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Russia: Government Pursues Unclear Energy Policy

Statements by Russian Prime Minister Mikhail Kasyanov suggest that the government will resist efforts to raise electricity tariffs as a means of implementing energy reforms. But the government's policy is far from clear at a time when massive investment is needed to keep Russia from becoming an importer of electric power.

Boston, 23 November 2000 (RFE/RL) -- The Russian government has sent a confused message on the direction of energy reforms, based on the statements of the country's highest officials in recent days.

On Tuesday, Prime Minister Mikhail Kasyanov signaled a go-slow approach during a government meeting to consider changes to the Unified Energy System electricity monopoly, known as EES.

Kasyanov appeared to endorse some form of restructuring for EES, saying, "To leave the sector as it is -- that is the road to nowhere." Kasyanov added, however, that "the long-term development of the power generating system is possible only if we raise tariffs, but this doesn't suit us." According to the Reuters news agency, he explained that "The social sensitivity of reforms in this area is extraordinarily high."

The comments seemed at odds with remarks made by President Vladimir Putin four days earlier. Speaking to a group of Siberian governors in Novosibirsk, Putin was quoted as saying that electricity tariffs should be determined by the market rather than the government. Putin said, "Tariffs are set individually for different groups of consumers, and it so happens that the tariffs of some consumers are subsidized by others."

"This must not be allowed. We should set order here," Putin said.

A basic contradiction appeared even within Putin's own statement. His call for imposing order seemed to be the opposite of letting the market decide. Under a market system, rates would be allowed to rise or fall in response to the forces of supply and demand. Electricity tariffs for consumers would also reflect the costs of fuel. Those costs in turn would be influenced by international prices for fuel or the rates that other countries pay.

For years, the Russian government, and the Soviet one before it, have protected domestic consumers from such forces. Although gas and electricity tariffs have risen this year, they still remain heavily subsidized. Gas is sold within Russia for $10-15 per thousand per cubic meters, for example, at a time when Russia is paying $38 to buy the same volume from Turkmenistan. Russia's Gazprom has charged an average of $96 per thousand cubic meters for exports outside the CIS this year.

Russian consumers are unable to pay such high prices for gas or electric power because the Russian economy has been based on cheap energy for so long. But the system has reached its limit, causing EES chief executive Anatolii Chubais to press for restructuring the electricity system.

Chubais wants to separate the network's generating facilities from its power grid, privatizing them and selling them off as separate companies to raise cash and spur investment. According to Chubais, unless $5 billion is invested in Russia's electricity system, the country will have to become an importer of power by 2005.

But minority shareholders are concerned that the generating companies will be sold too cheaply, before the government faces the tough political task of raising electricity rates. Kasyanov's statement suggests that the government would like to avoid that burden. Putin's comments leave the issue up in the air.

The question is of critical concern to Russia's consumers. Power has been cut off this year to individual users, entire districts and even military installations for failure to pay electricity bills.

This week, Russia's human rights commissioner, Oleg Mironov, asked the prosecutor general's office to examine the legality of the shutoffs, saying that some citizens have lost electricity service, simply because they are connected to the same lines as other users with arrears. The complaint raises doubts about the ability of EES to implement its plans fairly.

But perhaps the greatest deficiency of the government's approach to the energy reform problem is that it does not seem to be ready to set goals or a timetable for achieving them.

Both Gazprom and EES will reportedly seek new rate increases next year. But Kasyanov's remarks indicate that any approval for tariff hikes will be based on political rather than economic factors. If that is the case, the Putin government may prove no more successful in dealing with the problem than the governments of the past.