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East: Rising Oil Prices Alter Trading Patterns

Boston, 4 August 1999 (RFE/RL) -- Rising oil prices are altering trade patterns across a wide area stretching from Central Asia to Yugoslavia and from Russia to Iran. The changes suggest that even oil producers are having difficulty in dealing with the effects of good fortune this year.

Many countries are also facing economic challenges created by decades of fuel subsidies. The political consequences appear to be accelerating the trade shifts with unpredictable results.

Azerbaijan, for example, has reportedly suspended its sales of refined products to Iran because of serious shortages in Ukraine, which needs fuel for its harvest. Baku has agreed to supply Kyiv with 450,000 tons of diesel fuel, and it has already shipped 34,000 tons. The exports to Ukraine leave little or nothing to sell to Iran.

Iran is said to be likely to turn to Turkmenistan instead for the refined products that it imports. Fuel accounts for most of the small volume of Iran-Azerbaijan trade, but supplies from Turkmenistan are said to be cheaper. The change could have the effect of drawing Iran closer to Central Asia. The country already imports gas from Turkmenistan and links power systems to buy electricity.

Farther west, a gasoline crisis in Armenia has eased, but officials have blamed high prices and shortages on Bulgaria for shifting sales to Yugoslavia. Pent-up demand created by the wartime embargo and the bombing of Serbia's refineries may make the Yugoslav market the first to be served.

Russia, which is sometimes cited as a source of other countries' troubles, has its own problems with shortages. Government officials have threatened to bar oil companies from using export pipelines unless they make sure that the domestic fuel market is supplied.

On the surface, the disruptions are signs of a surprisingly mobile and fluid market for fuels throughout the region, after decades of central planning and control. But despite the progress in pursuing international markets, there are just as many signs of bad planning due to the legacy of the past.

Oil consuming countries like Ukraine complained loudly about gasoline prices last month when domestic prices soared to levels common in Europe. Low incomes in Ukraine make such prices prohibitive, but the episode has highlighted the high cost of subsidies for domestic users to keep political pressures under control.

Oil producing countries like Russia should be enjoying a windfall with the near doubling of oil prices this year. The Caspian countries should also be well placed to benefit from higher oil prices because they have not been required to cooperate with OPEC production cuts. Russia has officially pledged to impose a token decrease, but in actuality, producers are pumping all that they can.

But the benefits have been hollow. In Russia's case, the government has been beset with problems because it has no rational basis for managing oil and refined products, as long as fuel is sold domestically for a fraction of the price in Ukraine. Smuggling and tax evasion has made the true levels of trade untraceable as refiners chase higher prices in other markets and keep their sales off the books.

In Azerbaijan, opposition parties have called for steep cuts in domestic fuel costs, demonstrating that old habits of subsidies only serve to convince consumers that they are never enough. Fuel subsidies and market distortions may rob producing countries of the profits from higher oil prices, while leaving consuming countries impoverished.

Only Iran has tried to tackle the problem of subsidies. Last December when oil revenues were low, the government mounted an unprecedented public campaign to raise fuel prices and curb domestic use. Before the passage of Iran's annual budget, officials complained that subsidies for cheap gasoline were costing the government nearly as much as all its development expenditures.

The situation created a profitable smuggling industry with many of the same market distortions that other countries like Russia are experiencing now. In Iranian border areas, traders were reaping tenfold profits on subsidized gasoline by selling to neighboring countries. Meanwhile, the government was covering the resulting shortages by buying fuels at higher prices from countries like Azerbaijan. The implication was that Iran had to buy back its own fuel at a loss.

But a proposal to raise gasoline prices by 275 percent on purchases of over 45 liters a month was defeated as the majlis (Iran's parliament) approved a much more modest increase without volume limits. While Iran was prompted by its budget shortfall to take the risk of raising the subsidy issue, many other countries are now paying for similar problems. But with higher revenues from oil exports, most producers may not push for solutions until they also run short of fuel.

At its best, the system of subsidies is archaic. At its worst, it is corrupt and likely to cause economic and political instability if it continues. Few countries have dealt with the problem while oil prices were low. Now that they are high, it will take enormous political will.