Ukraine’s oligarchs make up for Donbass losses with expensive coal from USA

Ukraine is already buying U.S. coal at an extremely high price. However, this is not about U.S. companies’ desire to make money on Donbass blockade. This is about Ukrainian oligarchs’ efforts to compensate for the blockade and nationalization of their enterprises in Lugansk and Donetsk. They sale coal to themselves at the highest price to take money out of the country and pay less taxes to the state budget.

According to the Energy Information Administration of the U.S. Government, in Q1, 2017, the United States exported record-breaking volumes of coke-coal used in metallurgy to Ukraine. As compared to last year, supplies increased 2.4-fold to 865,000 short tons (1 short ton is equal to 0.9 standard ton). The price soared, almost threefold, to $206 per one short ton from $71. Last year, world coal prices skyrocketed reaching even $300 per ton, due to reduction of recovery in China and floods in Australia. However, earlier this year, the coal prices fell again and the average export price of U.S. metallurgical coal totaled $157 for Europe in Q1, according to EIA. It is by $49 or ¼ cheaper than Ukraine used to buy. Only Austria paid more for it in Q1 – 128,000 short tons of coal for $248 per short ton. Expenses of neighboring Ukraine, Turkey and Romania were much lower. Romanian companies bought 51,000 short tons in average for $145 per short ton, Turkish companies procured 493,000 short tons in average for $185 per short tons.

It appears that high prices of metallurgical coal are favorable to American companies that could take advantage of Donbass blockade. Both anthracite and coke-coal were supplied from the southeast of Ukraine. However, the extremely expensive coal was supplied by Ukrainian, not foreign businesspersons. And they sold it to themselves. We are talking about Metinvest group of steel and mining companies by 75% owned by businessperson Rinat Akhmetov’s DTEK. Yet before the conflict in the southeast of the country, he was called Donbass’ owner. He is still the richest Ukrainian. Due to blockade, he lost more assets than any other Ukrainian businessman did. Most of his enterprises were nationalized in response to the blockade of Ukraine’s southeast in Lugansk and Donetsk Peoples’ Republics.

Metinvest is still the largest group in Ukraine. It owns Azovstal Metallurgical combine, Mariupol metallurgical combine after Ilyich, and another 9 plants. Yenakiyevsky metallurgical combine was lost after Donbass blockade.

At first, Director of Azovstal Mariupol-based Metallurgical Combine Envar Tskitishvili told “Ilyichevsk” corporate newspaper about purchases of coke-coal from U.S. He said the enterprises did not receive raw materials from Avdiivka Coke and Chemical Plant, so it started buying coal from Russia and U.S., which is much more expensive than the Donbass one. He did not specify that Metinvest that owns Azovstal, is the owner of United Coal Company (UCC) in U.S. since 2009. It owns 18 mines and is the sixth largest metallurgical coal recovering company in U.S.

Later, Yuri Ryzhenkov, Director General of Metinvest confirmed the purchase of coal from their own companies. He said the group lost control over Krasnodonugol coke-coal mining and enrichment company in March and imports coal to cover halted supplies. “We have increased import of coal by sea, taking almost entire production of our UCC subsidiary in U.S. Earlier, we sold almost half of it on the domestic market in U.S. and took the other half. Since January of the current year, we have been importing the entire volume,” Metinvest director general told Novoye Vremya Ukrainian newspaper.

Noteworthy that in Q1, 2016, Metinvest supplied coal to Ukraine from U.S. mines for $71 per short ton and it was by $2 less than the average European prime, according to EIA data.

Why did the Ukrainian oligarch “overpay” himself more than $42 million for his own coal earlier this year? One of the local experts says the businessman is just compensating for his losses from the Donbass blockade and assets nationalized in Lugansk and Donetsk. “On the one hand, money is taken out of the country and transferred to the accounts of his own company in U.S. as profit. On the other hand, growth of expenses on coal, and consequently, on metallurgical production allows reducing profits and paying less taxes. At the same time, this does not affect the group’s rating as the money remains in the company. Only the state budget of Ukraine suffers from all this,” the expert says.

He is sure that businesspersons holding oil refineries and car filling stations practiced such “compensation schemes.” “Oil refineries were publishing their losses, while the profits are transferred to car filling stations,” the expert told EADaily. “The idea was to optimize tax burden. For instance, 43% of Kremenchug oil refinery belongs to the state, but operational control is in the hand of Privat Group of Igor Kolomoisky. If oil refinery generated profits for the accountable period, it would have to share it with the state. If the margin was transferred to car filling stations owned by Privat, there was nothing to share with the state. One can see a similar situation with import of coal from U.S. Artificial reduction of profits of Metinvest’s metallurgical combines enables the group to evade profit tax in Ukraine.”