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Russia: Gazprom Seeks Higher Tariffs

Russia's Gazprom has offered a plan to raise gas tariffs to world-market levels on industrial users while keeping low rates for households. The powerful monopoly's proposal seems to be aimed at influencing the government's reform plan for the natural-gas sector, but it could also affect Russia's entry into the World Trade Organization, as well as ties to the CIS.

Boston, 17 October 2002 (RFE/RL) -- The Russian gas monopoly Gazprom has proposed a plan for huge domestic price increases that could force higher costs on industrial producers and change relations with the European Union and the Commonwealth of Independent States (CIS).

Speaking in Moscow, Gazprom's deputy chief executive Aleksandr Ananenkov said the company expects "radical changes" in the government's tariff policy, the official news agency RIA-Novosti reported. The company's domestic rates may rise four to eight times to reach world-market levels, said Gazprom board member Vladimir Rezunenko, speaking on 14 October at the opening of "Russian Oil and Gas Week."

Rezunenko said that Russian gas tariffs range from $10 to $16 per 1,000 cubic meters, compared with world-market levels of $100 to $110. Ananenkov said the current average price for domestic gas is $16.40.

Ananenkov reportedly called for a 50 percent rise in gas tariffs next year, far more than the government's budgeted increase of 20 percent.

The reason, the officials argued, is that Russia's supplies of cheap gas are disappearing. Returns from older gas fields have been declining for years. Gazprom began to reverse the drop in its output last December with the opening of its giant Zapolyarnoe field in western Siberia.

In a research note, the investment bank Troika Dialog quoted Ananenkov as saying that Gazprom will invest at least $3.3 billion to double the annual output of Zapolyarnoe to 100 billion cubic meters by 2004, one year earlier than planned. But Ananenkov warned that other new resources in the arctic Yamal Peninsula will be "economically nonviable" if domestic gas prices are less than $75 per thousand cubic meters. The minimum price for profitability now is $30, he said.

In simple terms, the numbers mean that Gazprom wants to charge twice as much for gas on the domestic market now and nearly five times as much after 2004. But so far, the government has no such plans.

Last month, Prime Minister Mikhail Kasyanov said Russia may have a free market for gas and electricity in five years, but in the meantime, prices must remain regulated, he said. Inflation is the government's biggest concern. Last week, it issued an inflation forecast calling for a tariff hike of no more than 14 percent in 2004, which would set rates at less than a third of those sought by Gazprom.

But Gazprom's argument has several important implications, not the least of which is its willingness to campaign publicly against regulation. The government controls 38 percent of Gazprom's shares and a majority of its board. But the monopoly is lobbying for its own interests in advance of a new restructuring plan. In August, Energy Minister Igor Yusufov said his ministry would introduce "a concept of the reforming the gas industry" by the end of the year.

Perhaps more important than Gazprom's perennial resistance, Ananenkov argued that tariffs should be raised only for businesses but remain stable for households, RIA-Novosti reported. The recommendation seems to be aimed at easing inflation fears while building political support.

The argument could have relevance beyond Russia's borders because of EU demands for the country's membership in the World Trade Organization (WTO). The EU has been pressing Russia to equalize domestic and export tariffs for energy as a condition of WTO entry, in part because of fears that energy subsidies allow Russian products to compete unfairly on price. Another reason is that Gazprom has subsidized domestic users by charging far higher rates for exports. Russia supplies one-fourth of the EU's gas.

Raising gas tariffs to world-market levels for Russian industry could address the EU's objection by shifting some of the cost of household subsidies from foreign customers onto Russian businesses, which would then have to raise the prices of the goods they produce.

But the plan flies in the face of the government's policy on the EU demands. In August, President Vladimir Putin said Russia would not meet the EU's condition, calling it unaffordable and unfair. Putin said, "Low gas prices are our natural advantage," Interfax reported. The policy was repeated yesterday by Russia's WTO negotiator, Maksim Medvedkov, who said: "We do not want to take on any international obligations regarding this. Not one country has done this."

While Gazprom's plan may have political appeal, it seems unlikely to help the government with its battle against inflation, since any price increases in Russian goods would be felt both on domestic and foreign markets. It would also be just the opposite of the policy that the government is pursuing on tariffs for the Unified Energy System (EES), the Russian electricity monopoly, which gets its gas from Gazprom.

Speaking at a meeting of the Motherland-All Russia party in the State Duma last month, EES chief executive Anatolii Chubais argued against demands that household tariffs be cut at industry's expense, saying they were already one-fifth of the industrial rate. Chubais said, "In Western countries, tariffs for households are always higher than for industrial companies." His case was backed by Economic Development and Trade Minister German Gref, who said that the subsidies "may lead to [an] unbearable burden [on] industrial companies," RBC reported.

It is only a matter of time before the subsidy argument spreads to gas tariffs for CIS countries, which are about half of those for EU customers. The difference is based partly on distance but also on policy regarding Russia's relations with the "near abroad." If rates are raised to European levels on Russian businesses, they are likely to call for that policy to be revised. Otherwise, their higher costs would, in effect, be paying for lower rates in the CIS.

Gazprom's proposals suggest the difficulty of bringing about change in a system which has run on cheap gas for so long. The monopoly has also shown that it is determined to maintain its power, whenever change comes.