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Russia: Inflation Concerns May Halt Tariff Hikes

Russia may halt tariff increases for natural monopolies until the end of the year amid concerns about rising inflation. The move may be a sign of trouble for restructuring and reform plans. Our correspondent Michael Lelyveld reports.

Boston, 7 August 2001 (RFE/RL) -- The Russian government is performing a balancing act as it tries to reform the country's monopolies while keeping inflation in check.

Last week, Economic Development and Trade Minister German Gref ruled out any more tariff hikes by the country's natural monopolies this year, except in extraordinary circumstances.

Gref said, "Until the end of 2001, the tariffs of natural monopolies may be changed only in emergency situations, when a serious imbalance has occurred," the Interfax news agency reported.

The reason is that the Russian gas, electricity, and rail monopolies account for 38 percent of consumer price inflation, Gref said, according to "The Moscow Times."

Last week, Prime Minister Mikhail Kasyanov predicted that inflation this year will top the budget target of 12 to 14 percent. Gref accentuated the positive, saying that inflation was easing and was likely to reach only 17 to 18 percent this year.

But in order to meet the revised goal, Gref called for a virtual freeze on utility prices, a move that could make it hard to carry out monopoly reforms.

On 3 August, Kasyanov threw Gref's initiative into doubt, saying, "There won't be any freezing of tariffs," the Prime-Tass news agency reported. But he also did not say that any increases would take place, highlighting the government's predicament.

In May, the government approved a plan to restructure the EES electricity monopoly, with a doubling of tariffs by 2004. The rate hike is needed to attract the $50 billion in investment that chief executive Anatoliy Chubais estimates will be required to keep the system running over the next 10 years.

While there is still plenty of time to raise tariffs, the struggle with inflation from earlier increases this year makes it clear that the process will be difficult every step of the way.

The freeze may also affect the ability of EES and its affiliates to prepare for the coming winter and avoid a repeat of the power cutoffs that stranded many regions last year.

Some oblenergos, or regional utilities, are already way behind in stockpiling coal, said EES deputy chairman Mikhail Abyzov, "The Moscow Times" reported. The oblenergos will need 5 billion rubles ($170.3 million) to buy fuel this year if tariffs are not raised, Abyzov said.

Gref's announcement also appears to put a stop to price hikes at the gas monopoly Gazprom, which applied last week to the Federal Energy Commission for a 25 percent increase in consumer tariffs.

Higher rates are needed to close the gap between the domestic market and Europe, where prices are some 10 times higher. Low tariffs have also been blamed for Russia's sluggish gas production.

Last year, Gazprom's output dropped 4.1 percent. So far this year, the monopoly's production is down 3.7 percent, the Russian Energy Ministry reported last week. The slide seems set to continue without higher tariffs and the investment they would bring.

Last week, Kasyanov said the government hopes to deal with the problem of managing tariffs by establishing a single authority to approve all utility rates.

The new office could help by calculating the effect that fuel prices will have on electricity costs and inflation. But it seems unlikely to make the government's task much easier.

Gref's estimate that the three natural monopolies are responsible for nearly two-fifths of inflation is a sign of how much they contribute to the Russian economy. Together, Gazprom and EES accounted for about 13 percent of the country's gross domestic product last year.

Although the government has announced plans to restructure both of the giant utilities, it seems to have no plans to surrender its role. The partially privatized monopolies will have the task of attracting investment, while the government consolidates its control over rates.

The arrangement may be a far cry from the free market that foreign investors would want. But the huge part that the monopolies play in Russia's economy may make it necessary for the government to manage prices for years to come.

The political pressure on tariffs is likely to depend on how well the rest of the economy performs. But the move to freeze rates after the first seven months of this year may be an early sign of problems for the government's plans.