Payment Arrears in the Gas and Electric Power Sectors of the Russian Federation and Ukraine

Payments arrears1 present a serious problem in the Baltics, the Russian Federation, and other countries of the former Soviet Union (BRO). The disruption to interstate trade and financial flows following the dissolution of the Soviet Union, sizable relative price changes in the aftermath of price liberalization, inadequate policy responses to the emerging large macroeconomic imbalances, and the absence of an institutional and legislative framework appropriate for a market economy were...
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Payments arrears1 present a serious problem in the Baltics, the Russian Federation, and other countries of the former Soviet Union (BRO). The disruption to interstate trade and financial flows following the dissolution of the Soviet Union, sizable relative price changes in the aftermath of price liberalization, inadequate policy responses to the emerging large macroeconomic imbalances, and the absence of an institutional and legislative framework appropriate for a market economy were the key factors contributing to this problem.2 Given the size of the energy price shock, enterprises engaged in energy-intensive production were generally the hardest hit, accumulating large payments arrears to energy suppliers and triggering a ripple effect by weakening the latter's ability to pay. Governments often aggravated the arrears problem by failing to honor their own energy bills and condoning nonpayments by designated users of energy, who were not held sufficiently accountable for delinquent payments. The widespread accumulation of payments arrears, in turn, disrupted tax payments and weakened government finances, with adverse macroeconomic consequences.