Is it possible to stop illegal extraction of amber in Ukraine?

Author : Oleksiy Kushch

The legalization of the amber business was announced by President Zelensky. So far, victims of the "hand of the sovereign" have become representatives of law enforcement agencies of the Polissia region
20:46, 26 November 2019

Open source

Verkhovna Rada has adopted a draft law No. 2240, which should resolve the problematic issues of amber production in Ukraine. The speed of consideration of the bill is amazing: it was submitted to parliament on October 8, and on November 12 it was supported in the first reading. 342 MPs voted for it. What will the "fifth amber speed" of the vote lead to? Judging by the norms of the bill, the state decided to play a tough sheriff in Polissia forests, introducing criminal liability for "illegal extraction, sale, acquisition, storage, transfer, transportation, processing of minerals, the legality of which is not confirmed by relevant documents, and for evasion from land reclamation." A fee for a special permit for the amber production in the amount of 3400 UAH (136 USD) per hectare is also being introduced. This is the initial, starting price, and the final cost of production will be determined at the auction.

The legalization of the amber business was announced by President Zelensky. So far, victims of the "hand of the sovereign" have become representatives of law enforcement agencies of the Polissia region. In the near future, one should expect a “re-checking” of the higher personnel of the police, SBU and prosecutors. The cleaning will affect the most “amber regions”: Zhytomyr, Rivne and Volyn, that is, territories where the “sun stone” is mined or smuggled abroad, mainly to Poland.

"The aim of life was prey. Life itself was prey. Life lived on life. There were the eaters and the eaten. The law was: eat or be eaten.”These words of Jack London are very suitable for describing the mining industry in Polissia. However, the situation is now not as acute as it was in 2014-2015, when, on the one hand, the government vertical collapsed and the law enforcement agencies lost their monopoly on violence and on the other, world procurement prices for unprocessed amber soared and became the main driver of illegal mining growth. The legal vacuum only spurred the pace of shadowing this type of business.

Today, world prices for amber have fallen sharply, and the legal system in the state has somewhat strengthened. That is, we observe the opposite process to what we saw five years ago. And if then the above factors contributed to the maximum shadowing of the amber business, now the new puzzle of the basic conditions for the formation of the market environment gives the state a good chance to reload the market model on a more transparent and legal basis. Obviously, we are not talking about complete de-shadowing.

Instead, we observe either the ostentatious dismissal of law enforcement officers, as if the problem of illegal amber production rests on specific personalities rather than systemic things, and on the other, we see an attempt to turn the amber business into another "national project" with financial consequences. So the ex-chairman of the State Service of Geology and Subsoil of Ukraine Oleg Kyrilyuk at a meeting with President Zelensky proposed spending from the state treasury of about 20-30 million UAH for the geological study of land on which you can open legal mining. In the future, the state may even make money on the sale of special permits for the development of fixed deposits. Naturally, selling them at electronic auctions.

Summing up the roadmap for amber reforms, Kyrilyuk made a statement, in one sentence of which there were so many internal logical contradictions and system errors that would be enough for a whole “comprehensive state program”: “An increase in the issue of special mining permits is legalization of the market. And most importantly - this is an increase in criminal liability throughout the country and for all types of minerals for illegal mining, sand, coal, etc."

Related: Zelensky submits bill on punishment for illegal amber-mining to parliament

Ukraine really has substantial amber reserves, and estimates of these reserves are fundamentally different from each other. The so-called "Rivne amber" had formed about 40 million years ago during the Eocene. In those days, our country was an island, and Belarus and Poland, respectively, the bottom of the prehistoric sea. In terms of its composition, our amber practically does not differ from “Baltic” one according to the classification accepted in the world. It is distinguished from the "sun stone", mined, for example, in the Kaliningrad region of the Russian Federation, by a greenish tint and great ease of processing. As for potential reserves, in 2005 they were estimated by the State Geological Survey in the amount of 100 thousand tons. Currently, proven reserves are already 250 thousand tons, and if expert estimates without appropriate geological surveys (determined on the basis of forecast calculations) are taken into account - more than 600 thousand. The advantage of Ukrainian deposits is a small depth, only 2 to 8 m, which makes them easy prey for "black" miners.

Today in the world there are several formats for the development of the amber market.

Inclusive - when the state stimulates the extraction of the most expensive species, including insect debris, etc., while the main deposits of cheaper amber raw materials, including the so-called deposits of "young resin", remain untouched. Inclusions are traded by some countries in the Caribbean, and New Zealand has switched to this method. The use of the inclusive method allows you to sell only expensive amber, which is several times more expensive: for example, inclusions in the Dominican Republic are estimated at 20-25 dollars per gram, and more ancient “stones” from Lebanon reach up to a thousand. It all depends on the quality of the "debris."

Trading: amber production at depleted national deposits is frozen, and the main operations are concentrated in the segment of buying amber raw materials in other countries, such as Ukraine, and processing it at own production facilities: both conventional grinding and the manufacture of finished products can be used here. Thanks to the application of the trading method, the level of added value in polished amber or finished products can increase 5-7 times. An ideal example of a trading method is Poland, where amber companies are concentrated in Gdansk, as well as grinding facilities and China, where they produce the broadest possible range of finished goods: jewelry and souvenir.

Communal - tested in Mexico in turbulent border states with a strong development of separatist movements (for example, in the state of Chiapas on the border with Guatemala). Here, old abandoned mines and deposits are transferred under the control of local communities. Until 2014, they wanted to do something similar in Ukraine by establishing local communal enterprises. In a negative scenario, this method turns either into collection of corrupt rents in favor of the "center", or into sources of financing the same separatist movements with which it is supposedly called to "fight".

