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. Last Updated: 07/27/2016

Cabinet Raises Rates for Power, Gas, Rail

In an effort to keep inflation in check, the Cabinet agreed Thursday to let Gazprom, the Railways Ministry and Unified Energy Systems hike their prices, but not by as much as the natural monopolies hoped.

Starting July 1, domestic wholesale gas prices will jump 15 percent, the cost of shipping by rail will rise 6.8 percent and wholesale electricity rates will nudge up 2.4 percent.

Economic Development and Trade Minister German Gref was quoted by news agencies as saying the new tariff levels would allow the government to meet its inflation corridor of 12 percent to 14 percent for the year. Gas and electricity prices have already been allowed to increase some 20 percent this year.

"Taking into account seasonal factors, this will be possible because inflation may be below zero in the summer months," Gref said, adding that the Central Bank would have its hands full managing inflation in the second half.

Thursday's decision was generally expected and in line with statements made earlier in the week by President Vladimir Putin, who urged the government to be cautious on tariff hikes, which he called a very "sensitive" issue for the nation's economic development, Prime-Tass reported.

Gref said the government's 2003 inflation forecast would remain unchanged at 10 percent to 12 percent and that his ministry was recommending that Gazprom be allowed next year to raise its prices 20 percent, UES 14 percent to 16 percent and the Railways Ministry 12 percent to 14 percent.

UES was the most disappointed with Thursday's decision.

For Gazprom, 15 percent was less than the 20 percent it was hoping for, but a source within the company said it was satisfied, Interfax reported. And the Railways Ministry got slightly less than the 7 percent to 10 percent it was asking for. But for UES, "an increase of 2.4 percent will definitely not resolve our financial problems," UES spokesman Andrei Yegorov said.

Deputy Prime Minister Viktor Khristenko said the 2.4 percent increase on wholesale power rates would lead to 1.8 percent growth in retail prices.

Electricity tariffs have more influence on inflation than those for railways or gas, Gref has said.

While Russian gas and electricity prices, which lag behind those in the West by roughly 30 percent and 50 percent, respectively, must grow eventually, any increase has a very significant effect on the economy, said Oksana Dynnikova, natural monopolies specialist at the Economic Expert Group think tank.

"The competitiveness of producers depends on the level of tariffs," she said.

Vladimir Tikhomirov, an economist at NIKoil, said that while the decision was expected, it showed that the government's priorities are wrong.

He said when an economy goes through structural reforms, as Russia's is now, an inflation rate of 20 percent is normal. But the natural monopolies are not being allowed to charge enough to cover their expenses.

Tikhomirov said with State Duma elections next year and presidential elections in 2004, inflation will become a political issue. "The conclusion is that the government is delaying structural reforms," he said.