…BUT WILL THE ENERGY SECTOR SLOW THE RECOVERY?

Perhaps the most important barriers to sustaining Russia’s industrial growth are to be found in the energy sector, which accounts for about a third of industrial output. The recovery in the electricity and fuels branches lags well behind the rest of industry: Fuels production only grew by 2 percent last year, while no growth was recorded in electricity production. This lag is in some respects desirable, as it suggests that Russian industry is becoming less energy-intensive. However, there are limits to which economies in energy usage can be achieved. (Alternatively, the longer the official data show output trends in the energy sector diverging sharply from trends in the rest of Russian industry, the less credible these data will become.)

In order to meet its budget targets, the federal government has stepped up fiscal pressures on Gazprom, Russia’s largest single taxpayer. This helped Gazprom collect 72 percent of its total payments in cash in January, up from 41 percent at the end of November. Doing this meant putting the squeeze on the UES electricity monopoly, which as Gazprom’s largest customer accounts for 40 percent of Gazprom’s domestic sales. UES is also responsible for some 60 billion rubles of Gazprom’s 100 billion rubles (US$3.5 billion at current exchange rates) in overdue accounts receivable.) Because it received only 45 percent of its revenues in cash in January, UES does not have the liquidity required to meet Gazprom’s payments demands.

Gazprom in early April responded to UES’s nonpayments by informing UES that deliveries will run short of the electricity company’s orders by some 11 billion cubic meters (bcm) in 2000. This represents 8-10 percent of UES’s annual gas consumption. This shortfall is to rise to 37 bcm in 2001 and peak at 67 bcm in 2003. UES responded to the initial reductions in gas deliveries by cutting off electricity to some of Russia’s most delinquent regional power companies. Power cuts in April brought metro and train services to a halt in Saint Petersburg and Yekaterinburg. UES chief Anatoly Chubais has threatened to cut deliveries to the Nizhny Novgorod, Samara, Yaroslavl, Kostromo, Tver, Tula, Volgograd, Rostov, Chuvashia, Orenburg and Sverdlovsk regions by as much as 25 percent. Many industrial enterprises in these regions are facing the prospect of smaller gas deliveries from Gazprom as well.

In addition to squeezing their debtors, Gazprom and UES are boosting prices. The Federal Energy Commission (FEC) in November permitted Gazprom to raise gas tariffs by 15 percent. This was Gazprom’s first price increase since mid-1995. Gazprom got another 36 percent boost through the FEC in February, and requested a further 42 percent hike in gas tariffs in April. Although the FEC cut this rate request in half, the approved 21 percent increase for industrial users (effective May 1) could still have an important effect on Russian enterprises–37 percent of which were reporting losses at the end of January. UES plans to request permission to boost electricity tariffs by 50-55 percent this year. These developments are in some respects desirable, as they strike at the heart of the “virtual economy” under which Gazprom and UES subsidize continued loss-making production by industrial white elephants. UES is unlikely to raise the US$30-$75 billion in estimated investment needed to revitalize Russia’s electricity sector if it does not raise rates and cut service to delinquent users. The same goes for Gazprom, which has billions in dollar-denominated debts to service. Still, these higher prices, stiffer payment conditions, and delivery cutbacks could easily slow Russia’s industrial expansion later this year (Reuters, Moscow Times, Itar-Tass).

RUSSIA AGREES TO BEGIN REMOVAL OF TROOPS AND EQUIPMENT.