EUROPEAN ECONOMY Economic Papers 327| June 2008 The economic aspects of the energy sector in CIS countries CASE (Centre for Social and Economic Research) EUROPEAN COMMISSION Economic Papers are written by the Staff of the Directorate-General for Economic and Financial Affairs, or by experts working in association with them. The Papers are intended to increase awareness of the technical work being done by staff and to seek comments and suggestions for further analysis. The views expressed are the author’s alone and do not necessarily correspond to those of the European Commission. Comments and enquiries should be addressed to: European Commission Directorate-General for Economic and Financial Affairs Publications B-1049 Brussels Belgium E-mail: [email protected] This paper exists in English only and can be downloaded from the website http://ec.europa.eu/economy_finance/publications A great deal of additional information is available on the Internet. It can be accessed through the Europa server (http://europa.eu ) ISBN 978-92-79-08252-8 doi 10.2765/76267 © European Communities, 2008 The Economic Aspects of the Energy Sector in CIS Countries CASE – Center for Social and Economic Research Sienkiewicza 12, 00-010 Warsaw, Poland i Contents LIST OF ACRONYMS............................................................................................................... XI FOREWORD..................................................................................................................................1 EXECUTIVE SUMMARY............................................................................................................3 РЕЗЮМЕ......................................................................................................................................24 1. INTRODUCTION ....................................................................................................................37 2. LITERATURE SURVEY ........................................................................................................40 2.1 The macroeconomic role and importance of the energy sector............................................40 2.2 Macroeconomic challenges related to energy sector functioning.........................................41 2.2.1 Oil and gas and the CIS’s development prospects ........................................................41 2.2.2 Fiscal and monetary policy challenges..........................................................................42 2.3 CIS – EU energy relations....................................................................................................43 2.4 Energy policies in the CIS....................................................................................................46 3. ENERGY SECTOR AND ITS MACROECONOMIC IMPORTANCE IN CIS ...............54 3.1 Introduction ..........................................................................................................................54 3.2 The energy sector in CIS countries: differences and similarities .........................................54 3.3 Key statistics on energy resources........................................................................................55 3.3.1 Oil sector .......................................................................................................................56 3.3.2 Gas sector ......................................................................................................................56 3.3.3 Electricity production ....................................................................................................58 3.4 Key statistics on the role of energy sectors in CIS economies.............................................59 3.4.1 The share of the energy sector in GDP..........................................................................60 3.4.2 Energy in foreign trade..................................................................................................62 3.4.3 Contribution to fiscal revenues......................................................................................69 3.4.4 FDI in the CIS economies and the energy sector ..........................................................70 3.5 Other specific features related to the energy sector..............................................................73 3.5.1 Pricing of energy imports ..............................................................................................73 ii 3.5.2 Energy intensity and efficiency of economies...............................................................76 3.5.3 Other related issues........................................................................................................80 3.6 Conclusion............................................................................................................................83 4. KEY MACROECONOMIC ISSUES RELATED TO ENERGY SECTOR FUNCTIONING ...........................................................................................................................87 4.1 Introduction ..........................................................................................................................87 4.2 Resource curse or resource blessing? ...................................................................................87 4.2.1 Introduction ...................................................................................................................87 4.2.2 Resource curse evidence................................................................................................88 4.2.3 The mechanisms at play ................................................................................................89 4.2.4 Turning a resource curse into a blessing?......................................................................91 4.2.5 The CIS perspective ......................................................................................................93 4.3 Dutch Disease in the Former Soviet Union: Witch-Hunting?............................................100 4.3.1 Introduction .................................................................................................................100 4.3.2 Dutch Disease..............................................................................................................100 4.3.3 Empirical Tests for Dutch Disease ..............................................................................107 4.3.4 Natural Resources and Economic Growth...................................................................111 4.3.5 Concluding Remarks ...................................................................................................115 4.4 Fiscal challenges of energy resource windfall in CIS ........................................................117 4.4.1 Introduction .................................................................................................................117 4.4.2 Size of the energy resource budgetary windfall ..........................................................118 4.4.3 Sustainability of fiscal policies....................................................................................120 4.4.4 Volatility of fiscal policy.............................................................................................123 4.4.5 The institutional underpinnings of the fiscal management of oil windfalls ................125 4.4.6 The use of oil wealth ...................................................................................................128 4.4.7 The external dimension of oil-based asset management .............................................130 4.5.1 Introduction .................................................................................................................134 4.5.2 The major mechanisms by which the energy sector fulfils quasi-fiscal roles .............135 4.5.3 Evidence on the scale of energy-related QFAs in CIS countries.................................139 4.5.4 Conclusion...................................................................................................................152 4.6 Energy and monetary policy challenges.............................................................................155 4.6.1 Continuing inflationary pressures in CIS and its sources............................................155 4.6.2 Rapid increase in international reserves and its transmission into domestic money supply .......................................................................................................................156 iii 4.6.3 External price shocks...................................................................................................160 4.6.4 Exchange rate policies.................................................................................................162 4.6.5 Monetary policy regimes in CIS countries..................................................................163 4.7 Redistribution of oil revenues – the case of Central Asia ..................................................166 4.7.1 Studying the effects of an oil boom.............................................................................166 4.7.2 Methodology for studying redistribution of oil revenues............................................167 4.7.3 Results and conclusions...............................................................................................170 5.1 Introduction ........................................................................................................................172