-------
SUMMARY
-------
1. (C) In 2006, the GOR planned a series of tariff increases
to raise domestic natural gas prices for industrial consumers
to "market levels" -- that is, European prices minus taxes
and transport -- by 2011. However, full liberalization by
2011 appears to be off the table, with the Ministry of
Economic Development suggesting a new target of 2012, and
independent experts expecting delays until 2017. The GOR's
decision to delay gas price reform will likely hinder plans
to foster a more efficient economy and prevent more rational
gas consumption. End Summary.
----------------------------------
GOR PLANS GAS PRICE LIBERALIZATION
----------------------------------
2. (SBU) In 2006, the Ministries of Industry and Energy,
Economic Development and Trade, and Finance, as well as the
Federal Antimonopoly and Tariff Services approved a program
to increase domestic natural gas prices for industrial
consumers to market levels, i.e. netback parity (market price
minus taxes and transport) with European prices, by 2011.
Regarding non-industrial customers, gas prices for household
consumption will reach netback parity by 2015-17 according to
the 2008 version of the Ministry of Economic Development's
(MED) 2020 Concept for its Socioeconomic Program. (Note: The
GOR has heavily subsidized gas prices for both household and
industrial consumers since the Soviet era. Industrial
consumption represents the vast majority of Gazprom's
domestic sales, with household consumption comprising only 28
percent of sales in 2008. End Note.) The GOR decision on
raising gas tariffs had been seen as a way to improve
economic efficiency and promote more economically rational
energy use in Russia, where energy consumption per unit of
GDP is among the highest in the world.
3. (SBU) The 2006 industrial program envisaged tariff hikes
of 15 percent in January 2007, 17 percent in January 2008,
four increases of 13 percent each in January and July of 2009
and 2010, and the remainder to reach netback parity in
January 2011. However, with European prices variably three
to six times higher than domestic prices, many analysts have
always been skeptical of the program's feasibility given the
obvious political costs.
------------------------------
MARKET PRICING DELAYED TO 2017
------------------------------
4. (SBU) In July 2009, MED made it clear that the 2011 target
date would not be reached when it announced its intention to
raise the domestic natural gas tariff for industrial
consumers by 15 percent on January 1, 2010 and to limit
annual tariff growth in 2011 and 2012 to 15 percent, well
below what would be required to reach netback parity. In
October 2009, MED released plans to increase household gas
prices by five percent in January and 15 percent in April
from 2010-2011 and by 15 percent in 2012. (Note: Household
tariff increases are larger than those for industrial
consumers because household gas prices are currently
significantly lower. End Note.) Deutsche Bank experts
contend that achieving European netback parity levels for
industrial consumers would require not a 15 percent increase
but a 115 percent increase in 2011.
5. (SBU) In October 2009, the Ministry of Energy (MOE)
proposed to delay a final decision on natural gas price
liberalization until July 2010, claiming it would not be
ready to equalize European and domestic, industrial prices
completely until at least 2012. MOE officials cited concerns
over the potential for Gazprom to abuse its dominant market
position to benefit at the expense of consumers. Although
Gazprom's Board of Directors instructed company management to
continue working with the federal government on the
transition to market principles for gas pricing by 2011,
MOSCOW 00002904 002 OF 002
Valery Golubev, Gazprom Deputy CEO in charge of the Russian
market, told the press in October that his company did not
expect to receive netback parity prices from domestic
customers for at least five years. Elena Karpel, Head of
Gazprom's Economic Expertise and Pricing Department,
subsequently elaborated on this statement, proposing the use
of European netback prices from 2011, but with discounts that
would gradually disappear by 2014. Deutsche Bank experts
assert that even 2014 is not an attainable target and do not
expect full-scale liberalization of domestic industrial gas
tariffs until 2017, with full liberalization of household
prices following sometime later.
