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Russia: People Protest Higher Power Costs

The Russian government is struggling with protests over its energy-tariff policies as regional power prices soar nearly 70 percent. Officials have been unable to solve the economic and social problems created by the rate hikes, while international organizations offer seemingly contradictory advice.

Boston, 10 April 2003 (RFE/RL) -- The Russian government has been caught in a collision between economic and social forces over energy prices as it tries to cope with conflicting pressures from abroad.

This week, dozens of members of the Unified Russia party crowded into the Moscow office of the Federal Energy Commission (FEK) with the signatures of 2.6 million citizens, demanding lower electricity tariffs, "The Moscow Times" reported.

Georgii Kutovoi, chairman of the rate-setting FEK, was forced to agree with his critics. Kutovoi pledged, "We are going to work with all the regions in order to restore social harmony and resolve this political and economic conflict."

The immediate problem is that most of Russia's regions have raised electricity rates by far larger margins than the 14 percent that the government authorized for this year. In Ulyanovsk, residential tariffs jumped 66 percent, according to figures from Renaissance Capital, cited by "The Moscow Times" in February.

At the time, Kutovoi urged a sharp rise in industrial power prices in order to cut them for citizens. His recommendation came after President Vladimir Putin blasted the process, saying it was "absolutely going out of control," according to RBC News. But despite Putin's comments nearly two months ago, the high regional charges have not been rolled back.

The process may go beyond the question of controlling the regional energy commissions at a time when restructuring of the power sector is set to begin. Many may be raising rates in hopes of drawing investment to the spinoffs of regional energy companies. This week, the chief executive of the Unified Energy Systems (EES), Anatolii Chubais, said the power monopoly hopes to attract $55 billion in investment in the next 10 years.

But the entire concept of monopoly rate hikes is likely to come under fire in an election year. The government is racing to curb inflation and raise pensions at the same time to keep citizens from suffering with higher utility costs. The conflicting forces threaten to pull economic policy apart. Dissent within the government has erupted in open discord.

Last week, presidential adviser Andrei Illarionov attacked the Economic Development and Trade Ministry for a growth plan that includes more increases next year for the electricity, gas, and rail monopolies. Reuters quoted Illarionov as saying, "According to this strategy, we are to increase the size of the monopolies, namely through price hikes."

He also blasted the ministry's plans to diversify the economy by raising oil taxes in order to aid value-added sectors like the "processing" industries. Illarionov said such shifting would produce "higher costs for the Russian economy."

Taken together, the debates over the government's plans could have sweeping economic and social implications, raising political risks at a time when the government can afford it least.

The government faces similar conflicting pressures on the international scene, where its efforts to join the World Trade Organization (WTO) have become snared in energy tariff debates. This week, Russia's WTO negotiator Maksim Medvedkov said, "As regards problems of a systemic nature, the most important problem remains with energy pricing."

For the past year, the European Union has been pressing Russia to raise domestic gas prices to world levels, ending the system of subsidizing Russian rates at the EU's expense. Russian gas tariffs of about $20 per 1,000 cubic meters are less than one-fifth of export prices. But the advice of the World Bank and the International Monetary Fund (IMF) may have added layers of complexity to an already complicated plight.

The World Bank believes that Russia's prices should roughly double to between $35 and $40 per 1,000 cubic meters to cover the long-term expenses of monopoly Gazprom, Christof Ruehl, the bank's chief economist for Russia, said in March. But that figure is less than half of what the EU wants.

At the same time in March, the IMF's top Russia expert, John Odling-Smee, criticized the pace of reforms and lowered the fund's economic forecasts for the country. Odling-Smee said that key reform measures are "being blocked by a lot of vested interests," Reuters reported. Among them, he said, was the effort to raise energy prices to "a proper market level," implying tariffs in line with the EU demands.

But Odling-Smee also urged Russia to keep inflation to within 10 percent, the lower end of its target range for this year of up to 12 percent. Odling-Smee said, "If inflation is always going to be above 10 percent, this could develop into a chronic illness for the country." It was not clear how the government would meet demands for lower inflation and higher tariffs at the same time.

The question of gas rates is closely tied to electricity tariffs, since two-thirds of Russia's power is generated from gas. But working backwards from the demands of United Russia and its 2.6 million petitioners, the problem seems even tougher.

If the government is pressured to cut electricity rates before the election, it may find it impossible to raise gas prices by 20 percent this year and 25 percent in 2004 as planned. The result of such increases would be a squeeze on EES and its restructuring plan.

Those concerns may be one reason that foreign investors have so far shunned investments in EES, although shares have been pushed higher by well-connected Russian investors who are vying for control. This week, Chubais said that foreigners would soon "regret" the missed opportunity, the RIA-Novosti news agency reported.

But they may be staying away until Russia's policy conflicts are clearly resolved.