Analysis: Amid global recession, Russia's energy prices to rise

By JOHN C.K. DALY, UPI International Correspondent

WASHINGTON, May 5 (UPI) -- In the current global downturn, perhaps no energy company has fallen further from financial grace than Russia's natural gas state concern Gazprom. In a frantic search for liquidity amidst declining energy prices in the global recession, Gazprom is considering raising prices for its potentially most volatile customer base -- the Russian consumer. It would be a gesture fraught with risk for the government of Russian President Dmitry Medvedev and Prime Minister Vladimir Putin, but Gazprom's shrinking revenue base may leave the energy giant little choice.

The price discrepancy between what Russians pay for their subsidized natural gas and what Gazprom's foreign clients pay is immense. Last year, when Gazprom began formulating its prices for the first quarter of 2009, Gazprom spokesman Sergei Kupriyanov said during a Dec. 27 Russian radio interview that Russian consumers would pay $65 per thousand cubic meters, while European customers would pay $260 to $300 per tcm.


Fast forward four months. In the wake of pricing disputes with both Ukraine and Turkmenistan, on April 27 a government spokesman, speaking on condition of anonymity, told Interfax that Russia's Energy Ministry prepared a new forecast on the country's socioeconomic development for 2009-2012 under which gas tariffs in 2010 could increase 5 percent for companies and 20.8 percent for the population. Under the terms of the proposal, electricity tariffs would also increase 5 percent for companies and 10 percent for the general public.

Russian consumers can take some slight cold comfort in the fact that the new forecast followed a similar but harsher one prepared last August by the Energy Ministry for 2009-2011, which projected gas prices increasing in 2010 by 27.7 percent for industry and 30 percent for the general populace. Electricity increases were similarly severe, rising 22 percent for industry in 2010 and 18 percent in 2011, while tariffs for the population were to increase by 25 percent and 40 percent. The tariffs in the forecast were not approved.

The proposed increases are fraught with political risks, as the subsidized energy prices are one of the last fiscal cushions available to a population that has been financially hammered since the 1991 collapse of communism. While Gazprom has taken great strides in forcing its former Soviet republic and Eastern European customers to absorb a series of rate increases designed to bring prices closer to world levels, energy tariffs for citizens within the Russian Federation have been largely immune from such capitalist "shock therapy." The government's caution is largely due to the political risks inherent in provoking the long-suffering Russian consumer, few of whom have seen any significant increase over the last 18 years of their standard of living while being subjected to the spectacle of Russia's new class of energy billionaires indulging in obscene spending sprees.


The crisis has also put on hold for the moment the government's plans to liberalize Russia's wholesale energy market, which could be postponed by six months, a source familiar with the Economic Development Ministry's deliberations said, speaking off the record. According to the Federal Tariff Service, 30 percent of the energy market has been liberalized, but this share was to grow to 50 percent by July 1, a decision that is now likely to be delayed. The Economic Development Ministry will officially submit its latest forecast to the government next month, and the forecast is to be considered at the end of May.

The decision to squeeze its home base of consumers represents a stunning turnaround of fortunes for Gazprom, founded in 1989. Gazprom is now Russia's largest company and the world's largest natural gas provider, with 432,000 employees. In 2007, less than two years ago, Gazprom ranked sixth on the Financial Times Global 500 list, with a market value of $245 billion. Gazprom's majority shareholder is the Russian government, with 50.01 percent of its stock. Last year, Gazprom chief Alexei Miller confidently predicted that markets would shortly see $250-per-barrel oil, which would see Gazprom's market capitalization becoming the world's first company to achieve $1 trillion in assets.


Despite Miller's roseate predictions, inside Russia, Gazprom's revenue stream is constrained by domestic regulation, which compels it to supply the domestic market at government-regulated prices. As Gazprom is the country's largest contributor to the treasury, the Energy Ministry's forecast indicates Moscow is now willing to tinker with domestic prices in its search for additional revenues amid the global recession of energy prices, despite the potential for price increases provoking social unrest.

By any yardstick, the global recession has hit the Russian economy hard. According to the Central Bank, this year Russian businesses and the state must repay more than $152 billion on their foreign debt. Rising unemployment is also stalking the Russian economy; according to the Economic Development Ministry, this year Russia's unemployed will rise to 7.6 million to 7.8 million, against an earlier forecast of 6 million. Russia's Federal State Statistics Service recently put unemployment for the first quarter of 2009 at 7.1 million, 9.5 percent of the working population.

As far as pummeling the country's shrinking employment base with price increases, market forces are already impacting the Russian government's projections. According to Russia's Market Council, electricity consumption for the week of April 17-23 declined 5.2 percent year-on-year, slipping 1.2 percent from the previous week alone. Most ominously, consumption declines were recorded in 49 out of the 64 regions covered by the wholesale market's price zones. Should the projected price increases go into effect, consumption will doubtlessly drop further.


Gazprom's slogan is, "Mechty sbvaiutsia!" ("Dreams come true!") If the projected tariff rates go through, then Russian customers are likely to use a different word for Gazprom's reveries -- "koshmar," which means "nightmare." Rampant inflation, unemployment and rising rage over social inequity were some of the factors behind 1917, a fact that Russia's energy barons and government officials seem to have forgotten. Instead of extolling the country's Soviet past, Russia's current leadership could do worse than ponder the conditions that brought it into power in the first place 92 years ago and pay attention before rising numbers of unemployed battered by inflation forcibly remind them.

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