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Russia: Government Plans Changes Affecting Monopolies

Moscow, 2 April 1997 (RFE/RL) - Russia is to embark on a major economic hurdle: reforming sectors of the economy currently dominated by the country's giant "natural" monopolies. These include nationwide energy distribution networks (i.e. power grids) as well as comprehensive transportation systems such as railroads.

Although Russia has been able to lower inflation, stabilize its currency and carry out widespread privatization, millions of ordinary people have gone without wages and pensions in part because the government failed to undertake the serious "structural" reforms needed to bring about real economic improvement.

Analysts say restructuring the gas, electricity and railroad sectors -- currently dominated by the monopolies -- is essential if Russia is to get on the path of economic growth. But they also says that it may be the most difficult stage of the reform process.

Newly-appointed First Deputy Prime Minister Boris Nemtsov has pledged to tackle the monopolies He has said these monopolies still function as they did under the centrally-planned economy. Their prices are unrealistic, production costs are disregarded, and competition is stifled.

Influenced by political factors, this economic setup is full of contradictions. Although energy and transport prices for industrial consumers have increased dramatically since the reforms began, household rates remain low, with domestic consumers paying just a small portion of real production costs. Similarly, ordinary railway passengers pay subsidized prices which industrial companies end up covering. The end result is a distorted pricing system that has crippled the economy.

Yaroslav Lissovolik, an economist at the Russian-European Center for Economic Policy, says the idea behind planned reform is to eliminate cross-subsidization, which has leveled national prices for energy and transport even though production costs are higher in some regions than others.

Nemtsov is said to have singled out Russia's electricity giant Unified Energy Systems (UES), in which the government has a majority stake. He has demanded that the company reduce tariffs and allow regional suppliers to sell directly to consumers. He has said that regional utility companies should be allowed to compete among themselves while staying within an integrated grid.

It is unclear exactly how such a system would work. UES, which has stakes in 70 regional power generators, produces more than half of Russia's electricity and has a monopoly on distributing supplies. But the distribution system was set up to balance varying supply and demand across RussiaUs vast geographical territory, stretching from freezing corners of Siberia to the more temperate climates in the south.

Moving against the natural monopolies has been a challenge for the government because of the political muscle they possess. Not only has Prime Minister Viktor Chernomyrdin been closely linked to RussiaUs gas giant Gazprom, but the livelihoods of many ministry officials rely on the monopolies.

Nemtsov himself has alluded to the political problems involved in the restructuring. There is a danger, he says, that a total freeing of the prices could wreak havoc in certain regions. Nemtsov yesterday appointed Boris Brevnov, a banker from his home town of Nizhny Novgorod, as first vice-president of the company in charge of reform and privatization.

But Nemtsov's comments over the past week also suggest that the government is not planning to break up the monopolies. He has said, for example, that the integrated power and gas supply system would remain, and cautioned against making hasty decisions to dismantle them.

The international lending organizations have advised to do so. The International Monetary Fund wants to see fundamental reform of those sectors of the economy currently dominated by the monopolies as part of its $10 billion loan to Russia. IMF managing director Michel Camdessus was reported to have raised the issue during meetings with top government officials in Moscow yesterday. But there is still no sign that the government would heed the advice.

The monopolies are considered the main economic debtors. RussiaUs natural gas monopoly Gazprom, together with UES, have the largest debts to the government's Pension Fund. Likewise, these companies are in debt to one another. UES owes Gazprom billions of dollars, but is unable to settle outstanding debts because its consumers have not paid.

Most analysts believe changes in those sectors of Russia's economy currently dominated by the monopolies could benefit the economy as a whole by lowering energy and transportation rates, thereby boosting growth and investment. But average Russian consumers will likely feel the pinch first.