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Russia: Government May Open Energy Markets

Competitors to Russia's Gazprom believe the new government will open the country's energy markets. But our correspondent Michael Lelyveld reports that so far, there are few signs of any unified approach to the issues of market economics and control.

Boston, 19 May 2000 (RFE/RL) -- Reports that Russia may open its gas market to more competition have been met with both enthusiasm and confusion over the role that the new government will play.

At an investment conference in Moscow this week, Russian companies including giant LUKoil hailed the idea that President Vladimir Putin would institute energy reforms by freeing gas prices and curbing the monopoly of state-owned Gazprom.

In a report carried by the Reuters news agency, LUKoil Vice President Leonid Fedun said, "The problem with gas is clear to everybody in Russia -- it is Gazprom."

For years, Russian oil companies have either ignored or wasted the associated gas they have found in their oilfields because of Gazprom's hold over the market. Fixed prices and Gazprom's control over pipelines have made it impossible for other companies to profit from selling their gas. Fedun called the difference between domestic and export prices for gas "completely crazy."

Russia charges domestic customers about $11 per thousand cubic meters of gas, while accepting partial payment in bartered goods. In sales to countries like Turkey, Gazprom charges up to $120 per thousand cubic meters in cash. The situation has killed the incentive to invest in exploration, leading to shortages of both gas and electricity in Russia over the past year.

Fedun said: "We do not produce gas for one reason -- the low price of gas inside the Russian Federation and Gazprom's monopoly on the transport network. Now the situation is changing ... More and more we are beginning to become active in the area of gas."

Putin's inauguration and the plans of his economic advisers have raised new hope for competition among Russia's oil producers. This month, Gazprom raised its domestic rates by up to 39.5 percent in an attempt to stimulate production. World market pricing still remains a distant goal.

But the direction of the Putin government remains far from clear. While it may be able to capitalize on its new political mandate, the problem of energy pricing has been one of the toughest and oldest reform problems that Russia has faced.

In 1989, Soviet President Mikhail Gorbachev effectively shattered the Council for Mutual Economic Assistance by deciding to charge world prices for oil to Eastern European countries. But Gazprom's monopoly was left intact, shielding Russian consumers from a similar energy shock and the pressure for speedy economic reforms.

Although Putin's mandate is new, there may be no less political pressure to keep gas prices low. The government must also deal with the inflationary consequences of higher prices, no matter how much they may be justified.

This week, Russia's new prime minister, Mikhail Kasyanov, promised an economic policy "without shocks for the nation," a pledge that seemed to rule out any radical price reforms.

But aside from strictly economic questions, the philosophical direction of the Putin government remains uncertain at best. While the government's statements have praised economic liberalization, it has pursued greater centralization in political affairs. In the past week, the trend has been seen most clearly in Putin's plans to rein in Russia's regions and restructure the Federation Council of parliament.

The two contradictory forces of liberalization and control may collide on the question of Gazprom. For now, Putin's drive for control seems to argue against any real weakening of Gazprom's monopoly power, which has been one of the central government's most dependable tools. Particularly in relations with other countries, Russia seems as likely as ever to lean toward regulation of its strategic pipelines.

The government has also not given up on the idea of recreating a state oil company, further demonstrating the confusion over whether to tighten or loosen the reins over free enterprise in the energy sphere.

Russian Fuel and Energy Minister Viktor Kalyuzhny has reportedly been ordered to draw up a proposal by June 1 for merging the state's interests in Rosneft, Slavneft and ONAKO into a single company. But the head of Russia's Federal Property Fund, Igor Shuvalov, said this week that the separate interests could also be sold.

The alternatives seem to be a continuation of the contradictory plans that have been aired for months, making it unclear whether the government intends to get further into or out of the energy business. For the moment, there seems to be no fixed direction or approach. Perhaps with new leaders, all things seem possible.

But Gazprom's competitors may be premature in celebrating the opening of Russia's domestic and foreign markets for gas. Putin must first decide whether such a move would strengthen or weaken his power.