The Commonwealth of Independent States' Troubled Energy Sectors

• Author: Paul Mathieu and Clinton R. Shiells
• Position: Senior Economists in the IMF's European II Department

The energy sector plays a large economic role in several of the countries of the former Soviet Union, given their vast reserves of oil and natural gas. But the sector is riddled with distortions and inefficiencies-especially because of discriminatory access to transit pipelines-that hinder both intraregional and external trade and keep the region from realizing its economic potential.

Since the breakup of the Soviet Union, the story of the oil, gas, and electricity sectors in the Commonwealth of Independent States (CIS)-the economic alliance of 12 of the former Soviet republics (Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, the Kyrgyz Republic, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan)-has been one of missed opportunities. Trade outside the CIS and the Baltic countries, although growing-in 1999, about 50 percent of the oil produced in the region was exported to countries outside the CIS and the Baltics, up from only 22 percent in 1992-is less than it could be if distortions in key parts of the sector were addressed.

With the creation of national borders, five countries emerged as significant net energy exporters (see Box 1). The net importers, which had been accustomed to very low energy prices, suffered massive terms of trade shocks, being forced to pay high prices to monopoly suppliers, while net exporters found that pipeline access to regional and European markets fell largely under the control of neighboring countries. National governments took advantage of monopolistic positions to extract rents by limiting pipeline access. At the same time, lack of access to Western markets enabled many net exporters to avoid the kind of market discipline that comes from competition in world markets. Isolation from world energy markets allowed barter and other forms of noncash payment to flourish. Arrears on energy payments-sometimes used as a source of budgetary financing-rose sharply for the net importers, contributing to the rapid growth of external debt. Failure to honor contracts became commonplace, and cross-border disputes concerning energy trade disrupted trade flows.

Box 1 Which CIS countries are significant net energy exporters?

Russia is the largest producer and exporter of both oil and natural gas in the CIS. It accounts for about 80 percent of the CIS's crude oil production and a similar share of regional net exports; the bulk (about 85 percent) of its crude oil exports go to countries outside the CIS. Natural gas from Russia accounts for about 25 percent of total natural gas exports to Central and Western Europe. Kazakhstan, which is rapidly emerging as a major oil producer, is the second largest oil producer in the region; most of its exports also go to non-CIS countries. Azerbaijan is a net oil exporter as well, with its exports transiting Georgia and Russia to world markets. Turkmenistan and Uzbekistan are large producers and exporters of natural gas within the CIS; they are unable to export to Central and Western Europe because of restrictions on their access to Russian transit pipelines.

As a result of delays in much-needed reforms, vested interests have become entrenched and investment decisions distorted. Low domestic prices have encouraged the inefficient use of energy by households and industries. By international standards, energy-use intensity levels in the CIS remain extremely high, not only in the region's net energy...