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Russia: Inflation Fears Forestall Tariff Increases For Gas, Electricity

The Russian government's resolve to raise tariffs for natural monopolies has wavered with the first signs of rising inflation in 2002. The decision on 24 January to curb increases may be a setback for investment and a sign that officials will struggle with political pressure throughout the year.

Boston, 29 January 2002 (RFE/RL) -- The Russian government seems to have buckled under the burden of a tariff decision after agreeing to cut a series of planned increases for natural monopolies.

Following months of preparation, officials announced on January 24 that domestic rates for gas, electricity, and rail service will be allowed to rise by little more than half the amount expected for 2002.

Instead of the 35 percent limit that the government set in early December, Economic Development and Trade Minister German Gref said most hikes for utilities will be held to much lower levels due to inflation fears.

In making the announcement, Gref said, "While the natural monopolies may not be completely pleased, the government believes more tariff increases are not possible at present," "The Moscow Times" reported.

Prime Minister Mikhail Kasyanov, who recently overruled a rate schedule set by the Federal Energy Commission, said, "The government cannot accept that all the problems will be solved by an increase in prices," according to AFX news.

The action follows several forecasts for January inflation, all of which exceed on an annual basis the government's budget limit of 14 percent for 2002. While the Finance Ministry predicted 2.3 percent inflation for the month, the State Statistics Committee estimated the monthly jump in consumer prices will reach 2.4 to 2.7 percent in January.

The 2001 inflation rate of 18.6 percent overshot the budgetary target by about half. Russia's "Kommersant-Daily" raised alarms about the January rise, saying it could lead to annual inflation of nearly 30 percent. A poll conducted by the firm Monitoring.Ru and carried recently by Interfax identified inflation as the top cause of public concern, far ahead of crime.

The government is clearly sensitive to inflation, even though the year has barely begun and the January rate is lower than a year ago.

Gref said that under the latest decision, consumer costs for electricity will rise by an average of 17.9 percent in 2002. Gas will go up 20 percent in March, while tariffs for rail freight will increase by 16 percent next month.

The possibility of a second round of tariff hikes was left open, but Kasyanov seemed doubtful, saying they will be allowed only in case of emergencies, the RIA-Novosti news agency reported. "The Moscow Times" said the Railway Ministry may also get another 11 percent rate boost in August from an earlier reform plan.

Monopolies including Russia's Gazprom and Unified Electricity System (EES) have been counting on higher rates to attract needed investment. Russian tariffs are a fraction of those in Europe. While EES estimates it will need $50 billion during this decade, Gazprom's output fell 2.3 percent last year and 4.2 percent in 2000.

But with the projected tariffs, the monopolies may gain little real ground, since their increases would be barely more than the forecast inflation rate for 2002.

Russia's new railway minister, Gennadii Fadeev, was quoted as saying: "I would be lying if I said this suited me."

From a policy standpoint, the new tariffs may be the worst possible alternative, since they may only create automatic inflation through indexing, while doing little for investment. It is also unclear that the smaller increases will guarantee much relief to consumers without more government support.

Last week, Kasyanov approved a 6.5 percent rise in pensions at the urging of President Vladimir Putin, the ITAR-TASS news agency reported. At that rate, pensioners may soon fall behind double-digit inflation and higher utility costs.

The government's decision has made a shambles of the process that it created in 2001 to manage the tough decisions on tariffs. The Federal Energy Commission was supposed to take over as a unified rate-setting agency that would calculate and authorize increases. Instead, the government has stepped back into the process, making it less likely that it will be able to resist pressure over prices later this year.

After freezing tariffs in 2001 because of inflation concerns, the government's failure to stick with its plan for an independent rate-setting authority means that officials may have to deal with the problem on a continuous basis this year.

In some sense, the political struggle over tariffs may be seen as a result of Russia's relative success in recovering from the ruble crisis of August 1998 and decreasing its reliance on loans from the International Monetary Fund (IMF).

Russia paid $4.3 billion in debt service to the IMF in 2001, cutting its outstanding debt to $7.5 billion, or less than half of what it owed in 1999. Russia's recovery has taken place without additional funding or the outside pressure of an active IMF program that would set conditions for new loans.

The advantage is that the government has been able to steer its own economic course, with impressive results. The country's gross domestic product rose 5 percent last year after an 8.3 percent gain in 2000.

But self-reliance has also left the government with the difficult task of balancing inflation against the risk of losing investment, and no one else to blame if it fails.