Managing energy resource wealth
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Energy has always played an important role in central and eastern Europe and the former Soviet Union. During the 1970s the availability of vast energy resources in the former Soviet Union allowed the communist bloc to continue its policy of heavy industrialisation with scant attention given to energy and resource efficiency. Consequently the centrally planned economies forfeited important technological gains and were faced with the double disadvantage of a distorted structure of production and outdated equipment. It is only now, as energy prices are gradually adjusted to international levels, that the countries of the region are beginning to be exposed to the kind of price pressure experienced by Western firms.
The extent to which the transition economies are adjusting to these price changes is the subject of this and the following chapter. From the outset, a crucial distinction needs to be made between the energy-rich economies of Russia and the Caspian basin, and the resource-poor economies in much of the rest of the region. For the former, the move towards world market prices in the international trade of energy resources represents a significant gain in their current terms of trade or in anticipated future wealth, which could be used to cushion adjustment costs at home. For the latter, pressures to seek out the cheapest and most reliable sources of energy have intensified– a process that has, among other things, led to a move from coal towards natural gas. This has a number of implications for energy producers and for the environment. Chapter 5 examines the policies designed to increase energy efficiency in transition and looks at the generation of secondary energy.
This chapter focuses on the energy-rich countries of the region and the challenges they face in developing and managing their energy wealth. The evidence on the performance of resource-rich economies around the world is sobering. On average, growth has been slower in resource-rich countries. Macroeconomic volatility has been higher and corruption has often been more prevalent.
How can transition countries take advantage of their energy wealth without falling victim to the "resource curse" evident in many resource-rich countries? This chapter explores the extent to which the availability of actual or potential income (or rents) from energy production has helped reforms in the energy-rich transition countries in the past, and the extent to which this income has been used to delay critical adjustments. It highlights the policy challenges arising from the need to develop energy resources efficiently and in an environmentally responsible manner.
In exploring the link between energy resource wealth and transition, this chapter broadly covers quite varied experiences across the group of energyrich countries. For example, Russia’s oil production is relatively mature, investment needs in exploration are not large over the short to medium term and current energy income is significant. In contrast, Azerbaijan and Kazakhstan have great energy potential but this lies in the future and is dependent on considerable investment being made. The political conditions in each of the Caspian economies (Azerbaijan, Kazakhstan, Turkmenistan andUzbekistan) vary and this variation has been reflected in different reform paths. The resulting policy challenges are diverse, but the parallels are striking nonetheless and lead to the following general conclusions:
Investment in energy resource development is hampered by continued state control over much of the sector and, in the case of Russia, weak governance structures and misguided privatisation, which created incentives for asset stripping instead of business development.
To attract new investment, governments need to insist on better corporate governance and create a stable and predictable investment environment. One solution, which seems to work effectively in the context of relatively weak institutional capacity, is a system of production sharing arrangements (PSAs), which insulate foreign investors to some extent from the risks of frequent discretionary policy changes.
A key constraint on effective sector development is market access. While the state has relinquished control over production in many instances, it still extends large influence through its control of the major transport routes. Creating a regulatory framework that provides reliable market access while encouraging the development of alternative transport options is therefore a key challenge for the future.
The "resource curse" can be avoided through careful resource management. In this respect, governments need to adopt a long-term planning strategy and be guided by concern for sustainable development. They also need to put in place institutional mechanisms to deal with the macroeconomic risks of resource wealth, such as resource price volatility and exchange rate appreciation.
The following section provides an overview of the size and significance of the region’s energy resource wealth and the impact resource rents have had on output and reform. It includes a review of the significance of coal and non-fossil fuels in primary energy production in the region, and outlines trends in demand for various primary energy sources. Section 4.2 addresses the major impediments to the development of, and increased investment in, the primary energy sector, focusing on the region’s significant oil and gas resources, which are of major global significance. Section 4.3 examines the issue of sustainable resource management and the policies required to avoid the "resource curse".
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