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Russia: World Bank Loans To Reform Coal Industry

Moscow, 21 April 1998 (RFE/RL) -- Over the past two years, the World Bank has provided multi-million dollar loans to reform Russia's ailing coal industry. But the program has been dogged by controversy.

In 1996, the Bank loaned Russia $525 million to create a smaller, more viable coal industry, but a chunk of the money was misspent by government bureaucrats while miners went unpaid. Regional coal companies and local governments often misused funds meant for miners.

Now the money appears to be going where it is supposed to, but union leaders and coal industry workers say the money could be better spent.

The bank's latest $800 million loan to Russia, approved last year, will go towards paying off wage arrears to redundant miners and physically closing down dozens of mines across Russia.

The government has allocated 5.7 billion rubles ($930 million) for the coal industry in 1998, funded partly by the World Bank loan. Two thirds of the money will be spent on closing down unprofitable mines that are either too deep or difficult to operate.

By all accounts, the funding falls short of what is needed. Vitaly Budko, chairman of the official 500,000-strong Independent Union of Coal Industry Workers, said at least 10 billion rubles is needed to provide for what he called "civilized" closures and keep existing mines working safely.

The Russian government and the World Bank are currently negotiating an additional loan of up to $200 million to beef up safety at mines. Negotiations are also underway with the Japanese government to provide up to $400 million to aid Russia's coal industry. But neither deal is expected to be finalized until the end of the year.

For now, resentment is running high that the limited funds available are being used to shrink the coal industry.

Like many union leaders and coal industry specialists, Budko complained that there has been too much focus on closing down mines instead of investing in promising mines to make them profitable.

But Vadim Voronin, deputy head of the World Bank's Moscow office, said: "We need to reach a stage where coal enterprises will be able to pay for themselves."

The government's plan, drawn up together with the World Bank, calls for coal subsidies to be eliminated by 2000, creating a smaller, more competitive industry. Revamping the coal industry is central to the government's efforts to rein in spending. The coal industry once ate up more budget funds than any other sector except for agriculture, but the government has more than halved subsidies since 1994.

Government subsidies often have been poorly spent on loss-making mines with no future, perpetuating Soviet-era habits of maximizing production without any regard to costs.

As a condition for the World Bank loan, the government has pledged to clean up its act, cutting out subsidies to loss-making mines and providing an adequate social safety net to miners who have been laid off.

The government also has moved to root out corruption. Under pressure from the Bank, President Boris Yeltsin signed a decree last November abolishing Rosugol, the state company which once controlled the industry and doled out subsidies. The government has accused Rosugol of misappropriating funds and blocking reforms.

Now the Ministry of Fuel and Energy has been put in charge of regulating the coal industry and shutting down mines.

The government also has tightened controls over budget spending, channeling funds for the coal industry through Russia's emerging treasury system directly to mines that are in the process of closing. In many areas, local oversight committees bringing together union representatives, regional officials and coal workers monitor the use of federal funds, although many participants say they have little decision-making power.

The World Bank has provided funds to cushion the social impact of mine closures by paying off wage arrears and severance pay to redundant miners. But very little funding or thought has been given to the next step -- helping miners make the transition to new jobs.

The stakes are high. Nearly 400,000 people -- about 40 percent of the workforce -- have left the coal industry since 1993, as miners were either laid off, quit because they were not getting paid, or retired early.

While coal industries in other countries such as Britain have gone through similar transformations, Russia's transition is exacerbated by the collapse of basic government services. In Kemerovo, cash-strapped local administrations are unable to pay unemployment benefits because tax revenues have dried up in the wake of the coal industry's collapse.

Yuri Kim, director of the Kemerovo regional employment service, said only about one-quarter of redundant coal workers in the region found new jobs last year, mostly at other mines where wage arrears are common.

The bank hopes that by closing down debt-ridden mines, it will create room for profitable mines to grow. It has said the final $200 million tranche of its coal loan will not be released until half of the coal industry is in private hands and operating without state support.

Roughly a dozen other coal companies are scheduled for privatization this year. But already there have been enough scandals to scare away potential investors.

The Austrian company Prosystem GmbH bought a 40 percent stake in Kuznetskaya coal mine in the Kuzbass in 1991, but it is battling with the regional administration which wants to re-nationalize the mine.

With an uncertain investment climate and mines that are deep in debt, many industry specialists doubt that private investors will venture into the coal industry. Moreover, high railway tariffs make it difficult to export coal competitively, especially from remote regions of Siberia where much of Russia's coal reserves are found.

Declining demand for coal due to cheaper and cleaner oil and gas supplies has contributed to the industry's troubles. But many industry experts say Russian coal can become competitive with new environmentally-friendly technologies, better designed mines and a leaner workforce.