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Donbass-Abkhazia coal export scheme

On 9 February, the Ukrainian investigative online platform InformNapalm published a detailed report on the Russian government's alleged plans to start exporting coal from the separatist-controlled areas in eastern Ukraine via Russia and Georgia's breakaway region of Abkhazia to Turkey.

  • Russia is interested in facilitating exports from its protectorates in eastern Ukraine to provide them with additional revenue streams and make them more financially self-sufficient.
  • Any coal exports from Donbass via Abkhazia are likely to be mislabelled as Russian-produced, thus elevating corruption risks in the Russian coal sector by increasing risks for prospective foreign buyers.
  • Georgia is unlikely to intercept trade vessels engaged in illicit trade between Abkhazia and Turkey in order not to jeopardise its own commercial interests in trading with Turkey.
  • If the coal export scheme succeeds, Russia will likely encourage the Donbass separatist entities to export other commodities, including metals, chemicals and grains, via Abkhazia.

The report by InformNapalm on the proposed Donbass-Abkhazia coal export scheme cited an interview given by the self-described representative of breakaway Abkhazia in the self-proclaimed Luhansk People's Republic (LPR) in eastern Ukraine, Sergei Ladariya, on to the main TV channel in LPR on 29 January. Ladariya spoke about an unidentified "Turkish company" that expressed interest in buying coal from LPR in Donbass to be delivered to Turkey via Russia and the Ochamchira seaport in Abkhazia. He noted that the talks were at an advanced stage and were currently focused on forging an agreement on tariffs between the three sides.

Export mislabelling

Following the start of the armed conflict in eastern Ukraine in April 2014, the pro-Russian separatist militias established control over significant economic assets in Donetsk and Luhansk regions, including in mining. As of early 2015 the LPR and Donetsk People's Republic (DPR) controlled 60 out of 95 coal mines in the Ukrainian section of the Donets Coal Basin (Donbass), including all mines producing higher value anthracite. According to reports in credible media, both separatist entities in eastern Ukraine engaged in illegal smuggling of coal to Russia, some of it mined outside the established mines in makeshift illegal 'kopanka' mines. In 2015 alone they supplied over 1.3 million tonnes of anthracite to Russia, at a value of up to USD75 million.

The report on the potential Donbass-Abkhazia coal export scheme is corroborated by an IHS Markit source, which indicates that a Turkish entity is indeed currently seeking international financing for the expansion of the port infrastructure in Ochamchira to increase export of coal to Turkey via Abkhazia. In addition, photos of railway station in Sukhumi, the capital of Abkhazia, taken in July 2015, show coal-laden train cars, which suggests that the re-export route has been in operation for a period of time.

The satellite photos of Ochamchira port accompanying the InformNapalm report depict a large coal-loading area and cargo vessels loaded with coal docked in the port. It is likely that the coal from LPR is transported by rail to Ochamchira port via Russia since LPR, Russia and Abkhazia are connected by railways. Since 2008 Russia has provided services, including by its railway troops, to restore the railway infrastructure in Abkhazia, destroyed or damaged during the conflict in 1992-93 and deteriorated by disrepair. In November 2015, the Russian railway troops repaired a 30-km stretch of the railway line to Ochamchira.

Exporting coal from Abkhazia also provides opportunity to mislabel it as originating in Russia, which helps with avoiding international sanctions imposed by both EU and US and other Western countries on separatist controlled LPR and the nearby Donetsk People's Republic (DPR). It is unlikely be labelled as being Abkhaz since the coal deposits in Tkvarcheli have been largely depleted. In the recent years coal from LPR and DPR was illicitly exported to the international markets, including to Poland and Spain, via Russia, where it was mislabelled as Russian.

Abkhazian route

According to the Russian online trade statistics portal Ru-Stat.com, coal exports from Russia to Abkhazia in January 2013–September 2017 was very uneven, with peaks in July 2015 and July 2017 and the aggregate monetary volume reaching only USD332,000. However, from the Georgian government's perspective all trade with and business activities in Abkhazia are illegal. In fact, Abkhazia has been under a Georgian trade embargo and maritime blockade for years, though this has been haphazardly enforced due to the weakness of the Georgian state.

In 2005–09 there were a number of instances when the Georgian Coast Guard seized Turkish vessels sailing to and from Abkhazia with various cargo, including coal. This, in turn, led to periodic diplomatic tensions between Georgia and Turkey, which have not been resolved to date. The Turkish vessels typically sail from the ports of Istanbul, Trabzon and Samsun to Sochi in Russia and then turn off their transponders en route to make a detour in Abkhazia.

The incumbent Georgian government, which has been in power since 2012, is keen to avoid any problems with Turkey as it is considered a strategic partner. Turkey is among Georgia's top three trading partners, with Turkey's share of Georgia's foreign trade fluctuating between 13% and 17% in the recent years. This explains why there have not been any seizures of Turkish vessels engaged in trade with Abkhazia in the past several years.

Outlook and implications

The Russian government has been facilitating the development of trade ties between the breakaway territories Moscow controls in Georgia and Ukraine. This is done to reduce their economic dependence on Russia with the view of eventually making them financially self-sufficient. Ever since Ukrainian authorities, under pressure from nationalist activists, severed all trade ties with LPR and DPR in early 2017, the search for external markets to export coal has intensified. In this context establishing a re-export channel via Abkhazia represents an optimal solution, but it is risky because it relies on Georgia's tacit acquiescence, which is far from assured at this point.

An important indicator to watch is whether the Georgian authorities will continue to turn a blind eye to the growing trade between Abkhazia and Turkey, which in 2013 reached USD600 million, according to unofficial estimates. Although neither Abkhazia nor Georgia's other breakaway region South Ossetia are subject to US sanctions at present, the Consolidated Appropriations Act, passed into law in 2017, prohibits the allocation of state funds for countries that have diplomatic relations with these separatist-controlled territories. If Georgia chooses to obstruct the coal trade via Abkhazia, the DPR and LPR illicit coal exports would probably decrease, and would partially be redirected via Russian ports.

Another indicator to watch will be if the Donbass separatist entities succeed in using Abkhazian ports to supply coal to Turkey, this would likely open new channels for further trade. Illicit exports of steel, chemicals and grains from DPR and LPR are likely to follow, providing the separatist entities with additional revenue streams. This would improve self-sufficiency of DPR and LPR and support their separatist ambitions further, making a peaceful resolution to the conflict in Donbass less likely in the three-year outlook. The breakaway Abkhazia is likely to benefit from transit fees and increased employment in the transportation sector. This would mean that de-facto Russian military occupation and political control of sections of Ukrainian and Georgian territories will continue in the medium term.

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