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Russia: Oil Policy Seen Helping To Hold Down Inflation

Russia's decision to limit some oil exports appears to have brought an unexpected benefit for inflation. Growing supplies on the domestic market have made oil the biggest factor in lowering producer prices in the first quarter of the year. Boston, 29 April 2002 (RFE/RL) - Russia's oil policy seems to be helping the government to hold down inflation, leaving more room to increase gas and electricity tariffs later this year.

On 22 April, Russia's State Statistics Committee reported that producer prices fell 0.2 percent in the first quarter, the Interfax news agency said.

The figures may offer hope that Russia's most stubborn economic problem is under control. Consumer prices rose 5.4 percent during the same period, the government said last week.

But the decline in prices at the producer level may be significant in easing inflationary pressures, largely due to a huge drop in the domestic price of oil.

While charges in nearly all other sectors rose, prices in the oil industry plunged 21 percent in the first quarter. Similar declines were recorded for fuel and refining, while natural-gas prices jumped nearly 25 percent.

The odd combination of ups and downs seems to be the result of Moscow's equally unusual energy policy. Last December, the government paved the way for lower domestic oil prices when it announced export curbs in cooperation with the Organization of Petroleum Exporting Countries (OPEC).

Few analysts believed Russia's promise to OPEC that it would cut exports by 150,000 barrels per day to help keep world oil prices high. The limit applied only to pipeline exports. Russia's exports by all routes to countries outside the CIS actually rose 4.3 percent from a year earlier, according to Reuters.

But if Russia did little to limit exports, it did nothing at all to hold down production. The result was a huge surplus of cheap oil on Russia's home market. Production surged ahead at twice the rate of exports, causing domestic prices to plunge.

The policy created an enormous spread between export and domestic prices for oil. Last week, AP reported that foreign buyers were paying $23 per barrel for Russian crude, while Russia's refiners paid $4.50. Production continues at a high rate. On 26 April, Yukos, the second-largest oil company, said its output climbed 17 percent in the first quarter from a year before.

The glut may make little sense as energy policy, but the low oil prices may have given the government more confidence that it can meet its inflation targets of between 12 and 14 percent this year.

In January, a sharp monthly price rise of 3.1 percent forced the government to scale back plans for long-awaited tariff hikes to benefit natural monopolies that control gas, electricity, and rail service.

But in its semi-annual World Economic Outlook report released last week, the International Monetary Fund forecast that Russia's consumer price inflation will finish the year at 14.1 percent, almost exactly on target. The pace of price rises slowed in February and March. Speaking on 23 April in Copenhagen, Prime Minister Mikhail Kasyanov vowed they would not exceed the targets this year. Inflation topped 20 percent in 2001.

If oil continues to take pressure off producer prices, the government could find it easier to tackle its other stubborn energy problem by allowing utility rates to rise. Both Gazprom and the Unified Electricity Systems are in desperate need of investment, but Russia's low domestic energy prices promise little return. Gas prices in Russia are as little as 1/10th of those in Europe, where Gazprom provides one-fourth of the supplies.

Last year, the monopolies were promised increases of 35 percent. But the sudden shock of inflation in January forced the government to trim the rate hikes to 20 percent. Further good news on inflation could allow officials to restore the rest of the tariff rises this summer. On 26 April, Gazprom chief executive Alexei Miller said he is seeking annual increases of 25 percent from 2003 to 2006, "The Moscow Times" reported.

In his address to Russia's parliament last week, President Vladimir Putin appeared to rule out higher tariffs, the investment bank Troika Dialog said in a research note on 23 April. But it also cited continued government support for increases. Miller also stressed last week that investment in Gazprom makes no sense with current rates, the bank said.

The task of managing inflation and tariffs was already a balancing act before oil prices entered the picture. The future of Russia's oil policy is uncertain. On 22 April, Finance Minister Alexei Kudrin told the U.S.-Russia Business Council in Washington that export limits would not be extended beyond June. But Kasyanov said the next day that the government has yet to take up the question.

Whatever the decision, the government could see cheap domestic oil as useful this year as it tries to push tariffs up and drive inflation down.