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Sergey Kostyushev
Analyst,
Centre for Strategic Research "North-West"

The modern practice of water usage is based on the «unfair» cost of fresh water — in other words, water is an undervalued resource. Without doubt, the perception of this raw material as local, almost inexhaustible and easily accessible ¹ (in comparison with, say, fossil fuels) is gradually changing with the introduction of more or less effective legislation on nature preservation and the gradual development of water-saving technologies. However, these positive processes are lagging behind the growth of the world’s problems in the accessibility of good-quality water. The lack of water is more and more frequently becoming a «bottleneck» in the economic development of many countries and territories.

In areas where water shortage is critical — in China and India, for example, its use in agriculture is actively subsidized by the state, since it largely dictates the security of the food supply in a country with a huge population. In European countries with a developed water sector — Austria and Germany, for instance, water for irrigation — on the contrary, by virtue of its accessibility — is also provided with minimal cost to manufacturers. The question of a «fair» price for water does not arise.

Increasing the use of water, principally at the expense of the involvement in economic turnover of resources that have not yet been tapped, makes one think of their exhaustibility and «limits of growth». The prospect of a global water shortage is looming. The solution to this problem makes the question of the «revaluation» of this raw material very pertinent, and also the establishment of a water market or markets — macroregional and global — as a mechanism to regulate the consumption of a limited resource. The market cannot solve ecological problems, but can establish new relationships between consumers.

The practical actualization of water resources as one of the factors of worldwide development will be reinforced under the influence of the following conditions:

• The increasing lack of fresh water resources and the unevenness of their distribution among countries and regions;
• The growth of the economic value of water, the development of a global water resources market, the development of technologies for the transportation and treatment of water.

Accordingly, various scenarios for realising the potential of water resources will be implemented. The alternatives will be linked both to the expansion of the water resource base and a change in the role of water as a factor in production and the cost of assets, and to the factor of the attractiveness of territories to investors and the sphere of technological development.

Around a quarter of the world’s surface and underground fresh water is concentrated in Russia, but the population of Russia is only 2% of the world’s population. In addition, the geographical distribution of water in our country does not coincide with the distribution of the population, which has an influence on the means for realizing water resources. The actualization of water resources in Russia as a factor in the development of individual regions and groups of regions is based on the increasing shortage of water in neighbouring Asian countries, and the low standard of water supply and drainage.

Diagram 1. Distribution of fresh water resources in world countries. Dated 2000. (See full size)

Agriculture

Agriculture, particularly irrigation farming, is the largest consumer of the world’s water resources. By 2030 the world will need 55% more food than it does today, which will lead to an increase in irrigation. Because of the growth in population, which is exceeding the increase in arable land, the area of ploughed field per head of population is decreasing. The resource of undeveloped arable land remains very insignificant, though Russia does have such resources. In combination with sufficient water resources (albeit with significant interregional gaps), this gives our country the possibility to realize the potential of grain production and will guarantee it a niche on the world food market. The priority regions from this point of view are the European part of Russia, southern regions of Siberia and the Far East.

For this potential to be realized, the problem of the uneven distribution of water will need to be addressed. A major federal project aimed at resolving this problem is the construction of the Southern Transregional Water System (STWS), whose 1400 km network of pipes encompasses the south of the Volgograd Region, the west of the Astrakhan Region, the northeast part of the Stavropol Region, and the Kalmyk Republic. The STWS, which is due to be ready in 2013, will provide valuable experience in the design and construction of large infrastructures for water transportation. It will demonstrate the economic and social effectiveness of such projects, and also the consequences for the environment.

Hydro-Electric Power

The output of the world’s hydro-electric power stations shows a tendency for growth in developing countries — in developed countries the potential of such energy has, to a large extent, been exhausted. Russia has the world’s second largest hydro-electric potential (852 billion kilowatts per hour, after China with 1,750 billion kwph). This accounts for 12% of the world’s hydro-electric potential ², and the level of its development in Russia is not high (around 20%). Our untapped hydro-electric power resource amounts to 200 billion kilowatts, equivalent to the burning of over 60 billion cubic metres of gas annually.

