#7 - JRL 6600
Russia: Energy Monopolies Disappointed In Latest Price Increases
By Michael Lelyveld

The Russian government dashed the hopes of its giant energy monopolies this week by granting tariff increases that may cover little more than inflation. But the economy, looming elections, and the struggles of 39 million pensioners may have given government officials little choice.

Boston, 13 December 2002 (RFE/RL) -- The Russian government approved moderate price hikes for its natural monopolies this week, disappointing the energy empires that are still under its control.

At a meeting on 11 December, the cabinet cleared a series of tariff increases for 2003 to keep costs of gas, power, and rail service within bounds for citizens who are scheduled to vote in parliamentary elections one year from now.

The decision dashed hopes for the gas monopoly Gazprom, the energy giant Unified Energy System (EES), and their independent shareholders. But Russia's economy and the elections ruled out their requests for increases that would have been twice as high.

Prime Minister Mikhail Kasyanov portrayed the decision as a compromise. Kasyanov said, "The increase in tariffs for natural monopoly services should not have a negative effect on the financial situation at companies and should not lead to an unjustified increase in consumer prices," Interfax reports. The government controls the monopolies with 38 percent of Gazprom's shares and 51 percent of EES.

The Reuters news agency quotes analysts as saying heavily indebted Gazprom would be forced into more borrowing to avoid cutting its investment program of nearly 180 billion rubles -- or $5.6 billion -- next year.

In a statement, EES said the government's tariff policy "does not meet the needs of energy companies" and does not reflect higher costs for taxes and fuel. The rate restraint could hurt EES, which stands on the verge of a massive restructuring to draw investors to its aging assets.

But the government largely stuck with the figures contained in its 2003 budget and approved by the State Duma, granting a 20 percent rise for Gazprom and a 13 percent to 14 percent increase for EES retail consumers. Wholesale power prices could go up 17 percent to 19 percent. Russia's railways also won a 12-percent fare increase.

All the new price hikes will be shrunk in real terms by inflation, forecast at between 10 percent and 12 percent. The result may be little gain, particularly for EES, which relies almost exclusively on domestic sales.

The amounts sought by the utilities varied widely over the course of the year, suggesting that the tariff exercise has been more of a game than a science. Last June, for example, Gazprom asked the government for a 26-percent increase to start on 1 January. In the past month, the target went as high as 50 percent, then declined to 40 percent for industrial users before settling down to a reported request of 37 percent for all consumers as the cabinet met.

But the government was unmoved by Gazprom's argument that it loses money on all subsidized domestic sales, which are regulated at about one-fifth the rate for exports to the European Union.

While the government recognizes that energy in Russia is too cheap to promote investment or conservation, it has not strayed far from tariffs recommended months ago by Economic Development and Trade Minister German Gref. This week, it barely budged from the numbers despite heavy lobbying by Gazprom, EES, and the Federal Energy Commission (FEK).

The struggle with inflation is the main reason. This month, Gref was forced to take back earlier pledges that inflation would stay within the 2002 budget range of 12 to 14 percent, admitting it "might just sneak above that level." Analysts -- including the Economist Intelligence Unit -- have been predicting 15 percent all year. Price growth in cities like Moscow and St. Petersburg will almost certainly be higher.

On 10 December, President Vladimir Putin voiced disappointment but argued that inflation remains at "appropriate levels" because it will be less than last year, RBC News reported.

The compromise is unlikely to make anyone happy, but the government may have seen no choices for now. On one side, it felt pressure from the monopolies and the EU, which wants an end to domestic gas subsidies before Russia joins the World Trade Organization. On the other, it faced 39 million pensioners, or more than one-fourth of the nation, with average monthly payments of 1,417 rubles, or just under $45, according to government data.

Although the government has made progress, Kasyanov said in October that 30 percent of the population remains below the subsistence level. Higher tariffs would put basic services even further beyond the reach of the poor.

In October, "The Moscow Times" reported that barter payments to Gazprom tripled between July and August because of rising tariffs, while the use of veksels, or promissory notes, rose 58 percent. The surge is troubling after three years of growth in cash settlements.

The government seems to have compared the economy's condition with that of the companies and concluded that the economy needs more help.

Gazprom Chief Financial Officer Boris Yurlov told the daily "Kommersant" this week that Gazprom's profits will rise 1.7 percent this year to 102 billion rubles -- or $3.2 billion -- despite falling gas prices in Europe. Yurlov cited cost-cutting and efforts to collect arrears.

At EES, net profit jumped by 1,700 percent in the first half of the year under international accounting standards, mainly due to tax changes, Prime-TASS reports. Profit for the full year may decline, but neither company is losing money yet. The government has pushed the monopolies to find savings before coming back for higher rates.

But the problems and poor returns of the state-controlled energy giants should also be obvious to the government when it compares them to Russia's privatized oil companies. Although the companies are also required to supply the domestic market, they have run up record profits and stock valuations in the open market, providing far more growth for the economy than EES or Gazprom.

At the cabinet meeting 18 December, Kasyanov voiced hope that the government "will be able with time" to get out of the tariff-setting business and turn the regulation over to the FEK. So far, it is unclear whether either approach to tariff-setting will work.

