How long can Russian mining operations continue without imported spare parts?
By Vladislav Vorotnikov
Facing ostracism on the global market, Russia risks ending up without Western mining equipment and losing a decent share of overseas markets. Coupled with a profound anticipated economic depression and logistics problems, these factors promise to drive the mining sector into long-term despair.
A mass exodus of Western businesses is one of the main consequences of the Russian invasion of Ukraine. At press time, nearly 500 companies had announced their withdrawal from Russia, a research conducted by the Yale School of Management showed.
Some mining companies have also joined this trend. For example, the Canadian gold miner Kinross Gold sold its Russian assets, which includes the Kupol mine, to the Highland Gold. Kupol was expected to produce 350,000 gold equivalent ounces (oz) in 2022. Highland Gold is one of the largest gold mining companies in Russia and operates several mines in the country, including in the Chukotka and Khabarovsk regions where the Kinross Gold’s Kupol mine and Udinsk project are located, respectively.
Still, a relatively small share of mining assets in Russia is controlled by Western businesses, so the fact that key Western equipment suppliers pledged to sever ties with the Russian market is now seen as a far bigger problem for the Russian mining sector than the withdrawal of foreign money.
Almost all key suppliers have publicly announced a decision to suspend operations in Russia. Caterpillar has halted all operations in its Russian manufacturing plants and stopped all deliveries from abroad, while Hitachi Construction Machinery announced it will gradually stop production at its plant in Russia and will halt exports from Japan to the country. Komatsu also said it had suspended shipments from Japan to Russia, and the list goes on.
Companies have not only stopped executing orders for new equipment, but in most cases, these companies have ceased exporting spare parts and components. The threat to the Russian mining industry associated with a lack of Western technologies have been acknowledged by government officials in leading Russian coal mining regions.
“In the context of sanctions, and to be precise, the trade and economic blockade that unfriendly countries have declared to Russia, in order to maintain the sustainable operation of our assets, it is necessary to replace those products that we can no longer receive from abroad as soon as possible,” Kemerovo Oblast Gov. Sergey Tsivilev said during a press conference on March 25.
Tsivilev explained that the sanctions impacted equipment supply for coal mines in Russia’s largest coal basin, Kuzbass. He added that some efforts have been made to switch to equipment of Russian origin, which he stressed “is not inferior to imported products,” but did not provide any additional details.
The Clock is Ticking for Coal Miners
The biggest question now is how long the Russian mining industry can last without imported spare parts before major equipment failures begin.
Despite the calls voiced by government officials to replace imported equipment with Russian machines, the dependence of the Russian mining industry on Western technologies has continued to grow over the past few years. The average share of the use of imported equipment at underground coal mines and open pits in Russia jumped from 54% in 2012 to 79.3% in 2019, the Russian consultancy Rosinformugol estimated.
At the Russian open pits, the share of imported equipment increased from 71.6% on average in 2012 to 85.9% in 2019, while at the underground mines it grew from 40.7 to 59%, Rosinformugol reported.
“The share of imported equipment has been growing in the industry as a whole: in underground and especially in open-pit mines. From my point of view, the existing fleet of equipment with still fairly low wear and tear level will allow coal companies to work for several more years without a large-scale upgrade, with an increase in its utilization rate and using their own repair facilities,” commented Anatoly Rozhkov, science director of the Russian consultancy Rosinformugol.
Rozhkov added that a return to barter schemes of the Soviet era is not excluded, explaining that this would involve the import of new equipment and components for it, in exchange for the export of coal or other energy resources.
During a press conference on March 29, Russian Energy Minister Alexander Novak said Russia mulled plans of importing equipment for the energy complex from “friendly countries.” Novak explained that a group of government officials was discussing equipment supplies with the companies “that expressed readiness to make deliveries.”
However, Russian coal miners primarily relied on equipment imported from countries now labeled as “unfriendly.” As estimated by Rosinformugol at the end of 2019, underground coal mines in Russia operated 2,305 units of equipment supplied by Glinik (Poland), 2,046 units of equipment from Ukrainian companies, and 1,588 units of equipment from Joy Global. (USA).
Only three major suppliers were based in the countries deemed as “friendly.” This included ZMJ ZY with 1,242 units of equipment in operation, CODCO ZF with 272, and Tiande with 236 — all from China, Rosinformugol reported. Unfriendly countries accounted for more than 80% of equipment imported by Russian underground coal mines.
