The Baltic Course  

Andrei Illarionov: “Russia may be facing economic blackout”

By Inna Rogatchi, exclusively for BC

Professor Andrei Illarionov, Russian Institute of Economic Analysis’ director is a civil servant rarely found in any country: he always has his own opinion and has consistently defended it for years. His opinion is not a decoration one brings out for the election campaign; it’s not a party membership badge or a product or tool of lobbyist actions. His point of view has been evolving and keeps evolving through years of hard work and by enormous effort of a person, who treats his country with full responsibility and believes that the only way one shows his respect to others is by not lying to them. Western experts think that Russian President is very lucky to have such a chief economic adviser. 

”Privatisation” of public administration  – the most dangerous precedent 

We discuss with Mr. Illarionov mostly one subject that had been

Photo: Rosbalt

already largely explored in his work last year, i.e. energy issues and energy reforms in Russia. “For a country like Russia with its geographic and climatic features and existing industrial infrastructure, energy industry is more than a branch of economy. It’s literally a blood-vascular system of the country, which is home to 147 million living human beings. And to play with it or, worse, to manipulate it for any purpose – whether financial, political or both – for gains to some small group of extremely selfish and arrogant people, is completely unacceptable in any self-respecting country, I should think. But it did happen in our country.

By now everybody knows and it was no secret a couple of years ago when the management of the Russian energy company RAO UES (Unified Energy Systems) was openly handing out thick envelopes with “season greetings” in the offices of the State Duma, moving from faction to faction in full sight, to get passed the energy reform plan clearly contradictory to interests of the country and its people…

Russia needs an energy reform badly but such reform should have been well thought-out and protected from risks. The given reform was pushed through as a result of the process of “privatisation” of the public administration, which, I must say, has gone too far. Energy problems aside, what else can be more dangerous for functioning of the state than such trend?” pointed out Mr. Illarionov.

There reforms and… reforms

“Russian energy system must represent, first of all, a reliable, elaborate system of protection and security. Russia absolutely, probably more than any other country, needs the kind of back-up system which would prevent situations like we all saw more than once in the last few years in California where the overloaded system simply broke down, creating enormous chaos. Our experts from RAO UES have built their energy reform system after the American model. But Russia is not California – what would become of people and industry in Siberia, the Far East, Kamchatka, the Urals, etc., if, God forbid, something like California energy crisis happens in this country? Did anyone think of that? Did anyone came up with a system for protection and security, the contingency plan to ensure functioning of the power supply system that can without exaggeration be called the life-support system?

No, there’s no such system planned under the energy reform a-la Mr. Chubais [RAO UES Chief Executive Officer] because that would call for keeping certain part of national energy infrastructure under the federal ownership and control, as this equipment could help to supply power in case of emergency whereas the key point and also the biggest flaw of the current reform is to separate the two, i.e. power generation from power transmission grids. By tearing apart the only energy system that Russia has ever known (contrary to America, Russia has no experience at all in separate operation of main energy system components) and failing to introduce an additional back-up system for emergencies, the authors of the reform have artificially created within a stable and mutually-protected power supply system a hole that may suck all of us inside.

The generating companies no longer care in the least what happens to their product after they had been paid for it; transmitting companies will show equal indifference to the situation with generating companies because their primary function will be to charge clients for their services. Apparently, co-ordination and uninterrupted service will remain in the past and be replaced by the energy reselling body – a system similar to the Scandinavian power pool (which Russia joined recently at the insistence of Chubais). The only party which benefits from such arrangement would be the energy reselling body itself which, as far as I know, has raised electric power prices in Scandinavia several times in last few years. Mind you, without any objective reason and solely through usurpation of the sales function. This is not a market; it is a well-organised rip-off system. In Russian circumstances, it would become stubbornly enforced wild robbery.

Why an aspect so obvious was left out of the general reform concept? Because to keep part of energy resources and infrastructure under federal ownership and partly under control of regional administration would “lessen the interest of potential Western investors”, i.e. a fully privatised facility can be sold off easier and more quickly. As the saying goes, everybody has his own reasons. Only why should the whole country, and that’s no exaggeration, be held hostage by Chubais, and the people’s representatives sitting on the previous State Duma gladly went along with this direct jeopardy. And a lot of state officials were willing to lend a hand, guided by the same “principle of the thick envelope” in different variations. Such “reforms for the chosen” may have horrifying consequences that will have to be dealt with by thousands of people in extremely hard situation, not the selected few, who had successfully privatised the main life-support system of the nation which even wasn’t theirs to sell”, said the presidential adviser.

