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From: "Stanislav Menshikov" <menschivok@globalxs.nl>
Date: Sat, 15 Dec 2001

"MOSCOW TRIBUNE", 14 December 2001
But Rising Natural Monopoly Tariffs are Very Dangerous
By Stanislav Menshikov

The decision to cut Russian oil exports by 150,000 barrels per day has been called by some onlookers sheer pretence and bluff. Because the country usually sells abroad less oil than usual in the winter months the reduction would be discounted by the market and have no appreciable effect on prices. Andrei Illarionov, the president's economic adviser, believes that intervening in cutting exports is nonsensical particularly in the midst of an international recession. The government and president seem to think otherwise, and in this controversy we tend to take their side.

Cutting exports is meant not only for the coming winter but also for the whole of 2002. If other oil exporters follow suit, as expected, the overall reduction of 2 million barrels coming on top of the previous cut of 3,3 million earlier this year should seriously influence prices. A lot will depend on actual demand, i. e. on the global economic slump. But it goes without saying that with significantly lower supply prices will be higher than if no action to cut production and exports was taken. Prices might not return to the $30 per barrel peaks of late 2000 but should be higher than the $10 troughs of 1998. An intermediate price of $20 would probably suit both producers and consumers.

Unfortunately, there is too much politicking around oil. Russia has been criticised for siding with OPEC and thus negatively affecting its new relationship with the West. Well, every country seeks its best interest. Trying to assure adequate oil prices and a balanced federal budget is a legitimate national concern to follow. If Washington feels that it can abrogate the ABM Treaty despite Russia's objections, then it is only fair that Moscow is free to side with OPEC despite western objections.

One should stress that in this matter Messrs Putin and Kasyanov had no other alternative. Had the West suggested a way of compensating Russia for its fiscal loss from low oil prices things might have worked out differently. However, exactly at this point the EU officially made it known that it would recognise Russia as a market economy only if Moscow discontinued export duties and halted double pricing in the energy sector. Fiscal compensation by the West was obviously never seriously considered.

This message also came at a time when according to government statistics economic growth in Russia stopped in November for the first time in many months. Because industry is still operating at less than capacity the only reason is stagnating demand caused by slower capital investment and inadequate consumer purchases. This in turn depends on rising prices.

In recent months, official inflation has been minimal. But opinion polls show that a large part of the public does not believe government price statistics and is concerned about falling real incomes. The government is promising to raise salaries of government employees (including low paid teachers and doctors) next year by an average of 60 percent, but, as it turns out, has not appropriated the necessary funds in its 2002 budget. The promise could easily become fiction.

Moreover, in a recent cabinet meeting German Gref, the Economics Minister, suggested that the three natural monopolies - electricity, gas and railways - should be permitted to raise their tariffs next year by an average of 35 percent instead of only 20 percent envisaged by the federal budget. According to Mr. Gref this would increase general inflation in 2002 from 12 to 15,5 percent, which he did not consider excessive. According to the minister, the cabinet agreed.

But Andrei Illarionov immediately protested saying that no decision was taken and that the cabinet should disagree with Mr. Gref. According to Mr. Illarionov, more inflation would tend to slow down general economic growth and thus add to the president's political troubles. In this particular case we tend to agree with Mr. Putin's adviser. The extra 3 percent in inflation next year could easily deduct the same amount from real GDP growth making it a miserly 1 percent instead of 4.

Because Mr. Gref has not published his methodology, some experts believe that actual inflation next year could be much higher. Neither have the natural monopolies explained in plain language and straight figures why they need their excessive tariff increases. One argument is that Russian electricity and gas prices are way below western levels. But so are wages and other incomes that are needed to buy them. The EU may want Russia to discontinue double pricing in the energy and transport sectors but the reality is such that this can be done only slowly and without cutting into real incomes. Otherwise the economy may stop growing completely and easily end up in another crisis.

As it approaches Christmas and New Year the government finds itself caught up in the difficult position of fighting on two fronts simultaneously - against low prices abroad and high prices inside the country. Whether it can safely navigate between Scylla of outside recession and Charibdia of its own natural monopolies is so far an open question.

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