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EU: Deal Could Pressure Russian Energy Sector

A European Union plan to double energy imports from Russia, which is to be presented at an EU summit this weekend, could put more pressure on Moscow to reform the energy sector and reduce price subsidies at home. The government may now be ready to deal with one of Russia's oldest and toughest problems in energy pricing, but the political and economic effects remain to be seen. Correspondent Michael Lelyveld reports.

Boston, 13 October 2000 (RFE/RL) -- Talks on increasing European energy imports from Russia could lead to major changes in the use of the country's resources, forcing Moscow to deal with issues that were first raised nearly a decade ago.

Discussions since last month on a possible doubling of Russian gas sales to the European Union seem to have grown out of efforts by Russia's Gazprom to promote new pipeline routes to its biggest customers in Germany, Italy and France.

Russia has been complaining for years about gas thefts from transit pipelines that run through Ukraine, which owes Moscow at least $1.4 billion for fuel. On Wednesday, the debt problems prompted the Russian gas trader Itera to cut its deliveries, plunging Ukraine into uncertainty at the start of the winter heating season. Moscow has been pushing its plan for a new pipeline through Poland and Slovakia, hoping that EU demand will convince them to join in the project to bypass Ukraine.

That effort appears to have won sudden support as a result of mass demonstrations against high fuel prices in Europe last month. The public protests that disrupted countries including Britain and France drove leaders to look for new energy supplies. Some now see increased Russian exports as an alternative to reliance on OPEC.

A proposal to make the EU a strategic partner in Russian energy exports and investment is expected to be presented at an EU summit in the French resort town of Biarritz over the weekend and at a bilateral summit in Paris at the end of this month. The outcome could have enormous economic importance for Russia. Last year, fuel and energy accounted for over 48 percent of Russian exports, according to the Economist Intelligence Unit.

Some experts have voiced doubts that Russia will be able to double its exports after years of declining investment. Dimitri Avdeyev, an analyst at United Financial Group in Moscow, told Agence France-Presse that it would take 10 years or more to increase gas extraction in Russia.

But the demand for more energy in Europe also coincides with Russia's attempts to raise gas and electricity tariffs at home to boost incentives for investment and reduce subsidies. Electricity and gas rates have already risen by over 30 percent this year, while Gazprom is said to be seeking an increase of an additional 30 percent.

Even so, energy in Russia is still sold for as little as one-tenth of export prices, making it likely that EU demand will add to the pressure for higher rates. The effects may already be in evidence at Gazprom, which appears eager to sell gas in markets that will pay the company more.

On Thursday, Gazprom said that its pre-tax profit for the first half of this year tripled due to higher energy prices, adding that it would have been even more if not for tariff restrictions at home. The company said that it "continues to subsidize domestic customers through low gas prices and slow repayment of debts for delivered gas."

In recent weeks, Gazprom has reduced gas supplies to the EES electricity monopoly and shut off Russian users who have not paid their bills. At a press conference in Moscow this week, the head of Gazprom's analytical center, Alexander Gritsenko, called the amount of gas used by EES "absolutely unacceptable."

For its part, EES has joined the race to sell energy to Europe despite the squeeze on domestic consumption. The company recently opened a new power line to Poland for exports. It is also said to be considering electricity exports to Turkey through Azerbaijan and Georgia and even perhaps across the Black Sea.

The competition for energy supplies and the controversy over prices may soon spark questions about whether Russian consumers are entitled to the benefits of resources that were entirely state-owned only a few years ago.

It is a debate that has smoldered below the surface of Russia's economic struggles ever since former President Boris Yeltsin staked the country's claims to its own natural resources in the "war of laws" with the Soviet Union in 1991. The question now seems to be not who owns Russia's resources but who is willing and able to pay a market price for them.

Yeltsin kept energy tariffs low in Russia despite years of privatization and the freeing of prices for other goods. Now, President Vladimir Putin has approved rate hikes to raise revenues and narrow the gap between Russian and European energy prices. Without the increases, Russia may be unable to maintain its pipelines and production. A report this month by the Washington-based Center for Strategic and International Studies estimates that Russia's rusted pipelines leak 20 million tons of oil into the ground and rivers each year.

But the change could prove hard for poor consumers unless wages and payments keep up with their costs. The recent competitiveness of Russian products could also erode because cheap fuel helps to keep prices low for a wide range of goods.

The Putin government seems to be showing that it is willing to take on one of the country's oldest and toughest challenges in dealing with the energy question. How well it manages the problem will be seen as the effects are felt.