian Coal Sector," highlighting the tangible impact of targeted sanctions on russia's economy, as demonstrated by the successful coal embargo.
After a year of imposing sanctions on russian coal, their impact on both the national and regional economies of Russia is already evident. In 2022, total coal exports from Russia witnessed a significant decline of 7.6% compared to the same period in 2021. As a result, it is anticipated that the sanctions will lead to annual coal export revenue losses exceeding €8 billion.
In 2021, Kuzbass, the largest coal-producing region in russia, exported hard coal to approximately 60 countries, with Asia accounting for 44% of its exports, followed by the EU at 29%, Turkey at 9%, and Ukraine at 6%.
The ban on the purchase of russian coal, implemented from April to August 2022, was imposed by several countries, collectively accounting for approximately 41% (85.6 million tons) of the russian coal export market. This action was taken in response to the war in Ukraine and involved the EU (as part of the 5th package of sanctions beginning in August 2022), the United States, the United Kingdom, Switzerland, Australia, Norway, and Canada.
Since the outbreak of the war, overall coal exports have experienced a 14% decline. The ban on russian coal exports compelled Kuzbass to seek buyers for 36% of its production in foreign markets. Furthermore, if Japan fully implements the announced sanctions, the demand for hard coal exports is expected to decrease by 50%.
Sanctions on crude oil and refined product imports are having an impact on the coal sector, driven by the competitive dynamics among fossil fuels. Since March 2023, the EU has enforced an embargo on petroleum product imports, resulting in an increased reliance on fuel oil for domestic energy needs and decrease in domestic coal consumption. Besides, the coal sector is facing heightened competition from the rising popularity of natural gas.
These sanctions have far-reaching economic, social, and political ramifications, particularly evident in Kuzbass (Kemerovo region), a renowned coal mining region responsible for over 55% of russia's total coal production.
According to a recent report by Climate Strategies, calculations reveal significant impacts if Western and EU member states remain steadfast in enforcing sanctions. In the Kuzbass region, coal production is projected to decline by 28% ("soft" scenario) or 38% ("hard" scenario) from 2022 to 2030, compared to the baseline ("no war") scenario. Likewise, domestic and export coal revenues are estimated to decrease by 49% ("soft" scenario) and 51% ("hard" scenario) from 2023 to 2030, compared to the baseline. Employment in the coal industry is also expected to decline by 34% (soft scenario) and nearly 50% (hard scenario) by 2030, compared to the baseline.
It is essential to consider the influence of Asian markets, particularly China and India, as they continue to ramp up their imports of russian coal. Russia's coal shipments to China reached nearly 60 million tons last year, reflecting an 11.2% increase from 2021, while India's imports surged by almost 150%, amounting to 16.7 million tons compared to 2021.
Sanctions Impacting the Cost of Coal Production: Broadening Effects Beyond Oil and Gas
In 2021, the total cost stood at approximately USD 38 per ton. However, during the first three quarters of 2022, the cost surged to USD 55 per ton, primarily due to a 40% increase in material expenses. In terms of rubles, the cost of coal production from January to September 2022 rose by nearly 50% compared to the same period in 2021.
The transportation expenses for delivering coal by rail from Kuzbass to western ports were estimated at $45.5-50.3 per ton, while to eastern ports, the range was $53.9-60.1 per ton. As for coal transshipment costs, they varied from USD 8.5 to 42.0 per ton for western ports and USD 18.5-22.6 per ton for Vostochny port. In southern ports, the transshipment price reached USD 60 per ton. To provide some context, in 2020 and 2021, SUEK paid around USD 23 per ton for rail transportation and USD 2.1-3 per ton for transshipment from its own ports.
Deepening Impact of Sanctions: Unveiling Additional Consequences
It is highly unlikely that the Western countries will significantly ease their sanctions on russia, including their pressure on the coal industry. It can be stated with confidence that the region will not be able to return to pre-war "normalcy," which will lead to a substantial decline in living standards and an increased risk of social unrest. Furthermore, the restoration of coal production to pre-war levels is projected to be unattainable until at least 2030.
The decline in revenues from coal sales is expected due to the stabilization of global coal markets and prices following the energy shock of 2022. The rise in production and transportation costs, coupled with significant discounts offered by russian coal exporters, will further make it not profitable to export coal.
The long-term decline in global coal consumption is anticipated due to the implementation of stricter environmental policies and carbon regulations. Kuzbass and Russian coal producers are ill-prepared to handle the consequences of transitioning to green energy.
However, the current and projected deterioration of the Kuzbass coal industry does have positive implications for climate change. The reduction in coal production leads to lower methane emissions from coal mines, while decreased electricity and heat generation result in reduced CO2 emissions from coal combustion.
The West should adopt the same hardball approach by implementing full embargoes on russian oil and gas, effectively severing Russia from its revenue streams.