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Restructuring Russia’s coal industry, developing the domestic coal market, and modernising the necessary transport infrastructure were the subjects of discussion.

Mr Putin also spoke with workers at several coal producing companies via video linkup.

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Excerpts from transcript of Commission for Strategic Development of the Fuel and Energy Sector and Environmental Security

President of Russia Vladimir Putin: Good afternoon, colleagues.

This is the first time the Commission on Energy Sector Development Strategy is holding an away meeting. It is not by chance that we chose to discuss the situation in the coal industry in Kemerovo. This region, as we know, is the industry’s historical centre and flagship.

Another meeting took place in Kemerovo 18 months ago, here in this very same hall I think, at which we took a detailed look at the many problems facing the coal industry. Based on that meeting’s results, we approved a long-term development strategy for the sector through to 2030. Today, we will assess how the decisions made back then are actually being implemented.

I note that the commission’s members do not include anyone from the coal industry. This is something we need to change. This is a commission on the energy sector, of which the coal industry is a key part, and yet it counts not a single coal industry representative among its members. Let’s think about this. I’d like to hear your proposals. 

I will start with a very important issue, namely, restructuring the coal industry. Starting in 2008, more than 33 billion roubles [around $1 billion] were needed for carrying out social measures alone, and these funds were allocated. More than 7 billion was spent on land re-cultivation and environmental improvement work in different regions. I want to stress that we will continue to allocate funds for this work. We need to improve monitoring of their targeted and effective use. The big priority here is to resettle miners from out of old and dilapidated housing and from the Far North.

I also want to draw your attention to safety in the mines. We have taken special measures to develop modern Russian-made personal protection systems and life support systems for people working underground. I want to hear about what has been done so far, not much it seems to me, though the money was allocated, a whole billion, what’s more. 

Regarding the overall situation in the sector, there were good results in 2012. Production, processing and exports all grew. New production capacity is being put into operation. Exports were up by 17 percent. But the domestic market, for all its huge potential, is still not developing, even though we decided 18 months ago to stimulate domestic coal consumption through developing coal-powered generation in the energy and housing and utilities sectors. 

Of course, when you have a falling export market, developing the domestic market would be positive in every respect, but as I said, instead of developing it is at a standstill. Even worse, it shows a negative dynamic, unfortunately. Just look, coal consumption on the domestic market has dropped by 7 percent over the last 5 years, and preliminary forecasts suggest that this trend will continue in 2013. With the export markets in an unstable state, this makes the situation if not critical then certainly worrying to say the least.

Of course, we need to take into account the particular situation for and competition between the different energy resource types, but these are all issues that require a very pragmatic approach. Coal is the most effective local energy resource for a number of regions. We should speed up construction of coal-powered generating capacity in the Far East. The relevant decisions were already taken on this matter but, unfortunately, I have yet to see any real progress. 

I stress too the strategic importance of building a power station, one designed for flexible subsequent capacity development, in Kaliningrad Region. Coal-powered generation could give this region its own reliable energy source. I have discussed this matter on a number of occasions already with my Government colleagues. There are several possible options here: liquefied natural gas and other types of generating capacity. But we should not just toss aside the coal option. We should definitely examine it too, weigh up all the pros and cons and give it all very thorough analysis, especially with the discussions going on in the EU on possibly restricting energy cooperation between the European Union and Russia. At least, we know about the plans to take the Baltic countries out of our energy ring, and this would leave Kaliningrad Region in a difficult situation, and so we need to take the needed measures in advance.

I ask the Government to examine without delay the possibilities for building new generating capacity, including perhaps at coal-fired power stations. We need to settle this issue. Mr Dvorkovich [Deputy Prime Minister], I ask you to reach a final decision on this matter within the next three months at the latest.

We can supply coal to Kaliningrad Region via the sea port. Establishing a closed autonomous system in this region would reduce the energy sector geopolitical risks that could arise at any moment. As I said, it would perhaps be the right thing to diversify this region’s energy sector so that it does not depend on just one primary source. In any case, this is something we need to think about carefully.

