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CIAO DATE: 11/04
International Affairs:
A Russian Journal
Russian Gasoline is More Expensive than American
M. Smirnov *
On a bright spring morning we all learn, among other things, that gasoline prices in Russia went up 40 to 50 kopeks per liter. The radio commentator goes soothingly on that it is not that much after all. In the evening, we all learn from a TV commentator that gasoline prices in Russia are steadily climbing up at a pace of 10 kopeks a week. Normally, we do not pay attention to this: 40 or 50 kopeks can be ignored.
Still, one cannot help wondering why gasoline prices in the country that is the world’s second largest oil producer are climbing up; they outstrip the official inflation rate and send up foodstuffs, communal services, and commodities prices.
For a long time the fuel market in Russia remained isolated from the rest of the world. Every year, however, fuel prices are climbing up to catch up with the world’s level. In the recent past price increases were seasonal and normally took place in spring and autumn; today, the oil producers have discovered other reasons to inflate the prices, fuel deficit in the first place. They prefer to pass over in silence the huge amounts of exported oil that could have been used to cover the domestic gap between supply and demand. The majority of the gasoline station owners agree that domestic deficit is created intentionally, that it is managed and maintained to allow the oil companies keep their incomes on the same level when the world oil prices go down.
This year, however, the world oil prices did not go down. Early in April 2004, at a meeting of the OPEC energy ministers in Vienna it was decided to cut down extraction by 2 million barrels a day. This sent the prices up in the same way as massive actions against the American–British coalition in Iraq.
In the 1990s, the gasoline prices in Russia were stubbornly increasing allegedly because of inflation and because domestic prices were considerably lower than the world ones. By 2000, the domestic prices had nearly caught up with the world prices; in 2003, nearly all over Russia the price of 1 liter of ÀÈ–92 (regular grade 87) topped $0.35. In April 2004, it nearly reached $0.50. This is still well behind the European prices but it is very much ahead of the American prices: strange indeed for the second largest oil importer in the world.
Let’s have a look at the recent price dynamics. Throughout 2003, the prices were steadily climbing up. In January and half of February, the prices for regular grade 87 grew by about 5–8 percent even though in the past they had remained stable or even somewhat lower in winter because of the long holidays and cold weather. The fuel producers and retail operators were complaining about the fuel excise duty introduced as of 1 January 2003 (the excise duty for regular grade 87 increased from 2072 to 3000 rubles per ton). On top of this in Moscow the single imputed earnings tax was abolished as of 1 January 2003 to be replaced with the restored taxation system (the VAT, sales, profit and wealth taxes). This increased the tax burden on the gasoline station owners two–fold. According to independent experts, however, the new excise duty could have increased the gasoline prices by 2 to 3 percent (or by 3 to 4 percent if we take into account the restored taxation system). It seems that the difference between the forecasted and real prices was pocketed by large oil companies.
The next price increase started unexpectedly late in February 2003, much earlier than any seasonal changes could have been expected (normally this happens in March in the south of Russia and in April in central Russia). The oil companies did not hesitate to explain this out–of–season price increase by the agrarian sector’s increased demand. Petty oil traders, however, pointed out that it was limited oil supply that had sent the prices up. This is another paradox: all oil refineries are underloaded, an average loading for the branch being about 60 percent. Surgutneftegaz loads its oil refinery in Kirishi by nearly 100 percent (it exports the total amount of its products); Rosneft and Tatneft load their oil refineries by nearly 85 percent (the state companies extract more oil than their refineries can process therefore they load it to the maximum). Sibneft loads its refineries by 75 percent. All other oil companies that own oil refineries load them very much below 70 percent; the Bashneft uses its refineries by about half of their capacities. One should say that 80–85 percent is the best level of loading oil refineries. These figures explain the oil refineries’ low efficiency while their owners (large oil companies) are doing their best to remedy the situation by raising prices.
Obviously, none of the official explanations neither all of them can adequately explain the scope of annual price increases in Russia. Independent experts agree, however, that high monopolization of the fuel sector is responsible for this situation: it allows the gasoline station owners impose their will on the market and neutralize the measures applied by the state regulatory structures. Taken together, the largest players (YUKOS, LUKoil and BP–TNK) own 65 percent of the oil refining capacities. Together with three other vertically integrated companies (VINC) (Bashneft, Sibneft, and Surgutneftegaz) they command nearly 95 percent of the oil refining capacities.
