Power to the people; As Electric Yerevan showed, governments throughout Central and Eastern Europe and Eurasia will face the risk of social and political unrest when they move to compel their citizens to pay market rates for electricity.

Electrical Yard file photo

(Business New Europe – bne.eu – Ben Aris in Moscow and Nick Allen in Berlin – July 27, 2015)

The Electric Yerevan protests in Armenia burned brightly before police finally quashed them in early July. But the issue of electricity tariffs that sparked the protests will not go away: nearly half the countries in Emerging Europe also face a similarly grave dilemma over whether to give more respect to market costs or living costs. Armenia’s street clashes with police will certainly not be the last in the region.

The cost of lighting and heating homes is a fundamental issue because few countries in the region have managed to bring the costs up to the market prices that prevail in the rest of Europe. At best the price of a kilowatt hour (kWh) is half that of the European Union, with the difference met by some kind of costly state subsidy.

In Armenia’s case, because of a series of elections over the last two years, the government kept putting off raising tariffs in line with rising fuel costs. In Ukraine the situation was even worse, as a succession of governments, desperate to avoid the political pain of charging an already poor population more for something that was free in Soviet times, failed to increase tariffs significantly over two decades.

The enormous gap between what the Ukrainian government had to pay Russia for gas to run the power stations and what it charged households and companies that consumed the power is one of the root causes of Ukraine’s current budgetary problems. No wonder that one of the International Monetary Fund (IMF) prerequisites for its rescue plan was a tripling of prices of household power tariffs.

A bne IntelliNews survey has found that about a dozen countries are in a similar bind and in four of them the situation is as bad, if not worse, than in Ukraine. Prices will need to be hiked across the region.

Bringing prices closer to market levels, however, risks political unrest. In Yerevan, talk quickly turned to whether the electricity protests would become an “Armenian Maidan” and trigger the overthrow of the government, just as in Ukraine’s 2014 revolution. But the protesters quickly disavowed the parallel, stressing that their protest was just about halting the planned hike in power tariffs by 16.7%.

Yet even the pragmatic demonstrations in Yerevan have radicalised the population, underscoring how decisive an issue electricity bills can be. In the first clashes in June, police trucks carted away 237 demonstrators. But when even more took to the streets in response, the government backed off, afraid of sparking worse unrest. “The more you water us, the more we grow,” the crowd in the former Soviet republic’s capital chanted as its numbers doubled after the water cannons were sent in.

Nevertheless, from Armenia to Albania, Kosovo to Ukraine and Moldova, governments are having to raise energy prices to realistic levels because of budgetary pressures as economies continue to struggle following the 2008 crisis. “There is no other way except bringing tariffs to the market level,” Ukrainian Prime Minister Arseny Yatsenyuk said in June, under the additional pressure of Russia’s Gazprom axing the discounted natural gas rates Ukraine enjoyed for the past two decades. “Ukraine has to become a completely energy independent country within 10 years,” Yatsenyuk added.

Cushioning the blow

An important factor in calculating both the risk of economic distress and the likelihood of protests is just how much power costs in proportion to the average income in a country.

With a per capita GDP income of only €7,420 a year in purchasing power parity terms (according to World Bank 2014 figures), Armenia is one of the poorest countries in the former Soviet Union and so its population is particularly sensitive to the size of its electricity bills. Its 3mn people are already struggling and simply cannot afford to pay more.

“We won’t give up our demands, we will continue our fight,” protest leader Arthur Harutyunyan told the crowds on July 6 before the police finally moved in and pulled the plug on Electric Yerevan.

Aware that he had already pushed his luck too far, Armenian President Serzh Sargsyan caved after a week and announced that the rate increase, originally due to enter into force on August 1, would be postponed while an audit commission examined the need for the hike. “I am certain that voiding the electricity rate hike would be extremely dangerous. Thus, prior to reaching a conclusion [by an audit commission], the government will assume the full burden of the rate increase,” Sargsyan said, buying himself some more time.

The government also says it will cushion the blow with more subsidies. That placated the people for the meantime, but it doesn’t solve Armenia’s energy crisis; the government still cannot afford the power it needs to run the country.

Long reach of Russia

Every government in the CIS is subsidising power tariffs to keep the pressure off the population while they work on creating a capitalist market-oriented society. The problem is that energy subsidies are enormously expensive and none of the governments can really afford them.

In Armenia the rate hike had been requested by the Electric Networks of Armenia CJSC (ENA), a subsidiary of the Russian power company Inter RAO. ENA was no longer making a profit and asked for an AMD7 (€0.013) increase in the price of a kilowatt hour.

