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Russia: Rising Gas Prices May Pressure Asia, Euro Economies

Rising prices for natural gas may force CIS countries to make tough economic and social decisions this year. Change in Russia may drive much of the process, but each nation may struggle with political and economic costs.

Boston, 9 January 2002 (RFE/RL) -- Economies from Asia to Europe may face major challenges due to increases in prices for natural gas this year.

Slow growth could restrain rate hikes in Western Europe, but Russia and other countries in the area seem likely to narrow the gap in their gas tariffs with richer nations and market economies.

In Russia, the government's plan to raise gas and electricity prices by 35 percent may prove to be a test for the political system. A decade has passed since the country launched its "Big Bang" reforms that freed prices for food and most other goods.

But the move to cut subsidies for domestic users of gas and power may have serious economic and social consequences, since nearly all of Russia's industrial output and consumer prices are based on the low cost of fuel.

According to a government report last June, the domestic gas tariff in Russia is about $15 per thousand cubic meters, compared with $160 to $170 in Europe, the Interfax news agency said. Russia is the world's biggest gas producer and exporter. Gas accounts for 54 percent of all the energy it consumes, according to a U.S. Department of Energy report.

Export revenues have been subsidizing Russia's low domestic gas prices for years. But investors are unwilling to put up the funding for new production as long as prices and potential returns are so low.

The same problem plagues the power system, which needs $50 billion in investment during this decade in order to keep running, according to Anatolii Chubais, chief executive of the EES electricity monopoly.

But the resistance to higher tariffs is stiff. The government's plan has been attacked not only on economic but human rights grounds. Last week, Russia's human rights commissioner, Oleg Mironov, cited tariff increases as a reason for his view that the country made no progress on rights issues last year.

Mironov told Interfax: "How can one seriously talk about human rights, if charges for energy and for traveling by railway will increase by more than 35 percent this year? The Russian citizens, many of whom live below the poverty line, will have to pay more for gas, heating, and electricity. This is just inadmissible!"

Mironov also called the practice of shutting off utilities for nonpayment a "flagrant violation of human rights." He added, "This is telling on the citizens' health and goes against the constitution, which says that Russia is a socially oriented state."

The attack from within Russia's own government raises a critical issue. On the one hand, it is a reminder of Soviet days, when citizens could at least expect free heat in an otherwise miserable standard of living. On the other hand, it may also reflect a more recent expectation that Russia should be able to provide decent living standards as one of the largest energy suppliers in the world.

The issue is unlikely to be confined only to Russia, because gas prices are rising in much of the former Soviet republics and in other nations, as well.

Turkmenistan, which has provided gas free to its citizens, has raised the price of its gas exports to Russia from $40 to $43 per thousand cubic meters this year. In Georgia, Russia has boosted its charge for the gas it transports from Turkmenistan from $56 to $60.

In Azerbaijan, the government has been resisting calls to increase gas tariffs for consumers, the Sarq news agency reported, although it will have to pay higher prices for imports. The International Monetary Fund has been urging Azerbaijan to raise its domestic tariffs.

In Ukraine, Russia is pushing the price of its supplies up from $50 to $80 per thousand cubic meters, although Kyiv continues to get a break because it provides transit for Russian gas exports to Europe. Ukraine will pay for only 10 percent of the Russian fuel in cash, but higher costs seem inevitable as gas travels west.

Distance may justify the higher charges, but it may not reflect citizens' ability to pay in countries where per capita income remains low, leaving governments to absorb the cost or face the political consequences.

In hard-pressed Turkey, which is reportedly paying $110 per thousand cubic meters for Russian gas, the government is feuding with municipalities and business groups over rising tariffs, according to the "Turkish Daily News."

Last week, the chairman of the Istanbul Chamber of Commerce said: "If there is a government in Turkey, it would reduce high natural gas prices by 50 percent. If the government fails to intervene in the price of natural gas, we plan to call on people to pay half of their gas bills."

Even far to the east in China, where Russia hopes to find a new market for its gas, a similar dispute over tariffs has broken out.

Last week, the PetroChina oil company argued that the government's decision to control prices in the fledgling market will discourage investment. But Yuan Weixin of the China International Engineering Consulting Corporation told "China Daily," "If companies want to attract more customers to use gas, they should try to lower the gas price and take up some of the cost for users at first."

Each country must deal with a basic question for economies in transition, deciding how much and how fast to change. Rising gas tariffs are likely to force many of them to struggle with that question this year.