The coal trap: How Russia’s own policies are undermining a once-profitable export sector
The Russian coal industry has reached a point at which preserving the existing economic model of the country's coal-producing regions will require permanent, ever greater state support unless structural reforms are undertaken. Yet the government lacks the ideas, the political resolve, and the resources needed for such reforms. Moreover, many of the decisions governing relations between Russia's coal producers and the railway sector are made personally by Vladimir Putin,1 who is not inclined towards decisive change. As a result, the industry's problems are likely to continue to deepen. How did what was once a successful coal industry fall into such a poor state in just over two decades?
This article is part of a series devoted to the micro-level of the Russian economy, examining individual sectors, companies, regions, and markets. Focusing on these details will provide the necessary perspective for understanding the economic changes unfolding in Russia, which are not always apparent from macroeconomic sources.
Rise and decline
In the mid-1990s, Russia launched a large-scale reform of the coal industry, which included restructuring and privatisation. The federal budget was relieved of the burden of subsidies, which had reached 1.4 per cent of GDP, while private companies were given the freedom to decide where to mine coal and where to sell it.
The benefits of the reform, which was completed by 2000, did not become apparent immediately, but they were substantial. From 2003, coal production in Russia began to grow steadily, and by 2013 it had exceeded the level recorded in the Soviet Union in 1990. By 2022, output was more than 75 per cent higher than in 2002, with almost all of the increase sold to foreign markets. Today, Russia produces around 430–440 million tonnes of coal per year. About half of this output is exported, accounting for roughly 13–15 per cent of global coal exports and making Russia the world's third-largest coal exporter.
Following the record year of 2022, the industry entered a period of stagnation. Despite the start of development at several major new coal deposits in Yakutia, coal production stopped growing and even declined slightly. The share of coal companies which made a loss began to increase, while the industry's aggregate financial results (profits minus losses) turned negative. Whereas Russian coal companies generated almost RUB 2 trillion (around USD 25 billion) in combined profits over 2021–2023, the industry recorded a net loss of RUB 408 billion in 2025. At the same time, the share of companies making a loss, which had stood at just over 30 per cent during 2021–2023, exceeded 66 per cent in 2025.
This was partly due to a shift in export geography. Following the EU embargo, around 80 per cent of Russian coal exports were redirected to Asia, compared with a roughly even split between Europe and Asia before the war. However, sanctions did not reduce either coal production or export volumes in physical terms. Logistics is therefore only one of many factors, rather than the main cause of the sharp decline in profitability.
An excessively strong ruble
A major blow to the coal industry came from the appreciation of the ruble. In 2025, the Russian currency strengthened by more than 23 per cent. For exporters who earn revenue in foreign currency while incurring most of their costs in rubles, this meant a direct reduction in ruble-denominated revenue despite unchanged export volumes.
However, the most important factor behind the industry's losses was arguably a significant change in the principles governing railway freight tariffs for coal transportation. Russia's coal deposits are located several thousand kilometres from seaports, and coal has traditionally been transported at lower rates than most other types of freight. This system forms part of a broader framework of price discrimination in railway tariffs: low-value bulk commodities pay lower rates, while higher-value goods that are less sensitive to transport costs pay more. For the railway operator, this helps to maintain freight volumes, but it also makes coal a low-yield cargo.
Until 2025, the basic formula for indexing railway freight tariffs was formally linked to inflation and was intended to keep tariff increases below the rate of consumer price inflation. In practice, however, the government repeatedly broke this link, thereby favouring Russian Railways (RZD). Between 2022 and 2024, overall freight tariffs increased by 64.5 per cent, far exceeding cumulative inflation over the same period. In June 2022, in particular, the preferential coefficients applied to coal exports were abolished. As a result, by the end of 2024, RZD's average revenue per tonne of coal transported had increased by 78 per cent overall, and by 91 per cent on export routes, compared with an average increase of 53 per cent across all categories of freight.
From 2025, the government changed the formula for the basic indexation of railway freight tariffs, allowing Russian Railways to move away from the 'inflation minus' principle, under which tariff increases were set at 80–90 per cent of the consumer price inflation rate. It instead adopted a 'price pressure index', which takes into account the growth in RZD's costs across its main expenditure categories and incorporates these indicators into a composite index. The first tariff increase under the new formula was 13.8 per cent. In December 2025, tariffs were raised by a further 10 per cent, and from March 2026 an additional 1% surcharge was introduced for 'transport security'. Even after these increases, however, coal remains one of the cheapest types of freight to transport. It accounts for 38.8 per cent of RZD's freight turnover, but only 21.4 per cent of the company's revenue.
