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Russia: Divisions Persist Over Energy Reform

New proposals to double Russian gas tariffs suggest that the government's struggle over energy reforms may drag on into next year. As officials seek investment, they continue to be troubled by inflation as the budget outlook tightens due to falling export prices for oil and gas.

Boston, 9 November 2001 (RFE/RL) -- A fight over Russian energy reform is threatening to spill over into next year as officials continue to argue over the size of unpopular tariff hikes.

On Thursday, the Russian investment bank Troika Dialog reported that Energy Minister Igor Yusufov has proposed a doubling of domestic gas tariffs next year to offset a drop in export prices due to Europe's slowing economy.

The move would support revenues for both the Russian budget and Gazprom, which needs funds to reverse its production declines.

The recommendation would raise wholesale domestic gas rates from 410 rubles -- or $13.78 -- to 860 rubles per thousand cubic meters. The amount would still be less than one-third of the forecast export price. The domestic tariff is about one-eighth of the export rate now.

But the Energy Ministry's plan is far above any other official suggestions that have been made in recent weeks.

On 6 November, Deputy Prime Minister Viktor Khristenko gave assurances that tariffs for Russia's natural monopolies will rise by at least 13 percent, which is the projected rate of inflation next year.

Assurances were needed because the government has already postponed tariff hikes scheduled for the second half of this year due to inflation.

In August, Economic Development and Trade Minister German Gref called for a freeze on rates, saying that increases for gas, electricity, and railways had already accounted for 38 percent of consumer inflation in 2001.

Gref appeared to be at odds with Prime Minister Mikhail Kasyanov, who declared, "There won't be any freezing of tariffs." Whether for reasons of politics or inflation, the Gref view prevailed.

The London-based "Financial Times" reported earlier this week that government plans for next year had included increases of 20 percent for gas and 32 percent for electricity. Khristenko's statement seems to hint that the increases will be lower, while Yusufov's proposal would make them much higher.

The wide range of plans is important on several counts.

The government has already suffered from a lack of will in tackling the tariff issue, despite its otherwise strong record in other areas of economic reform.

In August, President Vladimir Putin ordered the formation of a unified tariff body to coordinate rates for all natural monopolies in an attempt to keep inflation from feeding on itself. The plan may also have been meant to distance the government from political pressure over rates.

But so far, the result has been no tariff increases at all, while cabinet officials have continued to press their cases, much as before. It also seems improbable that the government will avoid inflation, which is likely to follow whenever tariffs are raised.

If anything, the problem may be tougher next year because the government has set an inflation target that is essentially unchanged from this year's budget, although this year's actual rate of at least 18 percent will be considerably higher.

Yusufov's argument about falling revenues from gas exports is an additional reason for concern at a time when Putin has already ordered a budget review because of plunging oil prices.

Perhaps most important, the tariff trouble threatens to derail the government's ambitious plans to restructure the energy sector. Both Russia's Gazprom and the EES electricity monopoly are at a critical stage.

Interfax quotes Anatoly Chubais, the chief executive of EES, as saying on 6 November that the company will start implementing a series of investment projects in the second half of next year.

Chubais has said the electricity system needs $50 billion in investment over the next decade. Ten projects valued at $1.7 billion will be offered next year, but there may be little interest for investors unless tariffs can be raised.

Gazprom also seems to be at a crossroads. The company needs funds to reclaim valuable holdings from the gas trader Itera and to keep from losing its stake in its Sibur petrochemical affiliate.

Gazprom expects its output to decline by about 1 percent this year, despite the opening of its Zapolyarnoye field in the fourth quarter. The huge new field may only serve to keep output flat in coming years because of neglected investment at other facilities.

The government seems to face a difficult task in keeping the confidence of both foreign investors and Russian consumers as the country's rate of economic growth slows next year. But its delay on tariffs has not made the job easier, and the arguments seem no closer to being resolved.