Danny Donovan
12/9/99
Since the fall of the Soviet Union, regions in the Russian Far East (RFE) have been suffering from a persistent energy crisis. Twenty years ago, electrical services provided by the Soviet government were aptly described as being reliable. In post-Soviet times electrical services have often been disrupted. In the harsh climate of the RFE, Russian citizens are unsure from one day to the next whether or not they will have substantial power to heat their homes.
Prior to the Collapse of the Soviet Union, the military-industrial complex was the primary pillar that supported the energy system in the Russian Far East. After the collapse, dramatic cuts in military spending have lead to a situation where the military industrial complex cannot pay its power bills, let alone support consumer and domestic needs. In the void left by central planning, market reform has not produced an efficient economy. One of the results is a lack of consumer demand for power. Current energy rates therefore remain high in comparison to western standards, and they are still below cost recovery level. Subsidies by the federal government are being used in a stop gap manner to pay back wages, manage debt, and in various other ways in an attempt to keep the entire energy system from completely falling apart. Adding to the problem is the lack of investment needed to upgrade outdated power plants, coal mines, oil refineries and wells, and various other components of the infrastructure that are needed to support the energy system in the RFE. This all leads to a vicious cycle of non-payment that is tearing the whole energy system apart. The situation is only worsened when one considers the problems that arise out of federal and regional politics. With all things taken into account, the "Real threat posed by the current energy crisis in the RFE is the extent to which the shortage of integrating factors such as money, power, and communication can promote a drifting away of the region from the European core towards a closer integration into Northeast Asian."1
To understand the nature of the problem that faces the RFE, first one must look at physical characteristics of the region. RFE comprises administrative units or subjects of the RF: Repulic of Sakha, Chukotka AO, Primorsky krai, Khabarovsky krai, Amur oblast’, Kamchatka oblast’, Magadan oblast’, and Sakhalin oblast’. The population of the RFE totals around 15 million with the population centers being fairly isolated from each other. With estimated reserves of more than 15 billion tons of coals, 9.6 billion tons of oil, and 14 trillion cubic meters of natural gas, the RFE is a resource abundant region. Unfortunately the most of the regions fuel resources are located in remote areas and their extraction poses substantial technical challenges.
In the Soviet times, the centrally planned Stalinist economy relied on heavy industry and manufacturing to be done in huge plants in order to take advantage of the economies of scale. Production of key items was often located in a handful of factories that produced for the whole country. From there, the products would be managed by the central economy and distributed to the consumers.
The energy and resource complex of the RFE was created and managed by the Soviet centrally planned economy. Resources were extracted, processed, transported and consumed according to the dictates of Moscow. In the RFE this was a fairly daunting task. Extraction and transportation of resources from remote areas to processing plants was technically challenging. Transportation of refined fuel to power stations, heavy industry, and other consumers of the goods often required the crossing of several regional borders.
The central economy was supporting the whole system of the Soviet Union that had the wealth of the entire nation to draw on and the interest of the military industrial complex to meet. The government distributed all technical support, transportation costs, price control, and subsidies in order to keep the system running smoothly and effectively.
When the Soviet Union collapsed, the support for the energy complex disappeared. The breakup of the Soviet Union dislocated the patter of regional specialization that had developed since Stalin. Extraction and transportation of resources across regional borders is no longer fully coordinated and controlled by Moscow. The methods and machinery that were developed under the Soviet system are antiquated and inefficient. Military spending in the RFE has dropped considerably. These problems provided the background for the market reforms that are now supposed to control the system.
The reforming of the energy market in the RFE was in theory to be similar to the generalized concept of ‘shock therapy.’ Under shock therapy, "...countries plagued by years of planning, state ownership, and bureaucracy have to be jerked into mainstream market reforms. This is to be achieved by the rapid liberalization of prices, removal of subsidies, expenditure cuts and severe reductions in money supply2." The introduction of shock therapy to the energy complex of the Russian Far East has created a vicious cycle of non-payment.
Prior to the collapse of the Soviet Union, the military industrial complex was the main pillar that the energy complex rested on. In the 1990s, spending cuts created a situation where the military became unable to pay their power bills. Liberalized energy prices are not in a competitive price range and demand for power has dropped. The inflated prices are still below cost recovery range. In an attempt to turn a profit energy producers offer disproportionate prices to different segments of the economy. Industry and commercial operations receive a higher price tag than household consumers do and in return are unable to pay their bill. Power companies are then unable to pay the primary producers or transporters of the resources needed to generate power. The system is immersed in a confusing web of debt that is slowly choking the RFE.
