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. Last Updated: 07/27/2016

Illarionov Says Market Should Set Price of Gas

MTAndrei Illarionov
Russia should free domestic prices for natural gas over several years to boost competition and make its gas industry more efficient, presidential economic adviser Andrei Illarionov said Friday.

President Vladimir Putin, his aides and ministers are considering a draft calling for a "gradual" transition to free prices from the current system, in which the government caps domestic gas prices, Illarionov said.

"Price regulation always leads to the same result: to a series of crises," he said. "Sooner or later, gas prices should be defined by the market. Getting closer to this ideal state will be a long process, but only the market would tell what is a fair price level for gas in Russia."

State-controlled Gazprom, the world's top gas producer, pumps about four-fifths of Russian gas and sells it domestically at less than 20 percent of the price paid by Western Europeans. Cheap gas "ensures growth in other industries," Putin said at a news conference three hours after his re-election on March 15.

The European Union has demanded Russia drop price caps for electricity and gas before it can join the World Trade Organization.

Putin has also said Gazprom should allow other gas producers to use its pipelines for domestic sales but not for exports.

"Freeing up Russian gas prices is feasible in the long term, breaking the resistance of producers who enjoy the comparative advantage of cheap energy," said Peter Westin, an economist at Moscow-based Aton. "If freed, Russian gas prices would move up but still not as high as European levels."

The lack of a free gas market in both Russia and Europe, where sales are dominated by large companies such as Germany's Ruhrgas, a unit of E.ON, and France's Gaz de France, makes it hard to predict the price in Russia if caps are lifted, Illarionov said.

"It's impossible to say whether free prices will be lower or higher than current Russian prices," he said. "The market will tell. Now it's controlled by monopolies both in Russia and in Europe."

International gas prices will become more flexible as supplies of liquefied natural gas take a bigger share of the world's market of the fuel, Illarionov said.

Investors and international lending organizations such as the International Monetary Fund have urged the Russian government to break up Gazprom into gas-producing and transporting companies to open up the gas market, attracting more investment.

Putin has ruled out a breakup of Gazprom, Russia's biggest taxpayer, and urged the government to be "careful" dealing with the company, is 38 percent owned by the state.