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Russia: Little Progress Made Toward Free Market

Russia has hailed the European Union's decision this week to accept it as a market economy, easing the threat of antidumping actions against Russian exports. But Moscow's new energy policy that would exempt "strategic" users from higher gas tariffs may be a sign that little real progress toward a free market has been made.

Boston, 31 May 2002 (RFE/RL) -- Russia's new plan to introduce market energy prices in all but "strategic" sectors of the economy may have the makings of a colossal compromise.

The strategy outlined on the eve of a European Union-Russia summit in Moscow this week seems to split the difference between EU demands for an end to energy subsidies and Russia's desire to continue them indefinitely.

On 28 May, the government tentatively approved the plan to guide the energy sector through 2020, "The Moscow Times" reported. The proposal would restructure both the gas and electricity monopolies by 2005, while doubling Russia's use of coal.

The shift to coal is a measure that will benefit Gazprom, although not the environment. Gazprom, which is 38 percent owned by the government, has been trying to reduce supplies to the Unified Energy Systems power monopoly so it can sell more of its gas for up to 10 times the price abroad.

The energy strategy also encourages exploration and warns that Russia's oil fields could be pumped dry by 2040. But perhaps the most controversial feature is the division of the gas market into ordinary consumers, who would pay market prices, and "strategic" consumers who would not.

Energy Minister Igor Yusufov made clear that the government does not intend to get completely out of the business of controlling gas tariffs, despite previous promises. It would guarantee low rates for strategic users even after prices for other consumers are freed over a period that Economic Development and Trade Minister German Gref said would last no less than 10 to 15 years.

The plan, which is one of many attempts at energy reform since President Vladimir Putin took office, differs from reform steps outlined only months ago. In December 2000, Gref originally announced plans to free gas prices for all users sometime after 2008. The latest plan suggests that the reforms may have been pushed back both by date and degree.

On 30 May, the Moscow investment bank Troika Dialog said in a daily briefing that Prime Minister Mikhail Kasyanov signed an order last week to shift gradually toward setting only the transport charges for gas. But it noted that there is now "no timetable" for freeing wholesale prices, while strategic users would still be exempt.

The strategic users would include "the public sector, the army, health-care institutions, schools, and universities," the Associated Press said, quoting Yusufov.

The public sector was not precisely defined, but the exempt group is said to account for 20 percent of the domestic gas market. Officials argued that it needs continued protection because it cannot afford world prices for gas. One implication is that the entire group could be spared from a 30 percent tariff boost that has been set for this year.

The EU has been pressing Russia for energy reforms as a condition of classifying it as a market economy. On 29 May, Interfax reported that European Commission President Romano Prodi called Russia's adoption of world energy prices "the main issue" in supporting market-economy status and membership in the World Trade Organization.

But the EU seems to have glossed over the exception for strategic users in promising at this week's summit to recognize Russia as a market economy by September or October.

From one standpoint, the EU's insistence on energy reform may have few precedents in its involvement in the economic policies of Russia, which is not an EU member country. But the EU has reason to pursue its case.

As a major consumer of Russian gas, it has a vital interest in assuring supplies. Its gas imports at high rates also subsidize low Russian domestic tariffs. And because cheap gas is a component of Russian products, it affects the country's status as a market economy and the EU's basis for taking antidumping actions against subsidized Russian goods. Putin said this week that EU antidumping measures cost Russia $250 million each year, RIA-Novosti reported.

But it is unclear whether the EU has accepted Russia's new energy plan or simply failed to take it into account. A progress report released this week as part of an "EU-Russia Energy Dialogue" makes no mention of Russia's two-tiered system for gas-market reform. Equally murky is how far the government wants the system to go.

One question is whether the "public sector" will include all state-owned enterprises, industries, and institutes, as well as partially privatized companies. If so, the continued access to cheap subsidized gas could create a powerful disincentive to further privatization, conservation, and reform.

Tariff hikes for other consumers would also be used to offset Gazprom losses from fueling the protected sector. The result would be a similar system to the one that the EU objects to now. Instead of using high-priced gas exports to support a domestic market, Gazprom would push both EU and Russian commercial consumers into the high-priced category to support the strategic users. If some of those users then export products, the prices would be effectively subsidized.

That outcome seems unlikely to have been the EU's intention this week when it agreed to accept Russia as a market economy. It may also do little to attract the private investment that Gazprom says it needs.