RUSSIA - The Energy Base

Russia, the largest country on earth, has vast reserves of oil, gas and coal. It has enough to meet its domestic requirements and to become one of the biggest exporters in the world. But the country's energy sector has fallen into a decline since the collapse of the Soviet Union, and it has yet to recover. The huge Russian oil, gas and utility companies are going through a phase of uncertainty about their own futures. In the meantime, President Boris Yeltsin keeps changing governments and each new cabinet revives a debate about whether these companies should be restructured, broken up, or privatised.

For years now, the Russian state has been undergoing a series of crises in virtually every segment of the energy sector from coal to nuclear power over non-payment of dues, inability to pay workers' salaries, problems with distribution, etc. Stop-gap measures are frequently introduced to deal with problems as they occur. But the challenge of building up a coherent system for the post-Soviet era remains only partially addressed, because of political and financial factors, as well as resistance from within the existing system.

The consequence of this situation is that production and consumption of primary energy sources - including oil, gas, coal, nuclear and hydro-power - in Russia have registered a drastic decline during the 11-year period from 1987 to 1997. Total primary energy production has fallen from 1.257.1 million tons of oil equivalent (mtoe) in 1987 to 936.3 mtoe in 1997 - a drop of 320.8 mtoe which amounts to more than the combined consumption of all the other former Soviet republics last year. Total Russian consumption of primary energy was in 1997 268.4 mtoe lower than the figure in 1987, a fall comparable to the combined consumption last year of France and Austria (see tables overleaf).

The situation could change for the better if the political climate becomes more stable and the economy improves. Russia could revive its energy base to become the biggest oil producer in the world in addition to its current position as the biggest exporter of natural gas. Russia has the resource base to achieve this, with more than 250 undeveloped fields. Oilfields in the far north of Russia or in the far eastern island of Sakhalin have potentials more than twice the entire reserves in the Western Hemisphere. One field at Bovanenko, in northern Siberia, contains 155 TCF of gas - roughly the same as the entire USA. Another field nearby, Karasavey, has 42 TCF, about 10 TCF more than Chevron's total gas holdings worldwide. Yet experts in Russian affairs are not optimistic about the prospects ahead (see this week's Oil Market Trends).

The overall economic situation is dire. Russia's basically dollar-indexed economy is in a deep financial crisis aggravated by the meltdown in East Asia. Foreign exchange reserves are depleting fast, and the burden of debt service

is becoming too heavy for the economy to bear. Investors harbour strong doubts about whether Moscow will be able to redeem about $60 billion in short-term treasury bills due by end-1998. On July 20, the IMF agreed to a $22.6 bn support package for Russia to stave off a rouble devaluation. But one key problem is on the revenue side with tax collections, and the government is not likely to be able to resolve this over the short term. Efficient tax collection was one of the key conditions behind the IMF support package. Observers agree that if the situation persists, even the successes achieved by the managers of Russia's economy would be undermined. These include the stability of the rouble, achieved in recent years through a realistic exchange rate policy. To soothe investor concerns, on Aug. 3, the Russian finance ministry said it had decided to freeze borrowings for the rest of the year to no more than $2 billion (see OMT & the economic base on following pages).