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   On paper, both the steel enterprise and the energy trader are making losses with this deal. On paper, the energy trader receives only payments for part of the delivered gas. The steel enterprise becomes indebted with the energy trader.

    In many cases, steel enterprises are loss making (on paper) and receive direct or indirect subsidies from the state.  Energy traders are often on paper also loss making and do not pay for all energy delivered by energy producers. Often, the state jumps in and subsidises the energy traders and energy producers. Energy traders often bought from energy producers energy on loans, guaranteed by the state. When the energy trader failed to pay, the state paid back the loan.

    Independent energy traders can buy cheap gas, for example by paying immediately in cash and bypassing Gazprom. According to Yulia Timoshenko, in such a case gas could be bought for 25-30 dollars per 1000 m3, while Ukraine buys gas from Gazprom for 80 dollars in barter deals. Itera, the Russian/Ukrainian joint venture can, according to her, sell gas at 60 dollars per 1000 m3. The advantage of paying by cash gives the small private traders enormous profits. [xii]

      The whole set up favours the energy traders, not the energy producers. As President Kuchma said in early 2000: 'By getting hold of and monopolising the (energy) market, countless intermediaries are making super-profits, looting energy facilities and enterprises.'[xiii] Unfortunately, the president himself helped to create such a situation.[xiv] The energy producers are all state owned, therefore the state pays here the bill. Despite the fact that energy traders are the winners in the equation, they do not invest in the energy transportation infrastructure, because non-reported profits are channelled abroad. The deteriorating state of the electricity grid generates each year more power outages. Gas leakage increases each year due to bad maintenance of the pipeline system.

   Government placed a lot of enterprises and institutions on a list of entities that can not be disconnected from the energy grid under any circumstances. Among these are the most chronic non-payers of energy. This further aggravates the payments crisis.

  3. Energy production

Almost half of the energy Ukraine consumes is produced domestically. Almost all consumed coal is produced in Ukraine. An important asset is the nuclear power stations that produce almost half of the electricity consumed in Ukraine.

  Of all Ukrainian energy needs, 26 per cent are accounted for by oil, 35 per cent by gas, 34 per cent by coal and 4 per cent by nuclear power and hydroelectric power. [xv]

    The output of coal, the major part mined in South-Eastern Ukraine, declined from 216 million tons in 1975, to 189 million tons in 1985, 165 million tons in 1990, 84 million tons in 1995 and 81 million tons in 1999. Since the independence of Ukraine, 1991, coal production declined by more than half while employment dropped by more than one third. While the coal industry employed 650 000 employees in 1995, the beginning of restructuring, it counted 410 200 employees in January 2000.[xvi]

Table 1 Energy production in Ukraine

                                    1990           1995                 1999

coal (million tons)            165                   83.8                 81.7

electric energy (kWh)         298                   194                   172

gas (m3)                       28.1            18.2                  18.1

oil (million tonnes)               5.3         4.1              3.8

Source: Ukraine v Tsifrax 1999, p. 65

       The loss making coal mining sector is still for the larger part not privatized and receives large direct and indirect subsidies.[xvii] Coal mines are being kept afloat that produce coal twice the world market price while conditions for coal mining are deteriorating, given the prospect of even more expensive coal in the future.

       The easily available coal had been extracted so that what remained lay in thin and sloping seems, often more than 1200 meters deep with each passing year average depth of the coal faces increased by 10-15 meters. Quality of coal was declining. Mining technology is very primitive: 75 per cent of all jobs in the mines are done manually (from the mid-seventies onwards investments in coal mining were channeled to other regions than South Eastern Ukraine). One third of the mines is more than 50 years old, and some date of the 19th century. Many key pieces of equipment, including one third of the ropes hauling the mine elevators, are well beyond their service time.[xviii]

       Miners found themselves in a downward spiral of declining rates of productivity and investment leading to the increasing hazards of their work. In 1998 every thousand tons of coal cost the lives of four miners.[xix] 

The United Kingdom produces with only 3.8 per cent of miners 57.9 per cent of coal produced in Ukraine. Labor productivity of American miners is 58.7 times as high as that of Ukrainian miners. Here we do not take into account the fact that on average, Ukrainian coal contains 4000-5000 kcal/kg, while internationally, 7000 kcal/kg is usual.[xx]

    On average, in Ukraine production costs of coal are 40 dollars per ton compared with a world price of 35 dollars a ton, requiring huge government subsidies. According to the former minister of coal industry, Mr Tulub, coal enterprises owed late 1998 8.5 billion hryvnas to creditors and 63 per cent of mines were operating at extreme losses.[xxi]

    Support by the state is provided to cover 'accounting losses' which equals to 'profit on paper', reduced by the sum of operational losses. 'Profit on paper' is calculated by multiplying listed prices by the sales amount, provided by financial estimation. In fact, the real price of coal sold by the mines is much less than the listed price. That is why the mines which fulfil their production plan can not cover the operation costs, even when subsidized by the state.

    Well functioning mines are punished by siphoning off profits while badly performing mines are rewarded with subsidies. In Donetsk, fifty per cent of mines, all loss making, produce only 15 per cent of coal output. These mines take, however, two thirds of all subsidies to the coal mining sector.[xxii]

       A lot of (expensive) coal is consumed by electricity power stations. There the economic situation is disastrous as many clients, including industrial clients, do not pay, or have big payment arrears. In Ukraine as a whole, only 7 per cent of delivered electricity is paid in cash, half is paid in barter, and the rest is not paid for at all (1999).[xxiii] Electricity tariffs are still below cost price. On top of that, government has denominated 645000 energy consumers as privileged energy payers. The government does not compensate the energy enterprises for these discounts.[xxiv] As a result, electricity power stations do not pay for a large part of coal supplies.

       Also, big state enterprises, like cokes and steel enterprises, consume a lot of coal that is only partially paid.

      End 1998, 60 per cent of paid coals was paid in barter, down from 77.5 per cent in early 1997.[xxv]  In January/February 1999, just 20 per cent of coal sold to consumers was paid for using cash. This contributed to wage arrears. 

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