RUSSIA: THE GAS VERSUS COAL QUESTION

Russian policymakers have called upon the domestic coal industry to help diversify the nation's fuel supply portfolio at a time of growing demand for power and high international gas prices. Currently Russia is the third largest holder of coal reserves but is only the sixth largest producer of coal in the world. Despite coal's attractiveness in providing a more balanced energy future, Russia's coal industry faces an uphill battle in serving the power sector in European Russia.

*Coal production in Russia is rebounding and has shown steady growth over the past eight years. However, the industry's export-driven growth is expected to slow.

*Meanwhile, coal is poised to become more competitive with natural gas in European Russia by 2010, but only if Russia moves forward with the aggressive gas tariff increases that are planned and if rail tariffs for coal remain stable.

*However, Russia's coal strategy raises fundamental questions about the ability of mining companies to ramp up production on a cost-effective basis, as well as the ability of technology suppliers to construct new coal-fired generating capacity in Russia, which they have not done in almost 20 years.

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