Paying the High Price for Delayed Reforms

It is often said that Russia’s political elite doesn’t want to take unpopular decisions. The Russian leaders have yet to implement structural reforms in the economy, which are necessary for a dynamic economic growth. It is not very difficult to understand the logic of the ruling group. Most of the Russian leaders want to preserve the status quo, and for that purpose implementing radical reforms would be a counterproductive measure. However, such a strategy is very dangerous for the country’s future. It would be better if members of the Russian government invested their political capital in reforms that are desperately needed. Otherwise in the future Russia will have to implement reforms without financial resources as it was in the 1990s.

The coal industry restructuring was one of the most difficult reforms of the 1990s. This reform reflected a mixture of economic and political elements. Coal miners were in the avangard of the strike movement in the late USSR. In 1989 their demands had predominantly socio-economic character, but in 1991 they became political ones. That’s why it would not be an overstatement to say that coal miners supported democratic changes of the early 1990s. However, Russia’s coal industry was in deep crisis during that period of time. A significant part of the country’s coal mines and quarries were unprofitable and could exist only at the expense of the federal budget subsidies. To overcome the crisis it was necessary not only to implement full-fledged liberalization and large-scale privatization of the industry, but also to close hundreds of township-forming enterprises, relocate thousands of workers and their families from exhausted mines into other territories and help them to get a job. It was not only political will that was required to realize these measures, but also substantial financial resources that were lacked in the Post-Communist Russia.

An old imperative “We’ll give the country coal” has been in effect until 1988. In that year, the USSR and RSFSR registered the highest levels of the coal extraction in the Soviet history – 771 mln tonnes and 425 mln tonnes, respectively. But in reality the industry was a kingdom of crooked mirrors. Low and fixed state prices on coal have created the basis of non-market economic management at the expense of the state subsidies, which exceeded 1% of GDP per year in 1991. The budget subsidies have been formed by the profits of the successful mines and were given to the unprofitable ones. For years, the viability of the industry has been maintained by the high coal demand ensured by the excessively tight economic planning. No other industry of the Soviet economy has ever been as low-efficient as the coal one. In the 1980s the labour productivity of the industry was 5-7 times lower than in the largest coal production countries of the Western World.  By the 1990s only 10% of the Russian mines have met international safety standards. In that time the coal miners’ working conditions didn’t match hygiene and sanitary requirements, thus the level of professional diseases was 20 times higher than in other sectors of the economy. These facts indicated the necessity of a radical reform of the industry, which could become profitable on the basis of market competition.

At first, the restructuring process has been launched by the Russian Coal company (“Rosugol”), which de facto replaced the USSR Ministry of Coal Mining Industry. Although in 1993 “Rosugol” closed some unprofitable mines, the company predominantly used its monopoly position for lobbying the government. At that time, the Russian Coal company established a number of subsidiaries, which managing directors also headed Rosugol’s subdivisions. That kind of market structure allowed “Rosugol” to control the coal enterprises in Russia’s regions. As a result, “Rosugol” turned out from a driver of the industry restructuring process to its main threshold. Then a small group of the Russian government officials headed by Igor Kozhuhovskiy took responsibility for the reform. Frustrated by what he saw as Rosugol’s management inability to demonopolize and liberalize the coal industry, Kozhuhovskiy established the Interregional Commission on Economic and Political Problems of the Coal Mining Territories. The Commission was in charge of the coal industry restructuring process. Soon after, the Association of Coal Mining Towns also began its work. The Association represented citizens of mining communities.

In order to restructure the industry successfully, the reformers used the assistance of the international organizations. In December 1994, the Russian government and the World Bank published a paper called “Restructuring the Coal Industry: Putting People First”. The report recommended closing 100 of 300 mines, firing 320 thousands miners and establishing a new social safety net for miners and their families. This paper played an essential role in the further restructuring process, which in turn allowed the Russian government to receive Western financial support. From 1995 to 2000, Russia obtained two World Bank loans for a total of $1.3 billion. However, it would be wrong to overestimate the importance of the foreign financial support. The reform was funded mainly through the Russian federal budget. The Russian government used these loans as a political tool to overcome the Communist opposition to the reform in the Duma. The World Bank sought to cut the government subsidies to unprofitable mines and increase labour productivity in the industry. In 1997 the World Bank insisted on liquidation of the Russian Coal company, which in turn pushed demonopolization of the industry.

In the mid-1990s the closing mines process started to gain momentum. In 1996-1998 the government fired 93 thousand coal miners. By the early 2000s, the number of workers in the industry has dropped by 65%. Unfortunately, the reformers failed to create a new safety net for miners and their families in time, thus these measures caused social unrest. In spring 1998, the Kuzbass coal miners declared a strike, which later would become known as the “Rail war”. The workers felt left to sink or swim on their own, so they decided to block off railways. Then the Russian government officials conducted negotiations with coal miners’ leaders and took the commitment to pay salary debts. By the end of 1998, the problem of wage indebtedness was solved, though these payments contradicted Russia’s international commitments. That’s why the World Bank temporarily stopped funding the reform and tightened loan conditions: the Russian government should have been able to close more mines, privatize more state enterprises, and increase the financing of the social safety net.

Privatization became a cornerstone of the reform. In the late 1997, the Russian government announced the sell-off of state mining enterprises. First of all, the two most successful companies (“Kuzbassrazrezugol” and “Yuzhny Kuzbass”) were sold. The highly popular Kemerovo governor Aman Tuleev opposed the privatization of these enterprises. In December 1998 he convinced PM Evgeniy Primakov to stop privatizing the “Kuzbassrazrezugol” and “Yuzhny Kuzbass” companies. In the aftermath of this decision, the World Bank President James Woolfensohn threatened to stop funding the reform. Thereby the privatization process resumed. By 2001, the private companies were providing 72% of the coal extraction.

As I have said above, the reformers failed to create a new safety net for miners in time, which in turn triggered social instability in the coal mining regions. The labour markets of these regions were not prepared for the large-scale dismissal and re-employment of workers. In 1997-1998 nearly 75 thousand coal miners were fired, while only 11 thousand of them got a new job. The Russian government allocated money to support the dismissed workers, but the management of coal mining companies abused these funds. In the late 1990s the Program of the Development of the Coal Mining Territories began its work. The program helped substantially to re-educate workers, organize public works and create small businesses. In 1999 the Russian government established the treasury system of budget execution that made possible the provision of addressed social support. In 1994-2007 the government also implemented the Program of Resettlement of the Inhabitants of the Extreme North, thanks to which 16 thousand coal miners and their families got housing in the Central Russia.

Summing up the results of the coal industry restructuring process, it is worthy to note that the reform achieved its goals. The industry became profitable and independent on subsidies. During the reform period, 188 mines and 15 quarries were closed and 520 thousand workers were dismissed. Today nearly 160 coal mining companies are operating in the industry, and no one of them receives state subsidies. Russia’s coal production level improved from 232 mln tonnes in 1998 to 334 mln tonnes in 2011. Although several major mining accidents have happened in the last few years (particularly the Ulyanovskaya Mine disaster of 2007, which killed at least 106 miners), coal miners’ death rate decreased from 1.0 per 1 million tonnes of coal in 1993 to 0.27 per 1 million tonnes of coal in 2006. Since 1993, the labour productivity of the industry has increased four times. For the first time in its history, Russia has become a net coal exporter.

There is no doubt that the coal industry restructuring was a challenging process, both from a political and social perspective. However, all these burdens were caused by not merely the difficulties of the market transition, but also by the lateness of the latter. The coal mining reform is evidence how high a price we (the Russians) as a society pay for delayed reforms.