Utilitarian - when the export of unprocessed amber is prohibited, and the monopoly company (possibly state-owned or on a private partnership basis) is engaged in its primary processing. An example of a partial use of it is the Russian Federation, in which the export of amber was prohibited.

Already from the above list of methods for organizing amber business, it becomes clear that something special is being applied in Ukraine, which could be called the “smuggling method under the conditions of state-political partnership” - when amber is produced randomly, without any permissions, processing and the production of finished products is almost completely absent, exports are carried out in the form of smuggling, and representatives of the central government has corruption rents from this market with the help of law enforcement agencies.

Nowadays, from 600-700 tons of amber mined in the world, more than 100 tons fall to Ukraine. In some periods, taking into account all the shadow sources, our production volume tripled to 300 tons, and the shadow market’s turnover amounted to approximately $ 300 million. The development of the “shadow part” was facilitated by a rise in world prices (the world amber price index Amber stock-442): from 2011 ($ 900 per kilogram) the price rose to a maximum in 2014 - $ 2000 / kg. Then a gradual decrease began: in 2015 - $ 1,500, in 2017 - $ 1,100. Now prices have fallen to a minimum over the past seven years - only $ 450 per kilo.

According to the Le’amber Association, a sharp rise in prices for amber was facilitated by an increase in demand for it. The proposal covered only 60% of the needs. In 2018-2019 the situation has changed diametrically: supply exceeded demand by the same 60% and not least due to smuggling from Ukraine. Thus, our prospectors with the help of uncontrolled production actually cut down the branch on which they sat: a sharp increase in illegal supplies collapsed prices, and in 2019 only 70 tons of Ukrainian amber are expected on the market (mainly through smuggling; according to statistics, official export is 2 -3 tons per year).

In China, the main quotes are formed on the Shanghai Gems and Jade Exchange. For example, only in one "House of Amber Trade" there are simultaneously 10 tons of raw materials and one ton in finished products. In addition, the number of semi-legal processing companies in China  increased from 300 to 2000. In Europe, the number of processing entities has not changed, and the price stability of finished products is supported by exports. With 30% of them going to China, where in turn 70% of the global trade of "sun stone" and 80% of the processing capacity are situated.

Related: Two Ukrainians detained at large-scale amber smuggling operation in Poland

Thus, China has now become the sovereign master of the amber market, displacing even the Russian Federation: it also dictates world prices for raw materials and forms the cost of finished products. To compete with it (as some of our officials who advocate for their own processing offer) there is neither economic sense, nor real opportunities for us.

The decision to reform the amber market in Ukraine seems to be on the surface: as our officials suggested, you need to spend government money on geological exploration, sell licenses to the “right” companies and toughly, preferably “criminally”, punish shadow miners. The recipe is not a formula for success. This is just a mistake.

Here you can recall the times of the "gold rush" in the United States. In America, no one thought of developing government-funded geological maps for prospectors. Moreover, no one tried to punish them. The role of the state at the first stage was reduced to the sale of permits for the temporary development of potential deposits. That is, the government issued a license for a certain area, and whether there is gold there or not - it already depended on the luck and intuition of the prospector. He could guess and get rich, and he could completely lost. For him, no one would conduct geological exploration for budget money. Attempts to punish the miners could even lead to a second civil war in the United States, and this battle of the Wild West - the Official East could be more abrupt than North-South.

It must be taken for granted that at the first stage, the state has to put up with spontaneous production and the damage that is done to the environment. Any such fever goes through several stages:

- detection of readily available and at the same time expensive raw materials;

- the spontaneous emergence of miners' settlements and massive illegal mining;

- a light method, when prospectors select only what can be taken out of the ground with the help of a shovel and a sifting tray;

- mechanization of production, when the most easily accessible deposits are depleted and further production is possible only with a higher level of investment;

- prospectors are being replaced by systemic official companies.

Ukraine is now at the 2-3rd stage of the amber industry development. Any attempt of a forceful solution will only lead to mass resistance of the local population and the emergence of dangerous centrifugal regional trends.

On the other hand, now it is not the nineteenth century. In this context, the state could transfer control over the observance of environmental standards and mining rules to the local 'miners' councils, which could sell short-term (1-2 years) permits for the extraction of amber in certain areas, but without the state conducting geological exploration: fear and risk would be on the miners themselves. The central government could leave behind a monopoly on the extracted amber export, that is, there should be a centralized procurement system with a price 20-30% lower than the world (exchange) price. Reducing corruption costs and transportation risks would be beneficial for the producers themselves, who now give about 50% of the price for the export of amber to Poland or China. It is much more profitable for them to wholesale the mined amber to the state. Centralization of exports would not only provide important statistics, but would also consolidate the flow of foreign currency export earnings and allow Ukraine to influence world prices by regulating supply volumes.

After the depletion of easily accessible amber deposits, spontaneous exploitation will die out naturally. By that time, we should create a better market infrastructure. The potential parameters of amber production in Ukraine allow us to create capacities for its primary processing and production of finished products in the amount of up to 100 tons per year, as well as to form an exchange infrastructure in order to fulfill the role of a world price benchmark. The conditional “Volyn Amber Exchange” could compete with that of Gdansk, with an annual turnover of up to $ 1 billion. Although the transition to exchange organization of the market is not necessary at all, it can only occur if amber processing is developed and it is purchased in other countries. If several system players in production work on our market, the exchange nature of sales may not take place. Available amber reserves are enough for a hundred years of regulated industrial production.

Related: Ukraine’s parliament makes first step to legalization of amber mining

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