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Russia: Moscow Seeks Balanced Tariff Policy

President Vladimir Putin warned the government this week about tariff increases for Russia's natural monopolies as it faces decisions about price hikes for the second half of the year. Former Finance Minister Boris Federov has also recognized the "painful" effects of higher tariffs but has urged reform to create a competitive Gazprom.

Boston, 19 June 2002 (RFE/RL) -- Russian President Vladimir Putin has again ordered caution in raising utility tariffs, prompting doubts about the pace of monopoly and market reforms.

Speaking at a cabinet meeting on 17 June, Putin stressed restraint in allowing tariff hikes, according to an RIA-Novosti report. Putin said the government had pursued a "balanced" policy earlier this year under which "tariffs will be increased moderately, if at all." Officials should continue the approach, Putin said, calling tariffs "a highly delicate issue of the modern economy."

The remarks conveyed Putin's sensitivity to both the economic and political effects of the tariff problem. Writing Tuesday in the London-based "Financial Times," former Finance Minister Boris Federov sounded the same themes.

Federov, who represents minority shareholders on the Gazprom board of directors, called the tariff question one of the three major challenges facing Putin, along with reform of the civil service and the military. Like the other two issues, the effort to end energy subsidies represents a difficult break with the past.

Federov said that liberalization of energy tariffs "would probably be painful economically and therefore also politically." But he added that "reform would also enable companies such as Gazprom to compete effectively in Western Europe."

Gazprom has lagged in investment and market value in part because only about one-fourth of its gas is exported and sold at market rates. The Unified Energy Systems power monopoly has faced similar problems. Its chief executive, Anatolii Chubais, has claimed that the network needs $50 billion of investment in this decade to avert a collapse. Higher tariffs are seen as the only way out.

But the government has repeatedly stepped back from its own plans in dealing with the tariff problem. The 2002 budget initially provided for 35 percent increases this year in charges by natural monopolies for gas, electricity, and railways. The goal was to decrease subsidies and narrow the gap with European prices, which are often 10 times as high. But almost immediately in January, surging monthly inflation drove Putin to order a cut in the tariff target. Gazprom received a 20 percent increase in wholesale prices with the possibility that they might be raised again in the summer.

In February, Deputy Economic Development and Trade Minister Andrei Sharonov told Reuters that the government had agreed to a 30 percent increase for 2002. But Putin's caution has made it unclear that there will be any further hikes. On Monday, Deputy Energy Minister Vladimir Milov said the matter could be decided at a government meeting as soon as Thursday, RBC News said. But again, Putin's warning may have set limits for the decision.

The government has been struggling to keep annual inflation within the budgetary bounds of 12 to 14 percent, although some economists believe it will be higher. In March, Sharonov estimated that higher gas prices would contribute 0.6 percent to the inflation total, while electricity increases would add 1.5 to 1.7 percent.

Last week, Gazprom chief executive Aleksei Miller said the company will seek a long-term commitment to annual 25 percent tariff adjustments from 2003 to 2006. The comments suggested that he may have little hope for this summer and is already focusing on next year. The Economic Development and Trade Ministry has recommended annual increases of 20 to 25 percent. Miller has outlined steps toward the start of a deregulated gas market next year.

So far, all of the tariff figures are far less than the ambitious goals laid out last year by some officials. Speaking last November, Energy Minister Igor Yusufov said: "Calculations show that a 30 percent rise in gas prices twice a year is practically painless for industry. It will not have a big impact on Russian household budgets." Yusufov added, "Price changes should be carried out simultaneously and no less than twice a year," "The Russia Journal" reported.

But over-budget inflation persuaded Putin to freeze tariff increases in the second half of last year. It is not clear whether this year will follow the same course. But Putin has made it plain that he sees inflation as the primary problem, and monopoly reform must come second. There has also been a high cost to the process that the government tried to establish last year to regulate tariffs. It was supposed to be managed by an expanded Federal Energy Commission, which would set tariffs and coordinate them to keep inflation in check.

But Putin and government ministries continually stepped in to control the decisions, which seem to have been negotiated with the monopolies much as before. Long-range planning now seems likely to be subject to continual adjustments or freezes in response to monthly inflation figures.

Although share prices in Gazprom have risen sharply this year, there may be less investor confidence in how the tariff problem has been managed at a time when Putin has called for more management, not less.