The gasoline stations are also uniting into large networks, the process being controlled by the largest VINC; the majority of independent station owners possesses scattered stations and cannot influence even the local markets. The large networks are either owned by the largest oil companies or are operating as jobbers and franchisers. The trend will go on for some time, because the tax burden on retail networks will continue growing: in the last two or three years it was shifted from the oil refineries to fuel retailers. According to the Russian Fuel Union, the level of tax burden on the Russian fuel market has moved very close to Europe where taxes are responsible for 80 percent of oil product prices. It Russia, this share is equal to 60 percent while in the United States, 36 percent. Only the gasoline stations owned by the VINCs can lighten the burden: the oil companies either move their profits, through transfer pricing, into the branches with the lightest taxation loads or offshore. At the same time independent traders and gasoline station networks have an important role to play: to smooth down price fluctuations on the domestic market. In an effort to keep clients they avoid sharp price increases and do this at the expense of their own marginal profits. This happened in early 2003 in Moscow. According to the Moscow Fuel Association the retail prices increased by 3.6 percent even though the wholesale price went up by 9.4 percent because the independent owners continued selling the residual stock bought for lower prices.
On the one hand, concentration on the market is a normal phenomenon observed the world over; this is a natural response to economic globalization. In Russia, however, local monopolies, in fact, have closed the market for new players. Indeed, their underloaded oil refineries allow them to increase the output to slash the prices so that to push any new competitor out of the market. The VINCs control the major sales channels to prevent a newcomer from dumping.
Theoretically, there are state regulatory structures, the Ministry for Antimonopoly Policy (MAP) (since March 2004, the Federal Antimonopoly Service in the Fradkov cabinet) to supervise these processes. There are several measures that can help keep monopolists in check: tariff agreements; auditing of companies suspected of monopolistic practices; an institute of independent directors in monopolies (representatives of state or local business community in monopoly structures), etc. In other countries the state can act more radically: the company may be ordered to sell some of its gasoline stations or to remove oil tank farms from a VINC’s assets under the state’s strict supervision so that to prevent moving them to affiliated structures.
The Russian antimonopoly ministry, or the federal service for that matter, has not enough power. In summer 2003, the ministry’s territorial structures tried to bring to court several oil companies suspected of price collusion. In particular, the Udmurtia Territorial Administration of the MAP accused several local companies (that controlled on the whole 85 percent of the market) of price collusion and ordered them to bring the prices back to the old level. The Administration, however, failed to prove the facts of collusion in court and the order was cancelled. The Ministry tried to keep LUKoil, an obvious monopoly operating in the Nizhny Novgorod Region, within certain limits by taking the oil company to court because, the local regulatory structure argued, in the region where LUKoil was an obvious monopolist fuel prices were rising much faster than elsewhere. This conflict remained unresolved. Today, when the ministry was replaced with a federal service there is little hope that it will be resolved.
The oil companies continue maximizing their profits. On the one hand, while the world oil prices are still high they do their best to export as much oil as possible thus causing domestic deficit; when the oil prices are low they try to compensate for lost profits outside the country by raising prices inside it. This first became obvious in 1999 when the fuel market was hit by a sharp price crisis. The oil companies that lost a large share of their profits as a result of oil price crisis in 1998 (in 1997–1998, the prices dropped more than two times) inflated the retail prices by 2.5 times (in 1999, the prices for industrial products increased by merely 63.7 percent). Since that time the situation has been repeating itself, in a smaller scope, every year.
We can identify three phases of pressure on the domestic market exerted by oil companies. At the first phase, at which the world prices either grow or remain stable at a high level (over $20–22 per barrel) the oil companies export large amounts of oil, while building up oil extraction. This phase normally lasts one or two years, which allows the VINC plan their activity and export their products to the best markets. At home the situation remains stable: export increases together with extraction. The prices on the domestic market change insignificantly.
At the second stage when the world prices start falling the oil companies step up oil extraction in an effort to build up reserves for the coming lean period. This was what happened in February 2003, when it became obvious that the Americans would start a war on Iraq. Analysts predicted that the lightning operation in Iraq would bring back up to 2.5m barrels of oil a day to the world market. (Iraq can supply precisely this amount, even through in the past Hussein stopped oil supplies to protest against the UN sanctions and keep the oil market in suspense.) It was expected that by May (or August, at the very latest) 2003 the oil prices would fall 1.5 times. By way of preparation the Russian oil companies were exporting the ever–increasing amounts of oil. Mikhail Kasyanov’s cabinet helped them by lowering oil and oil product export taxes on 1 February 2003 thus causing domestic deficit and sending the domestic prices up. The operation in Iraq is still going on; the margin the oil companies have already obtained remained on their bank accounts and the prices remained high.
