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Russia: Despite Pledges To Reform, Government Continues To Back Monopolies

  • Michael Lelyveld

After Russian Prime Minister Mikhail Kasyanov promised this week to reform the country's "natural monopolies," the government has taken steps instead to ensure that the monopolies continue to operate as tools of the state. In the cases involving Gazprom and the EES electricity system, the government appears to be using the terms "reform" and "control" to mean one and the same thing.

Boston, 22 September 2000 (RFE/RL) -- Russian Prime Minister Mikhail Kasyanov's pledge this week that the government will soon address the question of the country's monopolies is a reminder that little has changed since former President Boris Yeltsin held power.

Speaking Tuesday in London, Kasyanov called monopolies like Gazprom, the EES electricity system and Russia's railway "one of the reasons the development of the economy and its competitiveness is being held back." Kasyanov added, "In the fourth quarter of this year or the first quarter of next year we want to take a major decision on reforming these natural monopolies."

The very term "natural monopolies" is the result of a key Yeltsin decision to shield certain monopolies from privatization if they were simply so vast that the government could not conceive of running the country without them. Some vital functions seemed to rely "naturally" on monopoly operations. How could the Kremlin rely on the functioning of petroleum pipeline network, for example, if there was a chance that it might be broken up?

The temptation to sell shares in old monopolies like the telephone system was driven by the need for revenue rather than a dedication to reform. The result were some strange hybrids like Gazprom and EES, which sold some shares in partial privatizations but which the government continued to control.

Just as strange was an episode last week in which EES cut off the electricity to a strategic missile base in Russia's Ivanovo region due to unpaid bills. Troops from the base then occupied the power plant and turned the power back on. In the aftermath, the Russian Finance Ministry promised to transfer 1.3 billion rubles to the Defense Ministry this month so that the military can pay its electricity bills. EES promised not to cut power to strategic bases again.

The episode is similar to threatened shutoffs of military installations during the dark days of the arrears crisis under Yeltsin in 1997 and 1998. But under President Vladimir Putin, the problems seem to proceed partly from a broader campaign to collect energy bills, end barter payments and raise energy tariffs across the board.

The effort would seem to make economic sense if it leads to market pricing of energy and the establishment of EES and Gazprom as completely privatized entities with true market valuations. Such moves could create a new foundation for the Russian economy based on real prices rather than subsidies. But the continuation of government control and protection of monopolies makes the collection campaign look more like an exercise of moving funds from one pocket to another.

Because 52 percent of EES is state-owned, more than half of the electricity payments from the state-funded military are essentially transfers from the state to the state. The situation is further complicated because EES is one of the country's largest taxpayers, so that another portion of the state-to-state payments go in a circle back to the state.

The real benefit of collecting bills from the Defense Ministry seems uncertain under such a circular system. Similarly, because Gazprom remains 38 percent state-owned, it is hard to assess the economic impact of the gas debts that are owed by state-owned EES.

Kasyanov's statement that the government will decide on "reforming" the natural monopolies in the future seems to ignore a statement by Minister of Trade and Economic Development German Gref in June that the government would increase its control of the monopolies. The question is whether the Putin approach is to control or reform, or whether the two terms are being used loosely to mean the same thing.

Gazprom's effort this week to gain control of Vladimir Gusinskii's Media-MOST empire suggests that the government may seek to control the news outlet through the gas monopoly, particularly in light of a threat by the Prosecutor General's Office to investigate Gazprom's charges that Media-MOST assets have been transferred abroad. There seems to be little change in Gazprom's role as a tool of government power since the Yeltsin years. Reports on Thursday that a court has frozen shares in Media-MOST seemed to support the idea that Gazprom is aiding a government power grab.

Likewise, there was intense speculation about the future of EES Chief Executive Anatolii Chubais during the early days of the Putin presidency, as other oligarchs came under pressure. But by July, the position of Chubais seemed assured as he accompanied Putin on his visit to Japan. But on Thursday, Chubais came under a cloud again with reports that EES is under investigation for unpaid tax bills.

The Reuters news agency quoted Hartmut Jacob, an analyst at Renaissance Capital, as saying that the tax probe was "a very useful tool" to make sure that Chubais does what the government wants. The move was ironic because it was Chubais who first called for tighter government control over natural monopolies when he served as first deputy prime minister in 1997.

The web of relations between the government and the monopolies presents a predicament with no easy way out. Without control, there may be no way to reform the powerful monopolies. Yet, government power is just as likely to maintain the monopolies as instruments of the state, preventing further privatization and reform. It is a problem that the Yeltsin government proved unable to solve, and so far, it is one that the Putin government seems to be putting off.