| The writer is a senior fellow
at the Brookings Institution and co-author with Clifford Gaddy of the
forthcoming The Siberian Curse: How Communist Planners Left Russia Out
in the Cold.
At an otherwise unremarkable meeting last week between Vladimir Putin,
Gerhard Schroder, Germany's chancellor, and Russian and German businessmen
in the Urals region, Mr Putin made a remarkable admission. In reference
to
the European Union's demand that Russia should raise its low domestic
gas
and electricity prices to world levels if it wants to join the World Trade
Organisation, the Russian president retorted: "That is impossible.
We would
cause the whole Russian economy to collapse."
Most observers shrugged this off as another example of defensive Russian
overstatement. But Mr Putin is absolutely right. It would be impossible
for
Russia to allow free-market domestic energy prices. Its economy is almost
entirely dependent on the provision of low-cost oil, gas and electricity.
It is equally dependent on budget revenues generated by energy sales abroad
at high world prices. Russia is in fact trapped by the imperatives of
a
two-tier energy pricing system.
Energy is the big issue in Russia's domestic and foreign policy. Oil
and
gas account for nearly a quarter of Russian gross domestic product, about
half its export earnings, and about a third of government tax revenues.
Every $1 increase in the world market price of a barrel of petroleum
translates into as much as $1.5bn of yearly federal budget revenues. Aside
from nuclear weapons, oil and gas are Russia's greatest strategic assets.
It has the world's third largest oil reserves, while in natural gas it
is
unsurpassed.
But, as Mr Putin is acutely aware, there are many conflicting demands
on
energy in Russia. Energy must fuel the country's economic development,
increase its influence overseas and satisfy Russian companies' aspirations
to compete with the world's oil majors. Most important, Russia's resources
must maintain cities and industries in some of the coldest places on the
planet. Bluntly speaking, it is cheap oil, gas and electricity that keep
people alive through the Russian winter.
Today, people and factories in Russia still languish in the places where
communist planners put them - not where common sense or market forces
would
have attracted them. From the 1930s to the 1980s, the Soviet Union defied
nature and the market to launch huge industrial and urbanisation projects
in Siberia. The costs are now apparent. The mass settlement of this vast,
resource-rich but inhospitably cold territory means that almost 40m people
live and work in cities where the average January temperatures range from
minus 15C to minus 45C. Of the world's coldest cities with more than 1m
people, the first nine are in Russia.
In other northern countries, people have moved out of the coldest regions
for warmer climes over the past decade, but Russians have been frozen
in
place. Migration to European Russia, to warmer areas where there is most
potential for economic growth, is constrained by restrictions on settlement
in Moscow, and by the absence of new jobs and housing elsewhere.
Siberia is a burden on the Russian economy. Costs of living are four
times
higher than elsewhere in Russia; costs of industrial production are higher
still. Residents of Siberian cities earn less than a twelfth of the wages
of counterparts in Moscow. Local industries (with the exception of oil
and
gas) teeter on the verge of bankruptcy. The majority of people and
industries cannot afford their utility bills. Even with low domestic
prices, the Russian government must pay for winter fuel deliveries for
the
coldest regions, at an annual cost of about $700m.
So Mr Putin is right. Deregulating domestic energy prices and raising
the
cost of utilities would prove catastrophic. In Siberia, heat is literally
a
life-or-death issue. No Russian government could let utility companies
punish millions of non-payers by turning off the heat. As it is, most
municipalities and many industries fall short on utility payments.
This state of affairs is not sustainable. As Mr Putin also noted last
week,
sooner or later Russia will have to contemplate switching its domestic
market to international energy prices. The state cannot afford to subsidise
Siberia. The dilemma is how to downsize Siberia's cities and industries
and
move people and economic activity back in from the cold. This will be
a far
greater challenge for Russia than any other structural reform of the past
decade.
See also:
Energy Sector
Reform
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