Commonwealth:A group of countries with the same political or economic aimsNomenklatura: The Nomenklatura is a group of people who manage all areas of the activities in countries and also hold various key administrative positions in the bureaucracy, running all spheres of those countries’ activity: government, industry, agriculture, education, etc.Tariff: Tariff is a tax imposed on imported goods and services.
The tax is a percentage of the total cost of the product, including freight and insurance. It raises the price of the import. Transneft:Joint Stock Company Transneft is a Russian company which is the largest oil company in the world. JSC “Transneft” is working on a pipeline of 70 thousand kilometers. In addition to crude hydrocarbons from the Commonwealth of Independent States countries, it transports about 90% of the oil produced in Russia and 30% of the petroleum products. The company is headquartered in Moscow and led by Nikolay Tokarev.
General OverviewCOMMONWEALTH OF INDEPENDENT STATESCommonwealth of Independent States is a community of states which was established with the signing of the Declaration no. 142-N of the Soviet of the Republics of the Supreme Soviet of the USSR by the Russian Federation, Ukraine and Belarus in December, 1991.The dissolution of Soviet Union had significant implications for energy trade in the region. After the establishment of geographical frontiers five of the countries became net energy exporters while couple of others were highly dependent on other providers for energy. The net exporters discovered that neighboring countries took control of their pipeline access to regional and European markets. After this incident, the governments established an alliance in which they tried to take advantage of the extraction of rents through limiting access to transit pipelines. Meanwhile the lack of connection between Western and world market eliminated the necessity for net exporters to do trade in Western standards and provided them with an opportunity to create their own market. Net exporters, which were used to very low energy prices, had faced with enormous terms of trade shocks.
The debt of energy trade payments has risen dramatically, especially in exporting countries, and the difficulty they had while clearing the debt caused a massive external debt problem. Between importing and exporting countries, different payment methods like various forms of barter had surfaced. Cross-border energy trade has become an issue which occurred continuously and that is one of the main reasons which caused disunity in energy trade. There is a broad consensus within the international financial institutions (IFIs) on the nature of energy sector problems in the CIS countries and on appropriate reform strategies.
By international standards, energy intensity levels in the CIS remain extremely high, notably among the region’s net energy exporters, but also in some energy-deficit countries, such as Belarus and Ukraine. The slow progress towards the efficient usage of energy for both industrial and household, often reflects continued (mostly indirect) subsidization of domestic energy prices and the incomplete restructuring of major state enterprises.STATE AFFAIRSLack of competition resumed state involvement and inappropriate regulation of natural monopolies serve to restrict access to transit pipelines for oil and gas and thereby distort regional energy trade. This section outlines the extent of state involvement in the energy sector, the monopolistic and vertically integrated system of the oil and gas markets, the transit impediments associated with these market structures, and how these impediments distort and disrupt local energy trade, through discussion of chosen CIS countries.TRANSPORTATION PROBLEMS IN ENERGY TRADEThis subsection describes the disruptions and distortions in regional energy trade associated with discriminatory access to pipelines. Belarus, Russia, and Ukraine are at the center of regional transit activity and reforms to liberalize transit are key to greater regional trade and economic efficiency. Regional efforts to liberalize access to transit pipelines could help to achieve a cooperative solution that would yield larger long-run benefits than might be achievable solely based on national reform strategies, given the short-run incentives for noncooperative behavior. The importance of ensuring market-based transit of energy to help ensure the development of the region’s rich energy potential was recognized and codified in the Energy Charter Treaty of 1994.
Unfortunately, not all countries (including Russia) have ratified the treaty and policies have not always been consistent with the full implementation of the treaty’s provisions ENERGY EXPORTERSThe largest energy exporter in the region, Russia, depends heavily on Ukraine, and to a secondary extent on Belarus, as transit routes for its oil and gas exports to the rest of Europe. The major transit countries (Kazakhstan, Russia, and Ukraine) set discriminatory tariffs favouring domestic suppliers. Transit prices for both oil and gas differ widely across the region, reflecting efforts even by small countries with transit monopolies to extract rents. Moreover, published tariffs do not reflect the entire transit cost to exporters, such asTransneft’s lack of a quality bank and its imposition of significant “deemed losses” charges which bear no relation to actual transit costs.The other large producer of natural gas in the CIS, Turkmenistan, has been among the exporters most seriously affected by limited pipeline access and distorted fees. Theonly gas export route available to Turkmenistan following independence—the unified gas supply system (UGSS) of the former Soviet Union—did not allow it to reach markets outside the Baltic and CIS countries, but each country along this route was able to extract economic rents on its sales within the region.Azerbaijan and Kazakhstan have faced similar transit difficulties.
In the case of Azerbaijan, the country has two accessible oil export pipelines. The limited capacity of the pipeline through Georgia to the Black Sea is fully absorbed by the modest production of the Azerbaijan International Operating Company (AIOC). All other oil exports must go through the Transneft system to Novorossiysk on the Black Sea. The cost of transport through this pipeline is extensively higher (about $9 per ton) than via Georgia, both because of higher transit fees and because of a quality discount, as light Azeri oil is mixed with heavier Urals crude. Kazakhstan faces a similar condition. Its access to the Russian transit pipeline has been administratively limited and higher quality oil has been penalized by the absence of a quality bank. ENERGY IMPORTERSSeveral countries face monopoly suppliers and thus must pay relatively high prices.
The Kyrgyz Republic effectively can only purchase natural gas from Uzbekistan, while Moldova is dependent on the Soviet-era pipeline crossing its territory. At the same time, all Russian gas destined for central or western Europe must transit through either Belarus or Ukraine. As a result, some of these countries are able to use their monopoly power in the provision of transit services to obtain gas at a lower cost, although prices are not always transparent, being “bundled” with the transit fees..III. Historical Background AAAAA in which Supreme Soviet announced that the Soviet Union had ceased to exist as a state.
