Russia must halt its vast power

Date: 19/12/02

By Peter Chapman

VLADIMIR Putin must halt vast subsidies on power used by Russian business if his country is to join the World Trade Organization (WTO), Trade Commissioner Pascal Lamy has warned.

Lamy said subsidised energy - worth up to 2.5% of the country's income - tilts the odds massively in favour of Russian industry when it exports to the rest of the world.

"It is undeniable that the cost of energy in Russia is artificially low," Lamy wrote in Russia and the WTO, a pamphlet published by the London-based Centre for Economic Reform. "Natural gas costs as little as one-sixth of the world market.

"Low energy prices and other indirect forms of support, such as barter trade, translate into an annual subsidy of around €5 billion. Since Russian producers' energy bills are kept down in this way, they can export goods at prices that are extremely low," he added.

Lamy said the EU had demanded that Moscow tackle the issue if it wants the Union to endorse its ambitious bid to join the Geneva-based WTO by the end of 2003.

But he insisted the EU was not singling out Russia for tough treatment on the energy issue. He said it had taken exactly the same stance with Saudi Arabia, which grants firms special low energy prices.

The European trade chief said the EU would tolerate other distortions to the Russian energy market, provided the subsidies to industry were toned down.

This could include subsidies for energy used in households, hospitals and schools. Russia could also keep low taxes on energy production or use, he added.

Maxim Medvedkov - Russia's chief negotiator at the WTO - totally rejected Lamy's claims.

Writing in the same publication, Medvedkov said bowing to EU demands would be disastrous for Russian business.

"Some of our trading partners claim that the gap between domestic Russian energy prices and world market prices bestows an "unfair" advantage on Russian producers. We disagree.

"There is no evidence that our energy pricing structure causes real and serious damage to firms in the EU or other WTO member states, which would be a precondition for it being defined as subsidies prohibited by the WTO.

"If Russia were to push up energy process to world market levels too quickly, the result would be economic devastation on a scale that would easily outweigh the economic benefits of WTO accession," warned Medvedkov.