In the open-pit mining segment, the largest equipment supplier was Belaz, based in Belarus, with 2,662 units of equipment operated at Russian mines at the end of 2019. On the list of top suppliers, it was followed by Komatsu with 914 units, Caterpillar with 472 units, Liebherr with 378, and Hitachi with 273.
Atlas Copco accounted for 152 units of equipment, while other companies with Chinese ownership jointly accounted for 126 units, Rosinformugol estimated.
Stanislav Mitrakhovich, an expert of the Russian Fund of the National Energy Safety, recalled that Western countries failed to prevent Western technologies from entering the country even during the Cold War.
“The assumption that in Russia there will be no coal mining at all on the horizon of several coming years, for the time being, is premature,” Mitrakhovich said.
“It will not be possible to completely deprive Russia of access to technology in the current reality when there is China as the second world superpower. Therefore, a decrease in coal production due to problems with the European market and limited supply of technologies is quite likely, but over time the industry will adapt,” Mitrakhovich added.
Another part of the problem with a high dependence on imports is that even Russian and Belarussian equipment is being assembled using imported components supplied primarily from the countries that nearly completely halted export to Russian customers on a large scale.
There is a lack of information on the operation of Belaz. In 2021, several companies terminated cooperation with the company, including Cummins and Rolls Royce Group — both are known to be the main engine supplier for BelAZ. In addition, all supplies to BelAZ have been ceased by Liebherr, Geramatic OY, Danfoss Group and Yokohama. The lack of components has become so tough that in August 2021, BelAZ reportedly started cannibalizing 450-ton haul trucks to urgently execute an order for four smaller haul trucks.
In the current circumstance, the Russian government stepped up with a proposal to allow imports without a trademark owner’s permission, also known as a parallel import.
On March 30, the Russian Prime Minister Mikhail Mishustin said during a government meeting that Russia indeed would legalize parallel import in order to “satisfy the demand for certain goods.” Mishustin said the new rule does not “mean the legalization of counterfeit goods,” but is about the “supply of original goods through alternative channels.”
The explanation came after some analysts raised fears that it was highly unlikely that Russia would be able to source original goods using the gray schemes. Far more likely, the country will get a flow of poor-quality counterfeit components and spare parts from Asian countries.
All Russian Mines Are in Jeopardy
The picture is similar for other segments of the Russian mining industry. As explained by Dmitry Luzhnov, head of the Amur Oblast Environment Ministry, almost all equipment for Russian gold mining is manufactured in the countries that imposed sanctions against Russia. Luzhnov admitted that this would inevitably impact Russian gold mining, though key gold mines in the Amur region purchased equipment and spare parts in advance.
“In this context, such things as a disruption in the launch of the flotation line at Malomyr, serious problems in the operation of the autoclave complex and processing plants, and repair of earthmoving equipment seem possible,” Luzhnov said, adding that switching to Russian and Chinese mining equipment is being discussed.
The existence of problems with imported equipment has already been recognized by several Russian mining giants. Western sanctions imposed on Moscow may delay investment projects of Russia’s Rusal and hit its profitability, the company said on March 30.
“The company may potentially face difficulties in the supply of equipment, which may lead to the postponement of investment projects,” Rusal said, adding that financial health was also on the line.
“Russia has already become a pariah, which is tough for the mining giants, as they were tightly integrated into the global economy,” said an anonymous source in the Russian mining industry. “We see that Russian companies have become toxic for foreign equipment suppliers, and the only hope is that this situation is temporary. But what we see is that the [Russian] isolation only strengthens.”
“If it goes like this, the Russian mining industry would change drastically in the next six to 12 months, as being stripped of foreign technology, it would inevitably become less effective, efficient, and on top of that, operations are inevitably becoming more dangerous,” the source said.
There are some signs that Russian mining companies are braced for equipment shortage. Since the beginning of the invasion, Russian recruiting agencies have recorded an explosive growth in demand for blue-collar workers, in particular, repairmen in the Russian mining industry. The trend is believed to be related to the suspension of foreign equipment imports and the withdrawal of foreign companies from the Russian market.
Since February, the demand for equipment repair specialists in Russia increased sharply, Vladislav Bykhanov, a partner at the recruiting company Cornerstone, claimed.
