Russia's Winter Woes

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

Note: This report is available in its entirety in the Portable Document Format (PDF).

Breakdowns in district heating services in Russia during the truly frigid winters of 2001-2002 and again in 2002-2003 grabbed headlines around the world. Local municipal enterprises that provide the heat claim that they had insufficient resources to maintain distribution pipes and boilers adequately or that they did not have the money to purchase coal or gas to generate the heat. Others believe the problem rests primarily with the inefficiency of the enterprises, which could do much better with the funds they do receive.

In fact, at least five factors determine the quality and costs of providing this type of service:

1. the technical procedures followed by the utility in determining the funds required to provide services, and if necessary expand them;
2. the process at the municipality for reviewing the tariff request made by the utility, including the level at which tariffs are set (adequate or insufficient to do the job);
3. the process at the municipality for acting on the recommendation from the review process;
4. the extent to which payments due to the utility for providing services are actually made (by households, commercial clients, and budget organizations, i.e., local governments and their associated agencies); and
5. the efficiency with which the available resources are applied by the utility.

This article examines tariff setting in Russian municipalities at the end of 2002, with the emphasis on the second and third points listed above. This is not to suggest that there are not problems in the other areas; there are, and they are very substantial.¹

Generally, municipalities set tariffs for district heat services and for water and sewerage services. In the following, we review the formal legal base, cite its shortcomings, and then empirically examine the behavior of a sample of municipalities in setting these tariffs from 1997 to 2002.

We find that little progress has been made in establishing a rational system for setting tariffs, that decisionmaking is highly politicized, and that in times of extreme inflation, tariff increases lag even further behind inflation. To judge from a review of World Bank documents, these problems are common in the countries of the Commonwealth of Independent States but much less so in among Eastern European and Baltic countries.²

Note: This report is available in its entirety in the Portable Document Format (PDF).

Acknowledgments

Mr. Sivaev is director of the Center for Municipal Economy at the Institute for Urban Economics, Moscow. Mr. Andrianov is head of the Tariff Regulation Team, and Mr. Askerov is an expert in the same Center. Mr. Struyk is a senior fellow at the Urban Institute in Washington, D.C., and was a resident advisor in Russia on housing and communal service reform from 1992 through 1998. The authors wish to thank the administrations of the cities that cooperated with the project by providing us with essential data and explanations. They also thank Sarah Polen for comments on a draft. This work was supported by the U.S. Agency for International Development under Cooperative Agreement No. 118-A-00-01-00135 with the Institute for Urban Economics. The views expressed are those of the authors and not necessarily those of any of the institutions named.

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

Usage, posting and reprint of materials on the UI web site:

Most publications may be downloaded free of charge from the web site in PDF format. This information may be used and copies made for research, academic, policy or other non-commercial purposes. Proper attribution is required.

Copyright of the written materials contained within the Urban Institute website is owned or controlled by the Urban Institute. Posting UI research papers on other websites is permitted subject to prior approval from the Urban Institute—contact paffairs@urban.org.

If you are unable to access or print the PDF document please contact us or call the Publications Office at (202) 261-5687.