The investment programme of the «HydroOGK» company, which has the Russian monopoly on hydro-electric power, envisages the building of a number of hydro-electric power stations of varying capacity in various regions of Russia before 2010. About 805 of Russia’s hydro-electricity potential is concentrated in Siberia. The potential in the central part of the country is not great and is limited to the construction of hydro-accumulative stations; there are specific resources for the possible use of hydro-electric power in the Northern Caucasus (small and medium-sized power stations).

The development of hydro-electric power in Siberia and the Far East is dictated by the potential demand for energy that may be created in the regions or abroad. There is talk of exporting electric power to China, which is the largest potential consumer. The realization of the hydro-electric potential of water resources in Siberia will provide the energy infrastructures essential for the creation of regional «points of growth» in the form of clusters of power-consuming industries, as well as energy for export.

Residential Water Supply

Around 80% of the world’s communal water services are provided by the public sector. It is only in France, Britain and the Czech Republic that the water sector is largely controlled by private companies. The world’s private water sector is dominated by two French companies, «Suez» and «Veolia», which handle around 70% of private water contracts. There are also several European companies with small shares in the market. The leading magazine in the water market, «Global Water Intelligence», estimates the annual volume of the global water market to be worth from $425 billion to $700 billion.

In addition, the magazine forecasts that the Eastern European market, and the Russian market in particular, will not grow substantially in the medium term. Meanwhile, several years ago Russia began transforming its residential water supply, which facilitated the country’s inclusion in the global market of municipal water usage. By virtue of its high reserves, the sector is intending large-scale long-term investment. Taking into account the deterioration of infrastructures in the Russian municipal economy (60-80%), the state is not in a position to provide the necessary level of capital investment and quality of management. As a result, the movement towards increasing the role of private enterprises is understandable. At present, according to information provided by «Rosstroy», private operators in the sphere of water supply and drainage account for 41% of all enterprises ³. They include several large (by Russian standards) interregional companies affiliated to major Russian businesses. At the same time, the international financial institutions (the EBRD and the World Bank) and Western companies (Veolia), which can provide the necessary technology and design experience, are showing an interest in the Russian water market, which is to significant degree open and loss-making from the point of view of financial resources.

Cross-Border Aspects of the Use of Water Resources

Water resources still rarely figure as an export commodity. Nevertheless, there are some private examples: one of the few widely-known large-scale projects of this type is the pipe from Turkey to Israel; water from France is delivered to Algeria by tankers. The scale of projects for the transfer of fresh water within national frontiers is constantly increasing. Construction of dams and canals is being undertaken everywhere. Examples of projects to divert the flow of rivers in the USA are well known. Today the real proving ground for such projects is China.

The question currently under discussion concerning the possibility of China and Central Asian countries using the rich resources of Siberian regions is a sensitive subject for all parties. In all probability, by virtue of the growing demand for water, the enormous difference between the resource potential and its use in neighbouring countries, the question will arise again and again, in spite of ecologists’ warnings.

Total water reserves in China are 2.8 trillion cubic metres (6% of the world’s reserves), while annual consumption is 840 billion cubic metres. China has the world’s fourth largest reserves of fresh water, but it needs only 2300 cubic metres per head of population (121st position in the world). In 2004 the average consumption of water in China was 427 cubic metres per person. In cities the average daily consumption per person was 212 litres, and in rural areas 68 litres. Today the annual shortfall in water is 30-40 billion cubic metres. Considering the size of the population and the intensive urbanisation of the country, both proportional and absolute figures for water consumption will increase rapidly.

The intensive use of water resources in China has its limits, which makes the importation of resources from other countries potentially feasible. According to forecasts by the Chinese Water Ministry, by 2030 the volume of water resources per head of population could fall from the current 2200 cubic metres (less than a third of the average world figure) to no more than 1800 cubic metres, while the total demand for water in China is comparable with the volume of accessible water resources in the country ⁴. By that time the use of water resources from Siberia will already be on the agenda in some form or another. There may be several alternative solutions, but the mildest and most mutually advantageous scenario is already demanding attention.

The economic development of the countries of Central Asia also depends on a solution to the problem of water. Climatic conditions and inefficient irrigation technologies in cotton farming — the principal industry in their economies — make Uzbekistan and Turkmenistan the countries with the highest consumption of water per head of population. Despite its diminishing resources of water, Turkmenistan has announced plans to double cotton production in the next decade. This is one of the reasons for the reviving of discussions concerning the transfer of water from the Ob basin to the Syrdarya and Amudarya basins.

