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. Last Updated: 07/27/2016

Cautious Cabinet Cuts Tariff Increases

Hoping to rope in inflation, the government decided Thursday to scale back hikes on natural gas, electricity and rail cargo tariffs this year.

The move is a disappointment for the natural monopolies -- the Railways Ministry, Unified Energy Systems and Gazprom -- which had lobbied hard for the extra revenues but in the end reluctantly accepted a compromise with the lower rates.

The Cabinet decided that the cost of shipping by rail will go up 16 percent as of Feb. 15, electricity rates will grow 20 percent March 1 and natural gas prices will increase 20 percent March 15.

While gas and electricity prices could go up again later this year, rail shipping rates will not.

These figures reflect the compromise achieved between the government and the natural monopolies, said Economic Development and Trade Minister German Gref.

"While the natural monopolies may not be completely pleased, the government believes more tariff increases are not possible at present," Gref told reporters after the Cabinet meeting headed by Prime Minister Mikhail Kasyanov.

The natural monopolies' infrastructures -- which include thousands of kilometers of pipelines, grids and rails spanning the length of the country -- are desperately in need of additional investment. Monopoly bosses looked to these tariff increases as a way to renew their core assets.

Gazprom has seen its production rates decline 15 percent from a peak in the early 1990s. Electricity outages have plagued the Far East in recent years. And rail routes have been left unfinished and abandoned in Siberia's forests.

However, according to Economic Development and Trade Ministry estimates, Thursday's tariff increases will allow the monopolies to fulfill their investment programs.

The strict limits on tariff increases will force natural monopolies to cut expenses, Gref said.

Industry analysts and monopoly moguls alike were disappointed by the government's decision.

"I would be lying if I said this suited me," said Railways Minister Gennady Fadeyev, in remarks reported by Interfax. The ministry received a paltry 16 percent increase even though it had requested 66 percent.

But the railways will get another break in August when a rail reform-ordered indexation of 11 percent will go into effect.

The Federal Energy Commission had earlier decided to raise rail tariffs 14 percent as of Jan. 20, but last week Kasyanov quashed the commission's ruling in order to keep a lid on January inflation.

Consensus expectations for January hover around 2.3 percent. At this pace, inflation by year end would be about 30 percent, much higher than 2001's 18.6 percent.

Stephen O'Sullivan, head of research at the United Financial Group brokerage, said the government is overreacting to January inflation.

"It looks as if they got a little frightened," O'Sullivan said. "But the January number is lower than the 2.5 percent we saw this time last year. This year, the inflationary pressures are less. In any case, three weeks of inflation should not set the tone of tariffs for the entire year."

Lower oil prices, lower foreign exchange earnings and lower domestic money supply growth may keep this year's inflation around the government's target of 14 percent to 16 percent.

And it's exactly this projected annual inflation that will erode Thursday's meager tariff hikes, said Vladislav Metnyov, an oil and gas analyst for the Renaissance Capital brokerage.

"In real terms, growth will be minimal," Metnyov said. "But I don't think this is the final word. The government may decide on another hike after reviewing Gazprom's investment program for this year."

The government is to issue its proposal to reform Gazprom in March, and cost-reflective tariffs are universally considered to be a prerequisite for restructurization.

Suboptimal tariffs encourage waste and repel direct investment from the electricity and gas sectors, O'Sullivan said.

"There is clearly a reluctance to inflict pain on the wider population," he said.

Electricity fees for consumers will grow by 17.9 percent on average, Gref said. The rate of increase will vary by region because final fees are set by regional energy commissions.

UES had requested a 44 percent tariff increase.

According to calculations made by UES experts, even an earlier proposed 32 percent price increase on the wholesale electricity market wouldn't be enough to keep five more of its local power stations from going into the red. Fifteen of the monopoly's 74 or so power stations are already loss-making.

In the past decade, the growth of production prices has outstripped that of electricity tariffs by 150 percent. Consumer prices have grown 200 percent faster than electricity fees to households.

The Cabinet decision shows that there continues to be a wide difference of opinion on the tariff issue, said Alfa Bank economist Natalya Orlova.

"In reality, the Cabinet has delayed the final decision on 2002's tariff policy," Orlova said. "The question will continue to be periodically raised. Every time investors or companies consider participating in a project, they will raise it."