International Business : Unpaid Energy Bills Split Russia, Neighbors

ISSUE: Russia, the world’s largest energy exporter, is turning up the heat on countries that won’t pay their power bills.

Russia’s cash-strapped neighbors in the Baltics and the Commonwealth of Independent States (CIS) are the worst offenders: Ukraine owes Russia nearly $3.5 billion for energy, including $900 million for natural gas; Belarus owes $240 million and tiny Latvia owes $23 million for Russian natural gas.

In early March, Russia tightened the screws and cut gas supplies to Ukraine and Belarus by up to 65% as a warning to all its debtors to pay up. Russia argues that its whole energy sector risks paralysis if, due to delays in payment, it lacks the cash to buy needed equipment and pay workers.

BACKGROUND: When the Soviet Union split up in 1991, many of the successor states were left with few energy resources. They turned to the same place for oil and gas as they had in Soviet times--Mother Russia, rich with 10% of the world’s known oil reserves and nearly 40% of its natural gas.

At first, Russia continued to sell its neighbors the heavily subsidized petroleum that fueled their economies in Soviet days. But under prodding from Western monetary institutions, and to compensate for a slide in overall production that has worsened every year since 1987, Russia has raised its prices for oil and gas exports nearly to world market levels.

Accordingly, Commonwealth and Baltic nations are buying less Russian energy. Russian deliveries of oil to CIS nations dropped a hefty 47% in 1993 compared with 1992 levels, falling to 40.4 million tons, and gas sales slipped by 17% to 80 billion cubic meters.

Many government-owned factories in the former Soviet nations have been closed due to the energy crisis, and the shutdowns hinder these countries’ ability to pay for the oil and gas they buy from Russia. In Ukraine, for instance, where industrial production fell 30% last year, a senior official said the gas cutoff was like “a bomb exploding on Ukraine.”

Russia, too, is caught in a vicious circle. It says it cannot keep the pumps running unless customers pay their tabs.

“The total of non-payments has taken on such huge proportions that in the near future . . . it could completely paralyze economic activities on the part of energy sector enterprises,” the Russian energy ministry said.

OUTLOOK: Having flexed its muscles, Russia restored most of the flow of gas to Ukraine and Belarus in mid-March--but gave its neighbors until April 10 to pay up or face another shut-off. Ukraine dispatched a high-level delegation to Moscow for talks with Russian officials, which began last Friday and are still under way, in hopes of resolving the non-payments crisis. An earlier round of talks, held in March, failed to draw up a payment plan acceptable to both sides. Belarus and Moldova have also been negotiating with Gazprom, Russia’s gas-producing monopoly. To show their good faith, Ukraine and Belarus each made payments of about $100 million toward their outstanding energy tabs. But they are going to have to come up with more than that to satisfy the Russians in the long term.

Because they are short on cash, Ukraine and Belarus--like the other debtor nations--are likely to turn to two sources for financing. First, they will try to barter food, ships and industrial equipment for energy. “We can supply Russia with various manufactured goods,” Ukrainian President Leonid Kravchuk explained last month. “Russian enterprises cannot buy them because they themselves have no money.” The republic of Moldova has already agreed to send Gazprom $25 million dollars worth of fruit, vegetables and other agricultural products as part of its gas payment.

Second, the former Soviet states will continue to seek Western loans and credits. As a stopgap, international institutions and individual nations have given aid to these debtor nations to buy energy in the past.

STRATEGY: Countries buying Russian energy are looking for other, cheaper sources.

In the short run, some countries have turned to other former Soviet producers for help. Turkmenistan, Kazakhstan and Azerbaijan have energy to sell. But that’s only a partial solution because those producers also won’t tolerate late payments. In February, for instance, Turkmenistan cut off gas supplies to Ukraine for non-payment of a $700-million gas bill.

In the long run, Commonwealth and Baltic nations are trying to boost their own energy production. Some countries, such as Lithuania, are working to develop untapped sources of oil and gas. Others, such as Armenia and Ukraine, are turning to nuclear energy.

Ukraine, for instance, was to have closed the Chernobyl power plant--scene of the world’s worst nuclear accident in 1986--last year. But the Ukrainian parliament voted to keep the plant open, even though it is acknowledged to be dangerous, and to beef up other nuclear facilities.

Last Friday, the United States said Ukraine had agreed to speed up the closing of Chernobyl, that the shutdown could come as soon as this summer. But the Ukrainians say it may take them until 1998 to secure enough alternative energy resources to be able to do without power from Chernobyl.