The Russia Journal

Price controls in the fuel and energy sector will continue, Russian First Vice Premier Nikolai Aksyonenko announced in mid-November.

This means that the price of natural gas and electricity will not go up significantly in the next few months, and natural monopolies Gazprom and UES cannot expect to receive equitable payment for their products on the internal market.

Railway prices will also remain unchanged. Aksyonenko says that the government has up to now successfully frozen prices on the production of natural monopolies. Aside from a price rise of approximately 10 percent, which took place only a few weeks ago, consumers pay the same for gas as they did last October, while inflation over the period was 94 percent.

This means that energy in Russia is essentially free: The consumer in Russia pays 10 times less for gas than in Eastern Europe.

Aksyonenko has a point. The elections are looming, and it would be unwise to irritate the voter by putting up the cost of utilities. And with the presidential campaign coming up in 2000, it is essential to achieve the most "positive" economic results. We saw the same phenomenon in 1996, when the authorities trumpeted the start of economic growth.

With the unprecedented rise in world oil and gas prices, and domestic production starting to replace imports following the August 1998 crash, the economic expansion is much more tangible. According to various estimates, 1999 should see at worst no rise in GDP. The Organization for Economic Cooperation and Development (OECD) optimistically stated in Paris in mid-November that Russia's GDP would rise 2 percent this year. The Russian finance ministry estimates that industrial production in the Russian economy will rise 8 percent to 8.5 percent by the end of this year.

Cheap energy resources are the basis of economic growth. The Moscow Energy Institute estimates that if the internal price of gas were doubled (bearing in mind that the ruble is now a quarter of its value at August last year) it would result in GDP falling 3 percent to 5 percent. This is why natural gas until recently cost the same as three years ago. Cheap gas and non-payments for several years now are effectively crediting the Russian economy. After the ruble devaluation in August, the fixed prices of gas and electricity gave exporters a sharp increase in profits, particularly in the chemical and metallurgical industries.

But is the picture still as rosy if we look beyond next year's election campaign? "Free energy" has already been criticized by those who produce it, especially Gazprom. Gas does not come out of thin air. It has to be extracted, a process that costs hundreds of millions of dollars.

In a situation where external earnings come mainly from taxes, and the internal market is not paying real money, Russian gas production may well fall in the near future. The Gazprom fields in Tyumen were opened under the U.S.S.R. and have been heavily worked. Gazprom urgently needs to open new fields if it is to retain its annual output at 550-600 billion cubic meters a year.

The press mentions all too rarely the other negative aspect of keeping energy prices down in Russia. Yet it is just as important as maintaining high gas and oil production. Energy conservation in Russia is absolutely non-existent. Russia would save about 40 billion cubic meters of gas a year (more than $3 billion) if it used European equipment to transfer and consume the product, according to a recent estimate.

The central heating system for apartments in winter is even more irrational. Energy losses are 50 percent to 60 percent when hot water is piped to the user. The only country that can afford to live like this is one that has the world's largest gas reserves and uses them at minimal prices.