The Russian government must free oil prices to avoid massive domestic shortages when export quotas are lifted, and can do so without causing runaway inflation, Western and Russian economists said Wednesday.
Under a presidential decree, export quotas are due to expire Jan. 1. The original June deadline was extended by six months when the Fuel and Energy Ministry argued that an end to quotas would result in a massive flow of cheap oil abroad and shortages at home.
Freeing prices would prevent "massive exports" by making the domestic market more profitable, said Sergei Pavlenko, director of the governmental Center for Economic Reform.
"Price controls must be lifted first so prices can balance out in advance," he said.
The Economics Ministry is drafting a presidential decree to free oil prices that it expects President Boris Yeltsin to sign in December, First Deputy Economics Minister Yakov Urinson said last week. Russian domestic oil prices are currently fixed at about one-third the export price of Russian oil, which is close to world prices at $110 to $115 per ton of crude.
Economics Minister Yevgeny Yasin told Interfax that if quotas were lifted, domestic oil prices would rise 80 to 160 percent. His deputy Sergei Ignatyev said last week that freed prices would likely rise gradually at a rate 2 to 3 percent higher than monthly inflation.
The idea of freeing oil prices has long been a point of contention in the Russian government. Opponents warn of hyperinflation, pointing out that the price of oil affects every sector of the economy, from transport to manufacturing to agriculture.
But economists say that Russia has now made enough progress against inflation to mitigate the risk involved in freeing prices.
"There will be a one-time adjustment of the price level; prices will go up since they must reflect the price of domestic oil. But that's not inflation," said a Western economist, who asked not to be named. "If there was low inflation before, it will continue to be low."
He compared the process to the price adjustments that occur when a country joins the European Union and, to comply with EU regulations, has to introduce a new tax that hikes prices by a certain percentage across the board.
In such cases, he said, "prices continue to move as they did before, according to various macroeconomic factors. It's just that prices have been adjusted upward 2 or 3 percent."
The economist said that freeing oil prices could even have an anti-inflationary effect by making Russia's oil companies more profitable and sending more revenues to the government, which in turn would rely less on inflationary Central Bank credits to finance the budget.
"The net impact could go either way," he said.
Tax revenues would further increase, because export taxes are calculated according to the per-ton price of oil on the domestic market, the economist said.
"If the same excise tax were assessed on a domestic price that was closer to international prices, it would mean a lot more money for the budget," he said.
Some government officials have suggested prolonging export quotas beyond the Jan. 1 deadline, which would for the time being defuse the whole issue of freeing prices. But Russia's new economic chiefs -- Economics Minister Yasin and First Deputy Prime Minister Anatoly Chubais -- have thrown their weight behind the plan to end quotas.
Yasin said Tuesday that scrapping quotas would boost oil exports by 10 million tons yearly and help oil companies raise much-needed hard currency, Interfax reported. And Chubais has said that Russia can afford to increase exports without causing shortages, citing government forecasts that domestic oil consumption will fall 9 to 10 percent next year.
Economists say lifting quotas will encourage investment in the oil industry by companies that so far have been reluctant to build new pipelines and terminals for fear they would not be able to export as much oil as they could produce.
Under a presidential decree, export quotas are due to expire Jan. 1. The original June deadline was extended by six months when the Fuel and Energy Ministry argued that an end to quotas would result in a massive flow of cheap oil abroad and shortages at home.
Freeing prices would prevent "massive exports" by making the domestic market more profitable, said Sergei Pavlenko, director of the governmental Center for Economic Reform.
"Price controls must be lifted first so prices can balance out in advance," he said.
The Economics Ministry is drafting a presidential decree to free oil prices that it expects President Boris Yeltsin to sign in December, First Deputy Economics Minister Yakov Urinson said last week. Russian domestic oil prices are currently fixed at about one-third the export price of Russian oil, which is close to world prices at $110 to $115 per ton of crude.
Economics Minister Yevgeny Yasin told Interfax that if quotas were lifted, domestic oil prices would rise 80 to 160 percent. His deputy Sergei Ignatyev said last week that freed prices would likely rise gradually at a rate 2 to 3 percent higher than monthly inflation.
The idea of freeing oil prices has long been a point of contention in the Russian government. Opponents warn of hyperinflation, pointing out that the price of oil affects every sector of the economy, from transport to manufacturing to agriculture.
But economists say that Russia has now made enough progress against inflation to mitigate the risk involved in freeing prices.
"There will be a one-time adjustment of the price level; prices will go up since they must reflect the price of domestic oil. But that's not inflation," said a Western economist, who asked not to be named. "If there was low inflation before, it will continue to be low."
He compared the process to the price adjustments that occur when a country joins the European Union and, to comply with EU regulations, has to introduce a new tax that hikes prices by a certain percentage across the board.
In such cases, he said, "prices continue to move as they did before, according to various macroeconomic factors. It's just that prices have been adjusted upward 2 or 3 percent."
The economist said that freeing oil prices could even have an anti-inflationary effect by making Russia's oil companies more profitable and sending more revenues to the government, which in turn would rely less on inflationary Central Bank credits to finance the budget.
"The net impact could go either way," he said.
Tax revenues would further increase, because export taxes are calculated according to the per-ton price of oil on the domestic market, the economist said.
"If the same excise tax were assessed on a domestic price that was closer to international prices, it would mean a lot more money for the budget," he said.
Some government officials have suggested prolonging export quotas beyond the Jan. 1 deadline, which would for the time being defuse the whole issue of freeing prices. But Russia's new economic chiefs -- Economics Minister Yasin and First Deputy Prime Minister Anatoly Chubais -- have thrown their weight behind the plan to end quotas.
Yasin said Tuesday that scrapping quotas would boost oil exports by 10 million tons yearly and help oil companies raise much-needed hard currency, Interfax reported. And Chubais has said that Russia can afford to increase exports without causing shortages, citing government forecasts that domestic oil consumption will fall 9 to 10 percent next year.
Economists say lifting quotas will encourage investment in the oil industry by companies that so far have been reluctant to build new pipelines and terminals for fear they would not be able to export as much oil as they could produce.
A Message from The Moscow Times:
Dear readers,
We are facing unprecedented challenges. Russia's Prosecutor General's Office has designated The Moscow Times as an "undesirable" organization, criminalizing our work and putting our staff at risk of prosecution. This follows our earlier unjust labeling as a "foreign agent."
These actions are direct attempts to silence independent journalism in Russia. The authorities claim our work "discredits the decisions of the Russian leadership." We see things differently: we strive to provide accurate, unbiased reporting on Russia.
We, the journalists of The Moscow Times, refuse to be silenced. But to continue our work, we need your help.
Your support, no matter how small, makes a world of difference. If you can, please support us monthly starting from just $2. It's quick to set up, and every contribution makes a significant impact.
By supporting The Moscow Times, you're defending open, independent journalism in the face of repression. Thank you for standing with us.
Not ready to support today?
Remind me later.
Remind me later.
×
Remind me next month
Thank you! Your reminder is set.
We will send you one reminder email a month from now. For details on the personal data we collect and how it is used, please see our Privacy Policy.