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Russia: Officials Considering Oil Export Regulation

Russian officials have proposed a new system for regulating the country's oil exports. However, it is unclear whether it will address the basic problem of domestic subsidies or lead to greater reform. RFE/RL's Michael Lelyveld reports.

Boston, 15 November 2000 (RFE/RL) -- A new Russian plan for managing the country's oil exports has highlighted the differences between economic systems in the East and the West.

The Russian business newspaper Vedomosti reported this week that Deputy Prime Minister Viktor Khristenko has offered a proposal to grant oil export quotas through open auctions instead of the current system that relies on government favors and questionable deals.

The new plan, which may take effect in January, would allow the government to auction off export rights to the highest bidder. One-quarter of the oil export quotas would be handled in this way. Khristenko proposed the auction system after President Vladimir Putin recently named him to head a new Fuel and Energy Committee to control Russia's pipelines.

Vedomosti quoted an official of Russia's Federal Energy Commission as saying that the auction idea was first suggested by the International Monetary Fund in 1995 as a fairer way of controlling access to Russia's pipelines and ports.

Supporters of the plan see it as preferable to Russia's current practice of requiring the country's oil companies to sell 70 percent of their production on the domestic market, while allowing them to sell 30 percent at much higher prices abroad. Critics say the system administered by the Energy Ministry has never been formally laid out in law, leaving it open to exceptions, corruption, and abuse.

Some of Russia's biggest oil companies have reportedly been permitted to export over 40 percent of their oil in exchange for carrying out government programs or returning hard-currency credits. As a result of such favors, oil companies exported over 41 million tons more than their 30 percent share. By that calculation, Russia kept only 56 percent of its oil for domestic consumers last year, instead of 70 percent.

A system of auctions could have the advantage of being more open. But it may be hard not to see it as another export tariff or tax. Oil companies that operate on the open market are already seeking the highest bidders for their products. The new plan would essentially force them to bid for the right to do so.

The logic behind the idea seems to be that Russia's pipelines are state-owned. Because their export capacity is limited, the choice is either to apportion the access or auction it. Apportioning has already been tried. In addition, the government would continue to restrict oil exports in order to keep domestic prices from rising too high. Energy prices in Europe are as much as 10 times higher than in Russia. Without export limits, few Russians might be able to afford oil or fuel.

There may be advantages to export auctions. But the improvement seems likely to be relative only to the current system, making it only a modest step toward free market reform.

The plan appears to assume that the Russian government will continue to control domestic oil prices and export levels. In the past, such interference with the forces of supply and demand have limited the incentive to produce. If world oil prices fall, there will be even less incentive than before. The result may be shrinking supplies for both exports and domestic use.

Russian oil companies have been using their export earnings to offset and subsidize their low prices at home. But if the new system succeeds in restoring the domestic share of production to 70 percent from the current 56 percent, there may be even smaller export earnings to help keep Russian prices low. The government will still have the problem of the huge gap between foreign and domestic prices for oil.

It is hard to find exact parallels in the West to the proposed auction system for export rights. In the United States, for example, oil exports are controlled but in a different way.

In 1979, the country restricted exports of oil produced in the United States in order to curb the effects of soaring prices during the Arab oil embargo. The government has since prohibited most exports of U.S. oil, as well as regulating other commodities that are in short supply. But unlike Russia, the United States produces less than half the oil it consumes. The government has not controlled domestic oil prices, although they have risen dramatically this year.

It remains to be seen whether Russia's latest experiment with trying to control the forces of supply and demand will work. But there are hopes at least for greater fairness and openness, even if it means replacing one imperfect system with another.