The Problem of Subsidisation of the Industrial Sector through the Energy Sector: Lessons for Ukraine from the Russian and Romanian Case

Abstract

Subsidising households and industry through the energy sector has been, and still is, a widespread phenomenon in transition countries.97 The topic has recently gained centre-stage in the political debate, having been raised by the ED in the context of Russia’s WTO accession negotiations. Energy prices, and more broadly energy sector reform, have also been on the agenda of ED accession negotiations. Apart from the political dimension, subsidising industry through the energy sector has high economic efficiency costs, especially in countries that are net energy importers. It keeps non-viable enterprises alive that are — or at least at market prices for energy would be — loss making, thus creating negative net value-added for the economy. Moreover, as the example of Romania shows, the survival of non-viable enterprises can cause chains of arrears with large negative economic externalities. Both of this put additional burdens on profitable enterprises, and thus slow down economic development. In addition, when energy prices are unsustainably low, incentives are distorted to invest in overly energy intensive technologies, leading to sub-optimal investment decisions and wasteful energy over-consumption.