The lack of rainfall and problems with the Metsamor nuclear power station (which produces around 40% of the country’s energy needs) meant that ENA had to buy more thermal power and ended up losing AMD27bn (€51.7mn) in 2012-2014. A series of local elections in these years meant no-one in government was interested in increasing tariffs, even gradually. ENA losses mounted to hit AMD55.1bn by the end of 2014 and the group was close to collapse.

On June 27, President Sargsyan caved into economic necessity and announced drastic increases to power tariffs to make up some of the shortfall or risk blackouts in the winter.

This increase has now been frozen but – in a sign that Baghramyan Avenue may yet hum again this year – the president has said that if an audit confirmed the need for a rate hike, consumers would still have to pay it.

Kicking the can down the road

Power tariffs across the CIS are inexorably moving towards parity with typical European levels. For comparison, the average price for the 28 members of the European Union is almost 21 euro cents per kWh and for the richer core 17 members it is 22 cents.

Electricity for the consumer in Armenia, at 8 cents per kWh, is cheap but it is not the cheapest in the former Soviet bloc. Indeed, power across the entire CIS costs about half of what it does in the EU.

Unsurprisingly, the cheapest power in the region is to be found in those countries that also produce the fuel to make it. The cheapest power on offer is in gas-rich Turkmenistan, where a kWh costs a mere 0.6 cents, as compared to Germany where power costs just under 30 cents, the most expensive power rate in Europe.

Most Central European countries that joined the EU in 2003 have already gone through the adjustment process and have power prices over 10 cents per kWh. However, those countries that remained in the CIS have power tariffs well below that, and six of them – Turkmenistan, Tajikistan, Ukraine, Uzbekistan, Georgia and Kazakhstan – still have power costs below 5 cents per kWh. Given that all these countries will have to quadruple their power costs at some point to bring them into line with European prices, they are all highly vulnerable to civil unrest.

Taking 10 cents as the cutoff – half the EU levels and a little more than Armenia’s at €0.084 – then the number of countries exposed to the danger of power-hike induced unrest rises to 19 countries: this is more than half the countries in Emerging Europe, and includes some EU members such as Estonia and Bulgaria.

Bulgaria has already been through Armenia’s experience, when tempers boiled over in early 2013 as homes began receiving massively increased electricity bills. While officials said the rise should “only” have been 18-20%, social media were flooded with scans of electric bills that were two and even three times higher than the corresponding period of 2012.

Spontaneous protests took place across the country. In Sofia around 500 angry demonstrators gathered at the offices of Economy and Energy Minister Delyan Dobrev, who came out to try to explain why the bills had shot up. It didn’t sit well with the mob, and drew chants of “mafia” and “resignation”, and a barrage of snowballs.

In Russia – currently the least likely scene of civil unrest because of the popularity of President Vladimir Putin – people are nonetheless feeling the pain of utilities bills amid consumer price inflation now above 15%.

Russia now has 22mn of its population of 143mn living below the poverty line, the deputy PM responsible for social policy, Olga Golodets, told media on July 13. Private debt for housing and utilities services soared above RUB1 trillion ($20bn) in May, with about 20% of citizens now late on their utilities payments. Around 20% of these debts were for electricity, and 25% for gas. However, unlike Armenia, with a per capita income of $12,926, the population is still well able to absorb the increased costs, which still only represent a tiny fraction of household outgoings.

For now, the hardships are widely seen as the fault of the West and economic sanctions, rather than the fault of the national leadership. But as ever more people fall below the poverty line and providers keep pushing up electricity costs, that patriotic patience could also eventually wear thin.

Between a war and a hard price

Meanwhile, Ukraine is still right down the bottom of the utilities price list, with power tariffs of a mere 3.7 cents per kWh, slightly below Uzbekistan’s 4 cents per kWh. The cost of power is indicative of the size of the reforms a country faces, and Ukraine has a mountain to climb if it is to bring its economy in line with the rest of Europe.

A core demand of the IMF’s $17.5bn bail-out package for Ukraine is that the government increase domestic consumer power tariffs at least enough to cover the cost of Russian gas imports used to generate the power.

About half of Ukraine’s electricity is generated by nuclear power plants, with most of the rest being produced by thermal power plants that burn coal and gas. In September 2014, Ukraine began to import coal to fuel its thermal power plants after domestic production slumped because of fighting in the eastern Donbas region, where most of the country’s coal mines are located. Gas shortages, amid tensions with main supplier Russia, and the closure of 80% of the country’s mines have resulted in widespread energy shortages.

Following a 13.7% rise in electricity rates in 2014, tariffs in Ukraine increased again from April 1 by 19% for people who consume less than 100 kWh per month and by 50% for those who consume 100-600 kWh. (A family of four in Ukraine on average consumes around 250 kWh).

The government in Kyiv will have closely watched events unfold in Armenia and drawn its conclusions about how to avoid similar scenes.

