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 market; 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.
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 exporters but also in energy-importing countries, such as Belarus and Ukraine.