Energy Price Hike Marks Further Russian Reforms

THE Russian government decree issued on May 18 sharply raising the prices of energy products marks the start of the second phase of the radical reform policies which began this year.

With Russia's admission to the International Monetary Fund (IMF) at the end of April and the promise of some $24 billion in Western financial backing, the Russian government announced two long-awaited steps. The first was the decision to make the ruble a fully convertible currency as of Aug. 1. Second is the energy price rise, a first step in a plan to gradually boost gas, oil, and coal to world market prices. Mounting economic risk

Both moves are fraught with economic and political risk. They could worsen the hyperinflation that has raged since the latter half of 1991. And they threaten to deepen the production slump, forcing state-run industries to let go tens of millions of workers.

Critics of the government charge it with needlessly pursuing too rapid a pace of reform, following prescriptions imposed on it by the IMF and other financial creditors.

In a recent typical commentary, Boris Rakitsky, acting director of the Institute for Problems of Employment under the Russian ministry of labor, charged that the government is seeking to get out of the economic crisis through two means: "by sharply reducing the peoples' living standards, approaching economic genocide, and by obtaining Western material assistance at the expense of national economic independence."

The energy price rise is the most visible and controversial move by the Russian government since the January "shock" freeing most state-set retail prices, but not energy prices.

Both Russian and foreign economists have long understood that cheap, subsidized energy prices are one of the most onerous legacies of the former Soviet government. At the previous state-set price of 350 rubles a ton for crude oil, Russian oil sold internally for about 2 percent of the world price. This meant that Russian consumers paid almost nothing for gas at the pump - until April, about 1 cent a liter and after that 6 cents.

Such artificially low prices act as a disincentive, accounting in part for the steady drop in oil, gas, and coal production that plagued the former Soviet Union (which was the world's largest oil producer) in recent years. This deprived Russia, which accounts for 90 percent of former Soviet production, of vitally needed revenue from exports. Low energy prices also distort the entire price structure. It was impossible for enterprises to know the true cost of producing their goods.

The decree issued by Russian President Boris Yeltsin is a compromise. It sets the wholesale price of oil at 1,800 rubles a ton, allowing a rise up to 2,200 rubles but with a progressively higher rate of taxation. At current exchange rates, the price of oil is rising from 48 cents a barrel to between $2.47 and $3.01 a barrel, compared to about $20 on world markets. Gasoline prices will go up, with standard unleaded gas costing 7.80 rubles a liter.

Overall this represents a five to sixfold rise in prices, although a Western economic expert here says when the price of energy products sold on the free market is taken into account, the rise is closer to twofold. Even these increases are only for a three-month period, with a second hike to take place at that point. Hope for more benefits

The government hopes to derive additional benefit from larger export revenues. Former Soviet republics will have to pay world prices unless they negotiate separate bilateral agreements with Russia, as Kazakhstan and Belarus have already done. The decree provides for tighter control over exports in an effort to curb the uncontrolled flow of oil out of the country by enterprises and foreign traders seeking to exploit the huge gap between the domestic and world prices.

"The move was inevitable," comments Izvestia economic analyst Mikhail Berger, one of the most respected economic journalists in Russia. "It was one of the IMF demands. Our government demonstrated a willingness not only to follow those demands but even to be a step ahead of them. As far as I know, the IMF offered a more moderate, gradual scenario of freeing prices but the government chose the most radical one."

Economic Minister Andrei Nechayev told reporters on May 18 that the increase will trigger a further 50 percent rise in the prices of other goods and may force production down another 3 to 4 percent (production has dropped more than 12 percent already this year).