forgiveness, have also absorbed part of Gazprom's burden. Further, between 1993 and 1995, Gazprom was able to recover an additional 0.5 percent of GDP per year as a result of tax privileges granted by the government on gas export sales. The electricity monopoly has negligible hard currency exports, and has never enjoyed tax privileges similar to Gazprom.<sup>29</sup> As a result, the only way it can offset implicit subsidies is by running arrears to the government and to its fuel suppliers, including importantly. Gazprom, which alone accounts for 30 percent of power utilities' payables. In spite of this, the sector was unable to pass on the burden of the implicit subsidy from arrears onto the government prior to 1997. In spite of large tax offsets run by the government for the electricity generation sector on an annual basis, power utilities had positive net receivables prior to 1997.

The costs do not end here. Woodruff (1998) argues that when Gazprom settles sales with NCS, it is in effect engaging in the same sort of discriminatory pricing any monopolist would, in this case, charging domestic customers less than foreigners; and further, given low marginal costs, this is justified on commercial and economic grounds. However, Gazprom's price discrimination is not without cost: (i) it has multiple domestic prices, and by charging unviable domestic firms lower prices than more efficient ones, the expansion of more efficient firms and economic growth get impeded;<sup>30</sup> and (ii) Gazprom makes up for charging lower prices by converting nonpayments into equity in targeted firms and industries, thereby (as noted earlier) creating monopolies in other branches of industry. In other words, there are significant negative externalities (in terms of foregone growth and additional monopolistic behavior) and fiscal costs associated with the subsidies transmitted via the energy monopolies.

Why do the electricity companies tolerate nonpayments? In addition to the inability to disconnect customers because of legal ambiguities in the civil code and political pressure (see World Bank (1999) and Pinto, Drebentsov and Morozov (2000)), the electricity companies' central role in many NCS schemes makes them vulnerable to influence by numerous interest groups, who profiteer on NCS intermediation. According to the Ministry of Interior, NCS with power utilities serves as a focal point for Mafia money laundering, and provides huge potential for corruption in the form of side payments to managers and bribes to public servants. Finally, NCS creates strong incentives for power utilities managers to get involved in profiteering and bribes.<sup>31</sup> Therefore, NCS and arrears represent a soft budget constraint that also enables various interest groups, including power utility managers, to enrich themselves in an atmosphere of tight liquidity constraints. This helps the perpetuate the system. World Bank (1999) reports instances where Energo managers refused cash payments because the resulting transparency ruled out side payments.

29 Interestingly, beginning last year UES has embarked on an active export promotion campaign, so far resulting in agreements to boost electricity sales to Germany, Japan and China. WMcKinsey Global Institute (1999) describes this as "unequal competition", and notes that it is endemic in the Russian economy.

31 The Bank energy sector study points out that barter intermediaries are often controlled by the managers of Energos, enabling them to skim off profits by inflating prices on the inputs side.