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. Last Updated: 07/27/2016

Gazprom Requests 35% Hike in Tariffs

Natural gas monopoly Gazprom has applied to the Federal Energy Commission to raise its tariffs by an average of 35 percent and asked for the hike be retroactive to Oct. 1.

Because of its monopoly on the local natural gas market, Gazprom’s wholesale prices are dictated and regulated by the Federal Energy Commission.

From 1997 to 1999 the average wholesale price for gas was frozen. The commission has since allowed Gazprom 15 percent price rises in October 1999 and April this year. Today the price of gas for industrial consumers fluctuates between 224 rubles ($8.08) and 400 rubles ($14.43) per thousand cubic meters.

That doesn’t seem to be enough for Gazprom.

Company head Rem Vyakhirev has frequently said that prices on the internal market must be increased by four to five times to make profitable sales. The hike would not necessarily have to be made overnight, but could take several years, he has said.

Gazprom needs to invest in gas fields or else gas extraction could fall by 40 billion to 50 billion cubic meters per annum. Gazprom sent its first appeal to the FEC for prices to be raised by 35 percent in August. But the commission rejected the gas giant’s appeal.

"Gazprom gave no grounds for why it really needed the increase and we requested additional information," said Vladimir Milov, head of the commission’s economic department.

"Recently, they repeated their request for a 35 percent increase. This time they presented documentation that we are prepared to analyze," Milov said.

Analysts said the government will gradually move toward granting an incremental increase.

"This is an objective necessity. Gazprom should not be subsidizing the Russian economy by selling gas at prices 10 times lower than in Europe," said Vladimir Nosov, oil and gas analyst at Chase investment bank.

Raiffeisen Bank said in a recent report that the government should grant Gazprom concessions, as it would be impossible to sign an agreement for increased supplies to the European Union without massive investment.

At the same time, the FEC’s Milov suggested that increased tariffs would not guarantee increased investment in extraction.

"The company is yet to produce a transparent and accurate investment program," Milov said.

An analyst from a Western investment company said that the next increase would happen no earlier than next year.

"They have already raised them this year. Most likely they’ll give Gazprom this gift closer to spring in order to compensate them somehow for Vyakhirev’s departure," the analyst said.

Vyakhirev said in June that he may retire next year when his contract expires.