OSW Studies

The Russian power industry shortly before reforms

This study is an overview of the current condition and principles on which the Russian power sector has been functioning so far. This analysis has been carried out against the background of the changes that have been taking place in the sector since the beginning of the 1990s. This text also contains a description of guidelines and progress made so far in implementing the reform of the Russian power industry, the draft of which was adopted by the government of the Russian Federation in summer 2001. However, the purpose of this study is not an economic analysis of the draft, but an attempt to present the political conditions and possible consequences of the transformations carried out in the Russian power sector. The final part attempts to evaluate the possibilities and threats related to the implementation of the reform in its present shape.

Key Points

1. The situation in the power sector is one of the major factors affecting the condition of the Russian state. The Russian power industry subsidises other branches of the economy as well as non-production sectors, and allows the continued existence of the energy-consuming Russian industry. The power sector is also a creditor of the most profitable export branches, which use their lobbying abilities in order to obtain preferential energy prices.

2. The Russian power market is strictly regulated at both federal and local levels. The state and the regional administrations fix not only the tariffs but also the scope and manner of energy distribution. Governors who fix local energy prices treat them as their own political instrument. Cheap energy ensures popularity and political support for the regional heads, particularly the support of the industrial plants who receive it. The populist policies conducted by regional leaders in this field have triggered many local power crises.

3. Energy prices in the USSR (and later in the Russian Federation) have not covered the cost of energy production and transmission for many years. Since the establishment of the power monopoly RAO UES of Russia in 1992, the prevailing forms of settlements for electrical energy were barter exchange and money surrogates. The share of cash in these operations was minimal. After Anatoly Chubais, the advocate of the monopoly reform, took over the concern's management, the consumption and production of electrical energy in Russia increased in 1999-2001 for the first time after a dozen or so years of decline, and barter exchange and money surrogates were almost totally eliminated from power settlements.

4. The long years during which the Russian power sector functioned on an almost cash-free basis, when the power market functioned very inefficiently, resulted in an ever deeper degradation of the infrastructure and in the sector's undercapacity, owing to its chronic indebtedness and lack of investment funds. Without fundamental reform to make the flow of investment possible, the Russian power industry would have problems to meet the demand of domestic recipients in the near future, and would become an impediment to economic growth.

5. The restructuring of the RAO UESR power monopoly and the reform of the Russian power industry is a crucial step in the state modernising programme planned by the Kremlin. The most serious hindrance to its implementation is the inefficiency of the natural-resource monopolies (RAO UES, Gazprom and the railways), resulting from the fact their economic role has been wrongly defined, and they are thus sponsors of an inefficient and anachronistic economy.

6. The project concerning the reform of the power sector, which was torpedoed by influential interest groups, is increasingly taking on the shape of a compromise. The huge resistance encountered whenever an attempt is made to restructure the power sector slows down the implementation of the reform. Nevertheless, owing mainly to the determination of RAO UES' management and the political importance of the monopoly's president Anatoly Chubais, the reform is making progress. There are many factors, however, which make a successful implementation of the reform highly unlikely, at least any implementation which is consistent with the proposed schedule.