Ukraine’s tariff hikes are being implemented with a number of variables, depending on consumption levels and other factors. UAH24.5bn ($1.1bn in a country with only about $9bn in hard currency) in funding was allocated for subsidies for some 15mn citizens who can least afford the bigger bills.

The government is also looking to win favour by cutting the bureaucracy needed to receive state assistance. “We have reduced the amount of documents needed, we have almost completely eliminated the red tape and simplified the process,” Prime Minister Arseny Yatsenyuk noted. “A person receives an application, fills in answers to 15 questions, sends it to the social service, avoids standing in line.”

Stressing the need to reduce wasteful energy consumption, Yatsenyuk cites the example of Poland, which has a GDP four times higher than Ukraine’s but consumes one fifth of the energy.

In late November, the Ukrenergo state power company also called for a modest reduction in power consumption because of the coal shortage. The company said that if all households switched off one 60-watt bulb, it would reduce electric power consumption by more than 1,000 MW, accounting for around 4% of the total load in Ukraine during evening hours.

More regional rumblings

Governments everywhere are trying to find that elusive balance between imposing tariff hikes that are large enough to cover rising costs, but not big enough to provoke protests. Kosovo, Moldova and Albania, along with Armenia, are the four countries in the region most at risk of unrest as they have both the lowest cost of power and the lowest per capita incomes.

In Kosovo last September, more than 30,000 people signed a petition opposing a 5.18% rise in consumer energy prices approved in August. The hike has since gone into effect, with civic society groups warning of street protests if the government fails to reverse the increase. On May 8, Kosovan Minister of Finance Avdullah Hoti managed to keep the lid on tensions by announcing that parliament would shortly receive a bill reducing VAT on electricity to 8%. Prime Minister Isa Mustafa also said there would be no new increase in energy prices this year.

In Moldova, another high-risk country, which imports around 80% of its electricity from abroad, electricity suppliers in March asked market regulator ANRE to hike end-user prices by 50-60%. However, ANRE deferred a decision and hinted that a foreign firm should be hired to evaluate the grounds for such a move.

Energy suppliers in Moldova have not incurred losses in recent years and pressure for upward price adjustments is not yet strong, while the current political turmoil in the country is likely to further delay any radical decisions. Here too, the poverty factor is crucial.

In May 2012, Moldova’s energy market regulator set the end-user residential electricity price at MDL162 per MWh, plus 20% VAT – yet the local currency has weakened by 26% against the euro since then, making this equivalent to just 7.8 euro cents. With poverty levels high, any price hike will have a significant impact on the bulk of the population.

In Albania, meanwhile, the World Bank has lent the government $150mn for power sector reforms. In December, the power regulator ERE raised the price of electricity for businesses and scrapped its lower rate for households in an attempt to reduce mounting debt. The reform process seems to be meeting some success: on July 13, the power provider OSHEE said it had received ALL34bn (€246mn) in payments for electricity in the first six months of 2015, up by 50% from a year earlier, after an effective anti-theft campaign.

Illuminating Armenian legacy

One notable legacy of Electric Yerevan is how the tiny republic of Armenia jumped into the world headlines, if only briefly, with an unexpected eruption of grassroots activism. And the stand-off with the government showed that heavy-handed tactics only brought more people onto the streets in defiance.

“The Armenian government thinks they solved the protestor problem with water cannons. Wrong. They baptised [a] new generation of activists,” Babken DerGrigorian, a researcher at the London School of Economics and the movement’s social media front man, posted on Facebook in the wake of the state’s initial brutal response.

Karena Avedissian, a Yerevan-based researcher whose PhD focused on social movements in the North Caucasus, argues that the utilities-driven events on Baghramyan Avenue marked “the beginning of the end” for the old politics of Armenia.

Others also say that even if it was only about electricity prices to start with, the ramifications of the protests go much further. “Yes, it is a game changer,” one of the Electric Yerevan leaders Vaghinak Shushanyan told bne IntelliNews. “It has shown that top-down decisions without an open public debate are no longer possible.”

“We are not satisfied with the government’s decision [to delay implementation of the price hike and grant subsidies], but it is a half step back – the authorities have understood they are there to serve the people, not the other way around,” the 24-year-old Shushanyan said.

Such examples will keep the utilities issue firmly in the spotlight for anxious presidents and prime ministers across the Eurasian land mass for years to come until something like pricing parity has been achieved.

But in countries sapped by years of mismanagement and corruption scandals, severe price hikes because of “market necessities” can only look like a further case of plundering the pockets of ordinary folk.

One of 20 tents pitched recently at the parliament in Kyiv by protesters bore a sign “Interim investigation commission against the corrupt government”. The Armenian protesters were far more direct, brandishing signs saying: “Stop robbing people!”