Adding to the situation’s complexity are the subsidies being provided by the federal government. In order to keep the energy complex from slipping into total chaos, the federal government has been using subsidies and soft credits in a stopgap measure. The federal money has paid back wages and helped to manage some of the debt incurred by the system. Little to none of the money has been used to improve the physical inefficiencies of the system. Also local and regional authorities embezzle a substantial percentage of the cash. Because the money that does not stay in the system does not come from the local economy, the outside funds push up regional inflation.
If one assumes that the shock therapy approach to market reform is the correct way of creating a viable economy, then one can see why the energy complex in the RFE is in trouble. Two key shock therapy criteria have not been met. Prices were not completely liberalized and subsidies were not removed from the system.
The democratic reforms that characterized the transition in European Russia did not fully take hold in the periphery regions. The old Soviet style bureaucracies have remained intact in much of the RFE. This has had negative effects on the working of the energy complex. First, privatization has been hampered by the remnants of the old order. Second, inter-regional politics have increased the costs of running the energy system. Third, political corruption has lead to the embezzlement of the much needed money to reform the system.
The Soviet economy created large bureaucracies in order to run the state-controlled industries. Market reform dictates that control over industries must be transferred from the hands of the government into the hands of private owners. In order for this to happen the bureaucracies must be eliminated and private ownership must be created. But, the great distance between the Federal government and regional authorities has caused problems. In essence, the federal government was unable to deconstruct the old bureaucracies. They were therefore left to carry out the process of privatization themselves. This creates a conflict of interest and the process was never fully implemented. Controlling interest in much of the RFE’s energy complex is still in the hands of the government officials that originally exercised control over them. Consequently many of the old inefficiencies that characterized the Soviet system are still in place.
Another problem that has arisen out of the decentralization process is inter-regional politics. As stated before, in the old Soviet system, the central government had the political power to transcend regional borders. Goods and resources freely moved across regional boundaries. Now, the increased independence of the regional governments under the federal system has allowed the local policy makers to enact among other things transport tariffs. In order to offset the debts that are being incurred by the inefficient energy complex, regional authorities attempt to pass the bill onto other regions by imposing high transport fees for resources that are being moved across borders. This not only complicates the cycle of non-payment but also creates tension among regional leaders at a time when cooperation is needed to solve the problems of the energy system.
Political corruption is the third, and possibly the most damaging, problem. In order to keep the whole energy complex from collapsing entirely, the federal government has been subsidizing it. Again the politics of distance plays a role. The inability of the federal government to exercise political control over the RFE has left the distribution of the subsidies under the hands of the local authorities. Weak law enforcement and the use "...of intermediaries for the sale of energy (opened) the door for the embezzlement of public funds and corruption...3" The basic nature of political corruption makes it difficult to say how big the problem actually is. It can be said though that the problem of corruption makes all possible investors, including the federal government, think twice before considering putting money into the energy complex.
There are two possible ultimate outcomes to the energy crisis in the Russian Far East.
If the Russian Federation does not find a solution to the degrading energy crisis and the system collapses, regional political instability is very likely to occur. The harsh weather conditions of the Russian Far East make power supply a near necessity to basic survival. Without it, the standard of living in the region will drop considerably creating widespread public discord. If this happens, the Russian Federation will have a difficult time in reasserting political control over the RFE. Even though the Russian government is in a process of decentralization, the majority of political power is still concentrated in Moscow, and spanning the miles will be difficult for the federal government.
The possible outcomes of the political instability are numerous. They range from political reconstruction, to regional independence, or to a closer economic association within the RFE, but with weaker control from Moscow. Whatever the path, none will be beneficial to the integrity of the Russian Federation. The only scenario that would be positive for the Federation is one in which the current political order takes the proper steps and exercises the necessary control over the crisis in order to get the energy complex running in an efficient and productive manner.
1 Bradshaw, Michael J., Peter Kirkow. The Energy Crisis in the Russian Far East: Origins and Possible Solutions. Europe-Asia STUDIES, Vol. 50, No.6, 1998, 1044.
2 Sakwa, Richard. Russian Politics and Society 2nd Edt. Routledge, New York: 1996. Pg 234.
3 Bradshaw, Michael J., Peter Kirkow. The Energy Crisis in the Russian Far East: Origins and Possible Solutions. Europe-Asia STUDIES, Vol. 50, No. 6, 1998, 1950.