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Russia: Moscow Struggling With Monopoly Agency Issues

Russia is creating a new state body to regulate tariffs for natural monopolies, like electricity and gas. But the threat of inflation may make it hard for the government to let the agency do its work.

Boston, 7 September 2001 (RFE/RL) -- After a month of debate, the Russian government still seems to be struggling with the question of whether to allow tariff hikes for natural monopolies or not.

Conflicting reports this week were similar to those in early August, when Economic Development and Trade Minister German Gref announced a freeze in rates for gas, electricity, and railways until the end of the year because of inflation concerns.

The next day, he was flatly contradicted by Prime Minister Mikhail Kasyanov, who said, "There won't be any freezing of tariffs," according to Prime-TASS.

The disagreement led to a series of inconclusive cabinet meetings, which seemed to be more about the government's confidence in managing the economy than about the tariffs that needed to be raised.

Early this week, there was news on several fronts, but still no clear outcome.

On 4 September, President Vladimir Putin signed a decree to create a new rate-setting agency that will control tariffs for monopolies like gas giant Gazprom, the Unified Energy Systems power company, and the Railway Ministry.

The new body is intended to coordinate increases so that rises in fuel will not lead to price spirals by adding sudden costs to power generation and transport.

Higher energy tariffs are needed because rates remain a small fraction of those in Europe, making it hard to attract investment. United Energy Systems estimates that it needs $50 billion of investment in the next decade alone.

Interfax quotes Gref as saying, "I think that from next year we will be able to regulate far more effectively the tariffs of our natural monopolies and control their production costs."

But until then, the process still seems confused.

This week, "The Moscow Times" reported that the Federal Energy Commission cleared Gazprom's request to raise rates next month by 30 percent on consumers and 15 percent on businesses, subject to Gref's approval. But on the same day, Energy Minister Igor Yusufov told RBC News that electricity tariffs would remain unchanged for the rest of the year.

Unless United Energy Systems is exempted from the Gazprom tariffs, it would be forced to pay higher costs that it would be unable to pass on. Last year, Gazprom cut supplies to United Energy Systems because of lagging payments, sparking a crisis. Gas is the main fuel at Russian power plants, but supplies have been falling over the past 10 years, according to a U.S. Department of Energy report.

The task of managing tariffs also means managing relations among the monopolies. But the fear of inflation may make the job even tougher.

Gref seems to have been right when he gave assurances last month that inflation would ease in the near term. The government reported no increase in August consumer prices.

But the Reuters news agency quoted analysts as saying that the relief was only temporary because of plentiful food supplies during the harvest. Gref has already conceded that the government will overshoot its inflation target of 12 to 14 percent this year, settling instead for 17 to 18 percent.

Putin has accentuated the positive. During a visit to Finland over the weekend, the president said the growth in gross domestic product would also exceed expectations, reaching 6 percent this year. Falling unemployment has also been a bright spot.

But the government is particularly wary of inflation because of the experience with the early days of reform under former President Boris Yeltsin. His decision to free most consumer prices in 1992 led to an annual inflation rate of over 1,400 percent.

The history explains why the government shows no sign of wanting to free tariffs for the monopolies, which still account for a major portion of the Russian economy. But the burden of managing increases may lead to continual debates and problems, especially since rates will have to rise fairly rapidly if investment is to increase.

By creating a separate agency to approve price hikes, the government may succeed in shifting the debate away from the cabinet of ministers. But it is unlikely to avoid the responsibility for long.

The threat of rising prices on the one hand and shortages on the other may only come back to haunt the government for as long as it maintains the monopolies.