For RZD, freight tariffs are not only a source of funding for current operating costs but also the main source of investment finance. Payments made by freight customers fund both the maintenance and the expansion of the railway network. For many years, a significant share of RZD's investment programme has been devoted to expanding the Eastern Polygon network, which includes the Baikal–Amur Mainline (BAM) and the Trans-Siberian Railway. Between 2013 and 2025, investment in this programme totalled around RUB 1.6 trillion. In effect, these expenditures financed the expansion of coal export capacity. This has created a vicious circle. In seeking to expand the Eastern Polygon to support higher coal exports, RZD's tariff policy is undermining the current profitability of the coal industry.
RZD's attempts to redirect coal exports from the Kuzbass2 to ports on the Black Sea and the Baltic Sea by offering lower railway tariffs on these routes have not been successful. Although the Kuzbass is 20-40 per cent closer by rail to the Baltic and Black Sea ports than to the ports of the Russian Far East, coal companies in the Kuzbass continue to prefer exporting via the Far East. The explanation is straightforward: regardless of the Russian port of departure, coal must still be shipped by sea to end markets, and maritime freight rates are far more volatile and less predictable than railway tariffs. Simple calculations show that, for coal exports, total transport costs are minimised when the sea leg of the journey is as short as possible.
Palliative measures and a disconnect from reality
The deterioration in the financial position of coal companies has had its greatest impact on the Kuzbass, Russia's principal coal-producing region. The Kuzbass accounts for around 40–45 per cent of the country's coal output, and the coal industry represents more than half of the region's industrial production. By mid-2026, 19 of the region's 151 coal companies had suspended operations, while a further 32 had been classified as being in the 'red zone' (i.e. in an extremely difficult financial position). The resulting shortfall in budget revenues is estimated to amount to as much as 20 per cent of the regional government's annual revenue.
The government is, of course, well aware that the coal industry requires intervention. In 2025, Vladimir Putin instructed officials to develop support measures for the sector as quickly as possible. In response, the government approved a support package that included deferrals of the mineral extraction tax (MET) and social insurance contributions, targeted logistics subsidies, and discounted railway tariffs for coal exports from the Kuzbass. In March 2026, these tax deferrals were extended until the end of May, with repayment of the deferred liabilities spread until the end of the year.
However, all of these measures are temporary. For the most part, they do not offset the industry's losses but merely postpone payments or redistribute costs from the coal companies to the federal budget and Russian Railways (RZD). With the industry recording a loss of RUB 408 billion in 2025 and being projected to lose up to RUB 576 billion in 2026, these measures reduce short-term financial pressure but do not restore profitability.
Russia has already gone through a large-scale restructuring of its coal industry. During the 1990s, almost 200 loss-making mines were closed, while employment in the sector fell from 900,000 to 328,000 by 2001. The current situation is unfolding differently. Instead of launching a new programme of structural downsizing, the government is attempting to preserve the existing system through tax deferrals and subsidies.
The reason why the government has opted for palliative measures rather than reforming the industry lies in a lesson it drew clearly from the 1990s: closing mines does not mean that workers move into other sectors of the economy. Labour mobility in Russia remains relatively low, particularly in depressed industrial regions. People are tied to their homes, families, and local labour markets, while relocating requires both financial resources and a clear prospect of finding new employment. As a result, within the logic of Russian policymaking, a loss-making mine is not simply a candidate for market-driven closure. It is a social problem affecting a single-industry town, one that the state prefers to mitigate rather than resolve.
Against this backdrop, the government's official plans for the development of the coal industry appear detached from reality. The Energy Strategy, approved by the government in April 2025, sets a target of increasing coal production to 662 million tonnes and raising exports to 350 million tonnes, even though the ability of Russian companies to maintain current export volumes is already in doubt.
Almost half of Russia's coal exports go to China, the world's largest coal importer, which accounts for more than 24 per cent of global imports. However, official assessments by the Chinese authorities indicate that the country has reached peak coal consumption and that demand is likely to begin declining in the near future. Given that domestic coal production already provides around 95 per cent of China's consumption, there are few grounds for expecting any meaningful increase in Russian coal exports to the Chinese market.
The first warning sign came in 2025, when China's coal imports fell by almost 10 per cent compared with the previous year. The decline continued in the first half of 2026, although at a more modest pace (coal imports were down 3.2 per cent over the first five months of the year). Imports of Russian coal, however, fell by 21.1 per cent during the first five months of 2026 compared with the same period a year earlier.
India and the ASEAN countries continue to increase coal consumption, but rising demand does not necessarily translate into comparable growth in imports. India is simultaneously expanding its domestic coal production and seeking to reduce its dependence on foreign supplies. As a result, there is no reason to assume that Asia's main coal markets will absorb the additional export volumes envisaged by Russia's Energy Strategy.
Whether the Russian government will find the political resolve and determination to undertake the structural reforms that could modernise the coal industry remains an open question. Given that the key decisions affecting the sector are made personally by Vladimir Putin, who is not inclined towards decisive change, the industry's problems are likely to continue to deepen.