One of today’s pressing problems for Russia, China and Kazakhstan in the management of cross-border water projects concerns the Chinese plan for the construction of the Cherny Irtysh-Karamay Canal. The projected canal would take 20% annually from the flow of the Cherny Irtysh, which could lead to the shallowing of the Irtysh and problems with water supply for some regions of Kazakhstan and Russia through which it flows. In Kazakhstan 2.5 million people live in the Irtysh basin, and in Russia over a million,. Currently around 10% of water from the Irtysh is being used in Chinese territory. By 2020 China plans to increase the removal of water from the Cherny Irtysh by an additional 1 to 1.5 cubic kilometres per year. Taking into account the current level, the total removal will be approximately one quarter of the border flow of the Cherny Irtysh.

To guarantee a mild scenario, it is expedient that the solution to these problems should be institutionalised in an all-party format. It is obvious that Russia, China and the countries of Central Asia face a number of «water» challenges that require an all-embracing solution. The all-party format will help to balance the political and economic weight of these countries: China as the largest consumer with the most powerful economy, Russia as the possessor of the largest untapped resources, and the Central Asian republics headed by Kazakhstan, the largest and fastest growing economy in this group of countries. The aim for Russia in this situation is to warn of the risks of the exhaustive use of cross-border water projects in China and Central Asia, and at the same time to realise the potential of Siberian waters with minimal ecological and political risks.

Rejecting or delaying the working out of a scenario for the joint use of water resources that is mutually advantageous and takes into account the variety of potential, may have negative consequences for our country. An adequate platform for this process could be the Shanghai Co-operation Organisation — on condition that their relevant agenda is followed.

Prospects for the Formation of a Water Market

The rapid economic growth of developing countries is the main cause of the price increases on the world raw materials markets. For water resources the principal factors in the increase of consumption are: the industrialisation of developing countries (increase of water consumption in energy and industry), global urbanisation (increase of water consumption in cities), and the growing global food shortage (increase of water consumption in agriculture).

The growing consumption of water resources and their gradual exhaustion will provide the stimulus for the urgent formation of a water market. As already mentioned, the volume of water consumption in China will be close to the volume of the country’s water reserves by 2030. By 2070, according to the European Commission, most EU countries will be suffering acute droughts. The significant increase in water prices will guarantee the payment of transport expenses and will trigger large-scale trading in water.

For the transportation of water to be economically acceptable it will be necessary to substantially «revalue» it several times over. There are well-known examples of increases in the price of other raw materials: in 1973 oil prices quadrupled in the space of only six months. The world’s dependence on oil as a strategic resource, essential for the functioning and development of the economy, then became evident.

The shortage in water resources has not yet reached a level to threaten a global economic crisis, and stable supplies of water are not problems for production or economic security on a world scale. The world’s economy cannot therefore be called «water-dependent» in the full sense in the same way that it is energy-dependent. However, considering the rapid increase in problems of water supply, this prospect is becoming ever more real.

An obvious consequence of this prospect is the appearance of powerful stimuli for the development of integral groups of water technologies: for saving water (for example, effective irrigation technologies), for manufacturing it (desalination of sea water), and technologies for the storage, purification and transportation of water.

Possible Scenarios for the Actualisation of Russian Water Resources

Based on the above, one can put forward three possible scenarios for the actualisation of water resources in Russia, to be implemented in various regional and time frames.

Scenario 1. In conditions of general economic growth we will see an intensification of water usage caused by an increase in demand for water as a raw material or as a link in the technological chain. This process will be accompanied by intensified pressure on the environment and the limited introduction of economically effective mechanisms of water usage and ecological defence mechanisms.

Scenario 2. An increase in the use of water resources, accompanied by a revaluation of those resources. This scenario will also be accompanied by intensified pressure on the environment and the introduction of economically effective water usage mechanisms and ecological defence mechanisms. Water will become an important factor in the competitiveness of commodity prices.

Scenario 3. The formation of a macroregional/global water market. The rapid development of trade in water resources with the aid of various transportation technologies (bottled water, pipes, tankers, canals). Water will become an important factor in the cost of companies’ assets and a factor in the attractiveness of regions for investment.