The origins of the dissolution of the Soviet Union can be traced back to the election of Mikhail Gorbachev as General Secretary of the Communist Party of the Soviet Union March 11, 1985. He took the office intending to revive USSR’s economy, to accomplish his goals he had made reforms; infamously the twin policies of Glasnost (openness) and Perestroika (restructuring) created profound changes in economic practice, internal affairs and international relations. The Glasnost, which accelerates the reversal of the reform process and the disintegration of the state reveals the fact that the theory of adverse reaction in history and sociological bases should be examined further among the astonishing views of those who support these periods. The rationale for the government party of the Soviet Union, which was tending towards innovations, has not gone beyond the idea of expanding political considerations, which are seen as a source of blockages in the economic and armed struggle, especially in the imperialist countries. Afterwards, it turned out that the Soviet’s disinclination to find viable solutions has caused problems for the working class and the lack of effort to improve their thoughts and lives has shown that the government never really took an action. Gorbachev tried to preserve the integrity of state by liberating economy as socialism in USSR ceased to function, on the contrary, he has led to the disintegration of the state.Broadly, the reforms that he made were mostly about redeeming the state mechanism from its unwieldiness. Giving autonomous authorizations to inefficient government agencies and businesses, them creating their own production plan, the focus on a profit-oriented production like in the capitalist system instead of shutting budget deficits, the use of resources on raising economic welfare, the usage of sources on increasement of economic welfare levels instead of arms race and thus signing non proliferation of arms treaties with the US are some of the main developments caused by the Perestroika Principle.
One of the main reasons on the failure of Perestroika was during Gorbachev’s six years in power, he introduced at least 10 programs for the “radical restructuring” of the Soviet Economy which were never implemented. Instead, economic reforms were limited to uncoordinated and vague measures. This increased the pressure on Gorbachev to grant autonomy for Republic’s within the Soviet Union. A failed coup by hard-line members of government who wanted to oust Gorbachev and reverse his forms.The 1991 Soviet coup d’etat attempt, was organized by the hard-line members of government officials, also known as Nomenklatura which is was a group of people within the Soviet Union and Eastern Bloc countries.
Although the coup lasted only two days, Gorbachev returned to the office, the incident damaged the stability of the Soviet Union and is believed to have contributed to both the abolishing of the CPSU and the dissolution of the USSR. With some having already declared their independence from the USSR, ten republics did so between August and December as it soon became obvious that USSR was falling apart on December 25. Gorbachev resigned as the president of Soviet Union and the Declaration no.
142-N of the Soviet of the Republics of the Supreme Soviet of the USSR was signed.With this treaty, Soviet Union was officially abolished and on December 21, 1991 former Soviet Republics have also signed this treaty with the exceptions of Estonia, Latvia, Lithuania, Georgia and Ukraine. The treaty includes the official declaration of Dissolution of the Soviet Union and creation of CIS.The declaration recognized former Soviet Republics’ sovereignty, even though five of the signatories namely Uzbekistan, Armenia, Azerbaijan, Kyrgyzstan and Moldova ratified it much later and some of the former Soviet Republics didn’t ratify the declaration at all. Both Turkmenistan and Ukraine withdrew their full membership, in 2005 and in 2014, respectively; Ukraine’s reason being the invasion of Crimea. POSSIBLE SOLUTIONSAccess to oil and gas transit pipelines should be allocated in a transparent and nondiscriminatory manner. International experience suggests that it may ultimately be necessary for the incumbent monopolist to divest itself of the pipeline as a means of enforcing genuine nondiscriminatory access, although this would need to be carefully sequenced with other reforms. All CIS countries should ratify the Energy Charter Treaty and implement measures sufficient to ensure that the treaty’s provisions regarding nondiscriminatory, free access to regional transit facilities are observed.
Expansion of the transport network driven by private investment would help alleviate capacity constraints, reduce transport costs, and enhance competition. Large investments will be required to expand transport capacity further, and foreign capital is likely to be an important source in this regard. Absent such investments, continuing significant transit difficulties will tend to lower thc attractiveness of investment in exploration and field development A stable and market friendly investment environment is clearly needed to attract the large sums required from foreign investors. Close policy coordination within the region will also be needed to ensure maximum efficiency in the provision of transport services.
Countries should refrain from introducing trade barriers in response to excess supply conditions in neighboring countries. Production subsidies should be eliminated and uneconomic energy production facilities should be closed. Improved access to transit pipelines will help alleviate excess supply and thereby ease trade tensions.Countries should take steps to move away from barter and other non-cash payments arrangements since these decrease transparency, reduce allocative efficiency, and promote corruption. The governments should take the lead by avoiding noncash transactions.
Where cash constraints are the reason for the barter deal, countries should seek to sign export and import contracts based on arm’s length, market prices simultaneously.To ensure the variety and the development competitive routes of energy supply, new transit routes must be developed. The Russian-Ukrainian and Russian-Belarusian disputes over gas demonstrate energy interdependence between the energy producer and transit countries. It is important to satisfy common interests in energy plans through multinational cooperation.Better regulation of firms with market power will improve energy sector performance, whether or not the firms are state-owned. Just as privatization is not a panacea far good corporate governance, continued state ownership is not a panacea for good government regulation of a monopoly,.Firms that remain in state hands could be subject to more rigorous and arm’s length trust management arrangements.
Examples could be the Ukrainian gas transit pipelines or the Russian government’s residual asset stake in Gazprom