Russia to raise Gazprom rates

  • 2002-06-27
  • Hugh Barnes, AFP MOSCOW
The Russian government took a controversial decision June 20 to raise gas prices by 15 percent in an attempt to cut domestic losses by the state-dominated monopoly Gazprom, despite fears the move could stoke inflation and cause hardship for poor clients.

Gazprom is a key natural gas supplier to all three Baltic countries.

Deputy Prime Minister Viktor Khristenko said the weekly Cabinet meeting had opted to raise gas tariffs by 15 percent, rail freight charges by 6.8 percent and electricity charges by 2.4 percent, Interfax reported.

Gazprom, which is 38 percent owned by the Russian state, and its chief executive Alexei Miller, a protïgï of President Vladimir Putin, have been actively lobbying for a 20 percent increase in industrial gas tariffs and a 25 percent hike in domestic charges.

The gas giant, often dubbed a "state within a state," has launched a major investment program but lacks the necessary financing because it operates at a loss in the domestic market where prices have been kept artificially low since the Soviet era.

However, senior government officials, including Economic Development Minister German Gref and Putin's top economic adviser Andrei Illarionov, have warned against the price increase, arguing it will push annual inflation above targeted levels.

Miller argues that gas prices must be raised because Gazprom's domestic operations are effectively subsidized by international exports, at a cost of $1.5 billion a year in cash that could be used for strategic investments.

Gref told journalists after the Cabinet meeting that the 15 percent hike in prices from July 1 was the first step in a government plan to free up the market for gas inside Russia.

"It is difficult to talk about boosting investments in the gas sector when prices in the domestic market are less than operating costs," Gref was quoted as saying by Interfax.

"Perhaps we will do what we can to achieve the necessary rise in gas prices, not straight away, but over the next two or three years," Gref added.

Increases of up to 25 percent in gas tariffs would net Gazprom up to $500 million in extra revenues by the end of 2002, Alfa Bank said.

However, the Russian government, fearing runaway inflation, appears willing to preserve "cross-subsidization" between domestic and export markets, with Illarionov persuading Putin that increases should be lower rather than higher, according to Alexei Moisseev of the United Financial Group investment house.

Gref's ministry is the biggest opponent of Gazprom's efforts to level the playing field because it is concerned that the resulting gas price increases will stoke inflation, said Alfa Bank's Sergei Glaser.

"We still see much greater long-term benefits for Russia in the form of timely financing of gas development projects and an end to the current practice of unnecessarily wasting this valuable fuel just to keep inflation under strict control," Glaser added.