Impact of Gas Prices on Political Stability


MOSCOW. (RIA Novosti political commentator Vasily Kononenko). The Federation Council (the upper chamber of the parliament) began its fall session by tackling the most sensitive issue - the skyrocketing gas prices in Russia.

At the first plenary session the senators adopted the wording of a letter to the government urging it to intervene in the economy when national stability is threatened. The legislature has turned an acute economic problem into a political one.

In the last fortnight, almost all the leaders of factions in the State Duma (the lower chamber of the parliament) lashed out at the government for allowing the monopolists to hike up oil prices. Now the heads of Federation Council specialized committees have followed suit. Addressing the senators, the head of the Federation Council Industrial Policy Committee, Valentin Zavadnikov, accused the cabinet of ministers of failing to establish timely control over the domestic gasoline market.

Since Russia embarked on the path of economic reform, price rises have been known to force ministers and even the entire government to resign. The country still remembers "Black Tuesday," which was when the ruble crashed against the dollar in 1994, causing prices for basic foodstuffs to shoot up by 25%. The soaring prices caused the population to panic and forced the then head of the Central Bank, Viktor Gerachshenko, to resign. The entire cabinet of ministers, headed by Sergey Kiriyenko, had to step down after the default of 1998.

The price of gasoline, the country's main economic product, has increased by 13% in just two months, compelling MPs, including deputies from the leading United Russia faction, to moot the possibility of high profile government resignations.

President Vladimir Putin found himself in a similar situation last winter when MPs urged him to dismiss the government following massive protests by pensioners and invalids over the replacement of benefits in kind with cash payments. On that occasion the government stood its ground. An anonymous source from the United Russia Duma faction told RIA Novosti that this time the cabinet of ministers would be given a deadline for redressing the situation - January 1. Just recently, Industry and Energy Minister Viktor Khristenko persuaded the oil companies to freeze prices temporarily, but this agreement will not suffice. The ministers will have to adjust the whole system so as to rule out "cartel conspiracies" by the oil monopolists.

What should Russia do in the face of spiraling world oil prices? What can it do? While the gas fever that gripped the U.S. and Europe several months ago did not affect the Russian market directly, politicians and experts maintained that it was not possible to erect price barriers or apply other administrative measures. They referred to the sorry state of affairs in Ukraine earlier this year. Now that there is a very real threat of an uncontrollable surge in gas prices and, consequently, in prices for other commodities, economists, including government experts, have to admit that the state has means of influencing the monopolists and that it should use this leverage without any further delay.

In the letter to the government the senators demand the imposition of differentiated severance tax that is not linked to world oil prices. They also urge the government to regulate oil exports with customs tariffs. There are other views as well. Duma deputy Valery Pokhmelkin told RIA Novosti that such half-hearted measures were not enough. He thinks the state should impose tough anti-monopoly control over oil companies and guarantee real competition by setting up a stock exchange for the oil market. Experts predict that the situation will change for the worse unless the government takes serious steps to reform the oil industry. "A price freeze is a populist measure. They will hold the prices in check until January 1, and then they will explode," said Yevgeny Gavrilenko, chief economist of the Troika Dialog brokerage.

Deputies and independent experts have been submitting their proposals to a working group consisting of representatives of the ministries of industry and energy, economic development and trade, finance, and natural resources. In a month's time, the group will present the government with a bill aimed at removing tensions in the gasoline market and laying the groundwork for reform of the industry. The group must find a way to protect Russia from spiraling world oil prices by January 1. It should adopt a flexible tax and tariff policy that will bring domestic prices down.

To sum up, Fradkov's government is faced with three tasks: to ensure that GDP doubles, to make the ruble convertible, and to protect the economy against cataclysms in world markets.

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