One of the weakest links in the sector’s technological chain at the moment is coal processing and enrichment. Of the more than 272 million tons of energy-producing coal mined last year, only 26 percent was processed.

Coal chemistry is another area. The Energy Ministry, Industry Ministry, and the Russian Academy of Sciences of course should all be involved in its development. The Government and the relevant agencies, coal companies and regions should all work on developing the domestic market. I ask you to come back to this issue too during the meeting today.

As for coal exports, we need to hold on to our markets, even with falling prices on world markets creating difficulties that you know better than I. If we loosen our hold here we will lose what we have and it will be very hard, if not impossible, to regain these markets later. We need to make maximum use of our competitive advantages. I note that prices on markets abroad have fallen around 20 percent on average. 

In term of advantages, coal from Kemerovo Region is a much more environmentally friendly coal, but transport still remains a huge problem. We need Russian production of heavy load rolling stock to be able to resolve this problem. We need of course to stimulate the market for these products, make it attractive for potential consumers, and put the necessary attention into modernising the transport infrastructure, both the railways and ports. We have already outlined plans to increase throughput capacity of the Trans-Siberian and Baikal-Amur Railways. Let’s look too at which other railway sections and port approaches require development. Some of them are already stretched beyond their capacity now.

I note too that average speed of industrial freight traffic on our railways is extremely low, and we are seeing a steady increase in the share of transport costs in the cost of coal production. The current system of railway tariffs needs improvement. It must be predictable and allow consumers to estimate their own transport costs. The railways are themselves a big energy consumer and could use coal-powered generation to bring down costs. This would all require study of course, but it would be worth in any case looking into the issue, and I ask you to do so. You transport coal to the coal-fired power stations, say, and then have the railway use the resulting energy too. Let’s reflect on the tariffs here.

Another issue is companies that build stretches of railway for common use. Flexible tariff agreement models are required in this case. If an investor builds a railway and then has to pay the same costs as everyone else, what incentive is there to invest? This requires some serious thought. There is nothing so unusual here, nothing anti-market. This applies in equal measure to the other structural monopolies too. It concerns not just the railways but also pipeline transport and the electricity grid. Overall, we need to move towards long-term tariff regulation for rail freight transport. I stress that we need to support the coal companies that put considerable money into developing rail and port infrastructure. 

I would also like to draw your attention to the following. Since our coal companies’ resource base is located in Russia, the profit centres and therefore, tax imposition, should also remain in Russia, and not somewhere abroad, offshore. I want to point out that it isn’t only the Russian leadership or the Russian Government addressing this issue this way. I want to stress that throughout the world, in all industrially developed nations, the issue is being raised in precisely this manner.

Throughout the world, a civilised and pragmatic approach has already been created, and taxes are paid in the nation where the business activities are actually taking place. I suggest we stick to this rule, especially when it comes to mineral resources, our national wealth. Both the management of these assets and corporate property must remain under our Russian jurisdiction.

Furthermore, companies in the coal sector are developing using their own funding and face challenges in modernising production, as well as creating new extraction and processing capabilities. Today, we need additional incentives that will help companies increase investments and lower their own expenditures.

Support for the coal industry should help create new jobs, increase tax revenues and encourage greater company transparency. Over the course of five years, we have discussed eliminating taxes on mineral extraction for companies cultivating low-income coal deposits in hard-to-reach areas with underdeveloped infrastructure. I am asking the Government to ensure the adoption of incentive measures for companies working on such new deposits. At least new ones.

We have talked many times about highly necessary measures needed in various sectors, including the coal industry. And the coal industry is not an exception. These are, in essence, enterprises which are starting their work in a green field. We have never collected all the taxes, and we never will, unless there are incentives to launch business activities. So I am asking the economic bloc of the Government and the Finance Ministry to assess this situation accordingly and find an overall systemic approach to these types of problems. Naturally, we need to free companies which are starting their work from scratch from the obligation to pay taxes for a certain period; different intervals have been suggested, including five-year and ten-year grace periods. All this requires calculation. But those calculations need to be made, and we need to make a decision.

