Deadly Greed

05.08.2011
| Kyiv Post
Analysts at Kyiv-based investment bank Dragon Capital said there is one obvious way to improve safety at Ukraine’s mines: hold owners accountable for investing more into basic safety and improving salaries. "Sometimes, [the owners] just take all the profits out of the company for themselves," said Oleksandr Makarov , a metals & mining sector analyst at Dragon Capital. "This is rather widespread."

Three deadly coal mine accidents - killing at least 39 men - have sparked fresh debate over whether the billionaires and government officials who control Ukraine’s dangerous workplaces are more interested in profits than safety.

The accidents occurred within a week of each other:

• On July 29, a methane blast claimed 27 lives at the Luhansk Oblast Sukhodilska-Skhidna mine owned by Rinat Akhmetov, the nation’s richest man;

• The same day, 11 were killed when the 70-meter elevator tower collapsed at Bazhanova mine in Donetsk Oblast’s Makiyivka;

• On Aug. 4, a methane leak killed at least one worker and injured more than 20 others at the Krasnokutska coal mine in Luhansk Oblast.

Ukraine’s coal mines are notorious for their outdated equipment, terrible working conditions, paltry pay and high mortality rates.

Moreover, experts note that opaque dealings - such as the sale of coal at below-market prices through murky intermediaries - mean that state and private mines rarely receive the capital investments needed to make them safer and increase the wages of miners.

"The coal mine owners, including Akhmetov, are not super generous when it comes to modernizing the mines," said Yuriy Korolchuk, an analyst at the Kyiv-based Institute of Energy Studies." They see [the coal mines] as a resource to exploit for as long as they can. The only time they really invest considerable amounts into safety is after a chain of deadly accidents — and they do so to avoid scandal."

Mykhailo Volynets, the head of the Independent Trade Union of Coal Miners and a parliament member in opposition leader Yulia Tymoshenko’s bloc, rated Akhmetov as the best in the nation in terms of caring for miners and investing into his mining businesses -but only in comparison to other domestic oligarchs and business owners.

And that’s not saying much.

Volynets said that coal mine accidents have claimed 80 lives so far this year.

According to figures from the United Nations and Volynets, Ukraine’s mines rank among the most deadly in the world. On average, each million ton of coal extracted at the country’s deep and dark pits claims two lives. In China, the world’s largest coal producer, the comparable rate is 0.7 deaths; in Russia, 0,2 and 0.02 in the United States.

Volynets said the grim official fatality figures are not the whole picture. The industry’s workers are plagued by injuries rarely counted, he added.

The methane gas blast at Akhmetov’s Sukhodilska-Skhidna mine was the deadliest mining accident in recent years, attracting widespread attention from experts, authorities and the public.

It even triggered a rare public rebuke of mine owners by Prime Minister Mykola Azarov, which came in response to a video interview with Ihor Smetanin, a wagon driver at Akhmetov’s Sukhodilska-Skhidna.

Smetanin lamented the unrelenting pressure to increase coal output, vital for fueling steel mills and electricity generators and laid the blame squarely on the mine’s owners and managers.

Coal miners "died because they keep [telling us]: ’Come on! Faster! Give us [new] shafts, give us millions," Smetanin said in the video interview posted online. "They [use] us like animals."

His public accusations won support from Azarov.

"I believe him. I see that he is desperate," Azarov wrote in his recently created Facebook page. "Because of this ’come on, come on,’ because of their greed they are killing people."

But this string of accidents is hardly surprising to anyone familiar with the dire straits of mining.

Experts say the accidents would be avoided if adequate investment was made into safety and efficiency. To achieve this, they say, the state must remove shadowy intermediaries from their role in selling coal dug by state mines. Billionaire owners who profit handsomely from the mines must also start investing more into safety for miners who risk their lives for salaries of several hundred dollars per month.

However, even the critics acknowledge that Akhmetov’s Sukhodilska-Skhidna was better equipped and more secure than most of the country’s pits. The mine’s management say they invest heavily into safety and modernization, and plan to increase such expenditures in the future.

Still, an analysis of Akhmetov’s mining company financials reveals that its capital expenditures are impressive only by Ukrainian standards and constitute only a fraction of what is invested into less dangerous mines in neighboring Poland and the Czech Republic.

Analysts at Kyiv-based investment bank Dragon Capital said there is one obvious way to improve safety at Ukraine’s mines: hold owners accountable for investing more into basic safety and improving salaries.

Experts say that Ukraine’s coal mines could be just as profitable as the European ones. How? Akhmetov and other mine owners would need to sell coal from the mines at market prices and stop using their own traders to optimize taxes or maximize profits through transfer-pricing schemes.

"Sometimes, [the owners] just take all the profits out of the company for themselves," said Oleksandr Makarov, a metals & mining sector analyst at Dragon Capital. "This is rather widespread."

Follow the money

Volynets described Sukhodilsk-Skhidna coal mine as "one of the most difficult and dangerous in the region," yet he insists it has all the necessary equipment to ensure safety. But under pressure, miners were bending safety rules to churn out more coal, Volynets said.

Still, a glance at Akhmetov’s Krasnodonugol coal company, which encompasses seven mines and two enrichment factories, shows that the picture might not be so rosy.

According to Dragon Capital figures, Krasnodonugol reported capital expenditures last year of just $33.6 million, or seven fold less than mines in neighboring Poland and the Czech Republic. Makarov explains that this figure reflects purchases of equipment last year, while the total investment declared in 2010 by Kransnodonugol reaches $58 million.

