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Russia: Oil Wealth Squandered In Bashkiria

By Khamid Gizatullin

Ufa, 11 April 1997 (RFE/RL) -- The small but oil-rich Republic of Bashkortostan in Russia is a good example of how wealth can be squandered. And it shows how severe a hangover can be once the party's over.

Bashkiria, in the southern Urals next to Tatarstan, has for decades had a major and well developed oil industry, producing millions of tons of oil per year.

As the Soviet era drew to a close, Russia's constituent republics -- including Bashkiria, with its population of over four million people -- gained a heightened degree of sovereignty. After declaring its sovereignty in autumn 1990, Bashkiris took over as their national property hundreds of oil wells, as well as refineries, petro-chemical works and chemical installations.

In the absence of any viable privatization program at the time, these facilities mostly came under the control of the government, thus allowing the national political elite to gather all the filaments of management into their own hands or into the hands of supporters.

With the oil flowing freely, the local finances were well stocked and Bashkiria went on something of a spending spree: the republic's leadership had not had this kind of spending freedom before, and it threw money around without concern for the underlying value.

For instance various popular measures were organised such as a series of cultural festivals starting in 1993 to serve an ostensible revival of Bashkir national culture. Among the many festivals was the World Bashkir Nation Congress, to which Bashkiris were invited from all over the world, In addition, credits were freely handed out to support unprofitable factories, as well as unviable collective and state farms.

Under the first heady flush of sovereignty, a policy of "economic separatism" developed, which manifested itself in unwillingness to integrate with the sourrounding Russian economy.

But in the years which have followed, the impact of profligate spending and irrational economic decision-making have become dramatically evident: today the once mighty Bashkortostan oil industry is near financial collapse, its production slashed by almost half, and its products so over-priced that they cannot compete on either the Russian or world markets. For instance, the Rostov region prefers now to buy its oil products from Omsk rather than Ufa, despite the fact that Ufa is much closer.

Lack of modernization and proper investment led to an inefficient and therefore expensive production cyle. Also adding to the costs were heavy taxes imposed to raise revenue for the state. These taxes peaked at 34 percent in 1994, fell slightly the following year, but plummeted by almost half (to 18 percent) last year as it became increasingly obvious that no-one was interested in buying over-priced Bashkiri oil.

Now, enterprises are encumberd with huge debts that are growing steadily. The state budget shows an alarming deficit, the treasury is empty and Bashkiria's financial structure is in danger of collapse.

Last week President Mortaza Rakhimov issued a decree forbidding crude oil exports. The decree is designed to prevent crude being sent out of the republic to other destinations for refining. Those exporting the oil are trying to avoid the high cost of the Bashkiri refining process!

Khamid Gizatullin is a member of the Russian Academy of Sciences.