-------------------------------------------
DELAY WILL ALSO HIT PROJECTED GAZPROM GAINS
-------------------------------------------
6. (SBU) Gazprom has long contended that rising prices in the
domestic market -- to which it sells 51 percent of its gas by
volume but from which it receives only 21 percent of its
revenues -- would help propel its future earnings. The GOR's
decision to reduce gas tariff increases in 2010 and delay
complete liberalization will thus lower Gazprom's projected
gains, at a time when it is already reeling from declining
demand and low prices in its major export markets. (Note:
Even in an environment of rising domestic gas prices, the
effect on Gazprom's bottom line is debatable. Some analysts,
citing examples from other countries, predict a strong
contraction in demand in response to price hikes. A recent
report by Credit Suisse cited the case of Ukraine, where,
according to their analysis, demand fell 50% in response to
rising prices throughout the 1990s. End note.)
-------
COMMENT
-------
7. (C) Although politically convenient given the current
economic situation, the GOR's decision to delay gas price
liberalization will contribute to continued inefficiencies
across the economy. As long as Russian enterprises do not
bear the full cost of their use of outdated processes and
equipment, they will remain unlikely to invest in the modern
technology and production methods necessary for future
economic growth. End Comment.
Beyrle
| FULL GAS PRICE LIBERALIZATION UNLIKELY ANYTIME SOON IN RUSSIA | |
2009 November 30, 10:51 (Monday) |
09MOSCOW2904_a |
CONFIDENTIAL |
CONFIDENTIAL |
|
-- Not Assigned -- |
6488 |
-- Not Assigned -- |
TEXT ONLINE |
-- Not Assigned -- |
TE - Telegram (cable) |
|
-- N/A or Blank -- -- N/A or Blank -- |
-- Not Assigned -- |
-- Not Assigned -- |
|
Content
Raw content
C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 002904
SIPDIS
DEPT FOR EUR/RUS, EEB/ESC/IEC GALLOGLY AND GREENSTEIN,
S/EEE MORNINGSTAR
DOE FOR HEGBURG, EKIMOFF
DOC FOR JBROUGHER
NSC FOR MMCFAUL
E.O. 12958: DECL: 11/29/2019
TAGS: EPET, ENRG, ECON, PREL, RS
SUBJECT: FULL GAS PRICE LIBERALIZATION UNLIKELY ANYTIME
SOON IN RUSSIA
Classified By: A/ECON Lynette J. Poulton, Reasons 1.4 (b,d)
-------
SUMMARY
-------
1. (C) In 2006, the GOR planned a series of tariff increases
to raise domestic natural gas prices for industrial consumers
to "market levels" -- that is, European prices minus taxes
and transport -- by 2011. However, full liberalization by
2011 appears to be off the table, with the Ministry of
Economic Development suggesting a new target of 2012, and
independent experts expecting delays until 2017. The GOR's
decision to delay gas price reform will likely hinder plans
to foster a more efficient economy and prevent more rational
gas consumption. End Summary.
----------------------------------
GOR PLANS GAS PRICE LIBERALIZATION
----------------------------------
2. (SBU) In 2006, the Ministries of Industry and Energy,
Economic Development and Trade, and Finance, as well as the
Federal Antimonopoly and Tariff Services approved a program
to increase domestic natural gas prices for industrial
consumers to market levels, i.e. netback parity (market price
minus taxes and transport) with European prices, by 2011.
Regarding non-industrial customers, gas prices for household
consumption will reach netback parity by 2015-17 according to
the 2008 version of the Ministry of Economic Development's
(MED) 2020 Concept for its Socioeconomic Program. (Note: The
GOR has heavily subsidized gas prices for both household and
industrial consumers since the Soviet era. Industrial
consumption represents the vast majority of Gazprom's
domestic sales, with household consumption comprising only 28
percent of sales in 2008. End Note.) The GOR decision on
raising gas tariffs had been seen as a way to improve
economic efficiency and promote more economically rational
energy use in Russia, where energy consumption per unit of
GDP is among the highest in the world.