Practice demonstrates that multiple years go by before companies can take advantage of these tax breaks – no less than two years. Unfortunately, at this time, they are forced to collect various types of paperwork. And in this respect, I would like to once again draw attention to the fact that we must end this excessive bureaucracy. Otherwise, we will be bogged down unable to implement projects to develop new deposits in Eastern Siberia, the Far East and major deposits in, say, Tuva.

I feel that the Natural Resources Ministry must broaden license content as much as possible so that companies do not lose time collecting the necessary documents; we need to optimise this work.

The problems I listed speak to the need to once again analyse and improve the provisions of the long-term programme for this sector’s development – and to do so right now. We need to determine whether the indicators and target figures outlined within it are current and realistic, and bring these improvements into accordance with trends in the domestic and global markets. We must also synchronise the implementation of the programme with measures stipulated by the master plan for developing electrical power facilities, transport strategy projects and the strategy for developing port infrastructure. We have a deputy prime minister who is responsible for this entire set of issues. Mr Dvorkovich, I would like to draw your attention to this. This is, of course, a large-scale project, involving an immense amount of work, but your challenge is to coordinate all these areas. This needs to be done.

It is also imperative that we similarly discuss the course of the pricing process in the coal sector and the factors that influence the occasionally unjustified price increases for end consumers. In accordance with the decisions made, all transactions with coal products are registered on the commodity exchange. But this is just the first step – registering transactions is good, but insufficient. Now we need to broaden the use of the exchange mechanisms themselves; we need to finally start doing real trading on the stock exchange. It is also imperative to create conditions to exclude illegitimate intermediaries that supply coal products, particularly supplies for government needs and companies with state participation. Intermediaries are a natural element in a market economy, but sometimes, intermediaries also naturally occur in places where they are entirely unnecessary.

In conclusion, I suggest we return to the question we already touched on during our Commission’s meeting last October – I mean training high-level and top-notch professionals to work in the coal industry.

I am asking you to present suggestions on the prospects for creating large regional education and research centres based at existing universities in the fields of mining and geology and fuel and energy.

In addition, our agenda today includes the now-traditional issue of fulfilling decisions made by the Commission at previous sessions. Let’s begin our work.

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Vladimir Putin: Colleagues, I think that the issue we discussed today needs no further endorsement. This is a highly important sector – and not just because it employs thousands upon thousands of individuals. It is important for the overall situation in energy.

In addition to being a traditional sector in our nation, it is also promising and important for the Russian Federation’s economy, and it will be maintained for many years. We must think about how to develop it, how to provide jobs, how to make it more profitable and more competitive.

Many nations – indeed, industrially developed nations – are now once again trying to establish coal production. You are familiar, for example, with the German economy; they refuse to use nuclear energy and are currently considering how to use coal generation.

We have every opportunity to examine the development of our neighbours’ situation, analyse everything, weigh our options and make timely, thought-through decisions.

I am confident that working as we did today, working together – we can certainly disagree at times, but we share the same goal – we will find solutions and implement them.

Thank you very much.

Excerpts from videoconference with workers at coal enterprise

Vladimir Putin: You mentioned Miners’ Day. We celebrated it just yesterday and I sincerely congratulate all miners and mine workers on this professional holiday. I wish you success, happiness and new achievements – and you certainly have some in your sector; the Minister spoke about them and they are demonstrated through facts.

Indeed, it is true that our extraction volume is the highest in all recent history, and perhaps including the Soviet era as well. In terms of our productivity level, we have already advanced quite far compared even to Soviet times.

We are renewing production and new staff members are entering the workforce. Naturally, we will further discuss all these issues and all problematic areas – and there are many of them in the sector. But a holiday is a holiday, so I congratulate you all and wish you success.

This work is very important and quite necessary for our nation. It is no exaggeration to say that it is not just associated with greater expenditures, but also, unfortunately, with a great deal of risk. And the people who come to this sector and devote their lives to it deserve special attention and respect.

Happy Miners’ Day! I wish you all the very best!

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