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. Last Updated: 07/27/2016

Minister, Industry Sign Pact On Prices

Russia's industrial giants closed ranks with the government Wednesday, signing an agreement to impose price controls aimed at dampening inflationary pressures and wooing the State Duma.

The deal was signed at the White House by the heads of 53 of Russia's largest companies, with the deal's architect, First Deputy Prime Minister Nikolai Aksyonenko, looking on proudly. A further four companies have also agreed to the deal.

"This agreement on cooperation in stabilizing the economy will fix existing price levels," Aksyonenko told reporters after the signing.

"The document was signed today by 53 participants representing over 50 percent of gross domestic product," he added.

The list of signatories to the deal reads like a who's who of Russian industrial magnates. Gas monopoly Gazprom, the Railways Ministry, Norilsk Nickel, oil pipeline monopoly Transneft, oil giants such as LUKoil, Yukos and Sibneft, and national electricity giant Unified Energy Systems were just a few of the bigger names. The list also included coal and metal producers and even carmaker AvtoVAZ.

With Prime Minister Sergei Stepashin conveniently absent f he was attending the St. Petersburg economic forum along with International Monetary Fund chief Michel Camdessus f Aksyonenko basked in the limelight of what he portrayed as a major step toward economic health.

The signatories showed they were committed to cooperating to stabilize the economy, he said.

"That shows a great sense of responsibility for the fate of Russia," he added.

A leak of the pact saw a preview of the deal splashed all over major newspaper Kommersant, and Aksyonenko waxed lyrical Wednesday on his vision for Russia's economic future.

As well as pledging to support domestic producers through export restrictions f perhaps even quotas f to guarantee access to raw materials, he talked of tax breaks and state guarantees for both foreign and domestic investors and an enlarged role for state intervention.

Wednesday's price control deal, for all its impressive display of solidarity between government and industry, was also lacking particulars. For one, it failed to provide for any control or supervisory mechanisms, without which it is something of a paper tiger.

"The agreement is a fundamentally non-market approach to price setting, but I still can't see how the government is going to implement the price controls," said Charles Blitzer, head of emerging market research at Donaldson, Lufkin and Jenrette.

Committing the parties to the establishment of "economically justifiable" prices on energy, metals and transportation for the second six months of this year, the pact called for measures to prevent "unwarranted" price rises. It also proposes establishing long-term agreements to be clinched between suppliers and their main customers. The document said prices and tariffs would be raised by no more than half of the industrial prices inflation rate until December 31 this year.

However, imposing controls on industrial prices will not necessarily dampen consumer price rises, which are driven more by increases in consumer demand, a rising money supply or decreases in the ruble's value.

In 1998, the Producers Price Index grew 25 percent while the Consumer Price Index (CPI) surged 85 percent.

Nevertheless, industrialists praised the deal as a necessary measure for preserving the fragile Russian economy.

Liberal reformer and current UES chief executive Anatoly Chubais said the pact could potentially have a "reviving effect" on the economy.

"It is impossible to impose price levels by agreement or by order, but it is possible to stop dangerous tendencies on the basis of the agreement," he said.

The agreement was "entirely acceptable" and will have a beneficial effect on the Russian fuel market, said Sergei Borisov, president of the Russian Fuel Union, in remarks reported by Interfax.

A week ago, Borisov was saying a gasoline price freeze would be a catastrophe, leading to sales of cheap gasoline surrogates and the closure of some businesses.

Despite criticism from leading Russian media that the pact invoked the "shadow of Socialism," Aksyonenko defended the move as market oriented.

"The agreement is an open, market oriented, democratic document," he said, Interfax reported. "It is not a price dictate."

However, the deal drew plenty of scorn from economists, who said it would be impossible to enforce effectively and economically harmful even if implemented in only a half-hearted fashion.

While the deal does little to make sure its signatories comply, it is very probable that the government will end up paying a high price for the magnates' apparent magnanimity, analysts added.

"It is highly likely that following a relatively successful record on tax collection leading up to the release of IMF funds, tax collection will soon slacken," said Natalya Orlova, an economist at Alfa capital.

"We may see that companies will insist on lower tax payments in cash," she said.Political analyst Yury Korgonyuk of the INDEM research center agreed.

"I'm sure that a lot of the signatories will be relieved of some of the burden of making tax payments in cash," he said.

Meanwhile, the government is unlikely to reap either the short term or long term rewards it has been aiming for with the deal.

Despite the pact, the State Duma is unlikely to pass the imputed tax on gasoline stations that Prime Minister Sergei Stepashin has been saying is vital to gain the release of IMF funds. The Duma has jibbed at the possibility that the law will cause gasoline prices to go up.

"Even so [the pact] might not persuade the Duma to pass the measures," said Sergei Kolmakov, deputy director of Fond Politika.

"The Communists are not only afraid of losing the potential vote of Russia's approximately 18 million car owners, but their public aims of defending the interests of the population are also a cover for strong lobbying from Yukos and LUKoil," he said.

The Communists, Yabloko and other Duma factions said later Wednesday that they would vote against the gasoline tax, (see story page 3).

Meanwhile, inflation is just as likely to break out in the long run.

"Inflation pressure will accumulate gradually, and it's hard to predict the outcome when the agreement expires," said Alexei Zabotkin, economist with United Financial Group.

"Besides, the government will be able to control only producers prices while consumer prices can keep growing," he added.

But the exporters among the industrial companies will reap most of the benefits. Oil majors in particular will be happy to lock in ruble costs.

"Domestic oil prices increased almost two-fold since year start, and oil companies could be happy to put a lid on tariffs charged by natural monopolies," said Alexander Agibalov, oil and gas analyst with Aton brokerage.

"It's beneficial for oil companies and less favorable for Gazprom," said Ivan Mazalov, oil and gas analyst with Troika Dialog. "But Gazprom has in some sense been in a better position from the very start because it paid no export tariffs."

In January, the Primakov government slapped excise taxes on oil, gas and metals exports.

But export tariffs levied on Gazprom were lifted just a week after the decree was enacted, said Mazalov.

Gazprom certainly did well. The company posted pre-tax profits for the first quarter of this year of more than 10.68 billion rubles ($440 million) in profits, a year-on-year increase of 600 percent in ruble terms, Interfax reported. Those profits were on sales of 53.7 billion rubles.