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. Last Updated: 07/27/2016

Kremlin Asks for More Gas, No Price Controls

Facing mounting shortages of gasoline and fuel oil, the government met Thursday with leading oil executives and asked them to raise production to avert the crisis, pledging in return that it would not intervene to try to control prices, or raise export tariffs.

"Gasoline prices can grow," First Deputy Prime Minister Nikolai Aksyonenko said after a meeting between the government, represented by Prime Minister Sergei Stepashin, Aksyonenko and Fuel and Energy Minister Viktor Kalyuzhny, and the heads of Russia's largest oil companies. Stepashin had earlier met with President Boris Yeltsin, who had expressed concern about the dire state of the gasoline market in Russia.

Gasoline is scarce in many regions across Russia, with lines at filling stations from Sochi on the Black Sea to Krasnoyarsk, Western Siberia, and Vladivostok in the Far East. Vladivostok has even introduced gasoline rationing cards, according to Russian media reports.

The disorganized fuel market threatens to disrupt the harvest, leave power stations with insufficient fuel for winter and lead to inadequate fuel supplies for the isolated Far North of Russia, says a government report posted Thursday on the AK&M news agency's web site.

Unified Energy Systems, the near monopoly that runs most of the nation's non-nuclear power plants, also warned that fuel oil is so scarce that it has been forced to halt hot water supplies in Arkhangelsk.

Other regions have had power cut off at specific periods and the number of areas affected is likely to grow unless the situation is addressed quickly and effectively, according to a UES statement released Thursday.

The government's main answer to the problem was that oil companies needed to raise production.

"We made a firm suggestion to oil companies that they should raise their production. In the fourth quarter and in 2000, the first results of this should become evident," Kalyuzhny said at a news briefing at the ministry.

However, it is unclear how much good pleas to raise output will do. On the one hand, Russia's oil industry is suffering from reduced capacity caused by years of falling investment in infrastructure. On the other hand, the simple reason that gasoline and fuel oil are so scarce inside Russia is because it is so much more lucrative for companies to sell it abroad.

Aksyonenko himself said as much Thursday, admitting that illegal gasoline exports are soaring.

"They smuggle it out between customs points. Our borders are too porous,'' Interfax quoted him as saying.

The government report backs that assessment up with some alarmingly high figures for the exports of oil products, and some dire drops in overall output.

Russia exported 55.2 percent of the 11.5 million tons of diesel fuel that it produced in the first half of this year, the report said.

And even as production of fuel oil dropped some 10 percent in the same period to 25.25 million tons, 28.3 percent of that amount was being shipped out of Russia. Almost half of all fuel oil output in the second quarter was exported.

That has caused a devastating drop in UES' fuel oil reserves, company spokesman Andrei Trapeznikov said.

By mid-July, power stations had fuel oil reserves of just 2.1 million tons, 25 percent less than budgeted and 20 percent less than they possessed at the same time last year.

With the scarcity of oil products sending prices up, UES says it will have to double power charges in order to go on buying fuel oil at current prices of 1,300 rubles ($54) per ton.

UES has urged the government to act by raising export tariffs for crude and fuel oil, a step the government ruled out.

The government is apparently hoping to strike a "gentleman's agreement" with oil companies to restore the delicate balance between public needs and private business, an analyst said.

Details of the agreement have not been released, but government officials said oil firms will be forced to increase supplies on the domestic market and urged to expand downstream activities.

Probably it will keep pressing oil companies to follow the agreed schedule of supplies to specific parts of Russia.

"This must be a gentleman's agreement which most probably outlines the schedule of crude supplies to the regions," said Dmitry Avdeyev, an oil and gas analyst with United Financial Group brokerage.

"Gasoline prices will grow until they are in line with global prices," he added. The flood of oil products heading abroad is due to the better returns available there. Deducting value-added taxation, markup, transportation and other costs from the average Moscow retail gasoline prices of 5 rubles to 6 rubles per liter ($0.25), The Moscow Times estimates that wholesalers probably receive roughly 3 rubles to 3.5 rubles a liter for high to very high octane gasoline.

The 12.5 cents to 14.5 cents a liter this represents is well below the 18 cents to 20 cents a liter that Avdeyev said was the norm on the international market.

The state's chances of reaching a gentleman's agreement and making it stick are poor.

It already signed an agreement June 16 with 57 major companies - including all the oil majors - under which the companies agreed to limit wholesale price rises.

That deal has been widely flouted, said a government report issued Monday.

Neither oil companies nor metal producers have stuck to the terms of the price-fixing agreement. In June alone, prices on the output of several pipe manufacturers rose 37 percent to 43 percent, the report said.