Mr. Illarionov underlined that he doesn’t argue against the need for the energy system in Russia. “On the contrary, the reform is needed, because the system’s fixed assets have already run out of their resources or are about to do so. In fact, what matters is not the reform but the approach to it. Either it’s thoughtless, rash, sometimes outright mean, or it’s thoughtful and responsible”. It looks like Russia has problems with grasping suicidal nature of the energy reform designed by Chubais. Therefore Mr. Illarionov doesn’t cease talking about it lest someone would finally understand. Adventurous approach to economy threatens an economic “black-out”.

He points out a recently completed major economic project: “Have you heard about Bureiskaya Hydro Power Plant (HPP)? You must have because the RAO UES management was trumpeting about this “great victory of capitalism” so loudly. I’m telling you, this is one of the biggest economic adventures, which makes another failure – the BAM (Baikal-Amur Railway) built back in the Soviet times – look like a childish joke. Just imagine, few months ago fanfares were sounded on completion of “the project of the century” (Bureiskaya HPP had stood uncompleted since the mid-1980s). Now it turns out that, apart from the enormous amount of public money already spent on the completion of the construction, at least another 20 billion roubles will be needed to really put the power plant into operation. Where one can get this kind of money?

RAO UES immediately starts lobbying actively for an urgent special amendment to the already approved national budget to get these costs included as a separate item. It’s very convenient, as I see. The key point, however, is that a simple objective study shows that even without Bureiskaya or any other new hydro power plant the Far East power generation already shows a surplus that simply can’t be used because the actual and most serious problem in the Far East is the extreme shortage of transmitting capacities. How did RAO UES respond to this important point? “This is up to local governments. Let the regions build the grids themselves or, at worst, participate with money”, says the energy monopolist. Do you find this approach normal?

Local governments are offered to finance the construction of transmitting grids to make it easier for RAO UES to sell electric power across the border to South Korea, Japan, etc. Meanwhile regional leaders are simply crumbling und�r the RAO USE dictate and scurry from office to office in Moscow, begging to find some way out, “to think of something”. They do not dare to protest openly because they depend on the RAO UES for energy supply by all 100 percent and simply fear to risk being cut off of power – after all, the Far East is no California,” said Mr. Illarionov.

Russian President’s special economic adviser is seriously concerned over such adventurous approach to economic matters. He thinks it poses a real threat of negative and dangerous development of the economic situation in Russia. One can hardly suspect Illarionov of laying it on thick or being biased – he was the only one of the leading Russian economists, who gave adequate evaluation to the economic situation which resulted in the huge crash in August 1998 and did it long before the general panic set in. Moreover, at the time five years ago he did not just make a detached and self-contented statement of facts but kept proposing specific and appropriate measures to get out of the inevitable crisis.   

Today the outlook seems no less gloomy to leading Russian macro economist: “Remember, how me and you talked long before the August crisis that it was bound to happen and only either the blind or the devious would not see it? I give you my word, it doesn’t give me any pleasure to predict bad economic news but I must speak out what I think. And this is what I think after I have scrutinised the energy reform they are forcing on us, and talked to a number of people in different regions of the country, and as I now watch the reform taking its ugly shape and compare it all with energy emergencies (black-outs) which happen around the world all the time. The whole Russian economy in general may be facing a macro economic black-out, if this reform is implemented in its current form. Trust me, I would like very, very much to be wrong this time”.

(c) Rogatchi Productions & Communications Ltd., 2003


The 2003 results by Andrei Illarionov:

Result of the Year: 6.5% GDP growth

Idea of the Year: To double national GDP by 2010

Anti-idea of the Year: Redistribution of the rent on natural resources

The year’s decision: Stability foundation’s creation

Year’s anti-event: Introduction of meat product quotas

Event of the Year: Russia gets investment rating

Anti-event of the Year: The YUKOS affair

Law of the Year: “On Foreign Exchange Regulation and Control”

Surprise of the Year: Lack of problems in overcoming foreign debts’ peak payments 

Mystery of the Year: The central Bank efforts to raise the rouble rate

Year’s swindle: Construction of Bureiskaya hydro power station

Global Economy Event of the Year: The Chinese economic miracle