IEA Commends Russian Efforts on Energy Security, Calls for a Full Implementation of Reforms

(Moscow) — 6 March 2002

The dramatic turnaround in Russia's economic health over the past two years will be sustainable only if extensive planned reforms are implemented across the Russian economy and especially in its energy sector. The IEA's Russia Energy Survey 2002 presents a very different Russia from the one that appeared in the Agency's last in-depth review of the country in 1995. At the Survey's launching ceremony in Moscow today, Robert Priddle, the IEA Executive Director said: "Russia is to be commended for setting out ambitious goals for energy sector reform. Reform is critical if the country's energy sector is not to hamper robust economic growth". Mr Priddle agreed with the view expressed in the new Russian Energy strategy "that price reform and energy efficiency should be a high priority, in order to maintain energy security in a period of strong economic growth".

Energy Sector Reform and General Economic Reform
From 1995 to 2000, Russia took important steps forward in energy-sector reform, but many of the goals set in 1995 were not achieved, due largely to the poor performance of the overall economy. Mr. Priddle emphasised that "reforms are essential to enable Russia's energy sector to keep pace with domestic energy demand growth and also to seize available export opportunities". The IEA survey describes the issues affecting Russia's oil, gas, coal, nuclear and electricity sectors. Inadequate investment and maintenance in the past increase the challenge to the energy sector in meeting the needs of a fast-growing economy. The IEA's in-depth review of Russian energy policies reinforces the more general conclusions of the recently published OECD Economic Survey of the Russian Federation. The IEA Survey identifies actions necessary to ensure that Russia maximises the economic benefit from its rich endowment of energy resources. To raise the $550 to $700 billion it will need to invest in energy infrastructure by the year 2020, the study suggests, Russia must create a much more stable and competitive investment environment. It must implement energy price reforms, make dramatic improvements in corporate transparency and energy efficiency while ensuring proper safeguards against the adverse environmental effects of increased energy production and use.

Energy Security
While Mr Priddle commended the electricity-sector restructuring plan approved by the Russian government in July 2001, he added that " for its effective and successful implementation a stronger independent regulatory body will be needed at the federal and regional level." This would ensure a "level playing field" for competition in the electricity and heat industries by guaranteeing non-discriminatory access to the high- and low-voltage grids, by setting transparent tariffs based on full costs and providing clear licensing rules for new players in the markets. Critical to the plan's success and the viability of the restructured companies will be effective implementation of planned increases in electricity prices so that they cover all costs - and continued robust collection of payments.

The IEA Survey raises concerns about the new Energy Strategy's insistence on reducing the share of natural gas in electricity generation in order to reduce Russia's heavy dependence on natural gas. Mr. Priddle noted that "with an estimated one-third of the world's natural gas reserves, Russia cannot be said to be "short of gas". He also pointed to the possibility of importing gas on commercially attractive terms from Central Asian and Caspian countries through established pipeline networks. Established gas resources will be adequate for the next few decades, but investments in future supplies will need to be made many years ahead of anticipated requirements. The IEA is confident that "security of supply will not be a major problem unless there is a failure to reform the price and tax regime of the late 1990s." On the country's plans to increase coal- and nuclear-based electricity generation, Mr. Priddle questioned the economic competitiveness of these fuels vis-a-vis natural gas. He also pointed to the environmental concerns surrounding increased coal use. In terms of the outlook for increased nuclear generating capacity he stressed the need to increase "safety culture" in Russia as well as the power and resources of the Russian nuclear safety regulator. He questioned the ability of these two sectors to attract the necessary investments as well as the need for as much new nuclear or coal-based capacity as projected, since higher prices are likely to curb demand through better energy efficiency.

Energy Efficiency and Environment
The IEA fully supports the Strategy's emphasis on reforming the energy price structure as the key to stimulating rational and efficient energy use. This would have a positive impact on the environment as well. Although Russia's energy-related emissions declined in absolute terms over the 1990s, they did not fall as fast as GDP. With the current outlook for stronger economic growth, more environmental funding will become essential, if the country is to limit the environmental damage of heavier resource use. Mr. Priddle pointed to emissions trading and Joint Implementation under the Kyoto Protocol as possible ways to raise revenues and attract investment to improve energy efficiency.

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