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Russian Oil Spill Leaves Stain on Economic Reform Efforts

By Amanda Bichsel. Amanda Bichsel manages Russian joint-venture accounts at DFI Internationala Washington consulting firm. / November 16, 1994



THE oil spill near the remote Russian town of Usinsk is one of the most serious environmental disasters of the decade.

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About 84 million gallons of black crude oil - eight times the volume of the Exxon Valdez spill - has already poured from a ruptured pipeline onto the Siberian tundra and is now ablaze.

But the most disturbing implications of the Usinsk disaster are not environmental. The flames devouring the delicate marshland around Usinsk are a sign that Russia's fragile experiment with economic reform is itself endangered.

Oil and gas were to be the fuel of reform. When Mikhail Gorbachev, then Russia's president, began a process of democratization in 1987, oil and gas were providing the Soviet Union with about 80 percent of its hard currency revenue. The Soviet leader hoped to export energy, one of the country's few competitive products. It would use the earnings to transform a command economy that was based on military production into a market economy based on political freedom. Reformers relied on the fact that Russia boasts two-fifths of the world's known natural gas and 6 percent of its petroleum. Analysts say new discoveries could easily double those reserves.

But Russia is wasting its chances. Instead of investing in new explorations, updating generation-old technologies, and replacing faulty equipment, Russian managers have chosen a policy of neglect. After peaking in 1987, gas production has declined, and oil production has plummeted more than 40 percent.

Russia's 1.25-million-mile pipeline network has become so decrepit that close to 20 percent of all Russian oil is leaked during storage or transport. These domestically produced pipelines do not begin to meet international safety or performance standards for wall thickness, insulation, or resistance to corrosion. By 1991, accidents and everyday leaks cost the country an incredible $8 billion annually, a figure that dwarfs the $1.6 billion the World Bank has lent the Russian oil industry over the past two years.

Last month, the ruble lost one-quarter of its value in a day, amid fears that the Central Bank was loaning more money than its dwindling hard currency reserves could support. The political fallout has been even worse. Reformist Finance Minister Sergei Dubinin was handed the role of scapegoat and was replaced by Vladimir Panskov, a former Soviet bureaucrat who once sat in jail charged with bribery. Deputy Prime Minister Aleksander Shokhin, another dedicated reformer, resigned in protest.

The great irony is that Russia's fear of being abused by foreigners has kept away those who could help most: American, Japanese, and European energy companies and equipment manufacturers. American private industry, in particular, would welcome the opportunity to provide the modern technology necessary to rehabilitate outdated plants and equipment. Industry analysts estimate that, taken together, foreign investors could invest $60 billion to $70 billion in the Russian oil industry alone.

US policymakers used the Clinton-Yeltsin summit in September to showcase a series of new initiatives. US agencies are now authorized to give $1 billion more to American energy companies for feasibility study grants, political risk insurance, and loan guarantees. But the summit did not address the root problems, and only a handful of companies have signed up for the new programs.

Their great concern is not so much Russia's chronically unstable political environment, but its lack of a legal and regulatory framework governing the exploration, leasing, and development of natural resources.

State Department officials hope now that the Russian parliament will remedy this situation when it examines the long-awaited ``Law on Oil and Gas'' at the end of this month. The draft law, which finally passed a first reading last June after undergoing several years of fierce debate, will no doubt face strong opposition in Russia's nationalist Duma. But the law is vital for attracting foreign investment to Russia's ailing energy sector. It lays down the ground rules that govern resource ownership, production sharing, and export licensing. The new law should be accompanied by less-punitive taxes that would allow investors to recover their costs from the initial revenue stream of projects. Without the legislation, Russia's energy sector will continue to disintegrate, hurting both the economy and the environment. The Opinion/Essay Page welcomes manuscripts. Authors of articles we accept will be notified by telephone. Authors of articles not accepted will be notified by postcard. Send manuscripts by mail to Opinions/Essays, One Norway Street, Boston, MA 02115, by fax to 617 -450-2317, or by Internet E-mail to OPED@RACHEL.CSPS.COM.