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Russia: Delayed Tariff Increases Endanger Economic Reforms

A decision to delay Russian tariff increases for natural monopolies could set back the government's economic program this year. But the debate in Moscow over living standards and the need for investment suggests that fundamental questions have yet to be resolved.

Boston, 18 January 2002 (RFE/RL) -- Russia's government may have failed the first test of its tariff policy for natural monopolies with a decision to cancel a rate hike for rail freight this week.

As President Vladimir Putin visited neighboring Poland, the debate among the government's economic leaders in Moscow seemed to convey an image of discord and disarray.

Speaking to reporters on 16 January, Prime Minister Mikhail Kasyanov said he had put off a 14 percent increase in rail tariffs for cargo that was set to take effect on 20 January.

According to the Interfax news agency, Kasyanov said simply, "I cancelled the decision." "The Moscow Times" quoted his spokeswoman as saying the move was aimed at avoiding a surge in inflation this month.

The Reuters news agency quoted a Kasyanov spokeswoman as saying, "This decision was needed in order to not speed up inflation in January." But there were several signs of a longer delay affecting services other than rail transport.

Kasyanov argued that no tariff increase should be expected before mid-February, because inflation is usually strongest in the first month and a half of the year, Ros Business Consulting reported. No rise would take place before the government agrees on a general strategy for "indexing" the tariffs of natural monopolies, the prime minister said.

Kasyanov is also said to have discussed the issue of tariffs hikes for natural monopolies with Deputy Prime Minister Viktor Khristenko. They reportedly concluded that none were scheduled this winter, raising the possibility of no increases before late March.

The postponement immediately raised doubts about the government's plan to boost tariffs this year for other natural monopolies, such as Gazprom and the Unified Electricity System (EES). Both are relying on rate rises to attract needed investment to their failing systems.

The problem for gas monopoly Gazprom is especially hard. Domestic gas tariffs are as little as one-tenth of prices in Europe and little more than one-fourth of those in hard-pressed CIS countries like Georgia. Exports have subsidized domestic users for years, but export prices are dropping in Europe due to weaker demand. Gazprom's output has also been falling, making the outlook seem bleak.

The government's delay also hinted at more basic problems for the Russian budget, economic planning, and politics. The trouble over tariffs has plagued the government for months.

Putin has long been aware that the huge gap between Russian and European tariffs is the unfinished business of reform economics. Low tariffs and subsidies are the basis for low wages and living standards, but at the same time, they make subsistence possible for millions of citizens until standards improve.

Last March, the government announced it would create a unified tariff agency by upgrading the powers of the Federal Energy Commission. The goal was to coordinate tariff increases to keep inflation from snowballing and getting ahead of the public's ability to pay. But the purpose was also to insulate the government from political pressure by giving the agency a final word on implementation.

Kasyanov's action this week looks like a sign that the solution has failed.

On 14 January, Federal Energy Commission Chairman Georgii Kutovoi said that rates this year would rise 35 percent for gas, 32 percent for electricity, and 26 percent for railways. The hikes would take place in two stages, with the first in February and the second in July.

But the gas tariff appeared to be more than advertised. Kutovoi said that gas would go up 25 percent next month and another 20 percent in the summer. The lag meant that Gazprom might realize an increase in domestic revenues of 35 percent over the course of the year. But consumers would start seeing rates that would be 45 to 50 percent higher in July, depending on how the hikes were imposed.

The calculations may have been enough to draw the decision back into the government's orbit.

In early December, the government agreed that tariffs for the monopolies would be raised by "no more than 35 percent" this year. The figure was soon translated into an expectation that the monopolies could expect an across-the-board increase of 35 percent this year. The delays could mean that the increases will be far less.

The government is struggling to avoid a repeat of its experience last year, when its budget was based on a forecast of inflation between 12 and 14 percent. As it became clear that it would miss the target, the government froze tariffs last August. Inflation still finished last year at 18.6 percent.

This year's budget has adopted the same inflation target, with much the same problem. But the government must now deal with a debate that goes beyond a temporary delay.

In an interview in "Argumenty i Fakty" this week, Putin's irrepressible economic adviser Andrei Illarionov made the case that no tariff increases should be allowed until incomes rise substantially.

Illarionov said, "Calculations show that our prices for electricity and railways are too high by about 40 percent for our level of living and economic development." He added that Russian electricity rates should actually be cut by over 75 percent, if the costs are to be as affordable for consumers in Russia as they are in the United States.

Putin will have to settle the argument, but chances for a solution now seem no better than last year.