On March 5, in particular, Cornerstone received a request from Phosagro, a major producer of high-grade phosphate raw materials and phosphorus-containing fertilizers to hire 60 repairmen, said Bykhanov.
“Sixty repairmen is a lot, even for Phosagro,” Bykhanov said, explaining that he associated this with the fact that many Western companies, such as General Electric, Hitachi, Caterpillar and MAN, stopped supplying production equipment and parts to the Russian market. In this background, Russian companies realized that they would not be able to source new equipment and began to stock up with employees who could repair old machines, he added.
Norilsk Nickel is another company that has recently started recruiting an unprecedented number of repairmen.
Daria Kryachkova, director of personnel policy at Norilsk Nickel, told Forbes: “In the context of limited supplies of spare parts or replacement of equipment with domestic counterparts [against the backdrop of sanctions], we will need workers with higher qualifications.”
Bykhanov said the number of repairmen in Russia is set to grow exponentially, so at some point, workers at the Russian mines would be forced to become “Kulibins” — a Russian term used to describe mechanics founding extraordinary solutions to technical problems. He added that, among other things, Russian mechanics would need to figure out how to use Russian spare parts on Western equipment.
Export is Under Question
Western sanctions and mounting international isolation also promise to hinder the Russian mining industry’s export prospects.
Before the war, Russia hoped to ramp up coal production up to 668 million metric tons (mt) by 2035, compared to 440 million mt in 2021 under an optimistic government scenario. Export was expected to double, reaching 390 million mt on the back of strong demand both in European and Asian directions. However, those plans have been voiced before the war, and no longer seem realistic.
On April 8, the European Commission passed the fifth package of sanctions against Russia, which included an import ban on all forms of Russian coal. This affects one-fourth of all Russian coal exports, amounting for around €8 billion ($8.5 billion) loss of revenue per year for Russia.
Russia will be able to redirect coal exports from the EU to countries in the Asia-Pacific region through the seaports of the European part of the country, Alexander Novak said, speaking during a press conference shortly after the decision was made public. He explained that Russian companies have the opportunity to export coal to the Asia-Pacific market through underloaded ports — for example, Taman and free capacities in the Baltic Sea.
However, Asian customers also started abandoning Russian coal. Kyushu Electric Power, based in Japan, said it would suspend all imports of Russian coal in 2022, and that the company had already found alternative sources.
The Russian newspaper Kommersant, citing sources in the Russian coal industry, reported that India looked like the only market where export growth was possible. Still, India has a moderate demand for coal. In 2021, Russian coal exports to India stood at only 5 million mt. The countries labeled as unfriendly jointly accounted for 40% of Russian coal imports, in 2021. In Europe, Russian coal is likely to be replaced by that from Australia, U.S. and Colombia.
Most Russian coal companies declined to speak publicly about the aftermath of Western sanctions. Russia’s largest coal company, the Siberian Coal & Energy Co. (SUEK), did not provide any comments by press time. A source in a Russian coal company commented that the ban on coal exports to Europe would become a shock for the Kuzbass.
“What we are witnessing now is likely to be the end of the Kuzbass,” the source said, explaining that there is no way to drastically boost the demand on the domestic market and find alternative overseas sales markets. “I think in a couple of coming years, we will be seeing smiles on the faces of Western coal miners, as they would be glad to replace us and make deliveries at relatively high prices.”
However, things are looking relatively positive for the Russian metal and fertilizer producers.
The West will not survive without Russian metals and fertilizers, said Maria Maksakova, acting head of the Department of International Economic Relations at Moscow-based MGIMO University. Any possible restrictions on the Russian fertilizers export could trigger a world food crisis, especially since the situation on the global grain market already seems harsh, she added.
This means that Phosagro and Eurochem are in rather safe territory.
In addition, Maksakova said Russia accounts for about 10%-12% of world nickel exports, 13% of titanium, and 40% of palladium.
Russian mining companies will have to cope with logistics and financial issues. Rusal reported it was also facing a shortage in supplies of alumina after Australia banned exports to Russia and Mykolaiv Alumina Refinery in Ukraine halted production.
“These measures and the events may influence the availability of alumina and bauxite or increase the purchase prices for group. Major international shippers have suspended bookings to and from Russia, which will cause the group to rebuild the supply and sales chains and may lead to additional logistics costs,” Rusal said.