Russia agrees 40% rise in energy prices |
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Russia on Tuesday signed off on a series of steep price rises for domestic gas, power and railway services for the next four years on the eve of Dmitry Medvedev’s inauguration as the country’s new president.
Mr Medvedev, who will be sworn in as Russia’s president on Wednesday, will inherit a potentially poisoned chalice of increasing economic and political risks as inflation surges to as much as 14.3 per cent. Thousands of people across the country took to the streets on May Day in rare demonstrations against rising food prices and living costs, the same day as a pre-election price freeze on basic foodstuffs expired.
The Russian government, however, on Tuesday added to the pressure when it agreed annual increases on state-capped prices of 25 per cent a year for household electricity sales and of 28 per cent a year for the wholesale gas market, rising eventually to a jump of 40 per cent in 2011.
Andrei Klepach, Russia’s deputy economy minister, said the increases in tariffs, which had been heavily subsidised for years, had been designed to keep “significant” inflationary effect to a minimum. The government also stepped back from a plan to liberalise gas prices to bring them level with European ones because of inflationary fears.
Chris Weafer, chief strategist at Uralsib investment bank in Moscow, said the government was caught between two hard choices and had to raise the tariffs, despite raging inflation, to fund upgrades to infrastructure.
“There is no choice if the government is to proceed with the next phase of the Putin plan,” Mr Weafer said. “But, on the other hand, they are doing it at a time when inflation is high and this is going to push inflation even higher.”
Russian consumer prices by the end of last month had risen 6.3 per cent in the year to date, making rising prices the number one concern for Russians. The government has pledged to rein in inflation to a maximum 9-10 per cent this year.
Economists, however, are baffled as to how Russia will combat inflation, which was sparked last year by a surge in money supply.
Traditional instruments, such as interest rates, have limited effect, while allowing a rapid appreciation of the rouble could also knock economic competitiveness. A cutback in state spending is also not on the cards, because the government intends to push ahead with a spending increase on infrastructure.
Source > Rusnet
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