Krasnodonugol’s press service told the Kyiv Post that last year it spent $90 million on maintaining capacity, modernizing the equipment and increasing

the mine safety. Makarov said this figure is exaggerated. Krasnodonugol claims that its capital expenditures this year has already reached $116 million.

Analyzing the company’s books, Makarov pointed out that had the company been selling the coal it extracts at market prices, without using any intermediaries, it would have posted $62 million in net income, instead of the $28 million in losses it reported. Last year Kransnodonugol sold its coal at an average price of $109 per ton, significantly below the market average rate of $144, according to Makarov.

Officials at Krasnodonugol, however, steadfastly insisted that their company fully complies with Ukrainian legislation and that all of their financial data is backed up by audits.

Out of the pit

According to Volynets, the union leader, the most likely cause for the blast at Sukhodilsk-Skhidna was the relentless pressure of mining more coal. The unfair payments system drives workers to boost coal output while ignoring risks, even if the methane detectors show dangerous levels. Volynets said management knows what is happening, but prefers to ignore it.

The way to minimize such risks, according to Volynets, would be to introduce hourly pay for miners. Such a rule was adopted by the government of Tymoshenko when she was prime minister in 2008. But, Volynets said, it was blocked by the administration of her rival. President Viktor Yanukovych.

As the Kyiv Post went to press on Aug. 4, a governmental commission had yet to announce preliminary findings of an investigation.

Dmytro Kalytventsev, head of the local miners union operating in the Krasnodon area where the Sukhodilska-Skhidna mine is located, expects officials to once again "lay all the blame on the dead miners." Kalytventsev said workers have come to expect no better from government officials who are strongly backed by the businesspeople who control the mining sector.

More accidents are bound to happen in the future, Kalytventsev said, adding that a big fire broke out at the Sukhodilska-Skhidna mine in June but luckily did not claim lives. "The management of Krasnodonugol needs to be held responsible. Until this happens, people will keep dying," Kalytventsev said.

Production demands at the mine were "over the limit," Kalytventsev said, forcing miners to switch off methane indicators to fulfill quotas and get a decent paycheck.

The victims died as some of the worst paid blue-collar workers in Europe. The average salary at Krasnodonugol reaches $600 per month, which is more than three times less than a coal miner would receive in Poland or the Czech Republic.

Yet, Kransnodonugol’s press service finds such comparison incorrect "due to the big difference in financial performance" of the mines in the two countries. Polish miners demonstrate higher productivity, they said. They also point out that the salaries Akhmetov pays are double the national average.

In the aftermath of the accident, Krasnodonugol announced that relatives of the 27 victims will receive around $127,000 compensation, more than triple what the government pays.

As the Kyiv Post went to press, Akhmetov’s spokesperson was not able to answer questions about whether the billionaire had met family members affected by the accident or attended the funerals.

The situation at more than 100 mines scattered across Ukraine is usually worse than at Akhmetov-owned mines, according to Volynets.

"I know the recent case in the town of Krasnoarmiysk when a coal miner was severely wounded. The mine clinic didn’t register the case. They didn’t take him to the hospital. So, in the morning, he died," Volynets said. "When the relatives showed up, the mine administration accused them of murdering him. His supervisor [who witnessed the accident] wouldn’t testify."

Kyiv Post Staff writer Vlad Lavrov can be reached via lavrov@kyivpost.com. Kyiv Post staff writer Natalya Vasutyn contributed to this report.

Akhmetov statement

Editor’s Note: The following is a statement issued Aug. 4 by the press service of billionaire Rinat Akhmetov, owner of the Sukhodilska-Skhidna coal mine in Luhansk Oblast where 27 workers were killed in a July 29 methane gas explosion.

"Rinat Leonidovich personally controls the two most important issues:

"First, is the maximum support and help to the families of bereaved coal miners, help to the injured coal miner, who is currently at the hospital, help to every child in the families. Not a single problem will remain unattended. Mr. Akhmetov personally controls the financial aid to every family and all the needs that these families might have as the result of the awful tragedy.

"Second, no less important issue, that is under personal control of Mr. Akhmetov is the maximum possible outfitting Sukhodilska-Skhidna coal mine, and all the other coal mines that are part of the System Capital Management Group, with the most modern equipment, which provides for maximum safety. This work is being done constantly and doesn’t stop for a minute.

"Mr. Akhmetov perfectly realizes that the working conditions of coal extraction on Ukrainian mines are incredibly complicated. Ukrainian coal industry is characterized by incredible difficult mining and geological conditions: 90 percent of the beds are dangerous in terms of the gas, 60 percent - in terms of the coal dust, almost every fourth - prone to spontaneous combustion, coal miners at around 35 Ukrainian coal mines extract coal more than one kilometer deep.

"That’s why investing into the most modern infrastructure and technology to ensure safe labor is the main task for the holdings’ managers. SCM constantly invests into coal mines’ modernization and labor safety. And will keep investing, to make coal miners’ work safe to the maximum!

"All profit that SCM incurred in 2010 ($464.5 million), according to the shareholder’s decision will be spent on the development and modernization of production. Last year, $99.7 million (62.6 percent higher than in 2009) were spent on labor protection and industrial safety.

"The task that Mr. Akhmetov gave the management and the implementation of which he controls personally - to make honorable coal miner’s work maximally safe. "Currently, all the services are working on it today 24 hours a day."

Comparing financial performance of Ukrainian, European mines