(Bloomberg) -- Russia’s government has been struggling to agree on a plan to curb rocketing fuel prices that balances the interests of refiners and consumers and its own desire to cut subsidies as it continues the war against Ukraine.
While President Vladimir Putin said last week oil companies and officials reached an agreement, talks have dragged on, people with knowledge of the discussions said on condition of anonymity. There is no easy way both to meet producers’ demand for compensation for domestic fuel supplies and to maintain defense and social spending, they said. With the nation at war, everyone, including oil producers, should have to bear some of the costs, one of the people said.
Political sensitivities spilled into the open Wednesday, when parliamentary speaker Vyacheslav Volodin, a key Putin ally, criticized the Energy Ministry for failing to prevent the jump in domestic fuel prices and demanded to know “why the president’s instructions are not being carried out.”
Surging fuel costs have been one the biggest contributors to inflation, a potential political headache as the Kremlin prepares for the presidential election in March. Rising diesel and gasoline prices in 2018 sparked protests that led the government to create incentives for producers to sell fuel at home. Earlier this month, the agriculture minister warned that shortages in some regions could disrupt the harvest and sowing winter crops.
“Quite serious measures are in the government now, it is a matter of days when these measures will be taken,” First Deputy Energy Minister Pavel Sorokin promised lawmakers who peppered him with questions at Wednesday’s parliamentary session.
Russia’s government has encouraged oil producers to supply diesel and gasoline at home by offering downstream subsidies, which are based on the difference between the base price on the domestic market and a theoretical value if exported to northwestern Europe, as well as the ruble exchange rate to the dollar.
Last year, the payments reached 2.17 trillion rubles ($22.5 billion) even as the cost of the war against Ukraine and waves of international sanctions strained the nation’s economy.
The government slashed subsidies to oil refiners by half this month, but faced a public dressing down last week from Putin, who’d just met with Igor Sechin, the head of state oil producer Rosneft PJSC, for failing to take into account the effect of rising global commodities prices.
Retail gasoline and diesel prices in Russia have climbed 9.4% from the start of the year to Sept. 18, according to data published late Wednesday by the Federal Statistics Service. That compares with an increase in overall consumer prices of 4%.
While the oil industry had expected Putin’s comments to signal an increase in subsidies, just days later the government moved to discuss more restrictive measures.
Options on the Table
Among the measures under discussion was a prohibitively high duty on the export of oil products from Oct. 1 through June 30 of next year, with a compensation mechanism for producers who ensure sufficient fuel supplies to the domestic market, according to a document seen by Bloomberg.
Under that proposal, the export duty would be set at $250 per ton for both light and dark petroleum products. That compares with $7.10 and $23.90 per ton set by the Finance Ministry for light and dark oil products respectively for October. Other options include an outright temporary ban on petroleum product exports, state news service Tass reported last week.
The numbers may change before the final decision, according to people with knowledge of the matter.
On Wednesday, Sorokin confirmed that a protective export duty was discussed as one of the measures, but how to compensate those refiners that ensure adequate supplies to the domestic market hasn’t been decided. Supplies to most regions are in balance, and the government is holding talks with oil producers to resolve some remaining shortages, particularly the southern Krasnodar and Rostov regions, Sorokin said.
Speculation about the measures has already helped, with diesel prices falling on the country’s commodities exchange over the past two days, he added.
©2023 Bloomberg L.P.