Russia’s coal industry faces collapse due to sanctions

Russia is preparing for the first major wave of bankruptcies since the invasion of Ukraine, with the coal industry being the key area of concern. The situation in the sector is so desperate that the government has already tasked Vnesheconombank with stepping in to save bankrupt companies. The bank has played a similar role before, bailing out firms that faced a debt crisis in 2008.

• Russia’s coal industry is in such dire shape that the government has decided to work out the details of how to support the industry, and what to do in the event of mass bankruptcies, Kommersant reported. The economy, energy and transport ministries, along with the Federal Tax Service have been ordered to save struggling mining operations, and Vnehsekonombank, which is used to managing assets too toxic to be sold, has been appointed as the main bank for the wave of expected bankruptcies.
• Kommersant’s sources in the industry say this is long overdue. The tax service has already lodged its first bankruptcy claim (against the Inskaya mine in the Kuzbass) and there are examples of mining companies shutting down due to lack of sales. Last year, coal companies posted massive losses (a combined $850 million over the first 10 months of the year). This year every mining company that is not part of a large holding “will be unable to cope with the tax burden and social obligations” that are being placed on the industry, a source at a major coal company told the newspaper.
• Russia’s mining sector has been hit with a “perfect storm”: declining external and domestic demand and a double whammy from sanctions. Russian coal companies have to sell at a discount, to compensate for the risk of their counterparties being hit with secondary sanctions, and also suffer from ever-increasing tariffs to use the railways thanks to the overloaded rail network because of how sanctions have hit Russian supply chains. As prices have dropped — to around $60-$90 a tonne at Far East terminals — costs have risen and there is no talk of investment or expansion in the industry.
• As a result, the netback on thermal coal has been below cost for a year now — at $35/tonne. In some areas in the northwest losses can reach $45 a tonne, Kommersant reported. Most enterprises are unable to cut production and only those mining more expensive coking coal, or with effective logistics, can operate normally.
• Vnesheconombank’s involvement in potential bankruptcies has largely been welcomed by the mining industry itself. The institution has many “coal” loans and therefore has an incentive to work quickly on restoring solvency rather than liquidating troubled businesses.

Why the world should care

Trouble in Russia’s export-led coal sector shows how sanctions threaten to collapse entire industries — by increasing friction in the economy. However, despite apocalyptic forecasts and rumors other sectors of the Russian economy could too be on the brink, nowhere else is facing such a deep crisis yet.