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Russia: Inflationary Pressure Eases As Oil Prices Continue To Slide

Russian inflationary pressure has eased after a sudden jump in January, giving officials more hope of meeting their budgetary targets. The anti-inflation effort may be helped along by low domestic oil prices due to high production, despite promises made by the Kremlin in December to the OPEC oil cartel.

Boston, 8 March 2002 (RFE/RL) -- Russia won a round in its fight with inflation in February as steep price rises eased, but pressures on energy policy may keep Moscow on guard for the rest of the year.

Government officials voiced confidence this week as monthly inflation fell to 1.2 percent after hitting a three-year high of 3.1 percent in January.

On 4 March, the head of the presidential economic department, Anton Danilov-Danilyan, said the January price spike "was of a purely temporary nature," the RIA Novosti news agency reported.

The government has been cautious since the sudden surge in January raised fears that it would miss its budget target to keep annual inflation below 14 percent. Scheduled tariff increases for natural monopolies on gas, electricity, and railways were slowed down or left up in the air.

Last year, Russia's inflation crept up to 18.6 percent. The February mark was lower than in 2001 but higher than in 2000, when consumer prices climbed over 20 percent. Despite a sense that seasonal price pressures may have abated, the government remains wary of its biggest economic concern.

Officials are being pulled in several directions at once over energy and economic policy this year.

This week, the International Energy Agency added its input with the release of a study on Russia's energy sector in Moscow. The Paris-based agency said that Russia "must implement energy price reforms" in order to attract the $550 billion to $700 billion it needs to invest in energy infrastructure by 2020.

A Reuters summary of the report said that up to 60 percent of Russia's oil fields are declining due to lagging investment. Among other things, the study urged Russia to close the huge gap between domestic and export prices of oil.

The IEA said that higher gas and electricity tariffs would also yield major energy savings by promoting efficiency. The report said that "Price reform is probably the single most important policy for the gas -- and perhaps the entire energy sector -- in the first decade of the 21st century."

The recommendations come at a time when Russia's domestic oil prices have fallen to about one-fifth of world market levels, while gas sells for one-tenth of European prices. The government has kept gas rates in check because of the inflation problem, despite its goal of ending the old Soviet subsidies and the practice of providing gas virtually for free.

But domestic oil prices have slumped in part because of seemingly contrary policies being pursued by the government.

Last December, the government promised the Organization of Petroleum Exporting Countries (OPEC) that Russia would cut oil exports by 150,000 barrels per day in the first quarter of this year to help keep world prices from falling too far. There has been vast confusion about the pledge, and from what level Russia promised to cut.

Some officials referred to a drop in production, while others talked about exports. Still others said the reduction would apply only to exports by pipeline and not by ship. Some compared the new level to the fourth quarter of last year, while others cited third-quarter figures.

After meeting with OPEC officials in Moscow on 4 March, Energy Minister Igor Yusufov told reporters that Russia "strictly fulfills" its promise to OPEC, RIA Novosti reported. But there has been little evidence that is the case.

On 6 March, the IEA's executive director, Robert Priddle, said Russia had yet to reduce its exports. Priddle said that "According to our preliminary figures, Russia's crude exports are holding up," the Dow-Jones news agency reported.

Interfax reported that Russia's oil exports outside the CIS rose 8 percent from the year-earlier period, while the industry newsletter Petroleum Argus said this week that "Russia shows no sign of cutting exports."

In Moscow this week, OPEC officials tried to get Russia to renew its supposed cuts, but they received no further pledges.

The doubts about Russian promises have made little difference to world prices, which have stayed firm because of optimistic OPEC statements, signs of recovery in the United States, and fears of a possible war with Iraq.

But within Russia, oil prices have dropped because the oil companies are producing even faster than they export. In the first two months of this year, production is up 8.7 percent. The production boom seems to be more responsible for flooding the domestic market than the export promise to OPEC.

The result seems to be in keeping with two goals announced by President Vladimir Putin's economic adviser, Andrei Illarionov. The first is to curb inflation. The second is to restore Russia's share of the world oil market from Soviet times.

For the time being, low domestic oil prices seem to be helping keep inflation under control even though some gas and electricity tariffs have been raised. The effect may make it less likely that Russia can afford to change its oil policy soon.

This week, Petroleum Argus also quoted an unnamed senior government official as saying that Russia "will never allow OPEC (to) manipulate its oil exports." The official said the government would rather risk losing revenue due to low oil prices than the share of the world market that Russia has gained.

The reasons may explain why OPEC officials left Moscow empty-handed this week and why the cartel may be unable to count on Russian promises again.