The Russian government dashed the hopes of its giant energy monopolies this week by granting tariff increases that may cover little more than inflation. But the economy, looming elections, and the struggles of 39 million pensioners may have given government officials little choice.

Boston, 13 December 2002 (RFE/RL) -- The Russian government approved moderate price hikes for its natural monopolies this week, disappointing the energy empires that are still under its control.

At a meeting on 11 December, the cabinet cleared a series of tariff increases for 2003 to keep costs of gas, power, and rail service within bounds for citizens who are scheduled to vote in parliamentary elections one year from now.

The decision dashed hopes for the gas monopoly Gazprom, the energy giant Unified Energy System (EES), and their independent shareholders. But Russia's economy and the elections ruled out their requests for increases that would have been twice as high.

Prime Minister Mikhail Kasyanov portrayed the decision as a compromise. Kasyanov said, "The increase in tariffs for natural monopoly services should not have a negative effect on the financial situation at companies and should not lead to an unjustified increase in consumer prices," Interfax reports. The government controls the monopolies with 38 percent of Gazprom's shares and 51 percent of EES.

The Reuters news agency quotes analysts as saying heavily indebted Gazprom would be forced into more borrowing to avoid cutting its investment program of nearly 180 billion rubles -- or $5.6 billion -- next year.

In a statement, EES said the government's tariff policy "does not meet the needs of energy companies" and does not reflect higher costs for taxes and fuel. The rate restraint could hurt EES, which stands on the verge of a massive restructuring to draw investors to its aging assets.

But the government largely stuck with the figures contained in its 2003 budget and approved by the State Duma, granting a 20 percent rise for Gazprom and a 13 percent to 14 percent increase for EES retail consumers. Wholesale power prices could go up 17 percent to 19 percent. Russia's railways also won a 12-percent fare increase.

All the new price hikes will be shrunk in real terms by inflation, forecast at between 10 percent and 12 percent. The result may be little gain, particularly for EES, which relies almost exclusively on domestic sales.

The amounts sought by the utilities varied widely over the course of the year, suggesting that the tariff exercise has been more of a game than a science. Last June, for example, Gazprom asked the government for a 26-percent increase to start on 1 January. In the past month, the target went as high as 50 percent, then declined to 40 percent for industrial users before settling down to a reported request of 37 percent for all consumers as the cabinet met.

But the government was unmoved by Gazprom's argument that it loses money on all subsidized domestic sales, which are regulated at about one-fifth the rate for exports to the European Union.

While the government recognizes that energy in Russia is too cheap to promote investment or conservation, it has not strayed far from tariffs recommended months ago by Economic Development and Trade Minister German Gref. This week, it barely budged from the numbers despite heavy lobbying by Gazprom, EES, and the Federal Energy Commission (FEK).

The struggle with inflation is the main reason. This month, Gref was forced to take back earlier pledges that inflation would stay within the 2002 budget range of 12 to 14 percent, admitting it "might just sneak above that level." Analysts -- including the Economist Intelligence Unit -- have been predicting 15 percent all year. Price growth in cities like Moscow and St. Petersburg will almost certainly be higher.

On 10 December, President Vladimir Putin voiced disappointment but argued that inflation remains at "appropriate levels" because it will be less than last year, RBC News reported.

The compromise is unlikely to make anyone happy, but the government may have seen no choices for now. On one side, it felt pressure from the monopolies and the EU, which wants an end to domestic gas subsidies before Russia joins the World Trade Organization. On the other, it faced 39 million pensioners, or more than one-fourth of the nation, with average monthly payments of 1,417 rubles, or just under $45, according to government data.

Although the government has made progress, Kasyanov said in October that 30 percent of the population remains below the subsistence level. Higher tariffs would put basic services even further beyond the reach of the poor.

In October, "The Moscow Times" reported that barter payments to Gazprom tripled between July and August because of rising tariffs, while the use of veksels, or promissory notes, rose 58 percent. The surge is troubling after three years of growth in cash settlements.

The government seems to have compared the economy's condition with that of the companies and concluded that the economy needs more help.

Gazprom Chief Financial Officer Boris Yurlov told the daily "Kommersant" this week that Gazprom's profits will rise 1.7 percent this year to 102 billion rubles -- or $3.2 billion -- despite falling gas prices in Europe. Yurlov cited cost-cutting and efforts to collect arrears.

At EES, net profit jumped by 1,700 percent in the first half of the year under international accounting standards, mainly due to tax changes, Prime-TASS reports. Profit for the full year may decline, but neither company is losing money yet. The government has pushed the monopolies to find savings before coming back for higher rates.

But the problems and poor returns of the state-controlled energy giants should also be obvious to the government when it compares them to Russia's privatized oil companies. Although the companies are also required to supply the domestic market, they have run up record profits and stock valuations in the open market, providing far more growth for the economy than EES or Gazprom.

At the cabinet meeting 18 December, Kasyanov voiced hope that the government "will be able with time" to get out of the tariff-setting business and turn the regulation over to the FEK. So far, it is unclear whether either approach to tariff-setting will work.