COMING SOON: SHOCK THERAPY, PART II?

With relatively little public fanfare, the Russian government is moving to implement a set of far-reaching economic reform measures. If implemented as planned, these measures could move Russia much closer to the institutional framework possessed by the leading transition economies in Central Europe and the Baltics. But these measures also promise to sharply increase the prices ordinary Russians pay for basic services. And because they envision the significant liberalization of the financial system and land markets, these reforms could mean renewed bouts of financial instability, capital flight, and battles over the spoils of privatization.

Some of the most controversial of these measures hide behind the innocuous title of “communal services reform.” The government in July is slated to vet legislation that would begin to remove government subsidies for apartment rents, hot water, sewage and other public services by 2003. By 2010, hard-pressed Russian households–who, according to official statistical data, only earn about US$100 in monthly wages–would be covering 90 percent of these costs. Further price increases are called for in government programs to restructure key infrastructure monopolies as well. Economics Minister German Gref told the Russian press last month that electricity tariffs during the coming years would at least double, and higher tariffs for natural gas are envisioned as well. The basic outline of the rail-restructuring program approved by the government in April also envisions sharply higher rail charges for passengers.

The economic case for these increases is straightforward. The prices paid by households cover only a small fraction of the costs of providing housing, communal and transport services, electricity and gas. These low prices devastate the cash flow of the companies supplying these services, leaving them unable to maintain these assets or replace worn-out equipment. Anwar Shamuzafarov, head of the State Committee on Housing and main author of the communal services reform, told the press last week that 60 percent of Russia’s apartment blocs need major repairs. One-third of all water pipes and one-sixth of all sewage pipes urgently need to be replaced, while annual leakage in central heating networks waste the energy equivalent of 80 million tons of oil. Much of the Russian Far East and portions of Siberia went without adequate heat and electricity supplies last winter when the energy and communal services infrastructures buckled under the weight of decades of neglect and particularly severe frosts. Anatoly Chubais, CEO of the UES electricity monopoly, has claimed that US$50 million must be invested in the power sector over the next ten years in order to prevent future shortfalls (Bloomberg, May 22; Christian Science Monitor, June 20).

…REFORMS WOULD PUT RUSSIA’S RICKETY FINANCIAL SYSTEM IN THE SPOTLIGHT.