#34 - JRL 2006-276 - JRL Home
Moscow Times
December 6, 2006
World Bank Stresses Need for Investment
By Anatoly Medetsky
Staff Writer

Further economic growth will hinge on the country's ability to increase investment in gas and electricity production, the World Bank said Tuesday.

Surging domestic demand has put a strain on the stagnating energy sector, which is badly in need of large investment in existing and new gas fields, the bank said in its December 2006 Russian Economic Report.

"It has been known for a long while that the problem was coming, but it may be more acute because the demand is growing faster than expected," John Litwack, the bank's chief economist in Russia, said at a briefing on the report.

Growth could reach 7 percent this year, the World Bank said.

The World Bank's estimate chimed with one by the Economic Development and Trade Ministry, which said Tuesday that the economy would grow 6.8 percent this year, upgrading its previous forecast of 6.6 percent. The ministry left its 2007 outlook unchanged at 6 percent.

A government plan to raise domestic gas prices gradually will not help to defuse a gas supply crunch if independent producers do not have full access to Gazprom's pipelines and gas-processing facilities, Litwack said. The World Bank suggested earlier that Russia should create an independent gas-pipeline company, he said.

"Since Russia is far from that, we offered a second-best plan," he said after the briefing. Under the plan, the government "would dedicate, say, 16 percent of the pipeline capacity to independent gas producers and enforce that."

The World Bank hopes that the Cabinet will use its proposal to supplement the government plan to increase gas prices, Litwack said.

Approved by the Cabinet last week, the plan entails gas tariffs rising progressively for domestic industry before being freely traded starting in 2011. The prices are still expected to be about 40 percent lower than in Europe due to smaller transportation costs and the lack of export duties.

Russia needs to increase its workforce by 1 million per year by encouraging migration into the country, to compensate for a decline in its own working population, Litwack said. "That is inconsistent with the quotas that are being discussed now," he said. "What will happen is that the conditions for migration will become more difficult and ... that will slow economic growth and lead to ... higher labor costs."

Economic expansion remains mainly in sectors that do not have to compete with imports and that have benefited from a stronger ruble, the report said.

Inflows of foreign direct investment rose by an estimated 55 percent during the first three quarters of this year and reached $10.3 billion, the report said. The lion's share went to energy, transportation, real estate and services, it said.

The report commended the government for its stated intention to promote diversification, develop competitive industries outside the resource sectors and cultivate an innovation economy. But it warned that selective support for specific sectors and companies "can invite corruption and rent-seeking behavior as opposed to innovative activity or the creation of competitive industries."