3. (SBU) The 2006 industrial program envisaged tariff hikes
of 15 percent in January 2007, 17 percent in January 2008,
four increases of 13 percent each in January and July of 2009
and 2010, and the remainder to reach netback parity in
January 2011. However, with European prices variably three
to six times higher than domestic prices, many analysts have
always been skeptical of the program's feasibility given the
obvious political costs.
------------------------------
MARKET PRICING DELAYED TO 2017
------------------------------
4. (SBU) In July 2009, MED made it clear that the 2011 target
date would not be reached when it announced its intention to
raise the domestic natural gas tariff for industrial
consumers by 15 percent on January 1, 2010 and to limit
annual tariff growth in 2011 and 2012 to 15 percent, well
below what would be required to reach netback parity. In
October 2009, MED released plans to increase household gas
prices by five percent in January and 15 percent in April
from 2010-2011 and by 15 percent in 2012. (Note: Household
tariff increases are larger than those for industrial
consumers because household gas prices are currently
significantly lower. End Note.) Deutsche Bank experts
contend that achieving European netback parity levels for
industrial consumers would require not a 15 percent increase
but a 115 percent increase in 2011.
5. (SBU) In October 2009, the Ministry of Energy (MOE)
proposed to delay a final decision on natural gas price
liberalization until July 2010, claiming it would not be
ready to equalize European and domestic, industrial prices
completely until at least 2012. MOE officials cited concerns
over the potential for Gazprom to abuse its dominant market
position to benefit at the expense of consumers. Although
Gazprom's Board of Directors instructed company management to
continue working with the federal government on the
transition to market principles for gas pricing by 2011,
MOSCOW 00002904 002 OF 002
Valery Golubev, Gazprom Deputy CEO in charge of the Russian
market, told the press in October that his company did not
expect to receive netback parity prices from domestic
customers for at least five years. Elena Karpel, Head of
Gazprom's Economic Expertise and Pricing Department,
subsequently elaborated on this statement, proposing the use
of European netback prices from 2011, but with discounts that
would gradually disappear by 2014. Deutsche Bank experts
assert that even 2014 is not an attainable target and do not
expect full-scale liberalization of domestic industrial gas
tariffs until 2017, with full liberalization of household
prices following sometime later.
-------------------------------------------
DELAY WILL ALSO HIT PROJECTED GAZPROM GAINS
-------------------------------------------
6. (SBU) Gazprom has long contended that rising prices in the
domestic market -- to which it sells 51 percent of its gas by
volume but from which it receives only 21 percent of its
revenues -- would help propel its future earnings. The GOR's
decision to reduce gas tariff increases in 2010 and delay
complete liberalization will thus lower Gazprom's projected
gains, at a time when it is already reeling from declining
demand and low prices in its major export markets. (Note:
Even in an environment of rising domestic gas prices, the
effect on Gazprom's bottom line is debatable. Some analysts,
citing examples from other countries, predict a strong
contraction in demand in response to price hikes. A recent
report by Credit Suisse cited the case of Ukraine, where,
according to their analysis, demand fell 50% in response to
rising prices throughout the 1990s. End note.)
-------
COMMENT
-------
7. (C) Although politically convenient given the current
economic situation, the GOR's decision to delay gas price
liberalization will contribute to continued inefficiencies
across the economy. As long as Russian enterprises do not
bear the full cost of their use of outdated processes and
equipment, they will remain unlikely to invest in the modern
technology and production methods necessary for future
economic growth. End Comment.
Beyrle
Metadata
VZCZCXRO2614
PP RUEHDBU RUEHFL RUEHKW RUEHLA RUEHNP RUEHROV RUEHSL RUEHSR
DE RUEHMO #2904/01 3341051
ZNY CCCCC ZZH
P 301051Z NOV 09
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 5537
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RHMFISS/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
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