Thursday, June 22, 2006

Turkmen gas price hike might force changes

[For John especially]

Continuing this week’s analysis of the gas sector, most of the non-governmental media in Russia is discussing the relationship between the exporter (Turkmenistan) and the unlikely importer (Russia) as the Central Asian nation is demanding that Gazprom must start paying higher prices for its gas. Many, especially in Europe, see Russia solely as an exporter of gas, without realizing that it desperately needs to import gas of its own in order to fulfill all of its obligations on the domestic and foreign markets.

Fundamental issues

Why does Gazprom give priority to the export market? As it has been discussed before, this is due to the fact that Europe is paying five times more than the domestic consumers (around USD250 per thousand cubic meters). In fact, the so-called “market price” could be defined the “the price Germans pay”.

Opaque state-owned companies seem to care more about their profit than about the needs of the people. As the monopoly and its controlling shareholder, the government, concentrates on acquiring European companies and resources in order to generate more capital, domestic customers’ fate seems irrelevant, which is dangerous as Russians could be considered as being mostly at risk if an energy crisis is to occur in the future.

This unhealthy situation, centering around the wide discrepancy between export and domestic, is made worse by the fact that there is no easy solution to it. If we are to bring domestic prices in line with “German prices”, then inflation will spiral and is unknown what effect this will have on the stability of the political system. Any other solution will requires political pressure, something which is unlikely to come in this time when political apathy and lethargy has gotten hold of the population. Decreasing consumption (energy-saving is virtually unheard of in Russia) is a difficult process of educating the public and let’s face it: it will not give results in the next few years.

Russia might be producing an image of an energy-super power who can bully its neighbors into submission but the truth is that it can be bullied by its own suppliers in the exactly same way. Let’s assume for a minute that Turkmenistan does turn off its gas at the source. This will not only cause widespread mass-media inspired panic in Western Europe, but will also put the Russian, Ukrainian or Georgian consumer in danger of spending the winter fighting gas shortages.

And Russia can’t do anything about it. Turkmenistan will not respond to any king of political pressure, it has no wine or mineral water to ban, no visas to reject and it does not depend on Russia for its energy supply. Hence it holds all the cards.

Blessing in disguise?

So Turkmen’s government has decided to double the prices it charges. After all, Turkmenistan is mimicking Russia exactly, by raising prices and warning it that it might turn the gas off or switch its supply to China. In the future, we might see Russia importing gas at “market prices”.

The first victim of this price hike will be Ukraine. Currently buying Turkmen gas (together with the more expensive Russian gas) from the shady RosUkrEnergo outfit,

Ukraine will see its import prices increase, something which will undoubtedly put pressure on the economy. Vedomosti analyst even goes as far as affirming that USD250 per thousand cubic meters will collapse the Ukrainian economy completely and that could be a secret ploy to remove Yulia Tymoshenko from the ruling post. Something to consider then.

The Turkmen gas price hike might be a blessing in disguise. Of course Turkmen gas is less vital to the Russian economy than Russian gas is to the Ukraine economy but it is important nonetheless. Gazprom is promising to increase its exports, something which produces shortages on the domestic market (which the Turkmen gas covers). Liberalisation might be a distant dream, but with the difference between export and import prices getting smaller, Gazprom will loose the desire to import foreign, politically unstable, gas and will put more of an effort into increasing its own supply, something which might benefit the economy as a whole. Also, the one-price system could see the disappearance of third party companies related to Gazprom which give it a bad image of an opaque state corporation where corruption is rife.

Hope for the future

Gas economics is creating Russia enemies all around. At this moment, the only friendly consumer getting cheap gas is the Russian citizen. Looking back, it could be argued that not before long the Russian consumer could theoretically become disgruntled with the energy politics of the state. Keeping the media under control might help. It is not unfeasible that the West will get blamed for the gas shortages with accusations of protectionism coming from Kremlin.

So far the market economy in the energy sector is giving way to centrally planned mechanism of a vertical political system. Whether the difficult times brought on by suppliers ‘not playing ball’ will pressure the system into changes is debatable. What is clear is that it will get worse before it gets better.

Vedomosti, RusEcon, Gazeta, BBC News and other sources.

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