Normally, the second phase takes about six months to reach a point at which the downward trend becomes obvious. By that moment oil extraction reaches its maximum–it is impossible to stop it at short notice. This could have created oil surplus on the domestic market that could have sent the oil prices down. This never happens, however, because the oil companies, in an effort to save for a rainy day, continue exporting oil in disregard of the lower prices and no longer bothering about maximal efficiency. From time to time the relations between the government and the VINCs become strained: the oil companies spare no effort to lobby lower customs dues and lower transportation tariffs. They step up “gray” export, normally, in the form of cabotage and railway transit. Oil refineries remain underloaded thus creating deficit on the domestic market. Independent oil traders are deprived of their share of oil products and are pushed away from the market; the VINC–affiliated traders alone have access to the oil product reserves accumulated by the oil refineries.
At the third stage the trend toward lower oil prices becomes too obvious; export stops being profitable; expensive railway transportation is discontinued, while extraction volumes remains the same for some time creating a surplus that should be refined. Oil producers increase their pressure on the media in an effort to convince the public that the unprecedented price increase was inevitable. The media campaign is launched at the end of the second stage. Independent traders are still deprived of their share of oil products that creates an impression of a deficit. The prices continue their upward movement to reach the level the oil companies find satisfactory. To keep them at this level, the VINCs start exporting the ever–increasing amounts of surplus products to the near abroad knocking down the local prices and damaging the interests of local producers. The VINCs prefers to lower prices in Russia’s CIS neighbors with much poorer populations that cannot pay more anyway; their main profits are produced on the more capacious and solvent Russian market.
The oil companies will continue applying this scheme if no serious amendments are introduced in Russia’s antimonopoly legislation. Today, new export routes are actively discussed that will allow the VINCs to more easily export oil. One of them will be realized in the Far East; this will be a purely private project outside state control. In October 2003, new capacities of the Baltic transportation system were commissioned; this added 12m tons of oil a year (an amount currently exported by rail and river transport) that brought up the system’s annual capacity to 30m tons of oil. In spring 2004, its capacity was further increased by 12m tons.
Obviously, continued pressure on the fuel market will cause a crisis: so far, the majority of our people still drives cheap Russian cars and cannot afford expensive fuel. They would rather park their cars and switch to public transport. In September 2003, the gasoline prices in Russia had nearly caught up with those in America; in April 2004, they outstripped them. At the same time the standard of living in America is much higher than in Russia where a third of population lives below the poverty level.
Meanwhile, recently the Russian media started comparing the gasoline prices in Russia and in Europe: obviously the level our oil monopolies find attractive. They argue that the taxation level in Europe and Russia is practically the same (80 percent of the oil product prices in Europe and nearly 60 percent in Russia); this means that the prices might go up 2 or 3 times. According to the International Energy Agency the lowest gasoline prices in Europe are found in the U.K. ($0.76 per liter) and Spain ($0.82); in other countries they are much higher: in France, $1.01; Italy, $1.07, and Germany, $1.08. In other words, the prices in Russia are catching up with the European level while the incomes are lagging behind.
Late in 2003 and early in 2004, some people expected that the government would use administrative measures to cut short further attempts at putting pressure on the market: the legal instruments proved inadequate. Indeed, the high oil prices curb economic development in the regions and hurt consumer markets–people do not buy fuel. According to the ÀÈ–92 Internet site in January–August 2003 the volume of oil deliveries to the Russian market dropped: the domestic market received 96.01 percent of gasoline and 95.21 of diesel fuel as against the 2002 level. The decrease was not caused by smaller amounts of extracted and refined oil: according to the State Committee on Statistics, in nine months of 2003 the country produced 1.8 percent more motor gasoline than in the previous year and 2.1 percent more diesel fuel. The explanation is a simple one: either people buy less fuel or they buy it at the “gray” market. The state can accept neither: in the first case economic growth will be checked and the president–formulated task of doubling the GDP never achieved; in the second, the consumers deprive the state of taxes.
The current increase of gasoline prices, the cabinet’s indifference and the State Duma’s Olympian calm testify that we are doomed to pay more and more.
Endnotes
Note *: Mikhail Smirnov, associate with RosBiznesKonsalting, an independent business news agency.Back