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. Last Updated: 07/27/2016

Export Control End Could Mean Havoc

The government has just under one month to stop a time bomb ticking away underneath it. On Jan. 1, unless something is done, the system of quotas and licenses on the export of crude oil is due to lapse.


Oil and oil products are a crucial part of the Russian economy. They already make up about 27 percent of Russian exports, and if the export restrictions are canceled, earnings could jump 50 percent in a few years.


Licenses and quotas were originally introduced on all of Russia's main exports in 1992 to cushion the impact of Yegor Gaidar's shock therapy. They were a transitional form of price control to protect consumers and inefficient industries, which cannot afford world prices.


The logic was to free domestic prices but control foreign trade with quotas and licenses. Over time, restrictions would be softened to bring world and domestic prices into line.


President Boris Yeltsin decided in May that this gradual approach had gone on long enough. He decreed quotas and licenses cancelled as of July 1. In most cases price differentials were already relatively slight, and consumers bore the pain as commodity prices rushed to world levels.


But not with oil. Yeltsin was forced to back down in a humiliating fashi July 1, the day his decree was to take effect. He delayed the end of licenses and quotas until year's end.


The oil lobby would like to see imports liberalized. They could then sell crude for export at $100 a ton and get paid immediately instead of selling to a Russian refinery that promises only $28 a ton and pays up six months later when the local mayor thinks it would help him politically.


However the oil lobby is also worried that a total liberalization of the oil trade could create havoc.


First, Russia's lack of oil export capacity creates a major technical bottleneck. The question will no longer be who has a license to export oil but who has access to the pipelines.


Russia this year will produce about 290 million tons of oil and export about 100 million. No one knows how much more can be pumped through the few export ports and pipelines that lead to world markets, but it would certainly not be a lot.


In the medium term, new pipelines and ports can be built. But by Jan. 1 the government must decide rules for who gets into them.


Otherwise, oil companies are worried that the bureaucrats who control the state pipeline monopoly will get very rich very quick. The companies that offer the biggest bribes will get access ; the rest will be left in the cold.


The other problem with canceling quotas is that the government relied on them for budget finance, allotting the biggest chunk of export quotas to itself. These "state needs" quotas earned perhaps $1.5 billion.


Oil companies also pay a $5-a-barrel export tax on crude oil. But a host of companies, especially those that have cooperated by voluntarily supplying oil for state-needs export, have won exemptions.


Ideally, when quotas and state-needs quotas disappear, the government wants to end all the exemptions. This should allow it to lower the rate of the hated $5 oil-export tax, by increasing the total amount of oil on which it is collected.


The government has had six months to consider these problems, but it has been paralyzed. A battle is going on between the oil lobby and free-market economists, who want to see quotas end, and the rest of the government, which prefers regulation and is afraid of consumer wrath as oil prices jump to world levels.


Some commentators blamed last month's mysterious oil shortage in Moscow on exporters taking oil away to be sold on the world market.


Reformers have been trying to downplay the risk of a rise in prices after the end of export restrictions. Perhaps, but Russia will still face a price shock in 1995 equal to the West's in 1974. The next month will decide how skillful it is in managing the process.





Geoff Winestock is a Moscow-based correspondent for the Journal of Commerce.