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Analysis & Opinion
05.03.12 Fanning Discontent
By Tai Adelaja

Forget about Russia’s fiddling middle-class protesters. A real showdown for the Kremlin may yet come from the country’s motorists, who have been growing exponentially in numbers in recent years. Gasoline prices, which have been kept artificially low ahead of the presidential elections, are set to skyrocket, analysts say. With the presidential elections all but over, many industry experts said they see domestic fuel prices increasing significantly this month. The prices may well exceed the inflation target close to the year’s end.

As the parliamentary elections loomed in December, oil majors, including TNK-BP and LUKoil, bowed to pressure from the Kremlin and announced "new year's discounts" on gas prices at the pump. The measures have largely worked, analysts say. Gasoline prices in Moscow remained static for most of January this year and even dropped 0.2 percent in February, according to the State Statistics Services (Rosstat). The downward trend in gasoline prices was even more surprising against the backdrop of a snowy winter in January and February, when motorists generally use more gasoline. However, on March 1 the “gentlemen’s agreement” between the government and various oil producers and distributors expired, and neither the government nor the oil producers have indicated they are willing to extend the moratorium.

Even if artificial price controls were extended, many analysts still expect gasoline and diesel prices to spin out of control after the presidential elections. "Now that the presidential elections are over, price hikes are inevitable," said Vitaly Kryukov, an oil and gas analyst at IFD Capital, an asset management company. “My guess is that domestic fuel prices will jump by about 20 percent to 30 percent because artificial regulation of retail prices for fuel has its limits and that limit has already been reached."

Among other factors that may make fuel price hikes inevitable is the recent surge in global crude prices, which analysts say may encourage refiners to export products, thereby creating fuel shortages in the domestic market. In the past, oil companies have been reluctant to sell fuel locally while international prices are rising even as the government keeps a tight lid on fuel prices at home. This trend prompted President Dmitry Medvedev in January to order the head of Russia’s Anti-Monopoly Service (FAS) to closely monitor retail vehicle fuel prices, saying that any baseless increases in fuel prices should be met with swift legal measures, RIA Novosti reported.

As if that’s not enough worry for the Kremlin, a raft of new amendments to Russian tax regulation, effective January 1 last year, increased the rates of excise taxes on gasoline and diesel fuel by 30 percent and 70 percent respectively, compared to the previously announced rates of excise tax for 2011 and 2012. In addition, different excise tax rates were introduced for different fuel classes. The first part of the excise taxes was introduced in January this year to be followed by a second stage on July 1. “When that happens, prices at the pump are expected to cross the psychological important threshold of 30 rubles a liter for the high-octane fuel,” Kryukov said. “The price for diesel fuel could rise even higher."

While the Kremlin is unlikely to risk a sudden spike in gasoline prices, analysts say, the July increase in excise taxes is expected to up the tax burden on fuel producers by about 1.5 percent. That burden could conveniently be transferred to consumers in the form of higher gasoline prices, they said. Moreover, gasoline and diesel prices are likely to increase when the sowing season starts in the spring. The incoming government may need a good harvest this year if it wants to hit the inflation target of six to seven percent. That challenge may further prompt strong demand for diesel for agricultural vehicles like tractors when the sowing season kicks off in the southern regions around April 15, analysts say.

“The impending increases in fuel prices remain one of the most acute headaches for both the government and motorists this year," said Viktor Pokhmelkin who heads the Motorists' Movement of Russia, an advocacy group. "High fuel prices are inexplicable in an oil-rich country like Russia, but part of the reason for the impending price hikes is the new excise tax on petrol."

In the past high fuel prices have sparked protests among farmers and motorists in Russia – the largest consumers of Russian oil and natural gas. Days after President Dmitry Medvedev took office in May 2008, motorists in about 50 cities across the country protested rising gasoline prices and called on the government to take measures to punish producers of substandard fuel. The demonstrations, organized by the Freedom of Choice drivers’ movement, involved lines of cars driving through city centers with their emergency lights on and empty fuel canisters taped to their roofs.
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